“What is good for America is good for GM”

The title of this piece is the actual quote from Charlie Wilson, the CEO of General Motors, testifying before the Senate in 1955. The second half was “…and what is good for GM is good for America.” The second half of the statement became immortal, and the first was forgotten. Policy makers seem to have adopted only the second half, as well.

A friend just emailed me a reminder of the Clinton-era program called Partnership for a New Generation of Vehicles, or PNGV. Under PNGV, the government plowed money and research resources into a joint effort with the big three automakers to develop a marketable sedan that could get 80 miles per gallon. Several years and hundreds of millions of dollars later, GM, Ford, and Chrysler had each developed 5-passenger prototype hybrids that achieved 70-80 mpg. They presented their new concept cars at the 2000 Detroit Auto Show, and then quietly abandoned them. Their public reasoning was that nobody wanted a high mileage sedan. Their public cover was that they were going to develop an even better, higher-tech line of hydrogen powered vehicles through the FreedomCAR program, with no fixed deadline. In the meantime they continued to fight increases in gas mileage standards.

Toyota and Honda took the concept seriously, and in order to compete with this soon-to-be imaginary line of American-made hypercars, developed the 60 mpg Honda Insight and the 45 mpg Toyota Prius. The rest of the automotive ass-kicking is history.

Why did Detroit keep on producing Stupid Useless Vehicles the size of armored personnel carriers? Simple short term economics. The material cost of a Ford Escalade, the size of a cottage and weighing three tons, was not that much more than that of a compact car, at least in comparison to the sale price. The cost of steel is generally less than $1500. The cost of the sales and marketing effort is the same and the healthcare and pension costs are the same. The cost of making a weld or driving a bolt into a huge car is about the same as performing the operation on a small one, and it is those labor costs that rule. The difference comes in the value proposition to the consumer. Use some extra steel to enclose more space and the buyer is willing to pay $30,000 to $50,000 for a box on wheels to get down to the grocery store. The automakers were netting $10,000 per unit for these behemoths. Let the future take care of itself, because they were minting money.

Then the supply and demand curves on the oil production graph got close enough to kiss, and the price per barrel quintupled in a few years. I’m sure that at some point the automakers noticed that even as they were discounting their urban assault vehicles to try to move them that there was a three to six month waiting list for Priuses. They had the technology in their pockets to make cars that could surpass the Prius and the Honda Civic Hybrid, but in their pockets the technology stayed. Perhaps their executives thought that if everybody in the audience clapped and believed in fairies, then newly discovered oil would fountain out of the ground and people would flock back to those highly profitable wheeled dirigibles.

Another friend just saw an ad by GM that said, “In a time of global financial crisis, supporting a loan to the U.S. auto industry is in America’s best interest.” What is good for GM is good for America. My friend commented, “GM's moved from commercials about rugged trucks bouncing around the landscape with pretty girls driving them to ads begging to be saved.”

Should they be saved, and if so, how? If not, what should we do instead?

We should look at this in terms of long term investment and geological inevitabilities. Even the Pollyannas at the International Energy Agency are presenting numbers that, if one reads them carefully, predict that world oil production will peak below 90 million barrels per day, compared to a production rate of 87 mbpd right now. They are predicting a decline in oil production on the order of 5% a year after 2015, if we don’t plow hundreds of billions into oil exploration and development. Which we won’t.

We won’t because of the short planning horizon of investors and corporate executives and the sawtooth oil price swings we are starting to experience. The price goes up, induces a recession and a collapse of demand, and the price of oil plunges. The economy slowly recovers, demand goes up as supply shrinks, and the price surges again. Repeat, with increasing price and decreasing supply. The problem is that the volatility discourages long term investment in expensive oil development projects. The new deep offshore fields and unconventional heavy tar-like crudes require prices in the $70-$90 range to break even. Oil development bankers won’t invest if they don’t know that they will get that price.

So this means that we’ll need more Priuses, right? As a stopgap, yes, but long term, even medium term, the ubiquitous personal automobile is doomed. It’s not about personal preference, virtue, or public policy – it’s just geology. We’ll need widespread public transport, different zoning, and the localization of our lifestyles in general.

