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With slower than expected sales in electric vehicles, automakers are questioning their multibillion-dollar investments in new factories and raising doubts about the effectiveness of Biden’s federal incentives. General Motors delayed plans to expand its electric pickup truck production at a plant in suburban Detroit, and canceled a program with Honda to sell electric vehicles for around $30,000. Ford paused its $3.5 billion EV plant in Marshall, Michigan and $12 billion of its planned $15 billion EV investment, citing market conditions. Despite $1.7 billion of promised taxpayer incentives for the plant and site readiness, Ford is not confident it can run the Michigan plant competitively. Further, as electric vehicles are sitting unsold on dealer lots, automakers and dealers are slashing prices and piling on discounts to clear out the unsold inventory. High inflation and high interest rates are making vehicle purchases difficult for everyday people. Auto executives are worried that many consumers have hit their limit.

EV Prices Reduced through Rebates and Lease Deals 

EV sales promotions have taken different forms. Some automakers, such as Hyundai Motor and Ford Motor, are offering cash rebates as high as $7,500 on top of the federal tax credit on some models. Others are offering aggressive lease deals that offer cheaper monthly payments or shorter contract lengths to attract buyers. Many car companies are offering low-interest rate promotions to make pricey electric vehicles more affordable. On average, customers received about a $2,000 discount on an electric vehicle in September, compared with a year prior when they paid a $1,500 premium. Industrywide, shoppers paid around $930 less than the sticker price in September. As wealthier EV adopters have already purchased an electric vehicle, the industry is now confronted by a more reticent group of consumers, who are being squeezed by high interest rates and rising costs.

Electric vehicles are now some of the slowest sellers on dealership lots. In September, it took retailers over two months to sell an electric vehicle, compared with around a month for gas-powered vehicles and only three weeks for a gas-electric hybrid. That trend is expensive for dealers who take out loans to finance their fleet. The longer a vehicle sits on the lot, the more it eats into potential profit. At the end of September, automakers had 88 days’ worth of EV inventory, compared to 56 days for conventional models.

The discounting activity is helping to bring down the cost of battery-powered cars, which on average sold for about $50,683 in September, down from more than $65,000 last year. By comparison, prices overall for new vehicles remained at about $48,000. According to car executives and dealers, the discounts will likely continue for now, especially in the form of lease offers.

The discounts are threatening to exacerbate problems at startups, which are swiftly burning through their remaining cash. Luxury electric-vehicle maker Lucid in August marked down the price of its vehicles by up to $13,000, due to weakening demand. EV startup Fisker said that it was lowering the price of its Ocean Extreme SUV, a brand-new model that went on sale this year, by $7,500 in response to “competitive realities.” Fisker’s vehicles do not qualify for a federal tax credit because they are built outside the United States.

Climate Law Pushed Manufacturers into EVs

President Biden’s climate law, the Inflation Reduction Act (IRA), stimulated a surge of investment in electric vehicle production across the country, including tens of billions of dollars on battery plants across the South and new assembly lines near the Great Lakes. Under the law, companies get lucrative tax credits for investing in electric vehicle production and component parts like advanced batteries. But, the climate law has not drastically affected trends in electric vehicle sales. Expectations are that Americans will buy one million electric cars and trucks this year, continuing a steady trend of increased market share for electric vehicles, but not close to what is being manufactured. Even Tesla is considering abandoning its $1 billion investment in a plant in Mexico despite seeing a grow rate of 51 percent in revenue last year.

The reality is that electric vehicles are too expensive for the American public. A Ford F-150 Lightning starts at about $50,000, before federal tax credits of $7,500. A base model gasoline-powered F-150 starts at less than $37,000. GM’s Chevrolet Blazer starts at around $37,000, but the electric version costs a minimum of $56,000 before tax credits.  Even with those price differences, Ford says it is losing over $60,000 for every electric vehicle it makes for a total of $4.5 billion this year. Without an American supply chain, however, electric vehicles cannot qualify for the full $7,500 consumer tax credit. Without the full credit, a typical electric vehicle remains much less affordable than a conventional automobile. President Biden’s climate advisor Ali Zaidi has admitted that the administration’s programs include reducing Americans’ reliance on cars, i.e. speeding the process of getting Americans out of their personal transportation choices.

