Gasoline Prices: What's the Magic Number?

By Bill Moore

Posted: 11 Mar 2012

This week, the Gallup Organization, which happens to have its corporate campus right here in Omaha, issued the findings of a 1000-person survey that tried to find what I call the "magic gasoline price number." That's the number that reflects the point of pain at which Americans, long used to relatively cheap gasoline prices, will, supposedly, change their lifestyles, Presumably, that means from EV World's perspective, shifting to electric cars, though in reality, that's probably the last thing many will do.

I base this view on a trip I took to Iceland a few years ago as a guest of General Motors to see how the island of glaciers and geysers use the earth's geothermal heat to convert water into hydrogen, hydrogen that runs a few demonstration fuel cell cars and buses. But what struck me about the trip wasn't the hydrogen fueling station or the bus, but all the SUVs on the island. It seems that's all Icelanders drive; big Mercedes, Lexus, and Range Rover sport utes, which, of course, get pretty poor fuel economy.

There's a couple reasons for this phenomenon, I think. One: winters are long and dark and cold in Iceland, and having a big, safe, preferably four-wheel-drive vehicle under you makes a certain amount of sense. There are few roads in Iceland, especially into its vast interior, so having some off-road capabilities also makes sense, especially recreationally. And thirdly, at the time the economy of Iceland was booming. Two years later, the banking crisis abruptly reversed that, but when I was there the country appeared prosperous. They could afford nicer homes, better, more expensive cars; and as a consequence, fewer and fewer were riding on buses; a fact related to me by the driver of the fuel cell bus GM arranged to have some of us ride in.

Now while Iceland is blessed (unless a volcano goes off) with huge renewable energy resources: hydroelectricity and geothermal; it has zero petroleum reserves. The nearest might be the Faroe Islands between Iceland and Norway. All that petroleum has to be imported and that costs. At the time, the price of a gallon of gasoline was equivalent to around $7US. Despite this, Icelanders were buying some of the least fuel efficient vehicles available. Clearly, $7US per gallon for fuel didn't change their buying behavior.

Back in my warmer part of the world, when I see Gallup announce that, according to their polling, $5.30 per gallon is the magic number that will cause American's to make significant changes in their lifestyles, I have to say that I have my doubts, especially since that number keeps shifting over the years. I can recall when the number was $3 a gallon. In 2012, we're north of that number and hybrids car sales have fallen steadily over the last couple years. Just before the housing bubble burst, sending the global economy into a tailspin, and as gasoline prices were climbing towards $4, the US Department of Transportation statistics revealed that Americans immediately responded by driving fewer miles; some 90 billion miles less from Q3 2007 to Q1 2008. The overall decline for 2008 was 3.4%, which has gradually been increasing as the economy improves. By the end of 2010, Americans had driven three trillion miles, the highest number recorded since 2007. Bottom line: $3.80 a gallon was not the magic number.

When, which is more likely than 'if', gasoline prices in America climb north of $5 a gallon, I am guessing there will be some economic pain and dislocation, but I seriously doubt everyone is going to run out an buy an electric car. So, what is the real "magic number"? $10? That's what they pay in Israel and they still buy gasoline vehicles that run on oil from their Arab neighbors.

I am coming to the view that there is no "magic number" other than zero. That's the price difference between an ICE-age vehicle and its all-electric or electric hybrid counterpart. Zero is when you can walk into a Chevy showroom and that generation three Volt costs exactly the same as that gasoline Cruze sitting next to it, not the current twice the price. That is when the choice becomes easy: run the Volt III on stable, comparatively cheap, locally-generated electricity or buy the Cruze and deal with wildly fluctuating oil prices, where much of the revenue flows outside the country, some of it to friendly allies like Canada and Brazil and more of it to unstable, dictatorial regimes in Africa and the Middle East. Regardless of where it goes, it goes, leaving the country even deeper in debt.

Reaching zero is, in fact, the objective of the EV Everywhere Challenge just announced by President Obama last week. The challenge will, in the words of the White House press release, "bring together America’s best and brightest scientists, engineers, and businesses to work collaboratively to make electric vehicles more affordable and convenient to own and drive than today’s gasoline-powered vehicles within the next 10 years."

In effect, this is Obama administration's equivalent to John Kennedy's 'moon mission.' Getting to zero is about as daunting a challenge as reach the moon, but it's doable and the payoff for America will be as beneficial as racing to the moon was fifty-one years ago this coming May 25th. In that speech, President Kennedy, challenged the nation to put a man on the moon within the decade. We achieved it and reaped enormous economic benefits. Reaching zero will do the same. We've already got a good start. America is building the necessary EV production capacity and most promising, an ARPA-e funded firm, Envia, has developed a promising battery that it says at 400 watt hours per kilogram can power an electric car 300 miles, while reducing the cost of the battery to a fraction of what it is today. The best current battery technology is about 160w/hr per kilogram. IBM is working on even more promising lithium-air batteries and other promising breakthroughs are announced regularly.

Zero is achievable. That's where the real magic starts to happen.

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