Monday, November 18, 2013

Robust Versus Feeble Competition: A Key Distinction

We have two very different ways fuels can compete with each other. One is what we have now — different cars competing with each other, each car using a single source of power: gasoline or compressed natural gas or electricity or hydrogen, etc. The other way is for the cars themselves to be capable of using multiple power sources, like flex fuel cars, plug-in hybrids, Ford’s new CNG-gasoline truck, etc.

Competition between cars is feeble. It is weak, slow, expensive, and cumbersome. It will do very little to lower fuel prices. Competition between power sources within a single vehicle, on the other hand, is robust, vigorous, agile and immediate. It pits fuels against each other, creating a strenuous daily battle to provide the best deal for the consumer. That's the kind of competition we should be aiming for.

To brew coffee at home, imagine what it would be like if each different kind of coffee required a different kind of machine. If you wanted to brew Folder’s coffee, you had to use a Folder’s machine. If you wanted to make Peet’s coffee at home, you had to use a Peet’s coffee machine. Each machine costs, let’s say, $100. You would be able to say that technically the different kinds of coffees are competing with each other, but it is also clear that this is a far cry from what we have now — where a single drip coffee machine can brew any of these brands of coffee, which forces the brands to compete more directly with each other. They must constantly try to outcompete each other to get your coffee dollars.

What if Peet’s dropped the price of their coffee, and you really liked Peet’s coffee, but you had a Folder’s machine? You couldn’t take advantage of the new low price for Peet’s unless you forked over 100 bucks for a new machine. You might hesitate to get the new machine. Peet’s new lower price might be temporary, after all. And how long would it take for you to recoup the 100 dollars for the new machine at Peet’s new low price?

That’s the choice people have now with cars and fuels (but with far more money at stake). You can buy a CNG car, but the car is more expensive than a gasoline-only car, and it still runs on only one fuel. No fuel choice. And what happens if natural gas prices rise and/or gasoline prices drop? You cannot easily switch fuels. That’s what happened in Brazil during the mid-80s and early 90s — the country had switched most of their cars to ethanol-only cars in the early 80s (flex fuel cars hadn’t been invented yet), but OPEC decided to drop the price of gasoline very low in the mid-80s. Brazilian drivers of ethanol-only cars were paying much more for their fuel than the owners of the old fashioned gasoline-only cars.

Competition between cars is feeble compared to competition between fuels within a single car. Think about what happened to phones. Originally, each cell phone had different features, and you could choose between phones. This was weak competition, though, because phones cost money and you often had to agree to a two year contract, etc.

Now most phones are capable of using apps. The apps are competing within single phones, and innovation has exploded. You don’t have to buy a new phone to get a new function. There are literally millions of apps available, doing every conceivable thing, with the level of innovation rising exponentially.

The same thing could happen in the fuels market. Imagine automakers creating cars that can use multiple power sources — the more power sources the better. For example, General Motors is coming out with a Chevrolet Impala in 2015 that will be capable of using gasoline or compressed natural gas. It will have two different tanks. Drivers will be able to fuel up on either, so those two fuels will have to compete against each other at the pump.

But GM could go even further. Since the car can burn gasoline, with a few very minor tweaks it could also burn ethanol, using the same liquid fuel tank used for the gasoline. Now all three fuels would have to constantly battle each other.

When the EPA changes its regulations, methanol could be added too. Four fuels in a single car. That's starting to look like robust competition.

Methanol and ethanol can also be made from multiple feedstocks, and those sources would have to compete with each other. Most methanol, for example, is made from natural gas. But it can be made out of many things. If a local waste conversion facility was turning garbage into methanol, it could compete with methanol made from natural gas. They could compete on price, and they could also compete on other factors. Even if the methanol made from local waste was more expensive, some people would rather buy it because it is local or because they want to support that industry, or for whatever reason. So even between different sources of methanol, we could have competition. The same would be true for ethanol.

But we can go still further. If the car can burn compressed natural gas and gasoline and methanol and ethanol, it might also be a plug-in hybrid. Now all those fuels would have to compete directly with electricity.

The point of all of this is that we need to draw a clear distinction between vehicle competition and fuel competition. They are two very different things. And we should be aiming most intently at fuel competition. We should aim at pitting fuels against each other in real time.

Methanol sells today for 93 cents a gallon. It is only 60 percent of the energy density of gasoline, but that still makes it half the cost of gasoline per mile driven. This low cost is in the absence of a vigorous competitive fuel market. If methanol was allowed to fight for our fuel dollars in an open market (which is what the Open Fuel Standard would accomplish), methanol could get even cheaper, and gasoline would have to radically drop its price if it had any hope of competing.

Robust fuel competition would transform our economy. Each of us would have more money to spend, which would create more jobs. The strategic importance of the Middle East would dwindle, which would allow for fewer conflicted foreign policy decisions. We’d save billions that we now spend protecting shipping lanes for oil. Every power source we’ve mentioned — CNG, ethanol, methanol, and most sources of electricity — produce less pollution than petroleum fuels, so the competition would be good for our health too. The petroleum industry would no longer have a monopoly and the excessive power it gives them. America would be a happier, freer, more prosperous country.

You can help us make this happen. Begin here.

Author: Adam Khan, the co-founder of and co-author of the book, Fill Your Tank With Freedom. 

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