|
|
Profiting Form the Automotive Energy Revolution
(Editor's note: There have been significant improvements in automobile power train efficiencies over the past couple of decades. But have these improvements translated into any overall reduction in demand for fuel? Byron King explores...)
Today the automobile business is vast. It is a global industry that has evolved by leaps and bounds in the 100 years since Henry Ford made his famous remark in 1908 about building "a car for the great multitude." The worldwide customer base includes at least a billion people - spread over six continents - who have income sufficient to buy a car or small truck. According to figures assembled at the MIT Sloan Automotive Laboratory, there are about 700 million automobiles and light trucks in the world. About 30% of those vehicles are in North America. And that world number is growing fast, particularly in Asia. Just in 2006 (the most recent year for which there are accurate figures), almost 63 million new vehicles rolled onto the world's roads, and 80% of them were sold outside of North America. So these days Henry Ford's reference to the "great multitude" takes on a whole new meaning. Every car requires steel, aluminum, copper and lead. Each car requires rubber, plastic, and myriad of other petroleum and natural gas by-products. And there is much else in the long industrial ladder of automobile production. Just think in terms of the energy that goes into processing materials, fabricating parts, building components, assembling a finished product, and all the transportation along the way. In addition to the basic energy and material resources that go into manufacturing an automobile, the sheer number of vehicles reflects a lot of fuel tanks to fill with gasoline and diesel. And this does not even touch on the energy and resources that go into building road systems. In the U.S., for example, transportation consumes about 30% of all primary energy, according to the MIT Sloan Laboratory. (The two other large energy using sectors in the U.S. are electricity production and space heating.) Within the transportation category, essentially all fuel has historically been petroleum based. In the U.S., about 60% of all liquid fuel goes for personal transportation. Freight hauling uses 30% of fuel. And aircraft burn the remaining 10% of fuel consumed. The recent push in the U.S. towards utilizing corn-based ethanol as fuel has consumed near half of the domestic grain crop in 2007 to supply about 3% to 4% of daily U.S. demand for blended transportation fuel. Using half the grain crop for fuel has also, of course, led directly to increasing the price for many basic foodstuffs. The oil shocks of the 1970s-in both price and availability - spurred improvements in auto energy efficiency within the U.S. as well as worldwide. In the U.S., the increase in fuel efficiency was related to rising costs for gasoline, as well as government mandates for higher fuel efficiency dating from the late 1970s. On average over the past 25 years, the typical power train of gasoline-fueled automobiles in the U.S. has improved in efficiency by about 1% per year according to data gathered by MIT. While discrete, 1% improvements may not appear to be much, the compound improvement in the typical U.S. automotive engine over 25 years has been about 30%. There has been even more progress in the fuel efficiency of diesel engines over the past 25 years. Diesel power trains are no longer the sooty, "knock-knock" devices that they were back in the days of disco. Most cars sold today in the European Union (EU), for example, are powered with clean-burning, fuel efficient, smoothly running diesel engines. In fact, the demand for diesel fuel in Europe is such that EU refineries routinely ship surplus gasoline to sell into the North American market. And in North America the relatively low prices for gasoline throughout the 1980s and 1990s discouraged the use of diesel engines. So there have been significant improvements in automobile power train efficiencies over the past couple of decades. But have these improvements translated into any overall reduction in demand for fuel? No. In 2007 motor fuel consumption in the U.S. was high as it has ever been. (Although according to the American Petroleum Institute, demand for motor fuel may be at a plateau due to price increases at the pump in 2006 and 2007.) Between 25 years ago and now, there are more people driving more cars for more miles. But compounding the fuel issue, the cars that people are buying and driving tend to weigh more and offer higher performance. And it is not just those dastardly soccer-moms driving their fuel-guzzling SUVs. Even compact and sub-compact cars tend to have more elements that require higher fuel burn, from safety features to power-sucking accessories. So almost all of the progress of the past 25 years - that 30% improvement in power train efficiency - has been internalized to the vehicle and driver, and not reflected in overall demand destruction for motor fuel. As we say over and over again in Outstanding Investments, we live in a world of peaking oil output, and of energy and resource scarcity. So the trend lines for fuel usage by automobiles simply cannot continue for much longer. The first, most obvious sign is the rising price for oil and by extension for fuel at the pump. Something has got to give, and the energy markets are sending signals of long-term high prices for motor fuel. Where do we go from here? Well first, people and policy makers have to realize that there is an energy problem. Everyone has to realize that this is something permanent, going forward. "Peak Oil" will not pass if we ignore it long enough. And no one can solve the problem just by bellyaching about the