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Michael Sheehan's Ferraris-online.com Article

The Death of Fossil Fuels

As appeared in:

Online Exclusive—August 11, 2017 issue

Sheehan-Online

by Michael Sheehan

The rush to be green

In only the last month politicians in Norway and Holland have pushed to eliminate ALL new gas and diesel-powered cars by 2025, England, Germany and India want to eliminate all new gas and diesel cars by 2030 and France by 2040. Four major cities including Paris, Madrid, Athens and Mexico City will eliminate diesels and most older cars by 2025. Stuttgart will ban older diesels by 2018 and London will have a low-emissions zone in October which will charge older cars a £12.50 ($16.50) a day driving fee. On this side of the pond, California, Rhode Island, Connecticut, Maryland, Massachusetts, New York, Oregon and Vermont want to ban all gas and diesel sales by 2050. The threat of global warning, politics, public opinion and sales figures are now moving Europe and the world towards emissions-free electric cars.

Norway, the leader of the pack, wants to become the most ecologically progressive country on the planet and has also decreed that they will become the first country in the world to commit to zero deforestation. Today Norway can boast that about 24% of the country’s cars already run on electricity and 99% of Norway’s electricity comes from hydropower. By waiving the high (roughly 100%) sales taxes on non-electric cars (and app $11 a gallon for gas), Norway subsidizes Tesla and other fully-electric cars. Electric cars can cruise in the bus lanes and toll roads for free, parking is free and new charging stations are being built on the nation’s highways.

While it’s politically correct to be Green, Norway is also Europe’s largest fossil fuel producer, with oil accounting for 45% of Norway’s total exports and 20% of GDP. Norway holds over $818b (over $160k for every Norwegian) in the Norwegian Sovereign fund, more than second-place Saudi Arabia, all funded by offshore oil. Thanks to ongoing government subsidies, the Norwegian oil company Statoil is also cheerfully drilling new oil and gas fields in the Arctic, almost all of which will become the exhaust fumes of other countries burning Norwegian oil and gas. Were Norway to transition to a fully electric auto fleet it would become the geopolitical equivalent of a drug dealer that refuses to touch their own product.

So that there is no question, this column is not meant as a denial of Global Warming or a denial that something has to be done, but instead tries to point out that the problems of Global Warming are very complex and that every and all solutions have unintended consequences and will require your tax dollars.

The death of diesel

In the early 1990s European studies argued that air quality could be improved by lowering CO2 levels. These led to the Kyoto Protocol of 1997 mandating that CO2 be reduced by 8% over the following 15 years. The big European car makers actively lobbied European regulators and politicians to further the diesel cause, citing diesel’s inherently low CO2 output and high mpg relative to the gas engine. Obedient government regulations and tax breaks paved the road to diesel cars. The nasty nature of diesels to emit higher levels of nitrogen oxides (NOx) and lung killing particulates was not of great concern at the time. Politics and tax breaks changed the European automotive landscape. Diesel car sales grew from 10% of the market in the mid-1990s to 31% by 2000 and 55% by 2012.

The VW Diesel scandal is easily the biggest self-inflicted auto industry scandal in decades because of its deceit of customers, dealers and governmental regulations, not to mention the sheer number of vehicles involved. Diesel sales fell to 46% in 2016 and are expected to be effectively 0% in 10–20 years. As part of its campaign for redemption, the VW Group has announced plans for 30 new ZEV and EV models by 2025, with a global sales goal of 3m units, mainly at its facilities in China.

China’s eager adoption of electric vehicles has four goals; to create a world-leading industry that would produce jobs and exports; to reduce its dependence on oil from the volatile Middle East; to reduce urban air pollution and to reduce its carbon emissions. With more than 630,000 new ZEV and EV passenger cars sold since 2005, China has the world’s largest fleet of plug-in electric vehicles, overtaking both the U.S. and Europe in cumulative sales. Government subsidies to both builders and buyers are equally as generous as those in the US.

Tesla and your tax dollars

The electric vehicle industry exists because of Zero Emission Vehicle (ZEV) and Electric Vehicle (EV) regulations first adopted by the California Air Resources Board (CARB) in 1990, expanded in 1996 and now adapted by nine other states. ZEV credits require manufacturers to build, and dealers to sell, a state mandated number of “zero-emission” vehicles each year. Because ZEV laws are a moving target and Elon Musk is an expert at gaming the system, Tesla’s Model S currently generates four credits per unit sold at $5k each which means Tesla can sell $20k in ZEV credits to other manufacturers for each Model S sold, a cost that gets pushed onto the buyers of diesel and gas cars. Additionally, every US Tesla S buyer gets a $7.5k Federal tax credit and a state tax credit which varies by state.

Tesla came into functioning existence thanks to a $465m taxpayer-subsidized loan in January of 2010 from the US Department of Energy. In May of 2010 Tesla Motors purchased a just-closed former GM-Toyota facility in Fremont, CA at a bargain price. The 380-acre site had been valued at $1.3 billion, but Tesla bought it for just $42 million thanks to pressure from local and state officials. Once purchased, the California Energy Commission spent $10 million to upgrade Tesla’s Fremont factory, another $650,000 to train workers for Tesla and the California financing authority gave Tesla sales tax breaks worth up to $90 million on manufacturing equipment.

In 2014, Nevada bestowed Tesla’s gigafactory with one of the biggest corporate-welfare packages in history. Tesla will pay no payroll or property taxes for ten years, no sales taxes for 20 years, and received $195 million in cash via “transferable tax credits,” which were sold to other companies to satisfy their Nevada tax bills, a $1.3b tax giveaway. While Elon Musk is certainly a visionary and has defined the electric car industry, Musk’s three companies, Tesla, Solar City and SpaceX, have flourished thanks to a total of $4.9 billion in US government subsidies over the years.

