Michael Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research.
The re-election of President Obama and the efforts to reduce the deficit are likely to see the country re-visit the issue of technology promotion, particularly with regards to photovoltaics and electric vehicles, two high-cost alternatives that receive extensive subsidies from federal and state governments. The Navy is also fighting to defend its biofuel policy, arguing that increased use will lead to lower costs. In California, the state has a notably aggressive program to require the sale of electric vehicles and, ultimately, hydrogen fuel cell vehicles, with the intention of making them economic in the future.
The Obama administration and many environmental groups argue that these subsidies and mandates will result in lower costs and, eventually, commercial success. Unfortunately, this is based on several specific incorrect assumptions about the way costs behave.
For one thing, it is often asserted that while new technologies experience falling costs, costs for conventional energies "must rise," making new technologies competitive when the curves cross. This is a myth, however. Electricity prices have not risen over the past half century, and natural gas prices are the same as three decades ago. Only oil is higher, and primarily due to political unrest in the Middle East and elsewhere. The point at which electric vehicles, for example, become competitive is much further into the future than proponents anticipate.
There is also confusion about what makes costs fall. New technologies usually experience a brief period of rapidly falling costs, as inventors optimize their engineering. And scaling up production in size from lab-bench to pilot plant to mass production does bring costs down quite a lot, but once factories are built, those benefits are achieved. Afterwards, progress slows and becomes relatively gradual, due to myriad small improvements. However, this is true of competing energies as well.
Another misconception stems from the comparison with advances in electronics. It's true that a modern car has more electronics in a few chips than would fill its trunk three decades ago, but that does not inform us about advances in battery technology, which is chemical in nature. Simply observe that today's automobile batteries, while improved over those in the 1970s, remain roughly the same size.
And the argument that subsidizing purchases will make photovoltaics cheaper is seriously overstated. Costs drop from economies of scale, it is true, but these were achieved long ago for photovoltaics cells. The learning curve effect does mean that production costs will drop as more are built, but only incrementally, and they won't become competitive for a long time. Instead, new types of photovoltaics which are much more efficient or much cheaper to produce are needed, and this will come from laboratory research, not as a result of more experience on the assembly line. The number of photovoltaics panels sold now will be nearly irrelevant to future costs.
Finally, mandating new technologies, like electric vehicles or hydrogen fuel cell cars, as California does is foolish. If it were not, the government could mandate a cure for cancer, rocket packs, or floating appliances. Gradual progress in, for example, automobile efficiency can be encouraged by government mandates, but breakthroughs do not obey the whims of politicians. And the argument that the mandates will achieve at least some progress, even if ultimately unsuccessful, completely ignores the cost to industry of having to shift research into mandated fields and start and abandon projects with changing political fashions. This lack of concern about imposing costs on industry is one reason why California is considered unfriendly to private investment.
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