Those IRA requirements, however, do not apply to the leasing market, which explains a shift in consumer preferences. Many car shoppers lease electric vehicles instead of buying them because a Treasury Department regulation enables auto dealers to avoid the law’s made-in-America requirements for cars that they buy and lease to customers. The regulation allows shoppers to obtain the full federal tax credit for models that otherwise would not qualify. The auto dealers association calculates that more than half of electric vehicle transactions in the United States — excluding Teslas, which are not sold through traditional dealership models — are leased, a large increase from a year ago, when it was around 30 percent.

China in the Driver’s Seat

The vehicle transition is effectively subsidizing China, which leads the world in electric-car manufacturing and battery technology and is home to vast stockpiles of critical minerals needed for batteries and other components. The United States has been slow to invest in raw materials and parts needed for batteries, including mines producing minerals like cobalt, and factories making chemicals that go into batteries, partly because of Biden’s anti-mining actions. U.S. companies have even sold their interests in cobalt companies in the Democratic Republic of the Congo to Chinese companies. China is decades ahead of the United States in these endeavors, meaning it may be impossible to catch up because China’s control means it can flood markets and drop prices for minerals whenever a prospective mine is announced elsewhere, undermining the mine’s economic viability.

Chinese electric-vehicle-battery firms are becoming major export players.  Contemporary Amperex Technology (CATL) and carmaker BYD are the top two producers of EV batteries in the world. Chinese battery manufacturers, however, lag behind South Korean rivals outside China, but that could change due to CATL’s growth numbers. Chinese firms are eyeing big new factory expansions in Europe and in U.S. free trade partners as a way to sidestep current and future U.S. import restrictions—much like Japanese carmakers did in the United States in the 1980s. Chinese firms have announced overseas investments of more than 200 billion yuan, $27 billion, in batteries and materials with more than 80 percent of that in Europe. China has also become the world’s top exporter of electric vehicles.

Despite China’s monstrous lead, the Biden administration is expected to issue more rules about when parts can be sourced from China and other countries, hoping for a renaissance in EV battery and vehicle manufacturing in the United States. He already has proposed regulations from the Environmental Protection Agency and the National Highway Transportation Safety Administration that encourage automakers’ investment in electric vehicle production by requiring that two-thirds of all new passenger cars sold in the United States be all-electric within a decade. If the regulations are implemented and auto manufacturers do not meet the standard, they will need to pay fines, causing vehicle prices to increase.

Conclusion

While the battery-powered vehicle market is still expanding, the pace of growth has slowed considerably. As a result, legacy automakers that had been spending heavily to build their electric car businesses due to incentives from Biden’s climate law, are now taking a more cautious approach to investments. And, they are offering discounts on electric vehicles as dealer lots are overflowing. Ford and GM are losing tens of thousands of dollars for every electric vehicle produced and sold and they have just given big raises to the United Auto Workers union.  Biden’s climate law and proposed regulations pushing electric vehicles just might result in automakers needing another multi-billion dollar taxpayer bailout.

John Mozena, president of the Center for Economic Accountability, said this is a “great example” of central planning. “This is a great example of what happens when government central economic planning runs face-first into the real world of consumers having inconvenient opinions and making actual decisions. At the end of the day, it doesn’t matter how many EVs automakers build. Rather, it matters how many EVs consumers want to buy and drive.”

