How California failed in efforts to curb oil addiction

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OAKLAND, Calif. -- In a government parking lot by the San Francisco-Oakland Bay Bridge, California is about to launch its latest attempt to get cars to run on something other than oil.

Chevron Corp., the California-based oil giant, plans to install a small tank here soon with enough corn-based ethanol to power about 35 General Motors Corp. cars capable of burning both ethanol and gasoline. California, the nation's biggest auto market, has about 10,000 gas stations. This will be its fifth ethanol pump.

For a quarter century, California has pursued petroleum-free transportation more doggedly than any other place in the U.S. It has tried to jump-start alternative fuels ranging from methanol to natural gas to electricity to hydrogen. None has hit the road in any significant way. Today, the state that is the world's sixth-largest economy finds itself in the same spot as most of the planet: With $75-a-barrel oil, and increasing concern about the role fossil fuels are playing in global warming, 99 percent of its cars and trucks still run on petroleum products.

At a time when President Bush is advocating alternative fuels, particularly ethanol, as an antidote to what he calls America's "addiction" to oil, California's experience offers a reality check. Perfected over a century, gasoline is convenient, reliable, and, even at current prices, relatively affordable. Challengers start with big disadvantages: inadequate infrastructure, their own performance problems, and higher costs. Moving alternative fuels into the mainstream would require hard political and economic choices -- choices that even California hasn't been willing to make.

California launched its alternative-fuel drive as an energy-diversification effort following the 1979 global oil shock. When oil prices fell back, the state shifted its emphasis to fighting air pollution. Since then, California has rolled out mandates and subsidies for alternative-fuel demonstrations along with broader rules forcing the oil and auto industries to clean up their conventional fuels and internal-combustion engines. The assumption was that the one-two policy punch would induce the industries to shift away from oil.

But the market hasn't responded the way California intended. The oil and auto industries got the state to kill or water down the alternative-fuel mandates, arguing that making the technologies viable would require big public subsidies -- something most Californians didn't support. Meanwhile, the industries made their conventional products clean enough to meet the state's pollution limits.

The upshot: The alternative-fuel push has helped scrub California's air, but it has done so by forcing improvements in fossil fuels and the cars that burn them. It hasn't curbed California's oil consumption, because it hasn't meaningfully deployed alternative fuels.

California's experience shows that there are "somewhat viable types of alternative fuels available out there in the event that somebody wanted to move towards them," says James Boyd, who has been pushing for oil alternatives for more than two decades as a California environmental and energy regulator. Though politicians since Richard Nixon have called for diversifying America's energy mix, he says, "we've never had a serious effort."

In the 1980s, Mr. Boyd drove a state-supplied methanol-powered car; California later took it away when spare parts ran low. In the 1990s, he led a foray into battery-powered electric cars, which fizzled. Today his state-supplied car is a hybrid. It gets better fuel economy than a conventional model because it combines an electric motor with a downsized internal-combustion engine. But it still fills up with gasoline.

"Petroleum is going to dominate for a long, long time," says Mr. Boyd, now vice chairman of the California Energy Commission, which oversees energy policy in the state.

Oil and auto companies say they're justified in resisting government mandates to roll out alternative technologies when they're not convinced consumers will buy them. Donald Paul, Chevron's chief technology officer, says California regulators essentially tell industry officials, "We know what the answer is. You guys just spend the money and everything will work fine." He adds, "History has not shown that that works very well."

John Wallace, who dealt closely with California officials as head of Ford Motor Co.'s alternative-fuel program throughout the 1990s, agrees. "Beating up the car companies doesn't accomplish very much," says Mr. Wallace, who left Ford in 2002. "If you've got a pull from customers, the car companies will beat themselves up to try to satisfy it."

The question today is whether the resurgence of high oil prices and the rise of global-warming concerns will give alternative fuels sustained backing. Already, ethanol, the brew now generating the biggest buzz, is hitting many of the same roadblocks that slowed California's past alternative-fuel attempts.

GM and Chevron are bickering over the ethanol demonstration project that is set to include the pump in Oakland and one near Sacramento. It's a chicken-or-egg dispute. GM, which for years has been building "flexible-fuel" vehicles that can burn ethanol but typically don't, wants Chevron to install a lot of ethanol pumps. Chevron, which estimates that installing a single ethanol pump and related equipment costs more than $200,000, wants to go slow to make sure first that consumers will buy the fuel.

When California started searching for potential petroleum alternatives following the 1979 oil shock, it concluded that methanol was particularly promising. The alcohol already was being made for industrial use. And it was derived from natural gas, which was cheap and was believed to be domestically plentiful.

