naked capitalism

By Edward Harrison of Credit Writedowns

This comes via the FT:

Saudi Arabia on Wednesday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.

The decision by the world’s biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world’s most heavily traded oil futures contract. It is the main contract traded on Nymex.

Before anyone tries to spin this as an anti-dollar move, you should read what else the FT article says:

In January, WTI, which usually trades at a premium of $1-$2 a barrel to Brent, fell sharply, leaving it at a discount of almost $12 – a record gap. This dislocation in the market continued well into the summer.

From January, Saudi Arabia will base the price of oil for its US customers on a new index developed by Argus, the London-based oil pricing company.

The Argus Sour Crude Index will track the price in the physical market of a basket of US Gulf Coast crudes, including Mars, Poseidon and Southern Green Canyon.

The point of this move is not to undermine the dollar but to get away from the WTI contract where prices have been artificially inflated due to storage shortages at Cushing.

A friend familiar with this market also indicated that big bank punters active in this market will like this move as well as it helps them evade the position limits and regulation of the CFTC. He says, “In fact, the lack of transparency and regulation on the Dubai Merc was one of the reasons why you had such successful speculation in the oil market during the spring of 2008.”

I see a spike in oil prices as a risk to any sustained recovery. Anyone with more insight into why the Saudis made this move, do comment.

I was on the Andrew Hall/Phibro beat for a while and must confess I dropped it in the finish-the-book crunch. I neglected to follow up on and important aspect of the story that is still germane.

Readers may recall the brouhaha: Hall, a high stakes oil trader, had received nearly $100 million in 2008 at Citigroup (Phibro, his unit, was a subsidiary) and had the potential to earn that much this year. His pay deal looked unseemly even by Wall Street standards. As we noted in our first post on this matter (where we took issue with the Wall Street Journal’s posture):

No where is the asymmetry of this arrangement mentioned: that Hall and his team get the upside (30%, more than a hedge fund success fee, more than even LTCM in its glory days, which got a 25% upside fee), but the taxpayer gets stuck with the losses. Hall and his bunch have the richest option deal going. Nor does it bother to point out that Hall would find it hard to get access to as much capital as Citi provides him on such rich terms from the outside. Citi not only provides him with more equity than he is likely to be able to raise (certainly for a 30% upside fee) and his cost of funding is sure to be considerably lower than if he were to operate on his own.

The indefensible aspect in our new bailout era was that taxpayers should be backstopping or funding activities only if they are essential parts of the financial infrastructure. Principal trading is not on the list.

What was intriguing was as things rolled forward was that is was increasingly obvious that Hall would not be able to replicate the conditions he had at Citi anywhere else. After some initial resistance to the pay czar pressure, Hall started negotiating with Citi. Huh? If he was such a hot item, he should have been able to decamp and raise money, or find a happy home in another bank. Contrary to conventional wisdom, not all banks in the world are walking wounded. The Japanese, who are keenly interested in oil thanks to their need to import a ton, would be candidates. Some Eurobanks are not on the government drip feed (Sandater, Deutschebank, although their regulators could have curbed a deal). And there was always the option of a joint deal, say a bank plus a deep pockets investor, private equity firm, or sovereign wealth fund (they took a hit, but should be showing some improvement as equity markets rebound).

But what did we see? Hall wound up at….Occidental Petroleum. Maybe the company has changed, but I had some very limited dealings with them in the 1980s (they were pedaling an utter garbage barge of an oil shale deal, and were so eager to foist it on the chump Japanese that I got to meet all the top brass. To put it politely, they were not nice people, and I see that some that I met are, ahem, still in positions of considerable influence. My dim views then were confirmed by commodity traders).

Now the Journal in particular put up a series of articles that finger wagged at government interference (see here, here, and here for a few examples, with a qualified exception here).

Whoa. Phibro earned an average of $351 million a year for the last 5 years. Oxy paid $250 million, the current value of Phibro’s trading positions. There was NO premium, zero, zip, nada, for the earning potential of the business. Zero. Oxy bought the business for its liquidation value.

