California's Fuel-Efficiency Battle and Peak Oil

California's Governor Arnold Schwarzenegger and his staff should be commended for their effort to increase automobile mpg standards in their great state. The Energy Independence and Security Act of 2007 doesn't require new vehicles to meet 35 mpg standards until 2020, which is laughable considering at least 3 big oil CEOs have said publicly that 2015 is the year in which worldwide oil supply will be inadequate to keep up with worldwide oil demand. California and a few other states want to adopt improved mpg standards much faster. Yet the EPA (the Environmental Disaster Agency) is blocking this effort, declaring that California hadn't demonstrated "compelling and extraordinary" conditions that would warrant the state to act independently of the federal government. So, off to federal court we go.

California's arguments for increased mpg standards are based on environmental factors. Instead, what they should be arguing in court in order to demonstrate "compelling and extraordinary" conditions is occurrence of peak oil. If anything in the world today is "compelling and extraordinary" it is the fact that worldwide oil demand will soon outstrip worldwide oil supply! It is an economic argument that should be the focus of California's legal case for requiring increased mpg standards. Imagine for a moment what life will be like in Los Angeles when it's millions of citizens can no longer either afford or obtain gasoline. Boy, if that doesn't scare ya, you've got iron cojones. But, like all US governmental agencies, the facts of peak oil rarely are spoken of let alone properly addressed with a real energy policy. Here is a real energy policy.

Hopefully, someone on the state of California legal team will read this article and decide to change their courtroom strategy. How could they not win their right to higher mpg standards if they can easily prove the state's economy will be thrown into chaos if they don't? Some would argue that oil at $119/barrel should be argument enough....

Meanwhile, the California effort should be applauded. US federal and state tax agencies should continue (or start) to give large incentive tax breaks for citizens purchasing fuel-efficient cars such as the Toyota (TM) Prius or the Honda (HMC) Civic GX NGV (natural gas vehicle). This car is way cool, but could someone drive across the country in it? The US should also be building out the infrastructure to refuel nat gas powered automobiles. Boone Pickens is a great fan of NGV's and his company Clean Energy (CLNE) is the largest provider of vehicular natural gas in north America. The move to natural gas transportation should be encouraged and supported by the US government. They'll eventually come around, but there is still time to load up on major gas producers such as Chesapeake Energy (CHK) and ConocoPhillips (COP).

A more diversified investment would be Fidelity Select Natural Gas [FSNGX] which has a great long term return. California also has many cities which would be perfectly suitable for teaming up with Shai Agassi's Project Better Place. Why is project Better Place being adopted in Israel and Denmark but not California? Sure, the electric car's ranges is an issue, but there are many tight knit communities in California which could benefit from part-time usage of electric cars for short trips. Oh well, perhaps one day a leading US politician will mumble the words "peak oil". Somebody please send me an email when it happens.

Why is it that US policy makers are always years behind the Europeans? Americans should be tired of lagging on every major policy decision. Speak up and send your opinion to your Congress person, Senator, and Governor. The current President obviously doesn't care about real energy policy (his big contribution was ethanol, gee, thanks a lot!), but you may try contacting the current Presidential candidates.

Disclosures: The author is long COP and FSNGX. The author does not own HMC or TM, but admires their automobiles and does drive a Toyota.

Comments

[Tim Plaehn:]

The odds of a natural gas fueling infrastructure are zip with the pending change to hydrogen fueling although the equipment would probably be interchangeable. As I have written elsewhere, NG or hydrogen infrastructure will probably remain in the area of fleets like bus or garbage truck where they can install their own fueling stations. Personal vehicle will go to electric or electric/liquid fuel hybrids where the current electrical and fueling infrastructure will be readily fuel these cars. Liquid will be some combo of petroleum and biofuels.

2008 Apr 27 09:53 AM

[Sanibel:]

The jest of the article seems correct. It should be easier (and more reliable) to project the effect of peak oil in 20 years, than predicting the effect of greenhouse gases in 20 years.

