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Keystone Pipeline Is Dead – The Triumph Of Politics

WASHINGTON – Now it is official. President Obama announced that he is against the proposed Keystone pipeline that would have allowed Canada to ship oil directly from the Province of Alberta to the Texas refineries. The project has been officially killed.

A symbol 

It is no secret that this pipeline had become a target for all the US environmentalists who believe that fossil fuels are bad, if not evil. The argument against this particular project is that it would have delivered an even more potent poison. You see, Canadian oil is extracted from oil sands. The process is messy, and dirty. And it generates more emissions.

Therefore, preventing this pipeline from being built became a crusade.

And now Obama has finally taken a position. It is no wonder that in the end he had to agree with the various environmentalist groups. They are mostly Democrats. Hard to think that he would done anything that would alienate them.

Theological argument 

And what about his argument? Well, his argument is based neither on economics nor on any practical energy policy. In fact, it is akin to a theological argument. America is leading the world in the battle against emissions and climate change, Obama said. By approving a project that increases reliance on a particularly dirty form of fossil energy, America would have tarnished its own credentials.

It would have set a bad example, right before the United Nations Conference on Climate Change to be held in Paris on November 30. This will be a major international event in which all countries are supposed to prove how serious they are on combating climate change. Approving a fossil fuels project right before a global forum in which America will encourage others to commit to reducing oil related emissions would have looked bad.

Therefore, this is not about getting more Canadian oil. This is all about politics, ideology and symbolism.

Negligible impact 

Let’s make it clear. Whether you are for or against the pipeline, at the end of the day, when it comes to global warming this is a non issue. The fact is that having or not having this pipeline does not move the needle in any special way.

Enhanced energy security 

However, it would have been better to approve it for different reasons. The pipeline would have contributed to enhanced US energy security. Indeed, the Keystone pipeline should have been allowed because getting more oil from Canada (as opposed to importing it from OPEC countries in the Persian Gulf) would have added to American energy security. Getting about 800,000 barrel a day from Canada would not have been a revolutionary change. But it would have been a positive incremental step.

And here is why. Notwithstanding the huge increase in US domestic production that took place in the last 5 or 6 years, the US still imports almost 50% of all the oil it consumes. That’s about 9 million barrels a day. This being the case, it would be wise to get more of the oil we absolutely need (until something else will replace it) from Canada, a friendly neighbor, as opposed to importing it from the perennially turbulent Middle East. It is as simple as that.

The Middle East is a mess that we cannot control. Something really bad may happen there; and a major crisis may affect oil flows from the region. Therefore, if we had a choice –and now we do–  let’s further reduce our reliance on oil imported from the Gulf region and let’s get more oil from Canada, a friend and an ally.

Is this really so difficult to understand?

No impact on the environment 

As for the alleged negative environmental impact, the Obama State Department, technically in charge of all reviews regarding the proposed pipeline, stated that building Keystone would not alter US total emissions in any appreciable way.

Therefore, all considered Obama should have allowed this project to move forward. He did not do this for political reasons. Nothing to do with the merit of the case.

Does it make economic sense? 

Now, from a different perspective, one could argue about the wisdom of constructing this new Canada to USA pipeline right at a time in which there is a global oil glut, and oil prices are half what they used to be when people started planning for the Keystone pipeline.

May be it no longer makes economic sense to build it. Fair enough. But this is a business decisions to be made by TransCanada and its partners. It is not up to the President of the United States to decide if a project makes economic sense or not. This project would have been built by a private company, and not by the US Government.

Oil transported by rail 

And one more thing. The green movement applauded Obama’s decision as a good way to preserve the environment, while sending a strong message to the fossil fuels lobby: Watch out. We are going to get you”.

But here is the irony. Without the pipeline, substantial amounts of Canadian oil are and will be imported into the United States. This Canadian oil is loaded on trucks or freight trains.

Now, any energy logistics expert would tell you that these modes of transportation are much more dangerous than a modern, state of the art pipeline. As several train wrecks with explosions and fires caused by the oil loaded on rail cars have demonstrated, transporting oil by train can be a real hazard.

The issue was the pipeline 

But I guess that trains loaded with oil, occasionally derailing and exploding here and there, are not an issue for the environmentalists.

The issue was the pipeline. And now it has been killed. Victory.