As Elon Musk has recently speculated, making the jump from 84k cars built in 2016 to 500k cars in 2018 will take Tesla into the lands of both “Production Hell” and a massive cash burn of over $1b a quarter. Tesla ended the first quarter of 2017 with $9.67b in outstanding debt and on 07 Aug., Tesla announced plans to raise another $1.5b in junk bonds to fund the Model 3 launch. Thanks to app 450k deposits of $1k on hand for the Model 3, if Tesla is able to ramp production to 500k cars a year, or 10k cars a week by the end of 2018, the Tesla Model 3 will be the best-selling car in America, thanks in large part to your tax dollars.

The Tesla Competition

While Tesla has long been the poster child of ZEV electric cars, the Nissan Leaf, introduced in Dec. 2010 is the best seller with over 250k units sold worldwide. Tesla, introduced in 2012 is in second at having recently passed 200k units and the Chevy Volt hybrid, introduced in Dec. 2010 is in third with 135k units at the end of 2016. Thanks to the need for credits, Ford, Fiat, BMW, Audi, Hyundai, Chrysler, Porsche, Mercedes and more have all joined the EV and ZEV party. All are built for ZEV tax credits, all lose money, for example, in 2014 Fiat Chrysler CEO Sergio Marchionne said that Fiat was losing over $10,000 on the sale of every Fiat 500e electric car.

In theory, the Tesla 3 and the all new Chevy Bolt fall in the same price category and mileage range, as the only ZEVs with a 200 plus mile range, although both have vastly different demographics. Tesla 3 buyers expect their new Model 3s to come with a host of cool technology such as self-driving features and other wow factors, but to get those options; customers will have to pay about $14k over the $35k base price, so closer to $50k. A fully loaded Bolt is app $43k and is available on the dealer’s lot today.

Speedbumps in the road ahead

Each automaker’s ZEV or EV receive a federal credit up to $7,500 until the 200,000th plug-in is registered inside the US, when a countdown for phase out of the credit begins. Since the laws are arcane, at the 200,000th sale the full $7,500 credit continues through the end of the current quarter and to the completion of the next quarter. After this period ends the “phase-out” begins, meaning the credit is reduced to $3,750 for the next six months, then to $1,875 for the next six months before expiring completely. Needless to say, Tesla is already lobbying the California Legislature for a modest $3 billion in further electric car subsidies to make up the difference when the federal subsidies run out. Yet another corporate-welfare package paid for by your tax dollars.

Nine states now charge higher registration fees on ZEVs and EVs, Michigan will be the 10th, with a half-dozen more governments seeking to make up for lost gasoline taxes, repayment for the free parking, free charging, HOV lane access, emissions waivers, four-figure tax credits, and other rebates EV buyers have been reaping for years. Battery-electric cars may rack up subsidized utility bills with state fees, but they’re not paying a cent toward the road maintenance that state motor fuel taxes fund. To that end, nine states are charging between $50 and $300 on top of normal registration renewal fees, or in some cases, a separate annual fee. The electric car handouts are winding down.

Further problems

We could go further into the problems with the lack of charging stations, especially for anything not built by Tesla, or the problem of incompatible charging equipment, or the cost and complications of building the charging station infrastructure and the substations that will be needed to power the charging stations. Who will build the many dozens of additional gigafactories that will be needed? How about the reality that the US has little of the needed lithium to make batteries or that demand for lithium batteries is growing at app. 25 percent a year, far faster than the 4%–5% overall gain in lithium production? Where are the charging stations and sizable substations that will be needed to charge fleets of soon to be built semi-trucks? And I haven’t begun to go into how fully autonomous cars will make almost every car on the road today obsolete in ten years, or the possibility of autonomous cars being hacked, or the lack of future buyers because of ride-sharing. Looking ten years down the road, what happens when hundreds of thousands of expired batteries need to be replaced, recycled or become land-fill? What happens to the millions of gas and diesel cars now on the road that will be legislated out of existence? As for the green ZEV reality check, at the end of 2016 24% of global electricity was produced by renewables, dominated by hydropower. Wind only contributes 4.0% and solar 1.5%, meaning the 75% of all electric power used for ZEV and EV charging still comes from fossil fuels such as oil, gas and coal. These are all subjects for another day, even more columns.

The future of collector cars

The good news is that there will always be a market for collector cars. While charging stations will slowly replace stations, gas is simply too energy dense and the distribution system too advanced and established to be quickly replaced. Oldtimer plates will increase in cost, fuel will increase in costs, but collector cars are an automotive indulgence, not transportation. Once a car is worth $1m plus, no-one cares if it costs an extra $2,000 per year for the registration plate or fuel costs go up. While politicians are in a rush to electrify the automotive world and kill off fossil fuels, England will exempt collector cars 40 plus years old and France will exempt collector cars over 30 years old registered on a special ‘Carte Grise de Collection’ or collector’s registration. The question for the future is which cars will be both coveted and collectable? As always collectability is, in part, inversely related to numbers built. An F40 will always be an automotive icon, an F430 just an interesting used car.

Thanks to Tom Harbin, our webmaster; Robb Sass of Hagerty; Jim Spiro; Kevin Kalkhoven, owner of Cosworth Engineering; Neil Jaffe of the Chequered Flag; Elliot Silber; David Allison; Howard Cohen of the Halcyon Group; Bjorn Martenson of Black Pearl Capital; Thor Thorsen; Paul Duchene, former Editor of SCM and Mike Mollere, Drilling Superintendent, Chevron.