Monday, December 6, 2010

Electric Cars Boom?

There are only about 40,000 electric cars and trucks in the U. S. today compared to a total for all cars and trucks of 246 million. That works out to about 1/60th of 1% marketshare for electric vehicles. This will change dramatically beginning in 2011. According to a study commissioned by the Center for Entrepreneurship & Technology at University of California at Berkeley published in August 2009, by 2030, less than 20 years from now, U. S. electric car sales are forecasted to account for 64% of light vehicle sales and comprise as much as 24% of the entire light vehicle fleet!

How do we know this very major vehicle transformation is likely to happen? Why is this very important? And what are the consequences for our economy and government policies? Aside from this study, we know this boom is likely to happen for a number of reasons. One big reason is the big success in recent years for the hybrid cars, especially the Toyota Prius, which run on both electricity and gasoline, developed and sold by most of the major manufacturers. Another reason is the very ambitious plans many of the manufacturers have for building and selling all-electric cars, including the all-electric version by Toyota of its Prius, General Motors' Chevy Volt, Ford's Focus, and Renault-Nissan's Leaf.

A big third reason is the performance and ambitions of a little known 42 year old very smart guy from Israel named Chai Agassi. (I don't know if he's related to Andre, the tennis player.) I saw him interviewed on TV a few days ago on Charlie Rose's TV program and was very impressed. He started out at 18 as a computer programmer who later founded some software development firms. Then in 2002 he joined SAP AG, the very large German headquartered business management software concern where he quickly became their chief technology officer. In 2003 at age 35 Time magazine named him Most Influential Businessman in the World!

Agassi left SAP in April 2007 to pursue interests in alternative energy and climate change and in October 2007 founded a company he named Project Better Place, having been inspired by a question asked by a fellow participant at the 2005 World Economic Forum in Davos, Switzerland. The question was "How do you make the world a better place by 2020?" The focus of his company was developing a green transportation infrastructure based on electric cars as an alternative to the current fossil fuel technology, i. e. cars fueled by primarily by gasoline.

What has Agassi done with his company now called just Better Place since its founding a little over three years ago? It's pretty amazing. He has developed a business model wherein customers enter into contracts to purchase driving distance similar to the mobile telephone industry where customers contract for minutes of airtime. The electric cars will be built and sold separately from their battery pack provided by Better Place, just like today's cars fueled by gas are sold separately from their fuel. Customers won't own the battery packs, but must lease them from Better Place, who will build a network of battery pack switching exchanges where customers can obtain new installed batter packs in just a minute or so, much faster than one can typically fill a car with gas at a gas station.

As of April 2009 Agassi had raised $400 million in venture capital to finance initial operations and received tax break offers from several countries and states. The investors include the big investment banking firm of Morgan Stanley. The initial implementation of his business model will take place in Israel with all needed agreements already in place in a partnership with Renault-Nissan who will build the electric vehicles. Renault has committed to spend $600 million over three years to develop a car with swappable batteries. Last year Better Place successfully demonstrated their switching station in Yokohama, Japan at the invitation of the Ministry of the Interior. In April this year they launched a 90 day similar demonstration for taxi electric cars in Tokyo using three Nissan Rogue crossover utility vehicles that had been converted into electric cars. Apparently this also went well.

The company has also announced an agreement to set up a network in Australia with energy firm AGL Energy and financial advisor Macquarie Capital Group and expect to raise hundreds of million in capital there. And in October this year announced a commitment to launch a three year demonstration program with electric-powered taxis in the San Francisco Bay Area in partnership with the cities of San Francisco and San Jose, taxi operators, several consumer and environmental organizations, plus the San Francisco Public Utilities Commission. Better Place has also announced that they have selected Denmark and Hawaii as two other test markets where network electricity will likely be generated by renewable energy from solar and wind farm sources. Finally, the company is currently in talks with more than 25 additional regions in the world, including Canada, California state-wide and Oregon. Interestingly, Better Place is now headquartered in Palo Alto in the middle of Silicon Valley.