Saudi Arabia Wants To Kill US Shale Oil

WASHINGTON – Saudi Arabia’s oil end game is to let prices fall and stay low for as long as possible in order to kill the less competitive American shale oil producers. It is clear now that Ali al-Naimi, Saudi Minister of Petroleum and Mineral Resources, is betting on Saudi Arabia’s ability to force high cost US shale oil out of the market.

Conventional wisdom about shale oil

Here is the conventional wisdom. Sustained high oil prices encouraged American companies to exploit US shale oil deposits. This new US produced oil means less oil imported from Saudi Arabia.

While shale oil profit margins would not be huge, (extracting oil from shale is much more expensive than getting “conventional oil” in Saudi Arabia), as long as oil stayed at around $ 100 per barrel, the Americans could sell their crude at home, make money and displace Saudi imports.

But if oil prices went below $ 80 or $ 70 a barrel,  there is no way that US shale producers could stay in business. Their production costs are just way too high.

Therefore, since Saudi Arabia’s production costs are much lower, it is smart to squeeze the new American competitors out by forcing oil prices down through over supply. Saudi Arabia still makes money with oil below $ 60 a barrel. But the Americans would not be able to stay in business and will be killed. Therefore let’s produce at full throttle, inundate the markets with excessive supply, and let prices go down and down. Unable to make any profit from their expensive oil, the US shale oil producers will simply go out of business. Saudi Arabia this way will regain its lost US market share.

What is the Saudis are wrong?

But what if the basic assumption about shale oil being unprofitable below $ 100, or below $ 90 is untrue? What if US shale oil producers can cut costs, and manage to survive and stay profitable even with oil below $ 60 per barrel?

Well, then we have entered a different era. The post-OPEC oil era. It would be really ironic if it turns out that Saudi Arabia’s effort backfired. Indeed what if the American shale oil industry will win by  demonstrating that unconventional oil producers are in fact much stronger than anybody thought?

American ability to innovate

So, the real issue at stake here is American ingenuity and the ability of the US shale oil industry to cut costs and stay profitable, even when oil is below $ 60 per barrel. Is this possible?

Until yesterday everybody would have said “no”. My gut instinct is to say “yes”, it is possible. I am basing this optimism not on any insider knowledge of the new extracting technologies being rolled out, but on the industry track record so far.

It could not be done

Please do keep in mind that almost all energy experts have consistently underestimated the strength of the US “unconventional” oil sector. Until just a few years ago, the consensus was that shale oil would never be profitable. Too many technical hurdles that could be addressed only at a spectacularly high cost. Well, that was not true. Hydraulic fracturing (“fracking”) and horizontal drilling made shale oil extraction possible and profitable. In just a few years the US added almost 3 million barrels a day to its total production. Amazing.

Then it was said that, even if some shale oil could be extracted at a profit, (assuming oil at $ 100 per barrel), this “mini boom” would end soon, because there was not that much shale oil, while shale oil wells would yield very little compared to conventional oil deposits.  Well, that was also proven wrong. Plenty of shale oil.

Enormous pressure to innovate

That said, can more and quickly deployed technological innovation keep the American shale oil industry in business? The pressure is both huge and sudden. Obviously the precipitous decline of oil prices forced everybody to go back to the drawing boards.

Is it possible to invent something new that will allow major productivity gains while reducing drilling and extraction costs? Can the US shale oil industry prove to be far more resilient than the Saudis assumed?

I do not know for sure. But, as I said, we have been surprised before, many times. The US energy industry is clearly engaged in a historic technological race, and it just may win.

If America wins

So, here is the picture. Saudi Arabia is trying to kill US shale oil producers, because their unexpected success is threatening its market share. But if the Americans manage to survive by demonstrating that they can make money even when oil prices hit bottom, and stay there, then they will kill OPEC.

Saudi Arabia needs high oil revenue to pay for everything

Indeed, let’s keep in mind that while Saudi Arabia is a low-cost, high volume producer, the Kingdom needs an enormous oil revenue (based on selling oil at or above $ 90 per barrel) to finance almost everything. While Saudi Aramco will stay profitable with oil at $ 50 per barrel, the Government of Saudi Arabia will not be able to function they way it is used to with a drastically diminished oil revenue. Less oil revenue means fewer subsidies for the poor, fewer investments in public services and infrastructure. In case you wonder, beyond oil Saudi Arabia has no other revenue.