Hall’s travails had been in the paper for months. The usual routine if you want to get offers for a division is to let the world know it is for sale (the usual code is “exploring strategic options” but more blatant forms like front page business section stories work fine too). Hall most certainly would have put out feelers; presumably Citi did as well. This was the best deal they could scrounge up.

So what does that say?

A LOT of Hall’s performance was due to cheap funding from Citi, and probably massive leverage too, conditions he could not replicate anywhere else. A risky, highly geared operation should pay an interest rate appropriate to the hazards it is taking, not the borrowing costs of its parent (this basic premise is widespread in financial firms, embodied in approaches like RAROC (Risk Adjusted Return on Capital), the Basel I and II rules, and Economic Value Added models.

Hall could not have been a balance sheet hero unless his pay deal did not adjust for the riskiness of his borrowings. Since Phibro acquired Salomon Brothers (which then came out on top in a palace coup) which was later acquired by Travelers and then merged into Citi, it is possible that Hall’s arrangement was grandfathered and the internal accounting made to correspond to it rather than the conventional metrics in use today.

It is impossible to know for certain, but the deal Citi cut with Oxy struck strongly suggests that Phibro’s preformance was in large measure the result of amped up leverage that no one outside Citi was able or willing to provide. Future financial reports from Oxy may shed more light.

The famed hedge fund investor George Soros has decided to make a serious push into clean energy, not only investing in projects but also forming an organization to weigh in on policy issues. From Bloomberg:

Billionaire George Soros, looking to address the “political problem” of climate change, said he will invest $1 billion in clean-energy technology and create an organization to advise policy makers on environmental issues…

“I want to apply rather stringent criteria to the investments,” said Soros in an e-mailed message. “They should be profitable but should also actually make a contribution to solving the problem.”…

Soros, 79, also will establish the Climate Policy Initiative, a San Francisco-based organization to which he will donate $10 million a year for 10 years.

“It will be part advisory service, part policy developer and part watchdog,” said Thomas Heller, who is heading the initiative. Heller is a professor at Stanford University Law School whose expertise is in energy law and regulation and environmental law.

Its goal is to look after the public interest as policies and programs are created to address climate change. The group will work in the U.S., Europe, China, India and Brazil, he said.

“The problem of global warming is primarily a political problem at this point,” Soros said. “The science is beyond dispute, but how do we achieve the objectives we all know are necessary? That is a political problem.”…

Soros has said he prefers a greenhouse-gas tax because carbon emission-trading systems, which are used in Europe, can be manipulated by investors.

You cannot make this stuff up. The Saudis are lobbying for foreign aid in anticipation of declining oil revenues. Hat tip reader Michael:

Saudi Arabia has led a quiet campaign….demanding behind closed doors that oil-producing nations get special financial assistance if a new climate pact calls for substantial reductions in the use of fossil fuels.

That campaign comes despite an International Energy Agency report released this week showing that OPEC revenues would still increase $23 trillion between 2008 and 2030 — a fourfold increase compared to the period from 1985 to 2007 — if countries agree to significantly slash emissions and thereby cut their use of oil…..

The head of the Saudi delegation Mohammad S. Al Sabban dismissed the IEA figures as “biased” and said OPEC’s own calculations showed that Saudi Arabia would lose $19 billion a year starting in 2012 under a new climate pact….

Al Sabban accused Western nations of pursuing an agenda against oil producers, under the guise of protecting the planet.

Many US commentators blithely asset that the US does not need to worry about the reserve currency status of the dollar, since there is allegedly no ready substitute. Yet those arguments ignore the fact that there has already been movement away from the greenback. The Globe and Mail in early 2008 noted:

A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”

The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

“The private sector’s use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”

Another chip away at the dollar’s standing is a effort underway by the Gulf States plus China, Russia, Japan and France to denominate oil sales not in dollars but a basket of currencies. Note this is not completely novel; Iran’s oil sales to Japan are quoted in yen.

From the Independent (hat tip reader John D):

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars…

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

Yves here. The explicit linking of security issues in the Middle East and the desire of a lot of countries to more away from the dollar as reserve currency is troubling, and the Independent also reads this as a thinly veiled threat:

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy…. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold…

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East….