The state began experimenting with a handful of 1979 Honda Civics that had been converted to run on gasoline mixed with up to 15 percent methanol. The idea was to use the methanol to make the gasoline go farther -- "Hamburger Helper," as state officials called it.

Soon California ratcheted up its experiment to include several hundred Ford Escorts that had been tweaked to run on a blend of 15 percent gasoline and 85 percent methanol, or M85. The state installed 18 methanol pumps at gas stations near state offices, divided up the cars into fleets, and told state employees to give them a whirl.

Operational problems soon arose, in part because alcohol fuels like methanol contain less energy than gasoline. The Escorts went only about 60 percent as far on a tank of fuel as their gasoline counterparts.

Mr. Boyd himself once ran out of fuel in his methanol-powered Ford. He was driving back to Sacramento from a meeting in San Francisco, and the methanol pump where he planned to fill up was out of order. He hit the road anyway, figuring he'd refuel in Albany, Calif. But that pump, too, was on the fritz.

"I sputtered to a stop somewhere around Davis," about 15 miles short of Sacramento, he recalls with a chuckle.

In the late 1980s, the auto industry came up with a technology designed to solve such problems: a "flexible-fuel" vehicle, able to run on either straight gasoline or an alternative fuel, which at the time was a blend of up to 85 percent methanol.

Legislation worked out in Washington gave auto makers a big incentive to crank out flexible-fuel vehicles. In 1988, with the support of California officials, Congress passed a law giving auto makers extra credit under the nation's fuel-economy standards for every such vehicle the companies built. The credits allowed the auto makers to build thirstier conventional vehicles. But they didn't require that the buyers of the flexible-fuel vehicles actually use an alternative fuel. Most of them filled up with gasoline.

That was rational at a time when global oil prices were once again falling. In California, alternative-fuel proponents shifted to a priority that had more enduring political support: cleaning up the state's notoriously dirty urban air.

In 1987, a state legislator introduced a bill to require that, by 1994, all cars and light trucks sold in California either "operate exclusively on methanol fuel" or meet emission requirements essentially as low as those that did. Oil lobbyists got the bill watered down to call merely for a methanol study. In one meeting during the study, a top official of Arco, a California-based oil company later acquired by BP PLC, announced that Arco had figured out how to brew a gasoline that burned as cleanly as methanol, recalls Mr. Boyd, who was at the meeting.

That helped embolden California and the federal government to roll out requirements for cleaner-burning gasoline. By the late 1990s, auto makers had stopped building cars that would accept methanol, and oil companies no longer were putting in new methanol pumps. "That was the death of methanol," recalls Mr. Boyd. "Gasoline won."

California continued to search for oil alternatives. In 1990, as California regulators were putting the finishing touches on new clean-air rules, GM unveiled at the Los Angeles auto show a bubble-shaped car that ran on electricity and thus emitted no pollution. It was called the Impact.

State officials were enthralled. The California Air Resources Board, the state's clean-air cop, mandated that 10 percent of all new cars sold in California be "zero-emission vehicles" by 2003.

Meanwhile, California told its investor-owned utilities to do what they could to encourage the rollout of both electric and natural-gas-powered cars. The utilities were eager for the potential new market that the alternative-fuel cars presented. By the early 1990s, they were spending tens of millions of dollars each year installing natural-gas fueling stations around the state and testing new technology for natural-gas and electric vehicles. They applied to state regulators for permission to pass along those costs to customers through higher rates.

The oil industry formed a coalition that sent letters to commission members and legislators opposing what it dubbed a "hidden tax" to subsidize alternative fuels. The California Public Utilities commission ruled that, while utilities might be able to spend ratepayers' money to roll out alternative fuels in the utilities' own fleets, they couldn't spend that money to try to commercialize alternative fuels more broadly.

As a result, California utilities closed or sold 54 natural-gas stations that they had installed for customers' fleets, says Brian Stokes, manager of clean-air transportation for PG&E Corp.'s Pacific Gas & Electric Co., a big California utility. They also stopped subsidizing customers' purchases of electric and natural-gas vehicles. Though natural-gas and electric-charging stations still exist throughout California, and PG&E is working to promote their expanded use, the state's decision severely impeded their growth, he says. "To the extent that policy could have provided a sustainable market, it was nipped in the bud," he says.

California Public Utilities Commission spokeswoman Terrie Prosper says the commission "did all it could" to promote alternative fuels "while benefiting and protecting ratepayers."

The auto industry also opposed the electric-car mandate, arguing that the California measure was forcing a technology that wasn't road-ready.

In response, California officials repeatedly softened the rule. They ended up letting the industry comply largely with a compromise technology: hybrid cars. Hybrids have an electric motor and batteries, but instead of having to be plugged into a socket for their power, their batteries are recharged continuously during normal driving -- driving that still requires a conventional engine under the hood. Hybrids have lower emissions and get better mileage than conventional cars, but they still burn fossil fuel.