It seems to me that Agassi and Better Place, just three years from its founding, are well on their way to being a major player in the electric car industry, assuming he has good, experienced people in place to help him manage their innovative, varied and growing world-wide activities in the U. S., France, Israel, Japan, Denmark, and Australia.

Why is this projected boom in electrical cars important? One of our national priorities is energy independence, especially from the Middle East and other unstable areas. U. S. oil imports in 2030 under the electric vehicle deployment scenarios are projected to be 18-38% lower than the scenario of improved internal combustion engine fuel efficiency, and this is equivalent to 2.0 -3.7 million barrels per day. In 2008 we imported 2.3 million barrels per day from the Persian Gulf. So one benefit from the boom is greater energy independence from lower oil imports. Another related benefit is an improved trade deficit, considering that 59% of our 2008 trade deficit was from oil imports.

Other reasons why the boom is important lie in health care cost savings and new attractive investment opportunities. The projected health care cost savings come from lower emissions of airborne pollutants when vehicles are charged using non-polluting sources of electricity. The net present value of these savings have been estimated at between $105 billion and $210 billion to 2030. That's obviously quite substantial. New investment opportunities are primarily in domestic battery manufacturing and deployment of battery charging infrastructure such as planned by Better Place. This ought to also provide opportunity for more U. S. exports in these areas, improving our trade balance. At present nearly all batteries in U. S. vehicles are made in Asia, especially China, South Korea and Japan.

Consequences for our economy and U. S. government policies? Our economy certainly should benefit, assuming the right government policies are in place to encourage the projected boom in electric vehicles. The benefit comes from greater energy independence, a better trade balance, new investment opportunities, higher net employment from new investments, and health care cost savings. Many different existing and prospective new government policies will and should be affected by this boom. Among those coming to mind are trade agreements with other countries, tax policies and incentives, congressional earmark legislation, environmental rules and regulations, and policies adopted by state and local jurisdictions as a result of federal policies and incentives.

In the policy realm there should, among others, be meaningful tax incentives to support domestic investments in battery technology and battery charging infrastructure, The federal government should develop plans to purchase primarily domestically manufactured electric cars for their large fleets, and trade agreements should serve to support the development of our domestic industries in these fields.

I realize there are opponents and skeptics to this electric car boom scenario. The oil industry, those who own gas stations, and those who supply parts to the combustion engine auto industry are likely to be both opponents and skeptics. You can bet that there will be lobbying pressure to stop or at least slow down the boom. Many car buyers will no doubt be skeptical about the capabilities, driving range and the convenience of charging or battery replacement stations related to electric cars. Environmentalists will no doubt have concerns with the electricity sources that will recharge and replace car batteries. Certainly there will be significant challenges.

However, what is quite positive about all this is that there will definitely be much more competition and innovation in the transportation industry. This should be very good for consumers, opportunistic investors and businesses, as well as our economy overall.

Wednesday, December 1, 2010

Our Unsustainable Federal Budget Deficit

As most Americans no doubt know, our country has substantial financial problems that require urgent attention. If appropriate action is not taken, the problems will only get worse and become much more difficult to deal with. Virtually all of us will ultimately be materially affected, depending on what happens or doesn't happen.

One of the biggest problems is our unsustainable federal budget deficit, that is the annual fiscal year difference between U. S. government revenues or receipts and spending or outlays. For both years ending September 30th in 2009 and 2010 the federal deficit has ballooned to roughly $1.4 trillion, equivalent to between 10% and 11% of the country's Gross Domestic Product (GDP), the highest rate since the end of World War II. So the government is spending $1.4 trillion more than its receiving in taxes and other receipts and can only do so by borrowing this amount from creditors, including especially in recent years China.

The borrowing adds to our outstanding public debt, which totaled $13.56 trillion or as much as 94% of annual GDP at the end of the last fiscal year. It also adds to huge amount of interest we must pay on this high debt level, budgeted at $164 billion for fiscal 2010! As the debt increases with large annual deficits and interest rates very likely growing significantly in future years, the interest burden will increase dramatically. Obviously this financial situation is unsustainable and moreover it is threatening our prosperity and important role in global affairs.