What this means for the Detroit automakers is that we could pour endless money into their accounts and in the long run they would go under. We should follow the old military adage, “Don’t reinforce failure.” It would be an absolute waste of our (borrowed) money to patch up GM so it could totter along for a few more years making unsellable SUVs and pickup trucks. In the short run, it would be cheaper for the taxpayer to let GM go bankrupt, beef up unemployment benefits for its workers, and invest in post-peak industrial development.

The restructuring of GM would have to involve more than administrative adjustments. If we really want it to thrive, it would have to refocus its production on vehicles for a post peak oil world. We need streetcars to replace the streetcar lines that GM bought up and burned over half a century ago. We need passenger railcars and high efficiency electric rail engines. We need high efficiency buses and passenger vans for flexible public transit. And yes, in the short term, high mileage sedans like the GM Precept and electric cars like the criminally abandoned and crushed GM EV-1. We don’t need an industrial dinosaur, managed by dinosaurs, gorging on our resources as it staggers towards extinction.

Make the Titans Battle

The victory of Barack Obama has given me, like many Americans, a sense of relief. In a couple of months our Sock-Puppet in Chief and his neocon handlers will be off cutting brush somewhere. I suppose war crimes trials would be too much to ask.

Even so, as a friend once warned me after Clinton’s election, “The left wing of the Capitalist Party has won.” President-elect Obama will have all the usual suspects chattering in his ears about how to benefit big business at the expense of the general public. We need to hold him to account, push him to do the right thing, and propose policies that benefit the general populace.

There are two big issues facing the president-elect that can be approached synergistically. One is economic stimulus, and the other is health care finance. The poster child for economic stimulus is the U.S. auto industry. After spending a decade or two profitably and short-sightedly building 3-ton SUVs, they are facing declining sales and, in the case of GM, impending bankruptcy. The big three need to redesign, retool, and refinance. They are asking for $25 billion from the government to do so. I am reluctant to reward these corporate dinosaurs for their greed and pinheaded behavior, but I don’t want to see hundreds of thousands of autoworkers joining the unemployment lines, either.

On a parallel track, health care costs continue to climb and 47 million Americans have no health insurance. In poll after poll, two-thirds of Americans say that the U.S. government has a responsibility to ensure health care for all. Two thirds say that they would pay higher taxes to achieve universal health care. Three quarters say they would pay more taxes to ensure universal health care for children under 18. And yet the subject of government sponsored health care isn’t even on the agenda in Washington. Both Obama and McCain proposed healthcare plans that enshrined the private health insurance companies. The reason is, of course, that the health insurance companies have near infinite money and the political clout that comes with it. Between soft money, bundled contributions and the health insurance industry’s multi-million dollar propaganda machine our (?) Congress faces inevitable defeat.

The two subjects connect if you realize that car companies spend more per vehicle on health insurance benefits than on steel, roughly $1500. Given that the U.S. spends about twice as much per person for health care compared to industrialized nations with national health coverage (with worse outcomes), you’d think that with national health insurance we could knock $750 off the cost of manufacturing an automobile. Let’s be conservative and put the savings at $500 per unit. With about 7.6 million passenger cars coming off the line every year, there’s $3.8 billion a year, or $38 billion over a decade.

President Obama and the progressive caucus of the Democratic majority need to make the case for universal health care to the carmakers. To Ford, GM, and Chrysler, private health insurance is a huge cost driver. Rather than fight the health insurance lobby directly, the Obama administration should pit the auto lobby against them. Not just the auto lobby – every major industry is struggling with health care costs. Get them all to gang up on the insurers and beat them into the ground. It is the manacles of fiduciary responsibility that cause the insurance company executives to strive to extract all they can from us. This same motivation can drive other industries to fight on our side.

Big pellets, big price

Those of you who don’t heat with wood and have no intention of heating with wood can go out to the kitchen and have a sandwich or something. This is for the woodstove crowd, and the consumer protection crowd, if any have stopped in.

With the price of heating oil, propane, and natural gas bouncing around, many homeowners are turning to firewood for space heating. Some are installing pellet stoves instead of the old-style chunk wood stoves. There is another development in the field, a kind of halfway measure called compressed wood firelogs.