IER

U.S. Senate Majority Leader Charles Schumer and 22 other Democratic senators recently wrote to the U.S. Federal Trade Commission (FTC), alleging that multi-billion dollar acquisitions by Exxon Mobil and Chevron would lead to reduced competition and higher prices for consumers and asking regulators to launch antitrust probes. Exxon has proposed buying Pioneer Natural Resources for $60 billion and Chevron agreed to acquire Hess for $53 billion. The letter clearly shows, however, that these politicians do not understand much about the U.S. oil market: its players and their contributions to the nation’s energy security. First, it is hard to understand how competition would be reduced when Exxon and Pioneer combined produce only about 5 percent of U.S. oil, which is just a fraction of the oil OPEC members control–approximately 80 percent of the world’s proven oil reserves. The United States has roughly 9,000 small independent oil producers that produce 83 percent of total U.S. oil production and 90 percent of total U.S. natural gas production. In Texas, there were more than 5,700 oil and gas producers operating in 2022.

These mergers are not unusual given the state of the oil market. Volatility in oil prices and the market forces that drive them have resulted in consolidation in the past. In addition, rising interest rates caused by Biden’s inflation have increased the cost of capital, making it more expensive for oil producers, who face massive capital outlays for exploration and development and to drill for new wells, making mergers more attractive. Oil companies need to be vigilant regarding Biden’s anti-oil and gas policies because they run the risk of investing in new oil and gas operations and infrastructure that might be made uneconomic if Biden’s net zero carbon program is fully implemented. These factors are compounded by the antagonistic regulatory environment that President Biden and his administration have promoted since his taking office.

Biden’s regulatory environment has caused U.S. gasoline prices to increase over his term in office. Schumer is right when he says “in April 2020 … retail gasoline prices averaged $1.84. Prices steadily rose for two years, hitting a historic height of $4.93 in June 2022, and remain relatively high today at $3.84.” The low prices Schumer sites occurred under President Trump’s energy dominance program, while the high prices occurred under President Biden’s anti-fossil fuel program.  In fact, to reduce gasoline prices before the mid-term election in 2022 to about where they are today, Biden robbed the Strategic Petroleum Reserve (SPR), the U.S. emergency oil reserve, of 260 million barrels of oil of the type that U.S. refiners need. He has yet to refill the emergency reserve. His vandalism has left the SPR at a 40 year low with much of the remaining oil not amenable to U.S. refiners who require certain grades of oil to refine into the products Americans use to make their lives better.

To support his argument, Schumer cited a 2004 GAO report that claimed petroleum industry mergers raised gasoline prices. The FTC, however, found that GAO report to be “fundamentally flawed.” It is also why the Commission resisted taking up Biden’s call to investigate the oil industry for price gouging.

The Schumer letter also claims that oil exports hurt consumers. That again is incorrect because U.S. oil exports work to lower oil prices and ease OPEC’s dominance of global oil markets. OPEC dominance was strong until the U.S. shale oil renaissance took off in the early 2000s and unlocked previously inaccessible reserves of oil and gas. More companies started producing oil from shale basins and oil production rose significantly. In 2022, U.S. oil production was 105 percent higher than in 2000. With the acquisition of Pioneer, Exxon’s Permian Basin production would more than double to 1.3 million barrels of oil, helping to lower prices and strengthen America’s energy security. Even the Dallas Federal Reserve Office has negated Schumer’s conviction. In 2022, a Dallas Federal Reserve study explained: “Because a cessation of U.S. crude oil exports would lower the supply of oil in global markets and raise its price, one would expect global fuel prices, if anything, to increase as a result….” The Senators’ argument may be simple and straightforward, but the record shows it is also wrong.

By allowing the major oil producers to increase their presence in U.S. shale oil plays, the deals create opportunities to bring significant new supplies to market. As The Wall Street Journal recently pointed out, President Biden demanded that oil and gas companies spend their record profits on increasing production, which is what they are doing, while also spending money on Biden’s energy transition. According to Chevron, the combined company is “expected to grow production and free cash flow faster and for longer” than its current five-year guidance. And, besides producing more oil due to its proposed merger with Pioneer, Exxon plans to produce lithium as soon as 2027 and to supply enough lithium to support the manufacture of 1 million electric vehicles annually by 2030, supporting Biden’s EV program. Earlier this year, the company purchased 120,000 acres of a geological site in southern Arkansas called the Smackover Formation that is rich in lithium. The big oil and gas companies are moving increasing amounts of money to renewable energy sources and “clean energy” technology, despite horrible economic performances of those approaches lately.