Recognizing the seriousness of this issue, President Obama appointed an 18 member bipartisan deficit commission in February this year co-chaired by former U. S. senator Alan Simpson, a Republican, and former chief of staff under President Clinton, Erskine Bowles, a Democrat. In a 59 page report the commission has come up with a large number of prudent proposals that reasonably well address the difficult deficit problem and likely become starting points for President Obama's budget plan for FYE 2012 as well as the budget plan to be put together by the Republicans when the new Congress convenes in January.

The full commission is scheduled to vote on the proposals at a meeting tomorrow. If 14 or more members vote favorably on the package, the commission will issue a formal recommendation to Congress and the White House. Even if that doesn't happen, I think the commission has done its job and its proposals will still probably serve as reasonable starting points for the plans of both parties.

The commission's report is based on a plan to reduce the deficit 75% through spending cuts and 25% through revenue (largely tax) increases. Among noteworthy spending cut proposals are freezing pay for federal workers, including members of Congress, for 3 years; cutting congressional and White House budgets by 15%, eliminating all congressional earmarks; and increasing the minimum age for receiving full Social Security benefits over a long timeframe. Revenue increases would come from, among other sources, a 15 cent per gallon gas tax increase (rate is currently 18.4 cents) and reworking the IRS tax code including eliminating itemized deductions and interest deductions on mortgages above $500,000 on individual tax returns, and closing tax loopholes which induce American companies to base operations abroad. Most of these changes are not planned to be implemented until 2012.

How the panel proposed to deal with the huge $453 billion spending on Medicare and $290 billion on Medicaid is rather complicated and not entirely clear, but they have recommended to increase cost sharing for Medicare recipients, reduce payments to physicians for services rendered and to hospitals for medical education services, and focusing more on eliminating Medicare fraud, among a long list. Importantly, the panel seems unanimous in not wanting to adversely impact the very poor in our population in their recommendations.

I generally have no problem with the above proposals, given what's at stake, except that we shouldn't necessarily wait to implement every proposal until 2012, such as beginning to cut Defense expenditures by closing down unnecessary or marginally needed overseas military bases. Other reactions:

1. With 70% of aid going to the largest 10% of agribusinesses, why not finally eliminate all farm subsidies, which can save us $25 billion annually, rather than just a fraction of this aid?

2. The current tax deduction for interest on mortgages apparently costs the federal government $130 billion annually. Retaining the deduction for homeowners whose mortgages are under $500,000, but eliminating it for those who have a larger mortgage makes sense. I'd also be open to a tiered structure where the elimination partially begins at say $300,000 and gradually increases to the $500,000 level. Hopefully any of the realistic options could save us close to $100 billion each year.

3. How about increasing the federal tax on cigarette sales, currently $1.01 per pack, and other tobacco products? It might not have a significant impact on current federal revenues, but it may induce fewer people to smoke, especially teenagers, and thereby reduce future federal spending on health care through Medicare and Medicaid.

4. We should consider reasonable means testing for Social Security recipients, so that those who earn more than, say, $250,000 in current dollars, who do not really need this income, do not receive any Social Security, or perhaps no more than 50% of what they would have been eligible for.

5. Noting that the panel is recommending 15% cuts in the budgets of Congress and the White House, why not the same cuts for all the federal departments and agencies, or are these included already in the White House budget?

We won't know exactly how all this will turn out for at least several months, and it could be years, but I'm cautiously optimistic that the government is finally on the right track toward a more viable and balanced budget. Hopefully, Speaker-elect John Boehner and President Obama and their staffs can work together to get this achieved on a basis that can be approved by Congress and judged fair and satisfactory by the majority of the American people. However, unfortunately there is a real possibility that stubborn and ill-advised partisanship pushed by the more radical groups on both the left and the right will jeopardize and delay a prudent outcome.