I am really looking forward to the day in which Saudi Arabia, Russia, Iran and Venezuela will be hit hard by falling oil revenue. There is plenty of “unconventional” oil not just in America but around the world.

American energy companies may be able to prove that it is possible to extract it and make a profit even when oil prices are 50% below their peak. In so doing they will break the price-fixing power of the OPEC cartel which was based on the assumption that there is only a limited oil supply, while just a few countries control a huge chunk of it.

 

 

 




Uber Will Win Against Regular Taxi Services Because It Provides Better Service At A Lower Price

WASHINGTON – I have never used Uber, the relatively new car hire service now available in America and in many other countries. However, based on many news accounts, I think that it is a very good, customer-friendly innovation.

Technology makes Uber possible

Uber is made possible by IT technologies. You register using your smart phone. This includes downloading the Uber proprietary software and registering a credit card that will be used for future payments. You can also use a regular mobile phoene and communicate via text messaging.

Once you are registered, when you need a ride, you request it through your phone. The system does the rest. It can determine where all drivers are at any given time, and dispatch to your location the one nearest to you. You do not need cash to pay. It is all done through its software. Your card is automatically charged. All this is quick, simple, efficient. And it costs less than a regular taxi.

Simple and reliable

The beauty of the system is that the whole “call-wait-request a cab-get confirmation-wait for arrival-ride-payment” process is extremely simplified, thanks to the software that links the service provider to the end users. And, of course, because of the simplification, on average, Uber costs less than a regular taxi ride.

Established taxi services fight to keep their monopolies

And here we see the clash. Established taxi companies and taxi drivers do not like this “disruptive technology” at all. Understandably, they see these Uber drivers as upstarts who are stealing their “protected” income. Hence their push to force public authorities to regulate Uber and its drivers out of existence. “They are not complying with this and that. They lack licences, permits, and blah, blah, blah”.

I realize all this. It is obvious that any established, regulated business that enjoys a monopoly and therefore a rent position, simply because it has no competitors, does not want newcomers who can undercut its monopoly. And so they fight it.

Losing battle

But I suspect that this is going to be a losing battle. In the end, public services exist in order to benefit the consumers, and not the providers. If there is indeed a more efficient, lower cost solution to offer the same service to the consumer, eventually it will win.

The established interests will oppose it. And, depending on how market-oriented regulators and public official are, it will be just  a matter of time before the old-fashioned, regulated monopolies will be dead.

The internet killed most travel agencies

Look, travel agencies used to get a cut for booking your airline tickets. Before the internet, this was almost like a tax they collected each time they booked a ticket, simply because the consumer had no choice. Now you can book and buy your own ticket on-line. The internet turned out to be a death sentence for many travel agencies.

Likewise, until not too long ago, if you wanted to send a package, you had to go to the Post Office. Today, you have plenty of choices: FedEx, UPS, DHL and more.

Consumers want a more efficient, lower cost service

Getting a vehicle when you want it, through a reliable service, on simple terms, and at a lower price is highly desirable. Established taxi companies and taxi drivers will fight against this new development that undercuts their protected business. But, sooner or later, they will lose this rear guard battle against this improved and lower cost service enabled by modern IT technologies.

If I were a taxi driver, I would start looking for a different occupation, or jump ship and sign up with Uber. Join the lower cost, more modern, and more efficient industry. Do not fight it.




Chinese Experts Say That China Needs A Lot More Natural Gas – Not Renewables

By Paolo von Schirach

February 17, 2014

WASHINGTON – In the often schizoid US national debate on energy issues the “good and enlightened people”, (those who would like us to stop using carbon based fuels immediately), frequently point out that China is way ahead of America. China, we are told, is investing massively in renewable energy, most notably solar. You see, the real point is that the wise Chinese technocratic leaders, capable as they are to serenely contemplate “the big picture”, figured out long ago that their vast nation needs to get out of carbon. The conclusion is that the Chinese are wise and smart. We are not.

Bad carbon based energy

Largely because of the evil works of the oil and gas lobby, we keep focusing on the outmoded, wrong formulas –fracking being the latest. Indeed, by developing this (sinister?) source of natural gas contained in shale formations we continue our perverse dependence on carbon, while we pollute our precious water supplies and create untold dislocations across rural America.

