The Second Fuel Crisis and the Potential Doom of the Domestic Automotive Industry

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The Second Fuel Crisis and the Potential Doom of the Domestic Automotive Industry

Economic illiteracy in general and a complete lack of understanding, in particular, of the economics of what the oft-cited political mantra refers to as “working families” by political elites and the new growing class of industrial elites has doomed the domestically owned OEM automotive industry.

Mark Twain is reputed to have said, “History doesn’t repeat itself, but it often rhymes.”   

In the 1960s, when oil was cheap, less than $2 per barrel (“bbl”), I heard a General Motors (NYSE: GM) executive say that, ” ‘we’ predict that the domestic American auto market in 2000 will be 28 million cars, and we are preparing for that.” (Note: In 2000, 17.8 million new cars and trucks were sold.) In those far-off days, the big three American OEM automakers had 99% of the domestic market and were vertically integrated, so they were designing and building not only assembly plants but also component plants en masse.

No one in Detroit, then as now, gave any thought to the issue of fuel. They made cars and trucks. The oil industry could take care of finding, producing, refining, and distributing “fuel.” Purdue and the General Motors Institute produced all of the engineers that GM would ever need, and no one at GM even knew if either of those institutions had oilfield engineering or oil refining courses.

The car makers specified the fuel requirements, and it was up to the oil industry to provide the products.

First Fuel Crisis – 1972 Arab Oil Embargo

In 1972, the Arab Oil Embargo hit and suddenly resource nationalism, although not called that then, hit the American OEM automotive industry like a brick wall. I am going to call this series of events the First Fuel Crisis.

Up until 1972, American oil production had not been anywhere near enough to meet domestic demand, but even with freight from the Persian Gulf, oil from the Middle East was so much cheaper than domestic oil that there was little point in increasing domestic production. Except for the West Coast, which was too far from the Middle East to make transportation economical and southern California was covered with pyramidally shaped structures, which were in fact producing oil wells. When I lived in Los Angeles in the late 1960s, I paid no attention to these structures which were common along the coast.

What was called the “Arab” oil embargo shocked the domestic American OEM automotive industry. Up until then, fuel efficiency was nowhere near as important as muscle cars.

When Crisis Meets Opportunity

But the oil shock and its concomitant rise in fuel costs opened a window for Asian and Western European car makers, who by necessity, had been engineering and producing inexpensive fuel-efficient cars for their economically devastated post-war populations.

By the end of the 1970s, Japanese cars were making headway into the US market. But they were poorly designed and not really ready for the US market. Young people, however, flocked to buy them, because they were affordable. U.S. domestic car makers scoffed at “Japanese junk,” but the Japanese were quick learners and they not only rapidly improved their products, but they kept the prices low so that they were “buying” market share.

American government regulations began to weigh heavily on OEM costs. First, there were mandatory safety requirements (Unsafe at any Speed), then the fear of air pollution brought about the catalytic converter requirement, and then competition and spiraling fuel costs mandated engineering improvements that drove margins down.

The Koreans entered the American market with the same scheme as the Japanese had originally had, the purchase of market share.

On top of that desire, as the Japanese and Korean economies boomed and even automation could not contain home country manufacturing costs, both the Japanese and the Koreans began to build assembly and even parts plants in the USA (and Europe, Canada, and Mexico). Even the Germans joined the move to assemble vehicles in the USA and their supply bases soon followed.

The domestic American OEMs had shed their vertical integration in the 1990s to raise much-needed cash and claim that not controlling their supply chains was more efficient for just-in-time manufacturing.

China’s vertically integrated EV supply chain

Meanwhile, a rough beast was slouching towards America, not the Chinese OEM automotive assembly industry but the Chinese total supply chain control of OEM industries.

China’s car industry began with fossil-fueled vehicles, but that soon led to enhanced air pollution in its cities where steel factories already poisoned the air.

China watched as a young South African émigré to the USA, after making his first fortune in the online bill-paying industry, revived the battery-powered electric car, which emitted no chemical pollution. Elon Musk forced the global car-making industry to look at the lithium-ion battery as the right technology to finally underpin a mass-producible, electric-powered car.

China created a resource security and resource processing sufficiency-based industrial policy to support its entry into electric vehicle (“EV”) development and manufacturing from the start of its entry into the mass production of this technology. These steps, up until just now, have been ignored by the American (and European) OEM automotive industry, which abandoned vertical integration for outsourced just-in-time delivery at the same time that China, as a nation, moved in the opposite direction to support its fledgling automotive industry both for fossil-fueled and, critically, for battery-powered EVs.

Today, these policies, developed and implemented over the last 15 years have given China dominance or outright control in all of the critical minerals and their processing into end-user forms to support the world’s largest fossil fuel and EV car industry.

China’s domestic electric power grid has simultaneously managed to support the supply of electricity for charging its world’s largest and fastest-growing domestic fleet of “new energy” cars, trucks, and buses.

No other nation has undertaken such a massive and comprehensive support program for an OEM automotive industry transformation of power trains from fossil fuels to electricity.

Second Fuel Crisis – Critical Minerals and Battery Metals

The second Fuel Crisis has thus hit the non-Chinese car industry even harder than the Arab oil embargo.

Natural resources are limited in their production. They are not organic, self-replicating resources. The metals and metalloids critically necessary for the production of the key components of batteries, miniaturized electronic switches and controls (“chips”), and the most efficient electric motors are scarce and or secondary, i.e., they are byproducts of the production of other metals. Thus the main issue of producing them is cost because capital and capital allocation are not infinite resources either.