Some analysts believe that bigger companies would be better in reducing greenhouse gas emissions—the main culprit in the Democratic leaders’ desire to eliminate fossil fuels, or so they say. Oil majors have the financial flexibility and the engineering skills to reduce the carbon intensity of their operations far more than independent oil producers that are staffed by an average of 12 workers. Both Chevron and Exxon have made emissions reductions part of their deal announcements and presentations. Chevron plans on an anticipated 50 percent reduction in methane emissions by 2028 and Exxon has pushed forward Pioneer’s target of net-zero greenhouse gas emissions in the Permian Basin by 15 years, to 2035 from 2050. Besides having the money to reduce emissions, there is a greater motivation by the larger companies to reduce their emissions and to hit their net-zero targets because the shareholder bases and activist investor groups are more demanding of the large companies for hitting more aggressive emission targets.

If Schumer is interested in the real problem, he should turn his attention to the state-owned energy companies in the Middle East, China, Russia, and South America that constitute real market monopolies. In 2020, 16 of the top 19 oil companies in the world were state-owned, controlling over three-quarters of global crude oil reserves.

According to Exxon, “For all those who seek even greater U.S. energy independence and far lower emissions, this merger represents nothing but upside for our economy and our environment given that ExxonMobil has the resources to get more out of the ground and do it at vastly improved emissions levels.”  And since the United States creates energy with a higher environmental protection score than virtually every other country in the world, allowing these American companies to combine will hasten the U.S.’s already outstanding record.  If the Senate authors of the letter regarding mergers understood that, they would be encouraging more production in the United States, rather than fighting it at every turn, as has been their record.

Conclusion

Schumer and his Democratic Senate friends should take an Introduction to Oil course to learn the mechanics of the oil market, which is a global market, not a domestic market. As the Congressional Democrats and the Biden administration are tying the hands of the oil industry any way they can, the industry is trying to survive by keeping U.S. oil production up and by investing in Biden’s energy transition. But, no matter what the industry does, the Biden administration and Schumer’s Senate Democrats produce barriers to the industry’s mission of producing oil for American families while investing in Biden’s “green” energy program.

The North American Electric Reliability Corporation (NERC) warned that more than half of the United States and parts of Canada, home to around 180 million people, could fall short of electricity this winter due to a lack of natural gas infrastructure. In its most recent winter outlook, the regulatory agency warned that prolonged, wide-area cold snaps could threaten the reliability of bulk power generation and availability of fuel supplies for natural gas-fired generation. The U.S. Midwest, Northeast, Mid-Atlantic, and South, along with some Canadian provinces, are at the highest risk. Grid operators are vulnerable to generators going offline under extreme cold conditions as there is not enough natural gas pipeline and infrastructure to serve all the gas generation in vulnerable areas. The situation has worsened under the Biden Administration due to its poor record on pipeline infrastructure construction, which in 2022 dropped to just 3 percent of the total constructed under President Trump in 2017. NERC also found that load forecasting in winter is growing in complexity and underestimating demand increases the risk to reliability in extreme cold temperatures.

New England’s Future Vulnerability

New England is particularly vulnerable since its natural gas infrastructure is very limited. And the reliability of its electric grid could get even worse next year. A possible loss of the Everett Marine LNG terminal could jeopardize the reliability of New England’s energy supply, according to the Federal Energy Regulatory Commission (FERC) and NERC. The LNG import terminal has been supporting natural gas supplies in New England since its first shipment over 50 years ago.

The 1,413-megawatt Mystic natural gas-fired power plant owned by Constellation Energy is scheduled to retire after May 2024.  The plant is fueled by Constellation Energy’s liquefied natural gas (LNG) import facility on the Mystic River in Everett, Massachusetts. The company also provides natural gas from its LNG facility to gas providers in New England. The retirement plan could change, however, if the regional grid operator or another body determines the plant is required to preserve reliability or for other reasons.

