Auto – Donald Marron

What Role for Natural Gas in Transportation?

Will natural gas ever catch on as an important transportation fuel?

Yes, argues MIT Professor Christopher Knittel, in a new discussion paper for the Hamilton Project. Given the now-enormous spread between gasoline and natural gas prices, Knittel thinks that natural gas vehicles should become increasingly popular. Here, for example, are his calculations of the lifetime operating costs for various vehicles using gasoline or natural gas (click to enlarge, and be sure to read the caveat in the footnote):

As you would expect, the biggest potential savings accrue to the most fuel-guzzling vehicles, heavy-duty trucks in particular.

Knittel does not believe, however, that the private market will exploit this potential as fast or extensively as it should. He thus proposes policies to accelerate refueling infrastructure build-out and to encourage natural gas vehicles. Here’s his abstract:

Technological advances in horizontal drilling deep underground have led to large-scale discoveries of natural gas reserves that are now economical to access. This, along with increases in oil prices, has fundamentally changed the relative price of oil and natural gas in the United States. As of December 2011, oil was trading at a 500 percent premium over natural gas. This ratio has a number of policy goals related to energy. Natural gas can replace oil in transportation through a number of channels. However, the field between natural gas as a transportation fuel and petroleum-based fuels is not level. Given this uneven playing field, left to its own devices, the market is unlikely to lead to an efficient mix of petroleum- and natural gas-based fuels. This paper presents a pair of policy proposals designed to increase the nation’s energy security, decrease the susceptibility of the U.S. economy to recessions caused by oil-price shocks, and reduce greenhouse gas emissions and other pollutants. First, I propose improving the natural gas fueling infrastructure in homes, at local distribution companies, and along long-haul trucking routes. Second, I offer steps to promote the use of natural gas vehicles and fuels.

His “steps to promote the use of natural gas vehicles and fuels” are subsidies and regulations. Regular readers will recall that I believe environmental taxes would be a better way of addressing environmental concerns and, in particular, of promoting natural gas over gasoline. Of course, that view hasn’t gained much traction among policymakers. As least not yet.

Online Education and Self-Driving Cars

Last week, I noted that former Stanford professor Sebastian Thrun enrolled 160,000 students in an online computer science class. That inspired him to set up a new company, Udacity, to pursue online education. A new article in Bloomberg BusinessWeek adds some additional color to the story.

Barrett Sheridan and Brendan Greeley answer a question many folks asked about the students: how many actually finished? Answer: 23,000 finished all the assignments.

Second, they note that professor Thrun is also at the forefront of another potentially transformative technology: self-driving cars:

Last fall, Stanford took the idea further and conducted two CS courses entirely online. These included not just instructional videos but also opportunities to ask questions of the professors, get homework graded, and take midterms—all for free and available to the public.

Sebastian Thrun, a computer science professor and a Google fellow overseeing the search company’s project to build driverless cars, co-taught one of the courses, on artificial intelligence. It wasn’t meant for everyone; students were expected to get up to speed with topics like probability theory and linear algebra. Thrun’s co-teacher, Peter Norvig, estimated that 1,000 people would sign up. “I’m known as a crazy optimist, so I said 10,000 students,” says Thrun. “We had 160,000 sign up, and then we got frightened and closed enrollment. It would have been 250,000 if we had kept it open.” Many dropped out, but 23,000 students finished all 11 weeks’ worth of assignments. Stanford is continuing the project with an expanded list of classes this year. Thrun, however, has given up his tenured position to focus on his work at Google and to build Udacity, a startup that, like Codecademy, will offer free computer science courses on the Web.

I wish Thrun success in both endeavors. Perhaps one day soon, commuters will settle in for an hour of online learning while their car drives them to work.

P.S. In case you missed it, Tom Vanderbilt has a fun article on self-driving cars in the latest Wired.

How Do Consumers Spend Engine Efficiency Advances? On Bigger, Faster Cars

Auto companies have made great strides in improving engine efficiency in recent decades. But those improvements haven’t done much to improve the fuel economy of America’s passenger car fleet. Instead, consumers have “spent” most of those efficiency improvements on bigger, faster cars.