What is really happening in China

Well, the real picture is quite different. China’s state TV, CCTV, reports that in order to curb stratospheric levels of pollution, officials in the Hebei Province, (a large area surrounding Beijing and now officially the most polluted province in China), had to resort to the actual closing down or destruction of 8,347 industrial plants producing cement and glass, among other heavy polluters.

An expert from an official research agency, interviewed by CCTV, indicated that reducing horrible levels of smog will be very, very tough.

For one thing, he stated, if the province wants to move to renewable energy, making anything there is going to be much more expensive. This will be very tough for business, he pointed out. Furthermore, the general public will be hit by higher utility bills.  So, there you have it. Renewable energy costs a lot more and makes it harder for industry to stay competitive.

China needs natural gas

And so, what is the way out? Well, the expert said that China needs to increase its supplies of “natural gas” and “nuclear power”.

Got that? “Natural gas” and “nuclear power”. Not a word uttered by this presumably enlightened Chinese expert about solar and wind. And why not? Not because they are bad. It is because, to date, they are still too expensive.

So, here in America our incredible natural gas bonanza is demonized by the “good experts” as more of the same bad stuff, while they invoke the healing power of renewables supposedly pushed forward by the smart Chinese technocrats. But it turns out that in China the experts say that they would love to have access to a lot more natural gas, so that they could reduce their reliance of dirty coal.

Renewable energy has a future

The day of renewable energy no doubt will come. But we are not there yet. The American do gooders should look at China’s environmental disasters and the lack –today– of cost-effective renewable energy solutions. After that, they should look back at America and consider how lucky we are. Thanks to fracking and horizontal drilling –American home-grown technologies– we are now the largest producer of natural gas in the world.

Because of this abundance of domestic, cheap and relatively clean energy we can retire old, high polluting, coal-fired plants without any adverse economic effects.

What do you know: our natural gas is very cheap and it is much cleaner than coal.

And, yes, as a result of this shift from coal to gas for power generation we have cut our greenhouse gases emissions. China is indeed investing heavily in solar energy. But, thanks to a huge number of high polluting coal-fired plants that cannot be shut down, as there is no economically viable alternative, millions of wise Chinese live in cities that are virtual gas chambers.

Certainly, we in America have a long way to go in our quest for affordable, clean energy; but –thanks to our natural gas revolution– we are much farther along.




New York State Run Out Of Ideas, It Does Not Know How To Promote Itself

WASHINGTON – New York, once upon a time the symbol of American economic might and creativity, run out of ideas. Or at least this applies to the people in charge of promoting New York State as a place for doing business.

Tax holiday state

On TV business channels, (Bloomberg, CNBC), these days you are bound to watch an often repeated TV ad supposedly promoting New York State as a great place for corporations. And what is the pitch? A rather poor one.

You learn that New York State is open for business. If you have a good idea and want to develop it, you should go to New York State, because there you will get a nice tax holiday. Yes, if you bring your business to us  –New York promoters tell you– you’ll pay no taxes for 10 ten years, or something like that. Give or take a few embellishments, this is pretty much it: “No taxes or very low taxes for new businesses coming to New York State”. This is really dry, unimaginative and very poor.

New business seeks a vibrant environment

Of course taxes are a big deal. And any business person will listen when you promise an extended tax holiday. But while this is true, it also true that business people, especially young entrepreneurs in tech sectors, are drawn to dynamic, vibrant environments where there is plenty of talent, research facilities, a cultural life, state of the art telecommunications infrastructure, and world-class, competitive logistics.

None of this is mentioned in the TV ad promoting New York State. It is only about low taxes. Nothing about local talent, human capital, innovation, dynamism, discoveries, enterprise. Here is the legendary “Empire State” version 2014: a “tax holiday” spot. That’s it. Not such an interesting place, really.

The allure of Oklahoma

Compare this with TV ads promoting Oklahoma as a tourist destination. The State is described as a unique blend of old and new. Nature and enterprise. The American West. Culture and fine dining. And the greetings are delivered by an attractive Native American woman who says hello in her own native language.

Now, that’s interesting, alluring and  intriguing.




Major US Corporations Are Buying Trucks Powered By Liquefied Natural Gas – Much Cheaper Than Diesel

By Paolo von Schirach

October 30, 2013

WASHINGTON – A recent lead story in the MARKETPLACE section of The Wall Street Journal, (Truckers Tap Into Gas Boom, October 30, 2013), points out that major US retailers, shipping companies and others (including FedEx, Procter & Gamble, and UPS), are ramping up their purchases of new heavy trucks powered by Liquefied Natural Gas, (LNG). Well, it has been a slow process; but finally it is happening.