The cheap shot against President Bush seems misplaced. Ethanol used to be part of the "gasohol" movement in the 70s. It recently replaced MTBE as an additive largely because of the environmental movement's opposition to the harm MTBE does to the environment.

2008 Apr 27 09:57 AM

[Sanibel:]

I meant to say "gist of the article". Can't say I am the best speller, sometimes.

2008 Apr 27 10:00 AM

[Michael Fit...:]

TimP: I am certainly not against hydrogen or electric powered autos as I did mention Project Better Place. Each have their issues: where will the hydrogen come from and is it safe? What is the range of the battery powered fully electric auto? My feeling is that the US has started so late and wasted so much time in transitioning away from the gasoline powered internal combustion engine that we will need all alternative sources. As you comment, NGV are now being used most successfully in fleets, and that is where Pickens' focus is on. However, as LNG terminals sprout up, why could NGV be used for personal transportation with some infrastructure buildout?

Sanibel: Two things, first: I don't think we need 20 years to project peak oil's effects: we are seeing them NOW. Boys dying in Iraq, $119/barrel oil, and oil-based raging inflation. Secondly, it wasn't a cheap shot against Bush: his ethanol program is his only "energy policy" of any substance and is a complete failure (like so many of his other policies: tax, fiscal deficits, weak dollar, etc. etc). The US ethanol policy is merely artificially holding down retail gasoline prices which is a short term effect only, but more importantly simply delays the US from making the substantive changes we need to be making to transition away from gasoline powered transportation. Meantime, using corn to fuel our autos is causing massive food inflation across the entire food complex. Currently, much cattle is being sold off because the cost of grains to feed them is so high. This is again causing a short-term effect of lower beef prices. Once this sell off stablizes, you won't even believe the prices you will see for hamburger at your local store. US subsidizing of ethanol should stop immediately. The only hope for addressing peak oil is a real energy policy:

seekingalpha.com/artic...

is a damn good start at the sort of initiative we need. I'm sorry for being so blunt, but in this respect, the 8 years of George Bush have been a complete waste of time. Nothing threatens US national security more than peak oil. Nothing.

2008 Apr 27 11:01 AM

[Bill James:]

CSX, the railroad, currently runs a TV commercial showing a Prius being loaded onto a rail car and states they can "move a ton 423 miles on a gallon of fuel."

The use of ultra-light rails, automated guideways, was identified by the Congressional Office of Technology Assessment in 1975 as a permantent solution to the 1973 Oil Embargo. Morgantown's Personal Rapid Transit was built and has delivered 110 million oil-free, injury-free passenger miles.

JPods version of provides on demand transport at about 183 miles per gallon. Except that they use no gallon. Solar collectors 6-foot wide, mounted over the rails gather 2.5 million watt-hours in a typical day. Enough to power 12,500 vehicle-miles.

Instead of building vast solar arrays in the remote desert, build them over the ultra-light rails that transport people and cargo with the convenience of a chauffeured car and the operating costs of an elevator.

Please visit jpods.com to see details.

2008 Apr 27 11:31 AM

[AlexS:]

Time to stop applauding politicians for setting goals that only take effect long after they are gone. It is not more commendable, for instance, to say we are going to cut global warming emissions by 50% by 2050 instead of 40%. The politicians are just laughing as the media takes this BS seriously (actually the journalists are laughing too, if they have any brains at all).

California has two problems. One is that they are doing essentially nothing about supply other than talk of pie in the sky. Nuclear is out, coal is out (clean or not). Their answer is to prescribe clean power plants built in another state. Is that courageous or what?

Their other problem: just look at the LA highways. Millions of people driving by themselves to work. No car pooling. No mass transit. You can keep prescribing small and smaller cars for the people, but what they will do is buy comfortable cars for their 2 hour commute. They will buy the smaller cars, and loan them to their kids to go over to their friend's house 5 minutes away.