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

It isn’t uncommon for a theme or a trend to dominate how investors and analysts view a particular sector. For instance, when barriers to interstate banking were lowered, then dropped, bank consolidation was all anyone seemed able to think about, even though there were other important developments in the industry. During that era, at McKinsey, a slide show made fun of typical presentations to banking clients. One had a cartoon of an a school of little fish fleeing an enormous fish with a wide open mouth and sharp teeth. Caption: “Citibank is about to enter your market.”

But while some banks were gobbled up by bigger ones, it was often because it served the executives to do so, rather than because it was a business imperative. Well-run small banks can do well; in fact, beyond a not-very-high threshold, banks do not show economies of scale (it may be that the diseconomies of scope outweigh the scale advantages within particular activities).

Similarly, in the dot com era, even stodgy industrial companies would feel compelled to show that they were somehow taking part of this (the seemingly) earth shaking change.

The rising influence of China is another sea change that investors and companies can nevertheless overdo. This tidbit comes from Andrew Kaplan, a hedge fund manager who focuses on the technology and alternative energy sectors:

From American Superconductor’s June quarterly earnings call, 7/30/09:

In 2008, China grew its installed base of wind turbines to about 12 gigawatts of power and early this year declared that it intended to add another 10 gigawatts or more in 2009…more recent reports state that China may exceed 150 gigawatts by 2020. To put all those numbers in perspective, one gigawatt is enough electricity to power…about 3,000,000 Chinese homes. It’s quite clear that the opportunity in China is tremendous and we are definitely taking advantage of the situation.

The 150 gw number by 2020, while it seems large, would be largely achieved if China kept its pace of wind installations flat with its 2009 number (10 gw).

China’s population is 1.3 billion. At current growth rate, population will be 1.4 billion in 2020.

Average household size in China (blended avg of urban + rural) is 4.0.

So in 2020 there will be 350 million Chinese households.

Given that 1 gw of wind can power 3,000,000 Chinese homes, 150 gw of wind will be able to power 450 million Chinese homes.

So in 2020 wind will account for 129% of Chinese household electricity use.

That’s all. You may now return to regularly scheduled programming. (and, yes, I know that households are not the only consumers of electricity. But, believe it or not, wind is not the only source of electricity in China).

This idea of China being ahead of the game in anything environment protection related probably strikes readers as ironic, given reports of extensive industrial pollution, such as air pollution on a scale that is changing weather patterns, large scale lead poisoning, and cadmium in the soil. As Forbes commented recently, “China: Where Poisoning People Is Almost Free.”

But we pointed out in April that China had been out for some time to take the lead in electric cars. Not only has the US fallen behind in battery technology, but we also gave up the know-how for the related drive trains:

h torque DC servomotors are the sine qua non for electric vehicles.

High torque performance is achieved via magnets made of alloys of various so called “rare earth” elements. Prominent among the alloys are samarium-cobalt and neodymium-iron-boron. GM held a majority interest in Magnaquench, an Indiana company with expertise in such materials and magnet fabrication. GM however decided that electric motors did not fit into its “core competencies.”

Ambrose Evans-Pritchard of the Telegraph tells us China is taking ground on other green energy fronts, namely solar panels and wind turbines:

China is running away with the green technology prize. It has conquered a third of the world market for solar cells and is on a breakneck course to build 100 gigawatts of wind turbines by 2020, doubling again the global capacity for wind power across vast stretches of Inner Mongolia and Xinjiang.

But potentially more important, China is on the cutting edge of price performance:

Suntech Power in Wuxi has just broken the world record for capturing photovoltaic solar energy, achieving a 15.6pc conversion rate with a commercial-grade module.

Trina Solar is neck-and-neck with America’s First Solar, the low-cost star that has already broken the cost barrier of $1 (61p) per watt with thin film based on cadmium telluride.

The Chinese trio of Suntech, Trina and Yingling all expect to be below 70 cents per watt by 2012, bringing the magical goal of “grid parity” with fossil fuels into grasp.