The LNG revolution

Yes, the trucking companies and other US corporations that rely on large fleets of trucks to deliver their supplies are waking up to the fact that America, thanks to the hydraulic fracturing revolution, is now producing plenty of cheap natural gas.  And natural gas, beyond its traditional use as feed stock for electric power generation, can be used quite effectively as transportation fuel. The obvious reason for switching over to LNG is lower cost. At today’s prices, filling up a truck with LNG would cost today almost half than filling up with diesel. Trucks are on the road all the time. Significant fuel cost savings, multiplied by hundreds or even thousands of heavy trucks, are the incentive to make the switch.

Technological problems

There are a number of technological hurdles. But the big ones have been resolved or have been at least addressed. In July Cummings Westport Inc. started selling its new 12 liter natural gas engine, ideally suited for trucks up to 80,000 pounds. Oil man T. Boone Pickens, the prophet of natural gas, has invested in Clean Energy Fuels, a Texas company that is already building the necessary infrastructure of natural gas refueling stations. These are basic preconditions, now in place, that are creating a real market for heavy trucks powered by LNG.

Cost of course is also an issue, as these new trucks cost more than traditional ones powered by diesel engines. But the price of LNG is so much lower that big companies realize that it is in their interest to make the investments, knowing that in a couple of years they will recover the additional expense for LNG powered trucks. After that there will be only savings. 

Hesitation would be normal if fuel costs were subject to significant fluctuations. But this is not the case. Oil prices, and consequently diesel prices, will stay high on account of sustained world demand (especially from Asia), while domestic LNG prices will stay low on account of vast, and if anything expanding, US natural gas supplies. 

A revolution

That said, beyond the advantages in terms of reduced operating costs for major US companies, there are additional gains that amount to an economic, environmental and –down the line– geopolitical revolution. The combined impact of lower electricity prices and the creation of a new, totally domestic and inexpensive transportation fuel will lift the otherwise anemic US economy. 

Consider this. The US has a fleet of about 3. 2 million big rigs and an additional 7 million single-unit trucks. While trucks represent only 1% of vehicles on the road, they consume about 20% of the fuel. Just one big truck, according to the WSJ story, burns the fuel of 40 sedans. Assuming that all heavy trucks will be soon powered by LNG, a fuel produced in America by Americans, this means cutting our oil imports by at least 2 million barrels a day. That’s a lot of oil that we shall not need to import from OPEC. That’s billions of dollars that will stay at home, instead of being transferred to Saudi Arabia, Kuwait or Angola. Besides, LNG, while not perfectly clean, is a lot cleaner than diesel. Therefore this switch over will have  a positive environmental impact in terms of air quality. 

Energy security

Finally, by relying more on domestic energy sources, US energy security will be greatly enhanced. For decades America had to be overly preoccupied with anything that happened or might have happened in the Middle East because that’s where most of the world’s oil is found. We absolutely needed that oil, and so did most of our key allies.

But now that picture has been transformed, beyond recognition. After many years of decline, now America produces more of its own oil. So, we need to import less. In the future oil imports will come mostly from vast Canadian reserves. This means far less oil from OPEC. And now, as a consequence of the natural gas revolution, the US will be able to do away with the oil imports currently necessary to fuel millions of heavy trucks. (For cars it is a different story; but with similar outcomes. It may be more cost-effective to develop electric vehicles than having cars powered by natural gas. Either way, LNG engines or EVs, technological changes will translate into lower oil imports).  

Geopolitical changes

All this means no more oil from OPEC. In fact it means no more oil from outside the Western Hemisphere. This is a major change that will have huge geopolitical consequences. It is hard to believe that 10 or 15 from now the US 5th Fleet will still be anchored in Bahrain, in the Persian Gulf, at a cost of billions of dollars a year for US tax payers. The US Navy is there for the sole purpose of keeping the oil flowing. If we no longer need that oil we can let the Chinese Navy patrol the Strait of Hormuz. China will need OPEC oil.

With the end of our oil worries, we shall also see a decline in the interest for anything that happens in the Middle East, just as the end of the Soviet Union caused a loss of interest in NATO affairs and German politics. 