We should support politicians who are for nuclear power (McCain as opposed to the other two). We should support politicians who are for drilling in ANWR or the OCS (most of them are Republicans, unfortunately so far not including McCain). We should oppose politicians (Obama and Clinton) who want to cripple the ability of oil companies to find more oil supplies. We should support mass transit in highly populated cities, and do it seriously. We should stop using clean energy as an excuse to throw big funding to our favorite universities and our favorite loyal professors.

2008 Apr 27 01:19 PM

[Michael Fit...:]

Bill James: many thanks for your response and website.

2008 Apr 27 01:33 PM

[Michael Fit...:]

AlexS: sorry to disagree with you, but i will support anyone who wants to raise automobile fuel-efficiency standards and who will tax the hell out of anyone who buys a hummer. if you took the time to read my energy policy, you will also see that i see no other way but to support nuclear energy along with post-processing of spent fuel. i also obviously support mass transit. however, i cannot and will not support republican politicians who believe, apparently as you do, that the US can drill its way, or produce its way, out of the realities of peak oil. it just isn't true - drilling in ANSR or not. it may help (very little) in the short term, but in the long run it is just another excuse to deal with peak oil in a logical, no-nonsense way. otherwise, we will continue to see much higher gas prices, much higher inflation, the continual decline in the value of the US dollar, and stock markets that continue to go nowhere (as they have done since bush has gotten elected). i wish "conservative republicans" would simply look at the raw economic data since bush took office and admit that "it just ain't workin'!" i mean, jeez, can you imagine what the "conservative republicans" would be saying about clinton (or any other democrat) if the results after 8 years in office was oil prices up 6x, the US dollar down 50%, inflation raging, and an S&P500 which after taking into account inflation and the decline in the US dollar are negative?? time to throw away the republican ideology and realize that the US has been completely bankrupted by the current administration in almost every way possible.

2008 Apr 27 01:41 PM

[rbblum:]

The rhetorical question (Why is it that US policy makers are always years behind the Europeans?) would be laughable if it weren't so sad as well as a historical disgrace . . . the political class placing their interests just one step ahead of the lobbyists and way ahead of their constituents - assuming they admit there is a constituency.

2008 Apr 27 02:18 PM

[AlexS:]

OK, Mike. Actually I left significantly more political comments on your previous discussion, so I won't repeat them here. I have read your energy policy and I basically agree with it. I don't particularly like a lot of what the Republicans have done but I recognize that the last 7 years have always included either a Democratic Senate majority or one that could filibuster successfully, and so I don't blame just Bush for every missed opportunity. He's sounding a lot like the Dems now anyway (ethanol, fuel efficiency. etc.). As for my November vote, like you I recognize the biggest issue is running out of supply and so I will vote for the candidate who is undeniably for nuclear energy. As you say, you can support whoever you want.

2008 Apr 27 02:23 PM

[AlexS:]

I will add something about the technical aspect of calculating fuel economy. If GM makes a flex fuel vehicle, the fuel economy of the vehicle is calculated assuming E85 is the fuel in use (although of course they mostly use standard gasoline) and the fuel economy is calculated on the gasoline part of the fuel only. Thus a large vehicle, if it gets, say, 15 mpg (like a Hummer), if it is flex fueled that is counted as a 40 mpg vehicle, for CAFE purposes. The auto makers are using this to store up credits for future "tightening" of fuel economy numbers. It's true that the latest energy bill lessens the use of this E85 fudge factor in the future. Time will tell of course if the politicians choose instead to extend it if their constituents are cool to very small vehicles. Beware of calculations in the hands of the politicians. As my sixth grade teacher used to say, "Figures never lie, but liars figure."

2008 Apr 27 02:37 PM

[whisperonth...:]

For your Honda GX NGV, this link might work better: automobiles.honda.com/.../ - since the other one didn't.

