Creative Destruction — The All-Electric Car = The End Of Oil?

It’s been about two and a half years since I last wrote about the concept of Creative Destruction in these pages. That force does not occur too often, but when it does, the results can be revolutionary. Let me warn you beforehand that we are about to enter the realm of Economics, a field most consider about as exciting as watching paint dry. However, there are times when an event occurs that is so electrifying, and the potential for change so powerful, that a quick stroll through academic minutiae will eventually seem bearable.

So, allow me to remind you that while the most famous economist of the second half of the 20 th century was probably Alan Greenspan, the most respected was a man few ever heard of. Joseph Schumpeter was an Austrian Jew who fled the Nazi rise in Europe in 1932 to join the Harvard faculty as a professor of Economics, teaching there until he retired in 1949. Although he wrote several books, his most important contributions were collected in one titled, Capitalism, Socialism, and Democracy, published in 1942. It was here that he emphasized it was the entrepreneur who created new competition, new ideas, new technology, and new modes of organization. These innovations in turn upend the established order, unleashing a “gale of creative destruction” that forces incumbents to adapt or to die. It is this “process of industrial mutation [that] incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

A more recent version of the concept is known as “disruptive innovation” or “disruptive technology.” Unknowingly perhaps, we have all participated in the destruction or disruption of an existing dominant product. For example, do you use a digital camera; a wireless phone or cell phone; a PC or Mac computer; a broadband internet connection? What happened to the original products or industries? Okay! That’s the end of the Economics lesson, so what’s all the excitement about?

Initiating a Creative Destruction Process

What do you do if you developed a business model that you think could revolutionize the way the automobile industry works, and more importantly would eliminate not only the necessity to import oil but eliminate completely the need for gasoline? (Do you think that qualifies for the title of creative destruction?) If you are 39-year-old Shai Agassi, you would arrange a meeting with the president as well as the prime minister of a country, present the concept, get support in principle, and agree to raise a significant amount of money in order to proceed with the project.

It’s quite probable that the name Shai Agassi (no relation to Andre) is unfamiliar. He is an Israeli software entrepreneur who, after moving his company to the United States, sold it to the German software giant SAP where he became a member of the executive board and was rumored to be in line for the CEO job. However, after coming up with a concept he believed would disrupt the existing transportation model, he presented the plan over a year ago to both Shimon Peres, the President of Israel, and to its prime minister, Ehud Olmert.

More often than not, when creative destruction develops, it is due to a disruptive technology. Agassi’s plan however, is based on transforming the way the automobile industry has worked for the past 100 years. His plan is to sell clean all-electric car transportation the way cell phones are sold. Based on that model, purchasers would be charged a low price for the car and receive a tax incentive from the government, they would then pay a monthly fee based on mileage, like minutes on a cell phone.

But the plan is much more extensive and truly creative, since the lithium-ion battery providing the electricity would require charging after only 100-124 miles or so. Agassi’s plan includes creating a whole new infrastructure of convenient electric charging stations as well as battery exchange stations where batteries can be removed and replaced automatically in about the same time as it now takes to fill a car with gas. The cars could also be charged overnight using a house outlet.

Is the Plan Realistic?

As audacious and even unlikely as this plan might seem, Agassi has enlisted the enthusiastic support of the Israeli government. Israel has increased the tax on gas by 60% so the price is the equivalent of $6.30 a gallon, and greatly reduced import taxes on all- electric cars. Both actions provide a significant incentive to eliminate oil from the transportation equation. Not only has Agassi raised $200 million so far from large investors such as the Israel Company (ironically a large refiner of oil), investment bank Morgan Stanley, and the Canadian billionaire Charles Bronfman. As a further indication that the concept is sound, Agassi has gained the backing of Renault-Nissan’s Chief Executive, Carlos Ghosn whose company will produce the cars. Ghosn has been quoted as saying, “Zero emission, zero noise — it will be the most environmentally friendly mass produced car on the market.”

Agassi’s company, Project Better Place, located in Palo Alto, California, will provide the lithium-ion batteries, parking meter-like plugs on city streets, and the battery exchange stations. The cost of the batteries would be included in the monthly charges. As a result of the tax break, Agassi states, “You’ll be able to get a nice, high–end car at a price roughly half that of the gasoline model today.” Incidentally, a Renault converted to run on electricity by Agassi’s group attained a top speed of 139 miles per hour, and went from zero to 60 in eight seconds.