The pellets that go in pellet stoves are made of sawdust compressed and extruded into what looks like animal feed. Think of it as beaver kibble. Some manufacturers have upsized the process to produce ersatz logs from compressed hardwood waste. They go by names such as EcoLogs, SmartLogs, Envi-Logs, PowerLogs, and Bio-Bricks. Most are about 10” long and 3” in diameter. So far, so good. Yet another waste stream recycled in a useful manner.

I decided to try out a few boxes of the EcoLogs recently and came to a couple of conclusions. First Conclusion: This particular product fell apart as it burned, exposing huge amounts of surface area and burning too hot and fast for a woodstove. Second Conclusion: There is something wrong about the advertised comparison between compressed wood logs and real firewood.

The advertising pamphlet handed out by the farm supply store where I got the EcoLogs claimed that 40 boxes of logs equaled a cord of firewood. A similar product, the slightly larger Smartlogs, claimed that 30 boxes equaled a cord. I did a little investigating.

A forum on the ever useful website Hearth.com had a comment by the U.S. distributor of Smartlogs, as follows:

“We would like to Thank everyone who is interested in SmartLog and alternative energy products in general. We are the U.S. representatives for SmartLog and can only speak to the facts of our product. Our logs have been extensively third party tested in Canada and our logs deliver 7,800 BTU’s/lb vs. 5266 BTU’s/lb of tested sugar maple with 20-30% moisture. Our logs are Octagon shaped and do not roll. SmartLog is 3"X3"X10" and weights 3.3 pounds per log with a 6-8% moisture content. SmartLog lights easily and produces far less creosote and harmful emissions than ordinary fire wood and is EPA certified. We offer 6 and 12 piece boxes. 30 Boxes (360 Logs) is equivalent to 1 US Cord based on BTU’s generated.”

As they say on NPR’s financial show Marketplace, “Let’s do the numbers…”

(Unit note: A BTU is a British Thermal Unit, the amount of heat necessary to raise one pound of water one degree Fahrenheit. For a better visual, it roughly equals the heat released by burning one wooden kitchen match.)

For sugar maple, the standard numbers are 3,757 pounds per cord and 24,000,000 BTU per cord, or a theoretical heat production of 6,388 BTU per pound. According to Smartlog, sugar maple gives a real world 5,266 BTU per pound, for a total of 19,784,362 BTU per cord. Almost 20 million BTU per cord – I can believe that.

Smartlogs weigh 3.3 pounds per log. Multiplied by 360 logs this equals 1,188 pounds. Using SmartLog’s own numbers, 1,188 pounds x 7,800 BTU per pound equals 9,266,400 BTU.

9 million BTU versus 19 million BTU. Somebody dropped a 1 somehow.

Unless, possibly, the weight of a cord of sugar maple is a lot less than advertised: 9,266,400 BTU divided by 5266 BTU per pound for maple equals 1,760 pounds per cord instead of 3,757? It must have been that helium impregnated maple.

The numbers for EcoLogs come out much the same: 30 pounds per box times 40 boxes equals 1,200 pounds, multiplied by 7,800 BTU per pound equals 9,360,000 BTU. Again, 10 million BTU somehow wandered away.

The cost for 1,200 pounds of EcoLogs or Smartlogs is around $250, so in real terms this wood alternative is running about $525 a cord. This is over twice the going rate for cut, split, and delivered hardwood in my area. I called a local lumberyard that was offering PowerLogs by the one ton pallet for $585. The woman on the phone claimed that 2,000 pounds of PowerLogs were equal to “two and one-third cords” of normal firewood. Again, off by a more than a factor of two.

I don’t really blame the local suppliers for this. They get the promotional material from the manufacturers and rely on it, just like any other product. In fact, the compressed log manufacturers may be perfectly accurate about the heat output of their own product. They are being misleading about the comparison, in both weight and cost, between their products and ordinary firewood.

This is a departure from my usual political essays, but with so many people having a tough time paying their heating bills as it is, I hate to see them buy what passes for firewood at a price per BTU that rivals oil. I hope that the consumer protection advocates in state government crack down on this and force the manufacturers to put some real numbers on their products.

