Sam: We're talking to David Cole, the Chairman of the Center for Automotive Research. We're here at the Alternative Fuel Vehicles Forum at the University of Michigan. Dr. Cole, where do you think that we're going with alternative fuel vehicles in the next few years and what do you think is going to be the primary direction that we're going to end up taking?
David Cole: Well, to begin I think we're making really amazing progress on two fronts. Both in the fuel side, on the energy side and then on the power train side, particularly with some of the hybrid technologies or advanced diesel technologies as well as the plain old ordinary gasoline internal combustion engine. We are finding that there's a reasonable level of potential improvement there maybe in the area of 20 to 25 percent at a relatively low cost and of course we are looking down the road a little bit further at some very exciting technologies with fuel cells and I'm sure we're going to hear a bit about that today from Larry Burns, who has been very deeply immersed in the fuel cell issue.
Continue reading Dr. Cole's comments on bio-fuels, CAFE, and oil prices and more after the jump. On the fuel side of things what I think is most exciting right now is what we're seeing in the bio-fuels and here I'm not talking about the corn and sugar cane or sugar beet or the starch or sugars used to make ethanol or other bio-fuels but when we start looking at waste materials like ligno, wood chips, cellulosic materials, I think the prospects of a real significant role for cellulosic bio-fuels in the future is quite high and it looks like the production costs potentially are going to get down in the area really in the next decade where they could be quite competitive and potentially a real game changer. There is the other technology that I think is just potentially earth changing would be the lithium battery technology. Both the lithium battery and cellulosic ethanol technologies I look at as more in the development path rather than requiring some basic invention. Invention is hard to forecast. Development you know you can do a little better job with that. But those two technologies are really key, it could enable the plug-in hybrid that we've been talking about, it could enable really significant volume substitution for traditional petroleum once we get into the cellulosic or ligno cellulosic bio-fuels and that's all I think very exciting. We don't know exactly what the time frame is going to be but it's not 50 years or 20 years, we're looking out here three, four or five years I think with some very major improvements in both power trains and in fuel cells.
SA: The other day I saw an article where they were talking to Dr. Christopher Borroni-Bird from GM who led the development of the Chevy Sequel and he was saying that he thinks that we'll be away from internal combustion engines entirely within ten years. Do you think that's realistic?
DC: I think it's tough and the reason that I say that it's tough is not about the technology of fuel cells, it's more related to where we going to get the hydrogen, how we going to transport it and how do you store it both off-board and on-board the vehicle. I think that's really a tremendous challenge. For example, we've got a lot of hydrogen around us in water. The trick is that the bonding energy of hydrogen and oxygen is so great it's very difficult to extract that hydrogen readily. If we have inexpensive electric power, no problem. But we don't have inexpensive electric power and there are other technologies that I think have to be utilized and of course if we take something like hydrogen out of a hydrocarbon molecule, what do we do with the carbon? We might be able to sequester , but where we get it, how we're going to store it and how we going to transport it I think are issues that are going to take a little longer than five or ten years.
Jeremy: You were mentioning cellulosic bio-fuels. What do you think the major stumbling block to actually bringing those to market right now is because currently all the bio-fuels that we're getting are coming from other sources.
DC: Yeah, corn and sugar beets. It's it's really in the chemistry of the manufacturing process and I think with some of the kinds of genetic engineering that is involved we're seeing really significant progress. For example, NREL the national renewable energy lab is going to be releasing a report shortly that looks at their projection on cellulosic ethanol in the area of about 2012 at about $1.07 to $1.10 a gallon and if you adjust that for the energy content to a gasoline equivalent that's in the area of about $1.30 or $1.40 a gallon and once you hit that level if we get it in mass production that really can change the game pretty dramatically. I'll tell you what my greatest concern is and this is a I think a fundamental issue where the government has to be involved. Not so much in the CAFE side on fuel economy regulations but what we have is a situation that could reassemble what we saw a generation ago when we were into an energy problem and that is all of a sudden we woke up one day and petroleum prices were $10.00 to $15.00 a barrel and it totally defeated investment in the alternative power technologies.