Agassi Speaks

Here, in Shai Agassi’s own words, is his description of the unique model that has the potential of creatively destroying a system that has existed for some 100 years: “…we propose the creation of a ubiquitous infrastructure that can enable a car to automatically charge up its battery when parked, and on the exceptionally long drive using an exchange station where an empty battery is replaced with a full one in automatic lanes resembling car-wash devices positioned in gas stations across the country. We for the first time look at the car battery as part of the infrastructure system, not part of the car, much like the SIM card inside a cell phone is part of the network infrastructure which is residing inside the phone. Since the car owners do not own the battery they can freely exchange it as needed, not fearing the issue of receiving an ‘older battery’ in exchange for a new one.”

But Agassi and his company has even more ambitious plans that extend far beyond just the effort in Israel. Aggasi is quoted, as follows: “Project Better Place will deploy and test this framework over the next 24 months in a variety of launch markets, after which it plans to deploy hundreds of thousands of vehicles annually, across multiple markets [a great number of additional countries]. The company anticipates achieving ‘tipping point’ saturation in early markets within 10 years.”

Although Agassi is fast approaching the point where at least the initial phase of his dream might well be initiated, he has no illusions as to the possibility of failure. An article in Business Week last month reads, “[Agassi is] optimistic that he’ll be able to beat the odds, but he’s also realistic enough to know there are many difficult days ahead. ‘There will be a very loud splat if I hit the ground’ he says, ‘or there’s going to be a revolution.’ ” A revolution, that if successful, unquestionably would be viewed by Professor Schumpeter as validating his concept of creative destruction — the end of oil, at least in Israel.

Alternative Energy—Our Only Alternative—Part II

With increasing recognition and acceptance that the threat of global warming is real, the subject of alternative (renewable, clean) energy sources has become a hot topic (excuse the pun). On February 10 th, the Sunday edition of The New York Times ran an editorial titled “Clean Power or Dirty Coal?” The Times editorial wrote, “…the failure — by both the Bush administration and Congress — to encourage alternative sources of power is distressing. Bowing to veto threats from the White House, Congress stripped from an otherwise admirable energy bill two important provisions on alternative fuels. One would have required states to generate an increasing share of their power from renewable sources like wind and solar. The other would have rolled back about $12 billion in wholly unnecessary tax breaks for the oil industry and used the proceeds to develop cleaner fuels and new energy technologies.” Does this make sense to you? This action merely sustains the failed policies of the past thirty years and emphasizes our “leaders’” (if you can call them that) lack of courage to act forcibly to solve our energy problem. It also exacerbates the dangers of global warming.

Ironically, on January 25 th, two weeks before the Times article ran, Part I of this series, published in last month’s issue, was submitted for publication. The last paragraph in the article read as follows: “Another detrimental factor resulting from the cheap price of coal is the current competitive relative cost disadvantage of alternative energy sources, despite the potential opportunities they might provide in reducing our reliance on foreign energy supplies, and their ability to help reduce undesirable emissions”. In addition, the article emphasized the failure to solve the problem by every presidential administration and every Congress over a thirty-year period.

Coal vs. Alternative Energy— The Paradox

Both the Times and Viewpointe articles underlined the fact that the use of coal to generate electricity is about one-third the cost of any other fuel, leading to its role in providing over 50 percent of the nation’s electricity. This relatively cheap price is indeed detrimental to the significant potential benefits of higher priced alternative energy sources (especially without subsidized government incentives) creating a huge obstacle in solving the problem of global warming. The U.S. Energy Information Administration projects that electricity demand will grow by 41% by 2030 — others predict a rise of 60%. Unless we can develop additional power plant capacity to fill that need, the economic and human consequences will be severe. Electricity blackouts could become the norm unless additional power plants are constructed. How do we balance relatively low cost coal-initiated electricity against the environmental degradation as well as the devastating impact on global warming caused by coal? Before we address that question, why is coal considered the “dirty fuel”?

The Union of Concerned Scientists concludes that one typical coal plant in one year produces the following emissions:

• 3,700,000 tons of carbon dioxide, the primary cause of global warming.


• 10,000 tons of sulfur dioxide, the leading cause of acid rain


• 10,200 tons of nitrogen oxide, leading to the formation of ozone.


• Plus several hundred tons of carbon monoxide, mercury, arsenic and lead.