Track the horse race

For those of you political junkies who want to follow the polls and the electoral college count, here's the best site I have found: Electoral-Vote. The Votemaster provides a color coded map, convenient tables, and some interesting short political news blurbs.

The other, more broad polling site I like is Pollingreport. It has assembled stats on everything from the presidential race to opinions on health care and tax policy.

Eight days left.

Notes From the Oil Production Downslope: Smoke Signals

The price of oil on the NYMEX commodity exchange closed yesterday at $66.75 a barrel, less than half of its high point in early July at $146.65. Are happy days here again? Was all that peak oil catastrophe mongering so much short-sighted panic? No and no, sadly.

People pay a lot of attention to the price of oil for a couple of reasons. First, of course, it affects our lives. Gasoline and heating oil at $4 a gallon takes a whack out of our wallets. Second, and more to the point, we are taught that we can tell how plentiful or scarce a thing is by the price. Dirt cheap versus precious metals. The problem with this way of thinking about oil is a phenomenon I call “too many hands on the steering wheel.”

Over the long term, price does mean something. The fact that the NYMEX oil price broke the $100 mark this year when in 1998 it dipped as low as $11 is significant. It indicates that the supply of oil and the demand pressure for oil have become close. The recent price swings, however, are more about a complex system under pressure.

I should distinguish between above ground factors and below ground factors. Below ground factors are straightforward, yet mysterious. There is some amount of oil in the ground. This oil is distributed in reserves that are easier or more difficult to get to, easier or more difficult to pump out, and of varying quality. Overall, the quantity is declining by about 86 million barrels a day, the quality is declining, it is getting more difficult to pump out, and the more accessible reserves are playing out. This is all happening in a consistent and stately fashion, punctuated by periodic discoveries of a new oil field or a new section of an old oil field. Yearly world consumption has been exceeding yearly new discoveries since about 1982, and the two lines on the graph haven’t been anywhere near each other for years. Not much dramatic here. The mystery resides in the fact that the major oil producing countries are secretive about their reserves and also less than truthful about their production capabilities. All of the major OPEC producers magically experienced sudden doublings in their stated reserves at some point in the last twenty years. Jeremy Gilbert, former chief petroleum geologist at British Petroleum, politely called these “technically unsubstantiated reserve increases.” We call ‘em “lies.”

Above ground, we get into the “too many hands on the steering wheel” problem. Country by country, consumption rates are mostly going up, but when the U.S. consumption of gasoline drops by 4% (as it has), that is a big deal. The amount of oil and oil products in storage varies around the world week by week. Iran talks tough and the price goes up. Iran says something conciliatory and the price goes down. Trillions of dollars slosh back and forth between commodities (such as oil), the stock market, U.S. Treasury bills, money market funds, and back to commodities. Oil prices surge, oil traders worry about the effect of those prices on the economy, and there is downward price pressure. The MEND rebels in Nigeria blow up a pipeline and take over an oil platform, shutting in 300,000 barrels a day of production, and prices are pushed up. A new pipeline opens up somewhere else, China’s economic growth slows, and the price is pushed down.

Meanwhile, OPEC oil ministers are talking about trying to maintain oil prices between $70 and $90 by cutting production. This gives them lots of profit without major demand destruction or pushing anybody into structural changes in their energy use. They are confronted with all the problems listed above, plus the fact that some OPEC members cheat and exceed their production quotas.

Add to this the hysteresis of emotion among commodity traders. They are looking at all these factors and betting large sums of money on the possible price swings. They tend to jump onto trends and then try to gauge when the trend will stop. This adds a rubber band effect to the steering system: Spin the wheel hard one way, delay, tighten, and overshoot. Spin the wheel the other way, delay, slack, tighten, and overshoot.

In the present situation, where world oil production has been on a bumpy plateau since 2005, while demand has increased by a small percentage each year, small pressures have large effects. Our upcoming recession and, more importantly, fear and speculation about recession will fuel some dramatic volatility in oil prices. My advice is to ignore the week by week hysteria and look at the decade by decade movements in production and price. That message is clear: Flat and then dropping world supply, volatile and rising price. Pursue localization, conservation, efficiency, and renewable energy as if the recent drop hadn’t happened.