The concept of grid parity is subject to fierce debate, mostly revolving around which form of fuel – nuclear, oil, coal, or renewables – enjoys the biggest implicit subsidy, and what the future price of crude is likely to be. Parity has already been achieved in hot spots. First Solar’s 10-megawatt plant in Nevada can produce electricity without subsidies for 7.5 cents per kilowatt hour compared to 9 cents for fossil-based power.

But are these true technology achievements, or also a function of cheap currency? These gains are coming at the expense of European rivals, and the often often Euro-bashing (more accurately EU-bashing, but that difference is often lost) Evans-Pritchard has some sympathy:

German pioneers Solarworld and Conergy allege foul play and have called for EU sanctions, accusing Chinese rivals of practices that “border on dumping”. China’s finance ministry says it intends to cover half the investment cost of solar projects. It is a life-and-death moment for the German solar industry, pioneers who provide 75,000 jobs and once led the world. “A large number of German solar cell and solar module producers will not survive,” said UBS’s Patrick Hummel….

Roughly speaking, Chinese firms can undercut the Germans by 30pc. At root, it is a currency problem. China has stolen a march against Europe over the last five years by linking an already undervalued yuan to a weak dollar. While Beijing sheds crocodile tears about the falling greenback, it is deliberately riding dollar devaluation to protect its own export share. What is happening to German solar firms is a revealing case study of the slow-burn damage caused by currency misalignment.

If the global economy continues to be weak, advanced economies will become less tolerant of China’s continued mercantilism. Everyone knows the danger of protecionism, but if China continues to push the boundaries based on the assumption its trade partners will continue not to do much to preserve the system, it may learn to our collective detriment that it overplayed its hand.

While oil is a finite resource, focusing on the long term can blind one to near-term dynamics. There has been surprisingly little mention in the mainstream media of how large the current oil surplus is. The collective view seems to be that this will take care of itself in short order. But that may be longer in coming than most believe.

Some veteran oil analysts, in particular Philip Verlerger, beg to differ. From the Los Angeles Times (hat tip reader Michael):

Downward pressure on oil prices is so great that crude could trade for as little as $20 a barrel by the end of the year — less than a third of what it traded for this week and an 86% drop from its peak last year, analysts said…

The reasons are simple, said Philip K. Verleger Jr., an expert on energy markets at the University of Calgary in Canada: The still-sputtering economy has lessened demand at a time when there is already a big surplus of oil.

For eight straight months, oil supplies have been running about 2 million barrels a day higher than the global demand of 83 million barrels a day, Verleger said. Eventually, he and others predicted, suppliers will tire of paying to store all of the surplus oil and flood the market.

“That is the largest and longest continuous glut of supply that I have seen in 30 years of following energy prices,” Verleger said. “It’s a huge surplus. There has never been anything like it.”

The market will eventually correct itself, pushing prices down, Fadel Gheit, senior energy analyst for Oppenheimer & Co., wrote in a note to investors. “Excessive speculation and a weak dollar have lifted oil prices to levels not sustainable by market fundamentals,” Gheit wrote.

Crude has traded in the range of about $70 a barrel for much of the last month, closing Thursday at $66.73. The markets were closed Friday.

With so much oil available and so little need for that amount, investors, oil companies and even some banks have bought and stored surplus oil everywhere they can. By one estimate, before oil surged to its high this year of $73.38 a barrel in June, as many as 67 supertankers — each capable of carrying 2 million barrels of oil — were being used as floating storage.

Verleger said it represented a largely risk-free investment for those who could sell that oil for huge profits on the futures markets.

But the glut has gone on for so long, he said, that the cost of all of that storage is bound to rise. When it rises enough, some suppliers will refuse to pay and a lot of that oil will be dumped onto the market.

“Oil will drop to $20 a ba

rrel by the end of the year because this situation just cannot be sustained,” Verleger said.

Submitted by Edward Harrison of Credit Writedowns.

During Alan Greenspan’s tenure at the helm of the Federal Reserve, he was often accused of using monetary policy to target asset markets so as to keep the party going. In short, Alan Greenspan was seen by many, including myself, as the bubble blower-in-chief. All of this came to an end with the very hard landing we have experienced after the global housing bubble.