A chemistry degree is not necessary to recognize that these are nasty emissions. The full impact of these numbers cannot be fully appreciated until it is realized that there are about 600 coal-fired plants currently operating in the United States. However that’s just a drop in the coal bucket compared to the fact (according to Wikipedia) that “the worldwide total of coal-fired plants [number] 50,000 and rising.” China alone is completing at least one coal plant a week and India is not far behind. Multiply the above emission numbers by 50,000 and the fast growing concerns about coal’s impact on global warming is understandable.

The Good News

Most surprisingly however, a sudden and drastic shift is roiling the electric utility industry. The pendulum seems to be swinging against the traditional coal-fired generating plant. There are several reasons. First, government officials, business leaders, banks and other lending institutions, scientists, and the general populace have awakened to the dangers imposed by carbon dioxide emissions, and its dramatic impact on global warming. As a result, it is assumed that in the very near future either a carbon tax or a cap-and-trade system will be imposed on carbon dioxide emissions adversely affecting the profitability of coal-fired plants. Several of our largest banking institutions have advised the utilities that they will not provide loans for coal-fired plant construction until legislation on this issue is passed. In a recent article, the Los Angeles Times summed up the situation, “…urgent questions are emerging about a fuel once thought to be the most reliable of all. Utilities are confronting rising costs and a lack of transportation routes from coal to generators, opposition from state regulators and environmental groups and uncertainty over climate change policies in Washington.”

As a result of huge demand, especially from China, the price of coal has doubled over the last year and continues to escalate. A number of utilities that were planning to build new coal plants have changed plans, moving to natural gas instead. All this has caused the utilities to cancel construction plans for 50 new coal fired plants in the last year, including five in Florida. Scrambling to replace the lost power, utilities are turning to natural gas plants, however, natural gas is more expensive than coal, creating electricity bills some 10% to 40% higher. On the other hand, natural gas plants are some 25% cheaper to build, and they emit the least amount of greenhouse gas of all fossil fuels. Natural gas, like oil, is not a renewable source of energy — its price is also escalating, and it too will peak at some time but there is no general agreement as to when.

Since there is a strong probability that some form of carbon payment will be required of the emitters of carbon dioxide, as well as increasing prices of coal and natural gas, what effect will that have on our energy choices, especially as it relates to alternative energy? That reminds me of the old joke about Morris who has had a bowl of chicken soup for lunch every day in the same restaurant, and has been waited upon by the same waiter for many years. This particular day, Izzy the waiter serves the bowl of soup but is soon called back by Morris who says to him, “Izzy, taste the soup.” Izzy looks dumbfounded, replying, “Morris this is the same soup I’ve served you every day for years. What’s wrong with the soup?” Morris repeats, “Izzy, taste the soup.” Izzy, annoyed now says, “Morris, the same cook made this soup from the same recipe he’s used all these years, there can’t be anything wrong with the soup.” Morris, without blinking an eye but a bit more demanding, once again says, “Izzy, taste the soup.” Izzy, now resigned says, “Okay, I’ll taste the soup. Where’s the spoon?” Morris says, “Aha!!!”

An Alternative Energy Primer To Come

If the missing spoon is the Aha! of the chicken soup story, than Alternative (Renewable) Energy has been the missing ingredient when considering the full subject of energy sources. It is missing in the sense that while it has received lip service, there has been no real concerted effort by our federal government over past years — by neither presidents nor Congress — to actively and vigorously promote alternative energy. What has happened to the type of government intervention and encouragement that created the innovative Manhattan Project and the Space Program? These efforts were driven by monumental needs (none more so than global warming) that were met by actions predicated on scientific facts uncontaminated by vote seeking politicians influenced by lobbyists, as was the case in the ill advised legislatively mandated corn based ethanol program.

For the moment, with relatively little in the way of government incentives, it seems we are destined to learn whether a capitalist based free market will overcome government’s failure by developing a robust group of alternative energy sources in time to thwart an accelerating threat of global warming, and the plethora of negatives relating to existing fossil fuel sources.
The next few issues will address the pros and cons of the various alternative sources of energy such as Biomass, Hydroelectric, Nuclear, Fusion, Wind Power, Solar Power, Geothermal, and Hydrogen. Many have great potential, and some actually offer interesting investment opportunities. For example, the #1 (non-small) performing stock in 2007 was a solar company that increased in price over 800%. That subject might keep you interested.