EPA’s Pending Power Plant Rule

Further negatively affecting the future reliability of the U.S. electric grid is the Environmental Protection Agency’s (EPA) new rules for power plant emissions that is essentially forcing natural gas and coal power plants off the grid. Due to negative criticism of its rule, the EPA has recently conceded that it may need to rework its new emissions mandates due to potential grid reliability issues. In developing the rule, the EPA relied on assumptions regarding the viability of green hydrogen production and consumption as a replacement for natural gas and on the availability of carbon capture and sequestration technology, neither of which are commercially available today, among other issues with its methodology. The EPA plans to work with NERC and grid operators to ensure the new rules do not fragilize the grid. The concerns deal with compliance timelines, which begin taking effect in 2030, and what happens if carbon capture and hydrogen technologies are not available to meet those timelines as well as the need for more details on options states could use to develop plans for meeting the proposal’s requirements.

An analysis by Isaac Orr and Mitch Rolling indicates how devastating EPA’s new rules would be for the Midcontinent Independent System Operator (MISO). The authors modeled EPA’s rule and discovered massive capacity shortfalls because wind and solar are not producing enough electricity to keep the grid balanced.  That is, there is not enough dispatchable capacity on EPA’s system to ensure the lights stay on. While EPA did build new natural gas peaking plants in its analysis of the rule, it did not build enough to replace retiring coal plants and meet future growing electricity demand when the wind isn’t blowing and the sun isn’t shining. The situation will only get worse as much of the Biden Administration’s vision of the “energy transition” relies upon increased use of electricity for heating, transportation, cooking, and everything else.

EPA expects weather-driven wind and solar power to show up when they are needed most, which does not happen in the real world.  As a result, Orr and Rolling found that a 32 percent increase in installed capacity would be needed compared to EPA’s analysis. Building this capacity would cost MISO ratepayers an additional $246 billion ($7.7 billion annually) compared to EPA’s assumed grid, causing electricity prices for families and businesses to increase by approximately 32 percent. That equals about $170 every year for each of the 45 million people living in the MISO region or $680 per year for a family of four. Those are needless extra costs as the existing coal and natural gas plants in the region could operate for decades if it were not for the EPA rule.

December 2022 Storm

NERC wants to avoid a repeat of outages that occurred from last December’s storm. In September, FERC and NERC presented the results of their joint inquiry into the power outages and rolling blackouts during winter storm Elliott in December 2022. The inquiry found that the sub-freezing temperatures and extreme cold weather caused unplanned electric generation supply losses. Both electric and gas systems in much of the eastern half of the United States experienced significant stress, resulting in unplanned generation losses, with around 90,500 megawatts out at the same time. Flows of gas into pipelines were reduced, while demand for gas for heating and power generation increased, dramatically lowering line pressures. The gas system only narrowly avoided significant outages as pipeline operators “used all possible flexibility and storage withdrawals to deliver as much natural gas through the system as possible.” In New York City, Consolidated Edison declared an emergency because it faced a system collapse that would have taken “many months” to restore service in the middle of the winter, a potentially deadly outcome since so many more people die of cold than of heat.

Conclusion

NERC and FERC found that the United States needs more natural gas pipeline capacity to maintain reliable gas supply during extreme cold weather to prevent a repetition of last winter’s power outages. More natural gas pipeline capacity is needed to maintain a resilient system that affords homes and the power grid access to multiple sources of the fuel. Unfortunately, pipelines in this country are having a hard time being built. The 303-mile Mountain Valley natural gas pipeline, for example, was originally set for completion in 2018 and may finally be completed by early next year. Permitting delays and court action have increased the pipeline’s cost from the original estimate of $3.5 billion to $6.6 billion. Permitting reform is needed, but the Biden administration seems to only want it for development of “green technologies.”

IER

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