If, for example, with petroleum if we could put some type of a floor on the price of petroleum let's say $40.00 or $45.00 a barrel, I think that will continue to provoke interest in investment in these alternative technologies that that to me is extremely critical. If, for example, petroleum ends up at $15.00 a barrel and we tell people that we're going to raise the price to $45.00 to sustain this investment that's not going to work because we know that the population is generally very suspicious of anything that looks like a tax on fuel. On the other hand if fuel is at $65.00 a barrel and drops to $45.00 or below there is a good deal between $65.00 and $40.00 or $45.00 and even if it falls below that the consumer is still going to have something that is very positive in terms of inexpensive fuel but then will continue with the investment in the alternative technologies that are so critical. It's kind of like an insurance policy. I have a friend, for example, that has done a considerable amount of consulting with Aramco, which is the Saudi Arabian oil company, their national oil company and they're very concerned about both the developments of alternatives fuels as well as power technology because they see that as competing against the product that they have in the ground, which are dozens of years of petroleum and their interest is in trying to optimize the value that over the lifetime of that resource and one of the things that they did in the past and I think they would be looking to do again is to really defeat the enthusiasm and the interest in some of the alternatives that are really very very serious candidates today.
JK: So what you're saying is that as the alternative fuels become more popular and become cheaper and a viable alternative it concerns you that the petroleum industry will see that as a bit of an attack and .
DC: As a threat. And I'm not so concerned about the traditional petroleum industries here, the Chevrons, the Conoco Phillips and Exxons because these companies are basically energy companies. They'll be in whatever energy we use. Some probably more so than others, but when you look at some of the producers in the world, they're the ones that have really a high stakes game..
JK: The countries actually pulling petroleum out of the ground.
DC: That's right. They're looking at a potential competitor that has real dimensions to it. Corn is never going to be a significant factor. It's probably more dependent on the tax subsidy today than the real economics but once you get into the cellulosic materials you begin to look at the world and the ability to grow things using new carbon versus old carbon, the scale of that is really pretty substantial and once we hit something in the area of $1.50 a gallon on gasoline equivalent for these bio-fuels we're into a very different game and things are happening very fast. I mean in my judgment right now the speed with which things are unfolding is really quite extraordinary. We're beginning to harvest some of the intellectual property that was where we had put seeds in the ground in the past, we don't know exactly where it's going to go but on those two areas of the lithium battery technology and cellulosic, ligno cellulosic bio-fuels this is coming along at a hundred miles an hour right now and we want to do everything to facilitate that rather than to shut it down and turn it in a different direction.
Sebastian: It sounds a little bit like in your predictions of how much power the alternatives would have, that you've seen possibly that oil could go back down to $10.00 a barrel, you mentioned that.
DC: Absolutely. At the margin you don't have to start impacting very much to have an impact when the supply and demand curves start getting close together as they are today, this causes these all wild gyrations that we've seen. You know a storm in the Gulf of Mexico for example or a terrorist issue in Algeria or Nigeria, these can cause problems. But once you start getting a little separation between the supply and demand curves then you're pricing can change pretty dramatically. What I would look at is the investment that we're making today in these advanced technologies as like an insurance policy. We know that we're going to have to have highly dense energy to sustain the life on the planet that we have. There is no option. We can't go back to basically riding horses and doing things that way without getting rid of a lot of people.
But as an insurance policy the more we work on this, what that does, in fact my personal number is for every dollar we invest in the alternatives our economy benefits by ten dollars in terms of less expensive energy. That is if petroleum is $50.00 rather than $60.00 our economy benefits and if we can use some of that savings to continue to invest in the alternatives, we're just going to move down the road a little further, a little faster and that's very important from a policy prospective. Probably the most important policy initive in my judgment is not fiddling with CAFE, which I think is poor regulation because there's no market incentive to, how do you get people to buy what you build if they don't want to buy it. Well that's a problem and CAFE doesn't deal with that. It's all command and control. But if we can induce investment in the alternatives we're going to be way ahead over the longer term. If we move as quickly as we can to establish some type of a floor on petroleum prices that the investment community say is serious, it's in place and it's going to continue the enthusiasm for investment in the alternatives that we're so excited about.
SA: How would the government go about establishing that floor and set a minimum price like say $50.00 a barrel and if the price goes below that you tax it up to that price.
DC: You just tax it up to it. I think there are different ways that it could be implemented, but the idea is to put a floor on petroleum pricing that the investment community, whether it's an auto company or private equity company can say I'm going to invest because I know that my investment is protected against very inexpensive petroleum and other energy sources.
SA: I think the the only the problem there that I see is that raising the fuel economy standard is a politically easy move for Congress to make because it doesn't directly hit any of the voters.
DC: Well, it does...
SA: It's easy for them to do that but if we talked about establishing a floor that involves actually potentially implementing some new taxes, politicians are going to run away from that one as fast as they can.