However, despite the economy being in tatters and debt deflation looming as a threat, many asset markets have zoomed ahead. The cause: easy money in the U.S. and elsewhere. In the U.S., we have zero percent rates with Ben Bernanke at the helm. So, naturally, you should ask yourself: Does Ben Bernanke blow bubbles too?

To get at an answer to that question, I want to highlight a recent post on MoneyWeek called “The next big investment bubble – green energy.” In this article, research from James Montier of SocGen about investor attitudes in bubbles is quite enlightening.

James Montier at Societe Generale is a specialist in ‘behavioural finance’. This basically takes psychology and applies it to the field of investment and economics.

As someone who’s studied psychology in the past, I’d be the first to admit that it’s a pretty ’soft’ science compared to something like physics, for example. But compared to the pseudo-science that is economics, it’s positively respectable.

And given that markets are anything but rational (even the Chartered Financial Analyst Society of the UK admits that a majority of its members have lost faith in the ‘efficient markets hypothesis’), it makes a lot of sense to take investors’ all-too-human characteristics into account when trying to figure out what markets might do next.

In a recent research note, Montier took a look at the psychology of bubbles. As suggested earlier, you’d think that investors would learn. If they’d seen one bubble, they’d be more careful in future.

And in fact, they do learn. An experiment conducted by joint Nobel prize winner Vernon Smith used an investment game where investors could trade a dividend-paying equity under four different random economic conditions, each of which would result in a different dividend payout.

In the first game, investors at first undervalue the equity, then massively overvalue it, creating a bubble which then deflates. Smith then got the same people back to play the game again. What happened? Well, says Montier, “far from learning from their experience in the first round, participants generally go on to create yet another bubble!” And when they were asked why, “the most common response was they thought they could get out before the top this time!”

However, when Smith asked the same players to play a third time, this time they’d learned. “You end up with a much tighter correlation between the market price and fundamental value,” says Montier.

So twice bitten, thrice shy, it seems. And you might therefore expect the current generation of investors to have learned from the two big bubbles of the past decade.

…but they can get sucked into creating them

But that’s not the end of the story. Smith found that there was a way to get experienced investors back into bubble mentality. How? He cut the amount of stock available in half, and doubled the amount of cash in the game, “effectively creating what might be termed a massive liquidity surge.” This time around, even the experienced investors were sucked back into creating another bubble, although it peaked earlier than the previous ones.

“A massive liquidity surge” is exactly what the world’s central banks are trying to create just now. Montier says he has no idea if it will be large enough to “reignite a bubble (and of course another crash afterwards).” But as US fund manager Jeremy Grantham of GMO has pointed out previously, we’re currently seeing “the greatest monetary and fiscal stimulus by far in US history”. So if that doesn’t do it, arguably nothing will.

What does that tell you? It tells me that while many are chastened, the recent surge of liquidity is likely to result in bubbles nevertheless. The article looks to ‘green energy’ as a likely bubble market. But in “The next bubble” FT Alphaville look to a more conspicuous place, emerging markets. This article is definitely worth reading.

I would also point to the recent 40% surge in U.S. equity prices as evidence that liquidity factors are at play and that a bubble mentality is returning. Moreover, $70 oil in a period of depressed demand for oil doesn’t speak to a market running only on fundamentals. If oil prices are $70 today, they most certainly can and will rise to $100, $150 and beyond if recovery takes hold and demand returns.

Therefore, in my view, Ben Bernanke does blow bubbles too.

A New York Times article tonight reports that China intends to become a world leader in electric and hybrid cars:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today….

To some extent, China is making a virtue of a liability. It is behind the United States, Japan and other countries when it comes to making gas-powered vehicles, but by skipping the current technology, China hopes to get a jump on the next.

The article then goes on to discuss the advantages (cleaner air) and difficulties (lack of public recharging centers, consumer worries about the safety of lithium ion batteries, disincentive of current cheap oil prices).

However, it fails to mention Detroit was once a leader in this technology.