The controlled production, distribution, and storage of electricity necessary to “fuel” battery-powered electric vehicles was never considered by those building those systems. It is a conceit of those ignorant of electrical engineering to just assume that the systems can accommodate a massive influx of irregular demand without added costs, if at all. It is beyond belief that anyone assumes that the developing nations will prioritize electric vehicles over electric lights as they build their domestic production and distribution systems for electric power, so it is clear that electric vehicles will remain an agenda item of only the developed nations and then only for so long as electricity is affordable.

Today’s OEM automotive industry would never consider converting away from fossil fuels if it were not for governmental mandates, themselves based on a dubious climate change agenda, making the manufacturing and sale of fossil-fueled vehicles prohibitively expensive.

Paradoxically, it is only through the continued sale of the largest fossil-fueled vehicles, SUVs, pickup trucks, cargo vans, and freight trucks that the American OEM automotive industry can continue to operate, and that only so long as government subsidies and grants for electric vehicles and new manufacturing facilities continue.

Where is my EV ‘gas’ station

But, back to fuel production and distribution. The unelected bureaucrats and academics who execute the policies prescribed by the elected politicians are quiet with regard to the rebuilding and repowering of the electrical distribution grid that is necessary to accommodate the addition of tens of millions of electric vehicles needing charging at random times across the 5 time zones that encompass the US. This is because the US economy does not have the ability to fund such a massive undertaking and continue on its climate crisis agenda alongside its massive “entitlement” system.

Studies estimate that the electricity-transmitting capacity supplying power to households that own an EV must increase by 70% to 130% to accommodate EV charging. Upgrading the electrical grid to meet this demand could cost from $10-$25 billion nationwide by 2030. In addition, when you add the additional costs for electrical generation and storage, customer-side infrastructure, and EV chargers, the total investment could range from $75-$125 billion. While utilities are likely to see an increase in revenue from EV users, it may not be sufficient to cover all of the additional expenses across the electric power supply chain.

The true crisis of on-demand electric fuel is that it is an impossible goal if the current American standard of living and quality of life are to be maintained.

Contrary to what the priesthood of climate change preaches, there is no infinite resource of critical minerals and even the processing of what we can produce or obtain of them is no longer possible in the US. The disorganized US government and OEM industries do not have the capital, much less the expertise, to address a slow-motion, non-catastrophic collapse of the US cheap-energy-based economy. Printing money has only accelerated the decline of American manufacturing as ignorant pronouncements from Washington replace market-based economics.

Goodbye American OEMs, it is too little, too late

The random moves by OEM automotive to reform its century-old procurement system to recognize total supply chains over immediate suppliers have resulted in the chaotic allocation of money to high-risk (aka, unproven) and poorly selected place-holders in total supply chains for not only critical minerals but also for their refining and end-user fabrication vendors.

Only those OEMs that have chosen wisely will survive, and they will be only those that make a mix of vehicles using both types of fuel, fossil and electric. For the rest, their unsold inventory of expensive EVs will be auctioned off by their bankruptcy trustees.

Around 20% of the world’s annual production of motor vehicles is assembled in North America. Yet, as the chart below shows, the US only has 6% of the global battery-making capacity. Even more disconcerting is the fact that the US has only 4% of the world’s lithium production capacity.

This is not a formula for success or even for the continued existence of an industry.

Battery manufacturing capacity by country (2022)

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5 responses

  1. David R. Hammond, PhD Avatar
    David R. Hammond, PhD

    Another excellent and spot-on analysis, Jack! Your analog of the impact of the 1970s oil crises impact on auto makers then with the pending lack of electricity for EVs today is inspired; great comparison and so obvious when one thinks about it (although no one else will, esp. in Washington or Detroit, or any academic institution).

  2. Rare Earths Investor Avatar
    Rare Earths Investor

    “The unelected bureaucrats and academics who execute the policies prescribed by the elected politicians are quiet with regard to the rebuilding and repowering of…”

    Thanks for the potted history and candid opinion. Always challenging and helpful to retail RE investors.

    IMO, the new monetary theory enables present US elites to view money and debt as mere stumbling blocks in their drive to new green infrastructure and products.

    Remember, even though the emperor had no new clothes the masses supported him until the charade unwound. Without discussing the rights or wrongs of such a ploy here, IMO, we are nowhere near unwinding this auto ‘show’. Yes, those in the know are keeping quiet for economic and political gains. However, IMHO, that is good for very selective retail metals investors until at least the end of 2024. The US election result will significantly impact beyond that.

    GLTA – REI

  3. Simon Avatar

    I hope that our Australian Government reads this. The chart is scary and the contents of your article hopefully will further alert our new Australian government that seems to understand what “critical” means.

    1. Hugh Sharman Avatar
      Hugh Sharman

      Simon, with due respect, I believe you meant to write that your new Australian government does NOT understand what “critical” means?

  4. Hugh Sharman Avatar
    Hugh Sharman

    Jack! Plaudits again! However, was there any reason for not mentioning “ESG” even once? “ESG compliance” is supposed to be an integral part of the “green energy transition” as we are so often assured here at
    Maybe I am just stupid ?For example. I remain unaware of the ESG-component of any product we can buy that contains a lithium ion battery, from almost all smart phones to any electric vehicle.
    I should add add a point to that scary slide from Bloomberg! Tesla, these days, is much bigger in China than anywhere else, There are Chinese funds and vital supplers in most of the ventures that Bloomberg mentions in Germany, Poland and Hungary.
    Finally, the EU Commission’s press release last month entitled “Critical Raw Materials: ensuring secure and sustainable supply chains for EU’s green and digital future” dated 16th March is 4 pages long but does not contain the word “China” once!
    Hilarious and tragical!
    As the Danish EU Commissioner Margrethe Vestager has said on several occasions: “We have not been too naive, we have been too greedy”.
    How right! But without these, the EU’s “green energy transition” is simply impossible.
    We live in perilous times!

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