2008 Apr 27 03:29 PM

[Michael Fit...:]

Whisper: Thank you kindly! I will let SA know, and perhaps they can fix for me.

2008 Apr 27 06:13 PM

[EconDemocracy:]

Much of what you say makes good sense, and well put, but when you write, "The US should also be building out the infrastructure to refuel nat gas powered automobiles....The move to natural gas transportation should be encouraged and supported by the US government." I wonder if you are aware of the Natural Gas peak in North America. Have you read Julian Darley's work? We cannot afford to spend a huge amount of energy and resources on NG which is peaked in NA and not far from peaking worldwide (also NG is not "clean", with almost 60% of the carbon coal has (651 kgCe per toe versus 1123 kgCe per toe) and almost 80% the carbon pollution of oil (651/830=78.4%) but the nail in the coffin is peak in Natural Gas. Massive cuts in energy usage, public transit, shared cars, and yes as you said, electric cars possibly augmented with a very small oil tank for backup

2008 Apr 27 07:14 PM

[AlexS:]

These conversations end up being variations of kicking the can down the road. Mike likes natural gas, Econ says natural gas is about out too and points to electricity. But electricity is not free either, and in the main is generated by coal (dirty dirty), with new plants from natural gas, so it begs the question. Nuclear. Three problems. 1. Fear from the public, exacerbated by lots of politicians. 2. Jimmy and the Congress outlawed breeder reactors back in the 70's, so existing uranium supplies only last a couple hundred years. 3. because spent fuel cannot be reprocessed, nuclear waste ends up being 50 times greater than if you could reprocess it. So where to put it and how to secure it? Plants are just putting it out back. Yucca Mountain, the best technical answer, is opposed by some powerful politicians, who will probably be even more powerful in the next 4-8 years (if the polls are right). Heck, they're even talking about banning nuclear in some states and some countries. Plants need time to be built. Politicos just keep kicking that can. Someone needs to pick it up. The road is ending.

2008 Apr 27 08:06 PM

[Michael Fit...:]

Econ: Thanks for your compliments. Not sure I agree with you that NG is "not far from peaking worldwide", although I do agree things look fairly bleak in the lower 48. I doubt ConocoPhillips and BP would be building the alaska/canada/lower48 nat gas pipeline costing $30 billion and having a capacity of 4 billion cubic feet per day if they didn't think it was an economic and viable venture (they have forged ahead with XOM's participation, whose absence I still don't quite understand). There are 35 trillion cubic feet of proven nat gas reserves on the north slope, but some geologists have estimated as much as 200 trillion cubic feet could be there. That's alot of nat gas! Also, with LNG terminals sprouting up in or near the US, nat gas imports from the middle east and elsewhere become economical as well. I get alot of emails that say "this" or "that" is the *only* solution to peak oil. What I try to impress on everyone is that the nature of the peak oil problem is so large (at least for the US) that we will need contributions from ALL alternatives, which is why I am now a fan of even nuclear power (to power electric cars). 5 years ago I was not in favor more nukes. So, more power to people like Boone Pickens (NGV) and Shai Agassi (EV)with their alternatives to the gasoline powered internal combustion engine! I also agree with you, that we need more and alternatively powered public transit - the French are powering theirs with nuclear, the Germans with wind and geothermal, the US doesn't even have public transportation (for the most part). Alternative transportation is needed for not only people but for goods as well. It is a complete failure of government leadership that we are not already massively into this work. Instead, we are spending $4 billion a week in Iraq, all of whch could be going into a real energy policy instead.
I did read something Darley wrote about sustainability and localization and I agree that is where we are headed in the future for a large segment of society. That said, that transition will take decades and in the meantime to keep our economy from completely tanking, we must immediately begin to take the steps I outline in the energy policy I published earlier.