MIT economist Christopher Knittel has carefully quantified these tradeoffs in a recent paper in the American Economic Review (pdf; earlier ungated version here). As noted by Peter Dizikes of MIT’s News Office:

[B]etween 1980 and 2006, the average gas mileage of vehicles sold in the United States increased by slightly more than 15 percent — a relatively modest improvement. But during that time, Knittel has found, the average curb weight of those vehicles increased 26 percent, while their horsepower rose 107 percent. All factors being equal, fuel economy actually increased by 60 percent between 1980 and 2006, as Knittel shows in a new research paper, “Automobiles on Steroids,” just published in the American Economic Review.

Thus if Americans today were driving cars of the same size and power that were typical in 1980, the country’s fleet of autos would have jumped from an average of about 23 miles per gallon (mpg) to roughly 37 mpg, well above the current average of around 27 mpg. Instead, Knittel says, “Most of that technological progress has gone into [compensating for] weight and horsepower.”

This is a fine example of a very common phenomenon: consumers often “spend” technological improvements in ways that partially offset the direct effect of the improvement. If you make engines more efficient, consumers purchase heavier cars. If you increase fuel economy, consumers drive more. If you give hikers cell phones, they go to riskier places. If you make low-fat cookies, people eat more. And on and on. People really do respond to incentives.

A Second Thought on the Cost of TARP

Two commenters (Jack B. and John L.) raise an important point about the $25 billion price tag that the Congressional Budget Office recently placed on the Troubled Asset Relief Program. Their concern is that the $25 billion figure includes some impacts that should rightfully be attributed to other government actions, not to TARP itself.

To illustrate, suppose that Treasury used TARP to buy $10 of preferred stock in Bank X in 2008 and that a year later Treasury sold its position for $12, including accrued dividends. This investment would be recorded as achieving a $2 profit in TARP (subject to one technical caveat, see below).

That’s the normal way of calculating profit on an investment, and is what CBO was instructed to do for its part of TARP oversight. But as Jack and John point out, there’s an important complication here. During the year, the federal government undertook many other policy actions which may have boosted the value of Bank X (remember all the new acronyms?). From the perspective of policy evaluation, some or all of the $2 gain should be attributed to those other policies, not TARP.

It could be, for example, that absent further action, Bank X would have struggled, leaving Treasury with stock worth only $6. Other government actions, however, breathed enough life into the company (or, at least, boosted the value of its assets) that the stock ultimately became worth $12.

In that case, you could argue that TARP, by itself, resulted in a $4 loss, while the other government actions created a $6 gain. That puts the budgetary impacts of TARP in a different light: a 40% loss versus a 20% gain in this example.

Of course, you could also argue that the $6 gain was only possible because of the TARP ownership stake. There’s certainly an element of truth to that. But the basic concern still applies: the $2 gain in this example reflects both TARP and subsequent government actions, not just TARP alone. That’s an essential point when trying to evaluate these policies after the fact, and we commenters should keep that in mind when interpreting CBO’s findings.

And that’s not all. The other government actions may also have imposed additional direct or indirect costs on the federal budget. As a result, the $2 gain in this example may be offset (or more) by other costs that aren’t included in the calculation.

Bottom line: One reason that TARP appears much less expensive than originally predicted is that many of its investments benefitted from other government actions whose costs show up elsewhere in the budget.

Caveat: CBO’s methodology actually judges the profitability of investments relative to benchmark rates of return. The details are surprisingly complex, but just for purposes of illustration, suppose that the appropriate benchmark rate of return for investing in Bank X was 10%. If Treasury sold the stock for $11 after one year, CBO would deem that as breaking even. If it sold it for $12, that would be a $1 profit.

How Much Did TARP Cost? $25 Billion

The much-maligned TARP program will cost taxpayers only $25 billion according to the latest estimates from the Congressional Budget Office. That’s substantially less than the $66 billion CBO estimated back in August or the $113 billion that the Office of Management and Budget estimated in October.

The good news, budget-wise, is that the government is on track to make about $22 billion on its assistance to banks.

