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By Robert Rapier on Sep 29, 2006 with no responses

Another Khosla Critic

A reader recently e-mailed me the following link from Reason Online:

An Open Letter to Vinod Khosla

This letter to Mr. Khosla, from a fellow Indian émigré, echoes a number of points I have made regarding Mr. Khosla and California’s Proposition 87. Some excerpts:

Now you have become the prophet of alternative fuels that, you believe, are going to revolutionize the energy industry, much as the internet revolutionized communications. You are impatient to cut by half President Bush six-year timetable to bring cellulosic ethanol produced from farm waste to the market.

But, with all due respect, even a man of your stellar track record can’t simply will markets to do his bidding; an economy is not a machine that can be manipulated according to its maker’s grand designs. If it were, India’s central planners would have made rivers of energy flow into every Indian home.

I understand that there are a lot of Khosla fans out there who think that letters like this, and my debunking of some of Khosla’s claims, are simply due to the fact that we just lack Khosla’s vision. But as I have pointed out, Mr. Khosla’s expertise in computers does not imply credibility on ethanol issues. I agree with Tad Patzek of UC-Berkeley, who said that Khosla may be a great guy, but asked if you would you allow him to do brain surgery on you. Or would you rather have someone qualified do it?

This is the disconnect that we have here. Khosla’s sycophants are quick to hand-wave away the technical problems, because they do not understand them. We aren’t talking about merely being able to throw a lot of money at this problem and solve it, or it would have been solved long ago. It is a tough nut to crack. I believe it will eventually be cracked, but progress will come in bits and spurts. (I also believe that we will eventually colonize Mars; we just won’t do it next year because significant hurdles remain – hurdles that require a lot more than cheerleading to overcome).

For you computer tech guys, consider this analogy. Let’s say I promise to mass-produce a 30 gigahertz personal computer in just 3 years. It will cost less than $500. Let’s say I successfully lobby the government for funding for my venture. Furthermore, let’s say that other important research gets pushed to the borders because people believe that my claim is credible. Now you, being knowledgeable about this sort of thing, start to critique and challenge my claims. Would I be justified in claiming that you are a naysayer and you merely lack vision? Or is it more likely that your criticisms are due to the fact that this is your area of expertise, and you understand the challenges that prevent the promise from being fulfilled in the time frame I have promised?

The bottom line on this is that it will be great if cellulosic ethanol scales up quickly (from essentially zero today) to displace a large fraction of our gasoline demand. I advocate a large amount of funding for cellulosic ethanol. But if we are counting on this, and making energy policy decisions based on this happening with a high degree of probability, then we are making a grave mistake.

(I hadn’t realized until I started formatting this that the following paragraph links to an essay that I did for The Oil Drum on Prop 87). More excerpts from the letter:

Proposition 87—which you are personally spending $1 million to promote—would force oil companies to pay taxes (or royalties, as you call them) for drilling privileges until the state has raised $4 billion for seed money toward alternative fuel ventures. You argue that California is the only state that does not collect drilling royalties, something that oil companies can well afford to pay given their “abnormally” high profits. But California imposes all kinds of other taxes that make its oil among the highest taxed in the country. Proposition 87 would raise these taxes another 50 percent, forcing Californians, who are already paying among the most exorbitant gas prices in the country, to forego energy consumption.

Your cause might involve very cutting-edge technologies, but you are promoting it with curiously outmoded economic thinking. It might be worth questioning your Prop 87 crusade by revisiting the lessons of failed policies from home.

If you have read my previous essays on Prop 87:

California’s Proposition 87

More on California’s Proposition 87

Breaking Down Prop 87

Then you know my feelings. Ironically, the “foregoing of energy consumption” mentioned above is one thing I think is a positive from Prop 87. However, this reduction in consumption is not what the proponents are promising. Furthermore, the proponents are conducting a very misleading campaign. I could give numerous examples, but I will give just one. The proponents claim time and time again that this is an excess profits tax. It is no such thing. It is an extraction tax. In theory, profits could be zero for an oil company, and they are still going to get taxed as long as the price of oil is above $$$.

Now, carefully consider this next passage:

Yet, the issue is, if ethanol has all the advantages you says it does—if it is renewable, cleaner, less volatile, more reliable, easily transportable etc.—surely you of all people could convince enough investors to cough up the $4 billion that Prop 87 would raise. Are you not turning to taxpayers because you don’t want to assume that kind of risk—and can’t convince fellow investors to either? That is hardly socially responsible.

Bingo. I have said this before. If all of the advantages that Khosla is claiming are real (including his claim of lower cost of production than gasoline!), then raising money for this shouldn’t be a problem. This should raise some caution flags.

However, I still think Prop 87 will pass. There is too much anger at oil companies, and the proponents have painted this as a way to get them back. Will the voters get what they think they are getting? I think not. I also think it is possible that there will a voter-backlash well before the fund-raising goals have been met. I am glad that I will get to watch this experiment play out from outside California.

Finally:

Where oil companies have used the government to create barriers or tipped the playing field against alternative fuels, we should fix that. (And, no, it is not an illegitimate barrier, as you claim, when oil companies don’t install enough E-85 pumps in gas stations to distribute ethanol; not carrying products that don’t maximize your profits is not the same as impeding others from offering those products).

I have pointed this out to Mr. Khosla before. If oil companies aren’t installing enough E85 pumps to suit him, then he should build his own stations. Remember, Khosla has claimed a tremendous number of advantages for ethanol. So, why not convince investors to build a lot of E85 stations? Seems like a no-brainer, UNLESS ethanol isn’t quite at the stage Khosla claims it to be. (In fact, as I have pointed out previously, we can’t produce enough ethanol to justify a fraction of the E85 pumps Khosla demands).

Mr. Khosla hasn’t listened too much to what I have said to him during our exchanges. Or perhaps he listened and decided to ignore it. Either way, maybe the same message coming from a different source will garner his attention.

I Can’t Believe My Eyes

In the strange but true category, someone e-mailed me the following link:

Khosla: Ethanol Not Final Fuel

In this story, Khosla is quoted: “Contrary to what you might believe, I think it’s extremely unlikely that in 20 years we will be using any ethanol in cars.”

I simply don’t know what to make of this. He is pushing us to spend billions of dollars to roll out all of this ethanol infrastructure, and he thinks ethanol won’t be fueling our cars in 20 years? What about all of those charts and graphs showing us making 200 billion gallons of ethanol in 20 years? Has he had a change of heart? I don’t know, but this is about the last thing I expected to come out of his mouth.

Over at AutoblogGreen, one of the posters suggested that my debunking/dialogue with Khosla helped prompt a change of heart:

Khosla: Ethanol is just a stepping stone

While I would like to think that our discussions made some difference in his opinion, it was clear from talking to him that he was not going to be easy to budge from his position. At the moment, I am at a loss to explain his apparent about-face. Maybe this is just another example of Dr. Jeckyll and Mr. Khosla?