 

 




China’s Leaders Want More Growth – But Innovation Requires Political Freedom

By Paolo von Schirach

October 9, 2013

WASHINGTON – Imagine this. Imagine that not so long ago the US was an over populated emerging market with a state controlled economy. A new crop of technocratic leaders decided to use cheap labor willing to come to Detroit, Atlanta and Houston to work in factories as the main national economic advantage. United Technologies, Procter & Gamble, Hanes and other state controlled firms would make a strong push into foreign markets with the considerable  advantage of rock bottom prices for US exports made possible by ultra cheap labor provided by migrant farm laborers coming into cities from Idaho, New Mexico and Oklahoma. Imagine that this economic growth strategy had been successfully carried out for 20 or 30 years.

End of growth

But then massive growth would stop. The engine would start slowing down because the products made by the state-owned companies are no so great when it comes to quality, while the cost advantage slowly evaporated. Indeed, the supply of inexpensive migrant laborers dwindled. Fresh labor shortages now translate into higher wages.

The smart technocrats see all this; but they want to find ways to keep high levels of growth. They turn to a very senior economist for advice. He says that the only way to reignite self-sustaining growth is really to privatize state banks and major state controlled firms, this way injecting genuine competition into the system. This will inspire more investments, innovation and therefore quality improvements that will benefit consumers at home and abroad. 

Growth or political control?

The political leaders listen attentively; but then they shake their heads. “Nice ideas –they say– but this cannot be done. If we relinquish control over the economy –all the banks, the big state corporations– then, our main power base is gone. Soon enough, if we empower the private sector, we are gone too“. And so, the decision is made: no real economic reforms. This way political control is secure. America may stagnate; but the people in power will do fine, at least for many more years. 

This is about China

Alright, just put “China” in America’s place, and you have the distillation of China’s policy dilemmas. China is still doing very well, but it is losing altitude. Forget about dizzy double-digit growth. The IMF is forecasting may be 4% in just a few years. An economy built from the top, based on cheap labor to export massive amounts of manufactured products, coupled with huge infrastructure spending has worked very well; but now it has run its course. From now on, expect China to do OK, at best.

Can a smart economist solve this problem?

The WSJ just published a major front page story on this very topic. It  featured Liu He, a very senior economic policy advisor in Beijing, (A bureaucrat Tricky Task: Reignite Chinese Growth, October 7, 2013). Reportedly Liu has been tasked with producing a new blueprint for China’s growth. It would appear that Liu and his staff would favor reforms and in particular the privatization of the large state-owned banks that control the entire financial system and the flow of credit.

Most Chinese reformers know that, while China has a vibrant private sector, the gigantic system created by state banks and often inefficient state-owned corporations is a major drag on the economy. To any free market capitalist this is no surprise. Indeed, who would expect monopolistic corporations run by political appointees to be hubs of creativity and innovation? These companies may do well in a controlled, protected environment. But they are not nimble and flexible. They are slow and bureaucratic. And top-down real innovation does not really exist.

Economic control equals political control

However, state and ultimately party control over huge chunks of the economy is almost a prerequisite for the self-perpetuation of China’s leadership. 

I am not sure how this attempt to find a new formula for China’s growth will play out.

But I very much doubt that China’s technocrats, even those who would really like to see modernization, are going to take big chances when it comes to giving up control over the economy. A vibrant economy run by an eager private sector creates a middle class that will eventually demand accountability, and a voice in the political process. And this is not something that the political leadership in Beijing wants to encourage, let alone allow.




Elon Musk, Tesla Motors’ Founder, Came to America Because He Believed That This Country Would Offer Opportunity

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/08/07/electric-cars-are-not-selling-well-but-quality-will-improve-for-heavy-trucks-though-the-future-fuel-is-natural-gas-not-electricity/

August 12, 2013

WASHINGTON – I wrote recently that it is going to be a while before electric vehicle (EV) maker Tesla Motors and others like it will be able to radically transform the US automotive industry. (See link above to related story). Indeed, while Tesla’s model S is doing very well, it is on track to sell at most 21,000 vehicles this year. This is obviously very good for a company that sells very expensive, high performance EVs; but it is hardly transformative.