However, CBO estimates that TARP’s other activities will cost $47 billion. This reflects aid to AIG ($14 billion), the auto industry ($19 billion), mortgage programs ($12), and a few smaller programs ($2 billion).

The Chevy Volt Premium

The other day I noted that Amazon has been tussling with book publishers over the pricing of electronic books. Amazon would prefer a wholesale pricing model, in which it sets retail prices, rather than an agency pricing model, in which the publishers set the prices. One reason that Amazon would prefer the wholesale model is because it would allow it to sell e-books for less than publishers would prefer.

A similar pricing kerfuffle has arisen in the pricing of Chevy’s new plug-in hybrid, the Volt. Auto dealers operate under a wholesale pricing model–they buy the cars and then decide what to charge for them. In this case, however, early demand is so strong that auto retailers are charging more than Chevy (a unit of GM) would prefer. As noted on the Wheels blog over at the New York Times, some dealers are apparently charging $12,000 above the sticker price–$53,000 vs. $41,000–for scarce Volts.

This has miffed GM executives:

By law, General Motors cannot dictate vehicle pricing to its dealers. But Rob Peterson, a G.M. spokesman, noted in a telephone conversation that the company had impressed on sales managers to keep prices in line with the company’s suggested retail price.

“The dealers are independent, for better and, in very rare cases, for worse,” he said. “There are some who have moved in the opposite direction of our request. In response, what we’ve done is to urge customers who have contacted us about pricing discrepancies to shop around, because there are dealerships in their area that are honoring M.S.R.P.”

Bottom line: wholesalers are like Goldilocks, they want retail prices to be neither too hot nor too cold.

How Much Did Cash-for-Clunkers Boost Auto Sales?

The busy folks at the Council of Economic Advisers (CEA) released a quartet of studies today, covering the economic impacts of:

I suspect that other bloggers (not to mention the regular media) will have lots to say on the stimulus analyses, so I started my reading with the clunkers piece, which I found quite interesting.

News accounts often describe the program as a success because almost 700,000 people participated in it in just a few weeks. But, as CEA emphasizes in their new study, the fact that someone participated in the program does not necessarily mean that they bought a car because of it. Indeed, CEA estimates that the 690,000 auto sales under the program boosted 2009 auto sales by only 330,000:

What about the other 360,000?

Continue reading “How Much Did Cash-for-Clunkers Boost Auto Sales?”

Standing Firm on Auto Dealers

Over the past year, the U.S. government has acquired an unprecedented investment portfolio, including a majority stake in GM and a large ownership stake in Chrysler. These investments have raised a plethora of difficult policy challenges. One of the most important is the ongoing risk that private business decisions may get transformed into public policy issues. Or, put more bluntly, that policymakers might use the ownership stakes as justification for and leverage to pursue their own policy agendas, regardless of whether they would be good for the companies.

Yesterday’s newspapers provided an excellent example of this risk. Some lawmakers want to use legislation — the annual appropriations bill that funds financial services and general government — to restore the franchise agreements of several thousand dealers who were terminated as part of the restructuring of GM and Chrysler. It’s easy to see how such a proposal can gain traction in the House of Representatives. Every terminated dealership will get a sympathetic hearing, at a minimum, from their local representative. But such meddling is not in the interests of GM and Chrysler, nor the nation at large.

Happily, the Obama Administration has come out against these efforts. In a Statement of Administration Policy on the appropriations bill released Wednesday, the Administration wrote:

Continue reading “Standing Firm on Auto Dealers”

The Subsidies in TARP

How much is TARP costing American taxpayers? We know that Congress originally authorized up to $700 billion in TARP investments. And we know that $439 billion has been committed to various programs. But how much of that money are taxpayers likely to see again? And to what extent will they be compensated for making those investments?

The Congressional Budget Office took a crack at answering those questions in a report released last night. The headline finding is CBO’s estimate that subsidies in the TARP program are $159 billion. Taxpayers put up $439 billion and, in return, now own assets (including recent repayments) worth $280 billion.

The following chart shows the estimated value of the TARP portfolio (dark red) and subsidies (light red) across the major TARP programs:

TARP Subsidies

Key insights from the chart: Continue reading “The Subsidies in TARP”