2008 Apr 27 08:17 PM

[AlexS:]

Energy has been brought to us by energy companies not by energy policy. A good part of energy policy lately has been to slow or stop the energy companies from doing what they do best and to attempt to control the energy markets. Trying to control what someone else produces is not a legitimate energy policy. Nor is blaming the energy companies, nor holding countless hearings, a legitimate activity. If politicians want to be movie stars they should resign and go to Hollywood with the rest of the crowd.

2008 Apr 27 10:18 PM

[StateofConf...:]

Part of the real solution is to stop illegal immigration in it tracks and greatly lower legal immigration. If we are having trouble with 300 million, what will it be like with 450 million people? Population control is needed, not just a rush to find more resources to feed uncontrolled growth.
We have wasted the last 8 years under Bush. Trillions of dollars spent for a war to free the middle east for democracy, as if a cult like Islam would ever be democratic. China could not have proposed a better president to destroy this country than the one we have now. If we are to have any chance at recovery, we must elect a democrat (and they are stupid on immigration).

2008 Apr 28 12:48 AM

[William Ellard:]

Hi Fitz;
I am also a believer of the peak oil concept. My view is the only quick way to tackle the energy/pollution issues is thru a change in the US's federal taxing system. Read this blog I posted on my fool.com CAPS page:


caps.fool.com/Blogs/Vi...

I also spend quite a bit of time fly-fishing in the mountains of Colorado......

2008 Apr 28 09:42 AM

[Michael Fit...:]

bellard: good article! in particular, you pointed out one issue that i knew about but neglected to add into my "energy policy" submission. that is private companies using public and BLM lands to extract natural resources without paying, in some cases, anything! this is a travesty and one that greatly accelerated under Bush's "leadership". whether it be oil, gas, coal, timber, or precious metals, Bush's buddies have been literally stealing the public's resources and not paying anywhere near market prices. This has to change. Only recently did the Feds raise rates on Gulf of Mexico oil production. In effect, if the US gov would quit subsidizing energy and other natural resources in this way, the prices would naturally go up and, since cost is the only thing americans appear to understand, conservation and efficiency would also rise. Couldn't agree more and I need to update my energy policy to include this fact. Rest of your article was well done as well.

That said, I am patiently waiting for the Colorado melt to finish and should be out there sometime in late June. I fish rivers near Salida, Basalt, and Alamosa to name a few. Perhaps we could wet a line and drink a cold pilsner by the riverside (I am serious). I like meeting new people in CO - especially fellow fly-fishers!

2008 Apr 28 10:08 AM

[ripskii:]

France has been reprocessing nuclear fuel for years and for many other countries too. The U.S. spent a lot of our money to build such a plant, but has never operated it. Solving the nuclear waste issue is key to future of building more generating capacity. Burying in the back yard of someone else is not a solution.

2008 Apr 28 11:30 AM

[AlexS:]

Bellard, your article has some good points. I would take a few exceptions. First, a lot of oil is produced on private lands. What has happened in the fairly recent past is that the Feds have identified potentially productive land and then basically seized it, and then set out to benefit from the fees or stop development altogether. I would say ANWR is an example. In that case it takes some gall to accuse companies of shortchanging the entity who seized the land. Second, if carbon dioxide is taxed as a pollutant, does that mean that everyone who breathes will be taxed as a polluter? How about all the natural sources of CO2? It seems a politicians tax heaven. Third, I don't look at companies as polluters when they produce energy. People are polluters when they consumer energy. However, I know Washington prefers to tax people through companies rather than directly, when they can.

Fitz, you really do Bush bash too much. As an example, you take Bush to task over the Gulf of Mexico contracts but as we all know those contracts were negotiated (and the escalation clauses left out) during the Clinton administration. Are you blaming Bush for Clinton's shortcomings too?