The value of new ideas

Still, having said that, it is really important to reflect on the incredible value of entrepreneurs like Elon Musk, Tesla’s founder. What needs to be stressed here is that Musk is a true, modern trail blazer. Musk ventured into practically virgin territory with what appeared to most analysts a really crazy idea: making a high performance, high price, sporty EV. Remember that many years ago when Musk got started people thought that EVs should be designed for young or middle aged tree-huggers, people focused on saving the planet. Whereas Musk focused on an entirely different market: quality conscious wealthy people interested in a brand new experience: a high performance (and consequently high price) EV.

Well, this is beginning to work. Of course, when it comes to market expansion, much will depend on Tesla’s ability to roll out equally interesting but much more affordable electric cars. We shall see.

Enterprise is our future

But this is not the point today. The point today is to celebrate Elon Musk and many others like him. These are the people willing to take huge chances in order to see if they can indeed push the envelope. It is obvious that when it comes to innovation many “Grand Ideas” are destined to fail. But some will not. And the record shows how, failures notwithstanding, many determined entrepreneurs will keep going at it. May be on their second or third try they will come up with something really important.

Focus on stagnant sectors

And we should be grateful for all these efforts. Indeed, it is mostly because of people like Musk that America can keep its position as technology leader. In a recent TV appearance Musk  indicated that innovators should really focus on sectors that have been stagnant, sectors that no longer deliver any special value. Real entrepreneurs should really look at ways in which they can introduce disruptive innovation that will cause a real paradigm shift. He talked for instance about the “Hyperloop”. This is really science fiction stuff. A totally new idea for an ultra fast inter city transportation system that is light years ahead of even the best super fast trains that still rely on tracks and locomotives, however advanced.

The “Hyperloop” is on the drawing boards, and most likely it will not happen any time soon. Still, this is just an example of Musk’s ability to think big and think boldly, even when some of his ideas may invite jokes.

Once again, many “Bold Ideas” that promise huge technological transformation will be failures. Sometimes costly failures. But it does not matter. Hopefully, those who tried and failed will not be discouraged. They will learn from their  lessons and try something else.

Policy makers have to keep America’s unique pro-business environment

That said, US policy makers must realize that they need to put in place every possible incentive for innovators. Indeed, for America to keep its coveted position as the world’s premiere “Innovation Hub”, it needs to attract people like Elon Musk who are willing to think big and take big chances. To this end, we need to do our best to reaffirm America’s credentials as the best place for true innovators. Do keep in mind that Tesla’s Elon Musk was born in South Africa. He came to America because he thought that the US would be an ideal home base. If people around the world stop believing this, if we lose this edge, the smart innovators will go somewhere else. 

 




Can China Fix Its Environmental Disaster?

By Paolo von Schirach

August 11, 2013

WASHINGTON – China is indeed “The World’s Worst Polluter“, as The Economist newsmagazine put it in its cover story (August 10th-16th, 2013). The implications are bone chilling for the Chinese people who are forced to breathe foul air and who cannot drink their water. But the rest of the world will also pay a huge price, given the enormous impact of China’s massive emissions on the planet. Indeed, the earth is getting close to a tipping point. Scientists indicate that we humans should do our best to keep carbon dioxide levels below 450 part per million. Well, we are now at 400 part per million. And most of the increase is due to China’s emissions. Put it differently, unless China reverses its course, even the combined efforts of the rest of the world may be not enough to avoid climate change Armageddon.  

Growth now, at any cost

Of course, we do know what happened. Over the last 30 years China pursued relentless industrialization, with total disregard as to how it was doing it. In other words: zero environmental protection standards. The goal was growth, fast growth, whatever the cost. Environmental protection measures costs money. This would slow us down. Therefore, no protection.

China’s apologists say that, in its noble pursuit of higher standards of living for hundreds of million of poor people, China was no different from Britain, the USA or Japan: “High growth now, stricter environmental standards later”. So, what’s the big deal about China’s behavior?

Lessons of experience were ignored

This exculpation is totally disingenuous. The truth is that when older manufacturing economies in the West were pursuing higher growth, the extent of the environmental damage their industries were causing was not well understood. But, beginning in the 1960s, policy makers in America, Europe and Japan began to understand it. And they started taking remedial action, while setting new standards that industries would have to abide by. 

Therefore, given  more than 40 years of Western environmental protection studies, enactment of new policies and consequent appreciation of the actual cost of cleaning polluted soil, air and water, China’s policy-makers cannot seriously claim that they had no idea that what they were doing in the 1980s and 1990s would cause serious, in fact horrible, damage.