DC: Well, if you have some chance of doing that, if you're starting high and going from say $65.00 a barrel to $40.00 a barrel because the consumer then wins with the falling petroleum prices and we also win by still encouraging investment in the alternatives. One of the realities of Congress and this is in a slightly different area but is related to what's going on with CAFE is what we saw in 1974, you guys are a little bit younger than that so you weren't around or were paying much attention to what was going on then. Congress actually passed what was called "The Seatbelt Interlock Standard" in 1974 and this was a very well-meaning policy. The idea was that when you got in the car you couldn't start it until you fastened your seatbelt, and the idea was that it was going to be providing safety, people would wear seatbelts and that would be great. This was implemented and within a few months the consumer uproar about this was unbelievable and basically what Congress said was "Oops we made a mistake."
Now the cost of that mistake as viewed to the industry that put this in was maybe $20.00 a car. But what happens now if the industry collectively has invested fifty billion dollars of technology that has now become too expensive, it's taken away what people wanted in their larger vehicles for larger families for their lifestyle and what happens then if Congress says "Oops we made a mistake." Now you have really put a lot of people out-of-business because you in a sense changed the game very quickly. And what is a concern with CAFE is that you can make any kind of regulation, one hundred miles per gallon. The fact is today a consumer.. actually the number that they're talking about is 35 miles per gallon in the next decade. You can buy a 35-mile per gallon car today. There's a lot of them on the market. The problem is that people don't want them. On a high a level it compromises their needs, their lifestyle and even at $3.00 a gallon they don't buy them. Well what happens if we implement so all vehicles, say all passenger cars have 35 miles per gallon in a few years and the fuel ends up being $1.50 a gallon, what are consumers going to say about that product. They're going you know be very upset about it. And the reality is a year from now we could be seeing fuel that is $1.50 a gallon or $4.00 a gallon or anywhere in between. That's probably a realistic range. And even this year, in six months I paid less than $2.00 a gallon for fuel less than six months ago.
So where is this gain and the problem with CAFE is is that it says industry you have to do this but there's no incentive for the market to follow what the industry has to do. If fuel prices are high there is an incentive. If fuel prices are low there's not and you've got a real problem in this disconnect between the market and what the manufacturer's can do. Product development times are in the area of two years versus five years, 10 or 15 years ago, the cost of developing a product or even more expensive the cost of developing a power train and you're into billions of dollars very very quickly and if you don't have some assurance that you can recover that from consumers that buy your products and you can sell them profitably you've got a problem in staying in business.
So CAFE in general, the way I look at CAFE and I listen to people talk about it, my general conclusion is the less people know about economics and technology the more optimistic about what what you can do. The more you understand economics and technology, the more reserved you are because you have to live with a set of restraints that are very real and that you understand. If you don't know anything about it it's no big deal. Like I don't know much about heart surgery and it's a piece of cake you know you just cut a guy open, you saw the breastbone and it's trivial because I don't know anything about it. If I knew something about it it would be very, very different altogether.
SB: I just it seemed to me that there was a little bit of ease with which you separated the idea of gas prices and what benefits customers receive if their cars got a lot of miles per gallon but gas is very cheap from an environmental perspective and obviously you're not from the environmental research center you're from the Center for Automotive Research.
DC: Yeah, I really struggle with issues related to global climate change, which is kind of the foundation. What I don't struggle with is that the whole concept of conservation and energy efficiency is really important. I mean we're dealing with finite resources. But we have to deal with those in the context of practical dimensions of technology and economics and that's where I really struggle. When you you you see people glibly talk about things. I was just on the way down here today and I was talking to a reporter with the San Francisco Bee which is in California and about the California Initiative and the projections of different technologies and what they are going to achieve in terms of fuel savings and they're actually not too far off, which indicates that somebody that has a fair knowledge of these technologies is in the middle of it. But often what you do, you look at three different technologies, this is worth 5 percent, this is worth 5 percent and this worth 5 percent. Let's do them all and get 15 percent. It doesn't work that way
When you start putting technologies together, we find interfaces, interferences and complexities that don't add up numerically like we would like them to do. But you know if you really don't have any experience with this there's a tendency to not think in those terms. But when you're when you're constrained by the basic laws of nature as a PhD in engineering I realize I've got to live with the second law of thermodynamics and it's not going to go away. Congress can pass a new second law of thermodynamics and we still have to live with the old one and what is I think particularly important today is to get appropriate balance between pushing hard to become more environmental in terms of our resources. It's just, any way you want to look at it it's a good thing. At the same time having a balance with technology and economics, which are necessary to ensure the kind of development of these technologies.
SA: We really appreciate you taking the time to talk to us Dr. Cole. Thank you very much.