2008 Apr 28 02:45 PM

[Michael Fit...:]

Alex: it is not possible to bash bush too much. as someone earlier commented: China could not have had a more advantageous US president if they had picked one of their own choosing! as ted turner said today when asked if he thought bush should protest the China olympics over the tibetan question: "when you owe someone alot of money, you better be nice to them." that says it all. now, if you don't understand these statements, or don't agree with them, all i can say is you are living in a complete and ideological state of denial.

i repeat again (please read very closely Alex), under 8 years of bush we have:

- biggest fiscal deficits in US history
- biggest trade deficits in US history
- 50% drop in the dollar
- 6x increase of the price of oil and gold skyrocketing
- raging inflation
- an very ill-advised ethanol program
- raping of the US treasury and public lands by bush insiders
- two undeclared wars (unconsitutional!)
- $4 billion a WEEK down the rat-hole of iraq
- absolutely no energy policy to deal with peak oil
- US is now rated the number 1 terrorist threat in world polls
- US has lost its leadership on the stage of world opinion
- US supports torture
- encouragement of illegal immigration
- fed is cutting rates while inflation is rising (!??)
- fed bailed out a publicaly traded investment house and put the risk on the backs of the US taxpayers (!??)
- and, since we are in an economic setting here: the S&P500 has done absolutely nothing in bush's entire term when adjusted for inflation and the US dollars fall. in fact, it's negative.

im mean Alex, jeez man, do i need to go on?? this will be my last response to you. my opinion is that Bush will go down as the absolute worst president in the history of the US. no one else is even a close 2nd. you can thrash me further, or put more words in my mouth, but nothing you can say will change my opinion of bush. he has been a complete and unmitigated disaster from an economic perspective. so much for our first "MBA" in office. what a friggin joke.

2008 Apr 28 03:23 PM

[Michael Fit...:]

ps - most of bush's disastrous policies were pushed through in his first term, when he enjoyed a republican control of both the house and the senate.

pss - this why i am now a "retired republican". as a famous person once said, "i didn't leave the party, the party left me."

2008 Apr 28 03:29 PM

[AlexS:]

Fitz, as you say, nothing I say will change your opinion. So I'll just get back to work.

2008 Apr 28 04:23 PM

[oldtheta:]

Fitz, while I agree with the substantive points of your argument (i.e. we should move ahead aggressively in all alternative energy areas, including NGV, nuclear, etc.), your message will lose some support as long as you focus on bush-bashing. The fact of the matter is that neither party is pushing a reasonable energy policy, and neither the Congress nor the President has given significant leadership. For example,
1. Both parties jumped all over ethanol in order to garner support in the Iowa caucas. Are you kidding me?
2. Hillary is now suggesting an energy policy that LOWERS gasoline taxes, and then exacerbates the oil situation by instituting a punitive tax on oil companies. How much sense does that make?

Still, by and large, I agree with your energy points. You'll get more people to agree (and listen), if you spend less time on Bush. If you want a political argument to break out (as here), then start bashing. If you want a substantive discussion/feedback on energy issues, then focus on the policies we need, not the policies of the past.
JMHO

2008 Apr 30 10:15 AM

[Michael Fit...:]

theta: you are, of course, absolutely right. i fear i have lost AlexS forever. my angst is never personal...it's just overwhelming frustration at the "lost" bush years - 8 years when we could have been doing alot but didn't. it comes out of my fingers to the keyboard so fast sometimes i don't realize the impact and abrasiveness of my comments. anyhow, i will take your words to heart, and appreciate them. i really am trying to be proactive and provide constructive criticism, and my proposed energy policy is an attempt to do more than throw stones. if i lose audience because of bush bashing, that isn't good. that said, the energy policy IS a political issue as the task at hand to deal with peak oil must involve leadership and tax and spend policies at the political level. it is simply too big an issue to address without governmental action (IMHO). anyhow, thanks again for your comments.

2008 May 05 11:29 AM

[legmaker:]

I love this stock ahead of earnings, great job. T. Boone Pickens is the man when it comes to energy.

2008 May 15 09:24 AM