rising price for gasoline. It helps to view the age of the automobile-and its future - as a systemic whole. And some social critics are out in front of the broad discussion, with a sharp focus on the automobile and what it has brought us as a society. James Kunstler, for example, author of highly regarded books such as The Geography of Nowhere and The Long Emergency, believes that the car-dependent suburban buildout of the U.S. may be "the greatest misallocation of resources in all of human history." That is, in an era of expensive energy and scarce resources, a car-dependent culture has no real future and is in fact a hindrance to progress in other directions. That is quite a viewpoint, well-presented by Kunstler in his writing. It's depressing, but it sure gets your attention. And criticism of the automobile culture is not confined just to social commentators like Kunstler. Another remarkable indictment comes from no less an automotive insider than Prof. John Heywood, the director of the MIT Sloan Automotive Laboratory. He has stated that "cars may prove to be the worst commodity of all." According to Prof. Heywood, cars are "responsible for a steady degradation of the ecosystem, from greenhouse emissions to biodiversity loss. What's worse, even if we improve vehicle efficiency, turn to fuel hybrids or make rapid advances in hydrogen-based fuel technologies, the scale for slowing down the degradation may run to the decades. Turning the curve won't be easy." You can agree or disagree with the broad themes of Jim Kunstler or John Heywood. But there's no argument with one of Prof. Heywood's points. Wherever we are going, it will not be easy to "turn the curve." Looking forward, the oil just is not there to fuel cars in the future in the way that we did it in the past. So a lot of people are going to have to do things differently. Worldwide, the automobile industry has seen the handwriting on the wall. Fuel is expensive, and is getting more so with each passing year. So the industry has invested tens of billions of dollars in improving engine and power train efficiency. In addition, auto designers are coming up with new ways to eliminate weight and drag. (At higher speeds, up to 70% of the energy used to turn the wheels on a car goes just to push the air out of the way of the chassis.) The auto industry is looking towards different sorts of fuels, and moving towards what is called fuel-flexibility. One example is called the GEM engine, which can run on gasoline, ethanol or methanol. (The methanol could come from coal; the ethanol could come from non-food biomass.) And other concepts for running cars include using hybrid engines that incorporate novel battery or fuel cell technology. These electric technologies commonly incorporate an ultra-efficient internal combustion engine to charge the cells. Or the electric drive might incorporate "plug-in" features that will closely tie the future automobile into the electric grid. All of this lays the foundation for our investment idea. We are going to stake a claim to the very heart of the car of the future. As you can probably discern from the discussion of cars and power trains in this article, the car of the future-and I mean the near future, within the next couple of years - will not be, as the commercial says, "your father's Oldsmobile." But the car of the future will trace some of its lineage back to Henry Ford's experimental "soybean car" of 1941. And then some. The car of the future will be much lighter due to the extensive use of plastics and other engineered materials. The only way to increase mileage is to eliminate weight. And the car will be far more aerodynamic than anything you are used to seeing. Under the hood - well, there might not be a hood like you are sued to seeing; the power train will actually run throughout the length and breadth of the vehicle - the future car will be powered by far more than an internal combustion engine. It will be something like a GEM engine at the core. Much of the mass of the car, and even some structural elements, will be a series of storage batteries. To make it all run, there will be a very robust electrical system that powers almost everything. Down where the rubber meets the road, electric motors will drive each wheel. At the heart of that electrical system in the future car will be a small army of computer chips and power distribution buses and other related devices. These chips will control the power train, and send electricity to numerous motors that do everything from turn the wheels to adjust the rear view mirror. The chips will monitor and control overall power levels. The chips will also monitor safety features and conduct internal diagnostics of auto systems. The chips will communicate the status of the vehicle to you personally if not to some central location (similar to the General Motors On-Star feature, but more evolved). Overall, the car of the future will have more chips inside it than the space shuttle. Until next we meet, Byron W. King P.S. Until tomorrow night at midnight, you can get Outstanding Investments (which I co-edit with Kevin Kerr), my newest service Energy & Scarcity Investor, and Kevin Kerr's Resource Trader Alert. |
 |
 |
Every automobile on the roads of the world reflects a long and complex chain of industrial production and energy usage. Yet we live in a world where many of the highest quality resources and energy supplies have already been exploited. And lower quality resources are more expensive to extract and exploit, if they are even available. So the world's automobile industry is in the midst of a revolution in both resource availability and energy consumption. In this article we will look for a way to profit from the energy revolution in automotive transport.