I did a study on advanced batteries, visited Detroit, and drove an electric car made by a GM consortium in 1993. At the time, there was a mandate in California as well as the Northeast scheduled to come into effect in a few years to have 2% of cars sold be electric. Now the idea of forcing a sales goal seems silly, unless you had some obvious targets. The early vehicles were best suited for city use (no worry about your car running out of juice on the interestate), so public transport, delivery services (think the Post Office, UPS, Fedex) and government fleets were logical buyers. But the states did nothing to help create a market.

GM spent over $1.5 billion manufacturing and marketing the EV1, its electric car, despite its ambivalence (at least when I was investigating, which prior to the 1996-2000 opportunity to lease the car in Arizona and California). GM did costly consumer marketing in those states, despite being able to manufacture only 600 cars a year. California also welched on its promise to lease electric cars and trucks in meaningful numbers and wouldn’t install public chargers.

Another issue was the batteries were not ready for prime time (I had looked at all the competing technologies adn recommended against investment for that reason and the lack of enthusiasm for the iniative). Batteries don’t do well in the cold. And electric engines don’t throw off heat the way an internal combustion one does, so the early EVs had small gas fired heaters to warm the passenger area.

However, success also depends on commitment to overcome obstacles, and GM had already divested key bits of relevant technology BEFORE the EV1 launch. Which begs the question, how hard were they really trying to make this work (for instance, did they press the California government when it started waffling?).

We have ceded leadership in battery technology to Asia, and reader Keenan pointed out, also the know-how for the related drive trains:

h torque DC servomotors are the sine qua non for electric vehicles.

High torque performance is achieved via magnets made of alloys of various so called “rare earth” elements. Prominent among the alloys are samarium-cobalt and neodymium-iron-boron. GM held a majority interest in Magnaquench, an Indiana company with expertise in such materials and magnet fabrication. GM however decided that electric motors did not fit into its “core competencies.”.

While the article highlights the aspects of defense technology, the commercial / industrial side of the business is every bit as important in today’s world of economic warfare.

GM sold Magnaquench in 1995:

Magnequench had a unique expertise in the manufacture of high-powered neodymium magnets, which it pioneered in the 1980s for its parent company, General Motors, to use in airbags and mechanical sensors. When GM restructured in the early 1990s, the company began to divest itself of subsidiaries that were not in its “core competence.” Magnequench, in spite of its high-tech pedigree—and the fact that it provided critical component parts to “precision guided munitions” that were then in great demand by the U.S. Department of Defense—was put up for sale.

Reportedly, Magnequench supplied 85 percent of the neodymium magnets used in servo motors for PGMs,[5] but neodymium magnets are far more important and ubiquitous than their use in advanced weaponry might suggest. They are the sole reason high-speed, high-capacity computer data storage devices can work. They are found in literally every computer in the world, and in 2004, Magnequench, together with its merger partner NEO Material Technologies (and its integrated Chinese joint-venture partners), supplied about 80 percent of the world market share of neodymium and rare-earth oxide powders used in those magnets.[6]

So when GM put Magnequench on the block in 1995, who should come up with the $70 million asking price?[7] An investment consortium headed by Archibald Cox Jr. (son of the illustrious Watergate prosecutor) acting in concert with two Chinese state-owned metals firms, San Huan New Material and China National Nonferrous Metals Import and Export Company (CNNMIEC), which had been pestering GM to sell Magnequench since 1993.[8]…

Magnequench’s Chinese owners cleverly reinterpreted the CFIUS conditions. One Magnequench employee reported that shortly after the Chinese took over, Magnequench’s neodymium-iron-boron magnet production line was “duplicated in China” and that, after the Chinese “made sure that it worked, they shut down” the U.S. production in Indiana. The employee added, “I believe the Chinese entity wanted to shut the plant down from the beginning. They are rapidly pursuing this technology.”[16]

So this vignette reveals the degree to which Detroit helped seal its own fate. It went along with the electric car mandate fully hoping its 2% goal would make it a non-starter (that was the line I heard, anyway, that the cars would be costly enough that the target was pretty certain to be unrealistic) and played the game out, rather than try to influence the legislation so as to get a program that might be viable for the states as well as the carmakers.