I am very happy to announce the first in what I hope will be many guest contributions to BlawgConomics. In this post, my good friend Pat Decourcy reviews John Murphy's 2008 Wall Street Journal Article on the hot topic of electric cars. ('U.S. Auto Makers Target Battery Gap With Japan,' John Murphy, The Wall Street Journal, Monday, B1, B7, September 15, 2008) This ties in nicely with the recent conversation on Smart Grid technology, which many hope will incorporate electric cars as part of the global energy solution. I am working on posting the figures, and will update the post when they are available.
In ‘U.S. Auto Makers Target Battery Gap With Japan,’ John Murphy explored the idea that scarcity of advanced automotive batteries impacts the absolute advantage which Japan has in manufacturing this resource. The United States-based auto manufacturers are troubled by this because they have seen an increase in demand for these batteries in their hybrid-electric cars due to the increasing cost of gasoline, and are concerned about having to import most of their advanced battery supply. This increase in gasoline price has also caused a strategic disadvantage for U.S auto manufacturers because their investments have focuses on gas-guzzling trucks and SUVs, while the Japanese have made investments in energy efficient technologies (such as hybrid cars and batteries) and the infrastructure to mass produce them (Figure 1). Many Japanese battery manufacturers are fueled with capital and investments from Japanese automotive manufacturers and the U.S. automotive firms worry that if there is a shortage in supply in batteries, Japanese auto manufacturers will get prioritized treatment for their battery orders. The U.S. auto manufacturer’s solution to this problem is an influx of government loans to develop technologies which can help shift the production possibilities frontier towards a lower overall cost to produce batteries and reduce the need for imports (Figure 2).
Even if the US auto manufacturers get the government loan, it will require many years of research and development to allow for the high-yield production of batteries. Although over the long run this investment in technology is a good idea, this will do very little to help the US auto manufacturers in the short run. The article didn’t explore how the US and Japan could maybe set up a system to trade goods to mutually benefit each other. Assuming that the US auto manufacturers simply pay for their imported batteries, if there were some good or product they could produce for a lower opportunity cost than Japanese companies, than a trade system could be set up to mutually benefit both countries (Note: My production possibilities frontier analysis probably would not be 100% realistic in this case because it shows that the US is the low cost producer of hybrid cars and that is probably not true given their lack of investments in this area). An ideal good to trade would be something the American automotive industry could produce more efficiently than the Japanese automotive industry. As long as there were no trade controls (free trade), this could benefit both sides considerably.
Another way to analyze this situation is through the use of supply and demand. There are a few different factors to consider here: 1) Due to the lack of domestic battery production and supply, the USA has to import batteries to support its own hybrid-electric manufacturing operations and overcome its domestic shortage (Figure 3) Normally, imports are viewed as unfair to producers, but since the USA has so few producers of batteries and such a great demand from consumers for hybrid cars, there is no need for trade controls in this case. 2) Gasoline and hybrid- electric automobiles can be considered substitutes, in the sense that an increase in the price of gasoline raises demand for hybrid electric cars (Figure 4). The article makes mention of this fact. 3) Batteries and hybrid-electric cars are complements and a battery is a key input in the manufacture of hybrid cars. If the price of a battery could be reduced through investments in technology and an increase in domestic supply, auto manufacturers feel the demand for their hybrid cars would be increased (Figure 5). The article does not mention this, but I feel that this is the real reason for US automotive CEOs attempt to get the government loans for battery production. The CEOs are trying to market it as a national security enhancement, but I think they are being somewhat disingenuous in that attempt. What they are looking for is corporate welfare – essentially a low rate taxpayer funded loan to develop technologies which can eventually help their ailing balance sheets and lead to future profitability. My question would be whether or not the automotive industry should be rewarded with this loan, given that they read the market incorrectly and didn’t hedge their bets with investments in hybrid technologies.
The author made a very good point relating the current importing of almost all our oil supply to the importing of advanced batteries. A supply and demand analysis similar to figure 3 could be drawn for oil and why we need to import oil. Despite this, the USA is sitting on oil reserves in Alaska, the Outer Continental Shelf, the Atlantic Ocean, parts of the Arctic Ocean and parts of the Rocky Mountains. The reason why exploration hasn’t taken place is because environmentalist lobby groups have had success in shaping policy with congressional lawmakers. Environmental theory has outweighed demand for increased domestic energy production and lowering the USA’s reliance on foreign oil imports. This same situation could very easily occur with advanced batteries and the author mentioned this briefly at the end of the article. Hybrid car batteries and engines need rare earth metals to function. See generally, Rare Earth Elements—Critical Resources for High Technology.” USGS Fact Sheet 087-02. 2002. http://pubs.usgs.gov/fs/2002/fs087-02/fs087-02.pdf. Rare earth metals are naturally formed over many years and have to be mined in processes which most wouldn’t consider environmentally sound. The USA has a comparative disadvantage in the mining of rare earth metals with China. Almost 90% of the USA’s rare earth metals in the year 1999-2000 were imported from China and the disparity has grown as time has gone on. See, Will, George. “Fuzzy Climate Math.” Washington Post 12 April 2007: A27 Whether or not America has facilities to manufacture advanced batteries may only be part of the solution – reducing the monopolistic influence of China in controlling key inputs to hybrid cars and increasing our domestic supply of rare earth metals (whether by mining or advanced chemical synthesis) is just as critical for becoming energy independent and less reliant on energy imports.