Because of the well documented and analyzed Western experience, they knew about pollution, its consequences, the high cost of fixing it, and therefore the importance of preventing it. But they simply did not  care. And when it comes to the scale of the damage the Chinese caused, what they have done does not even remotely compare with what Europe or Japan did in the 1960s or 1970s, simply because of size. China is an enormous country of 1.3 billion. Just to cite one factor, most of its electricity comes from dirty, coal-fired plants. In order to provide electricity to all these people, not to mention hundreds of thousands of industrial plants that fueled the export-led economy, China became the largest user of high polluting coal in the world. As a result, beyond the Chinese people, now the entire world suffers the consequences of China’s emissions. 

Serious clean up efforts?

That said, what are China’s leaders going to do? Now that pollution has become a front burner public policy issue, the Government is trying to show that is really working on it. As the cited The Economist story explains, massive clean up investments have been announced, along with new regulations, strict enforcement standards, etc.

Obviously all this new activism is as much about politics as it is about caring for the environment. The Chinese people, especially the new and better educated middle class, understand that higher standards of living are of no value when the city dwellers are forced to breathe the most polluted air on earth. At some point, China’s scattered but vocal grass-roots environmental movements may morph into organized political resistance. And this is a huge worry for the Beijing leadership.     

Powerful resistance

But, while we have literally tens of million Chinese clamoring for clean air and clean water, while worrying about contaminated food, there are equally powerful interests that will resist meaningful change. The big manufacturers, the big utilities, all the super polluters have no intention to spend fabulous sums of money to clean up their mess. And, even assuming that will be forced to do this, the Communist Party leadership understands that making environmental clean up a top investment priority at least in the short and medium terms will result in slower growth. And this awareness clearly creates another political problem. The very legitimacy of China’s  leadership rests on its ability to deliver consistent high growth. If China’s economy slows down substantially, this is likely to create discontent and disillusionment.

Unpleasant political outcomes

So, there you have it. This is a classic “damned if you do, damned if you don’t” most unenviable situation.  Whichever way you look at it, China’s growth will be less potent, while its dreadfully damaged environment will improve only a little bit, and at a very high cost.

Frankly, my hunch is that the environmental damage already caused is so huge that it is probably irreversible. At best, provided sustained efforts and fabulous amounts of money, China may be able to stabilize  a very bad situation. But the price of any improvement will be lower economic growth. And that carries negative political consequences.

Indeed, as this massive clean up effort will unfold, millions of Chinese will have reasons to complain about persistent pollution and/or the impact of permanent damage, while at the same time complaining about slower economic growth and diminished opportunities.

I really have no idea how Beijing plans to manage all this.




Cost Competitive Solar Power? Coming Soon, But Not Here Yet

By Paolo von Schirach

August 9, 2013

WASHINGTON – The FT published a big spread on solar power, (A rising power, August 9, 2013), accompanied by this intriguing subtitle: “Plunging prices are finally making solar power competitive with conventional sources of energy…” Now, if it were really so, this would be the announcement of a major breakthrough, both technological and economic. This would mean that finally a key component of the renewable energy sector can actually make it on its own, without mandates, rebates or other subsidies, that is.

Mostly subsidized

Well, reading the long article was rather disappointing. True enough, the cost of solar panels has gone down, in fact it has plummeted in the last decade –by 80% in the last five years alone. This is truly remarkable. And certainly, in specific markets where there is a lot of sun and high electricity prices, solar power is becoming a viable alternative. But while this may be the case here and there, it is not true worldwide. Most of the installed solar power in place today is there only thanks to subsidies or mandates.

In fact, the very same FT story tells us that only 0.1% of total solar installations are unsubsidized. So what happened to the headline of solar power having finally become competitive? Well, we are moving in that direction; but we are not quite there, yet.

Solar technology will improve

Look, solar technology has improved and I have confidence that it will keep getting better. Costs have come down rapidly. And soon enough we shall get to a point in which people will place inexpensive solar panels  on their roofs in order to generate their own low-cost electricity, because it is the smart thing to do. I am looking forward to this new era.

But we are not quite there yet. For the moment, amidst overcapacity, bankruptcies, industry consolidation, Chinese dumping, murky regulations, political pressures and what not, renewable energy is still not capable of making it on its own.