The oil lobby is trying to end government aid for the development and production of electric cars as large automotive companies are teaming up to address their emissions problem.
The oil industry hates electric cars for good reasons. Intelligent executives in the industry (of which there seem few) see electric vehicles (EVs) as a death threat to their business. Thus, they have fought aggressively to end tax credits that encourage consumers to buy EVs. To a large extent, their lobbyists have succeeded.
However, EV manufacturers have now been given a regulatory lifeline. Last week, Financial Times reported that Fiat Chrysler Automobiles (FCA) has agreed to pay Tesla hundreds of millions. The payment will allow FCA to pool its fleet sales with Tesla’s to “avoid large fines for breaking tough new EU emissions rules.”
The FT article explains that new EU regulations on carbon dioxide (CO2) emissions require that new vehicles emit no more than 95g/CO2 per kilometer. In 2018, these emissions averaged 120.5g/CO2 per kilometer and FCA vehicles averaged 123g/CO2.
FCA could address its emissions problem by selling hybrid and electric vehicles. However, it has yet to produce any. Consequently, according to FT, the firm would face more than two billion euros (2.3 billion dollars) in fines when the EU CO2 emissions rule takes effect.
Now, however, FCA plans to avoid the fines by pooling its vehicle emissions with those of Tesla, A payment of more than one billion dollars, perhaps as much as two billion, would likely convince Tesla to pool with FCA. The additional cash would help Tesla fund another year’s operations as the company now burns around $700 million in cash per quarter.
Oil executives must be horrified to find that the auto industry is helping preserve a company that threatens their livelihood. The auto executives, particularly those at FCA, could care less. Oil officials, after all, have never been concerned about the future of car companies. I am sure everyone in the auto industry recalls the period of high prices in 2008 when oil executives gave them the finger.
Those who have been around for a few years will recognize the EU emissions-pooling allowance for what it is and what it will accomplish. The exception provides a subsidy, one supported not by taxpayers but by industry. Over time, it will rapidly accelerate the growth of EV use and help push the oil industry to the sidelines.
The United States instituted a more deliberate strategy that had a similar effect for oil firms in the 1970s. It was called the “Entitlements System,” and it supported the expansion of companies like Valero and Marathon at the expense of large multinationals such as BP and Shell.
In 1974, officials of the Nixon administration confronted a predicament. The large, integrated firms generally had access to low-cost oil due to price controls. Independents such as Valero did not. Price controls required the larger firms to pass their lower costs on to consumers, while the smaller firms, saddled with more expensive crude, had to charge higher prices for products. The smaller firms faced bankruptcy because consumers naturally gravitated to the lower-priced stations associated with Big Oil. The executives at major oil firms delighted in the fact that they would soon be rid of the pesky independents that cut into their profits.
The Nixon administration came to the aid of the smaller firms by instituting a program that required firms with access to lower-priced oil to pay the refiners forced to buy expensive crude. The system created terrible animosity in the industry. The CEO of Amoco complained bitterly that he had to write checks of over $100 million per month to smaller refiners such as Ashland.
The government officials who designed the system (all of whom were card-carrying free-market economists and businessmen such as Treasury Secretary William Simon) brilliantly came up with a scheme that left no fingerprints. It also did not require the government to subsidize the smaller firms as governments today have in the case of electric vehicles. Even now, no one blames government bureaucrats for the billions transferred from one oil company to another in the 1970s.
The entitlement system succeeded in keeping the smaller refiners in business. Some, such as Valero, have now come to dominate the industry, leaving the BPs and Shells in the dust.
The EU rule that takes effect in 2021 will have the same impact. Regulations will require CO2 emissions per vehicle per kilometer to be reduced steadily. Some companies such as VW will produce more electric cars. Others such as FCA and perhaps Daimler Benz will be forced to look for partners with whom to pool their emissions.
Firms such as Tesla will be ready, willing, and able to provide the emissions credits but at a rapidly rising price. The oil industry executives will be unable to do anything but watch as larger and larger amounts of cash move to Tesla and other EV manufacturers. These firms will be able to lower the price of their product, sell a larger number of units, and accelerate the decline in sales of internal combustion vehicles. The European market for petroleum products will shrink.
California and other states seeking to reduce emissions may adopt a variant of this idea. The state’s low-carbon fuels program already provides incentives that accrue to EV owners. Other schemes will be introduced.
Ten years from now, executives of the multinationals will bemoan the fact that the government cut their EU market in half. Sadly, today, they are powerless to affect the decisions of the smart regulators—like the US officials in Nixon’s administration—who have laid the foundation for their demise.
This article was originally published on Oilprice.com