Yet the auto industry protested the move toward hybrids too. In 2001, GM sued California to block the zero-emission vehicle rule. Its suit, later joined by DaimlerChrysler AG's Chrysler unit, argued that by shifting their focus from electric cars to gasoline-burning hybrids, California regulators had turned their clean-air rule into a veiled attempt to improve fuel economy. And fuel economy, the auto companies noted, is something only the federal government has the legal power to regulate.

GM and Chrysler later dropped their suit when California officials further softened their rule.

Largely as a result of the zero-emission-vehicle mandate, California now accounts for 26 percent of the U.S. hybrid market, far more than any other state. Still, the approximately 52,000 new hybrids registered in California last year amounted to only about 2 percent of all new light-vehicle registrations there, according to R.L. Polk & Co., an industry consultant. As for the vaunted electric vehicles, there are about 15,000 on the road today, state officials say, but the vast majority are "neighborhood" versions, which resemble golf carts and aren't allowed on highways.

Around 2000, a series of gasoline-price jumps hit California. State officials ordered a study of whether oil companies were gouging drivers at the pump. The study concluded the jumps were due not to gouging, but to market forces: Global demand for oil was growing faster than global supply. A follow-up report called for California to cut its oil use 15 percent by 2020, in part by using more ethanol and other "biofuels."

That marked a turning point in California's energy agenda. No longer was the state's goal simply to reduce the pollution produced when fossil fuel is burned. Now, as in 1979, it was to reduce the amount of fossil fuel burned in the first place.

Since then, oil companies have helped quash efforts in the California Legislature to codify that oil-use-reduction target into law. Joe Sparano, president of the Western States Petroleum Association, a Sacramento group that represents major oil companies, says reducing oil use isn't realistic in a state that is growing as fast as California. Oil companies, he says, already are investing in alternative fuels, and will ramp up those investments as they deem them economic. He calls the approach "petroleum plus."

Gov. Arnold Schwarzenegger, who met Monday with British Prime Minister Tony Blair to discuss ways to reduce global-warming emissions, says he supports the oil-use-reduction goal. "I think it's a good idea," the former body builder said in a recent interview, likening it to a dieter's resolution. "If I don't say that I want to lose 10 pounds by summer, it's not going to happen by itself." He added, "Of course the fat in your body is screaming, 'Don't attack me. I love myself.' So the oil companies are screaming, 'This is terrible.' "

The revival of interest in California in curbing oil consumption soon led to an intensified push for ethanol. But that push has clashed with the state's clean-air goals.

For years, gasoline in parts of the country with particular smog problems has contained 10 percent ethanol, the result of a federal rule ordering refiners to put an oxygen-rich additive in the gasoline they sell in those areas to help curb pollution. Yet studies show that while ethanol added to gasoline in low concentrations helps reduce certain emissions, such as carbon monoxide, it tends to increase some other emissions. In particular, it raises the gasoline's "vapor pressure," leading more gasoline fumes to seep out of a car's fuel system. California effectively restricts ethanol concentrations in its gasoline to 6 percent.

Last summer, the federal government passed an energy bill that rescinded the oxygen-additive requirement but ordered the U.S. to nearly double its ethanol production. That has intensified nationwide excitement over E85, a blend of 15 percent gasoline and 85 percent ethanol. E85 isn't thought to have the same vapor-pressure problems as lower concentrations of ethanol. But, largely because ethanol is more corrosive than gasoline, E85 requires specially outfitted gas stations and cars.

Proponents of oil alternatives are pressing ahead. An initiative set for California's November ballot would hit oil companies with an "extraction fee" on every barrel of oil they pull out in California, a top oil-producing state. The fee would range from 1.5 percent to 6 percent of the oil's value, depending on the prevailing per-barrel price. Backers say the measure would raise $4 billion, which would fund research into alternative-fuel technologies and incentives for consumers and fleets to buy alternative-fuel vehicles.

The initiative is bankrolled by entrepreneurs including Vinod Khosla, a Silicon Valley venture capitalist who has been investing in ethanol and other alternative-energy businesses.

The oil industry has formed a committee to fight the initiative. The biggest donor is Chevron, which so far has given $3.8 million, according to state records.

Meanwhile, an unlikely alternative-fuel promoter is pushing to expand the number of E85 pumps in California: GM. Amid rising gas prices, GM is under mounting criticism for failing to more significantly improve the fuel economy of its lineup. Already, as a result of the credit added in 1988 to the federal fuel-economy standards, GM, like Ford and Chrysler, builds hundreds of thousands of flexible-fuel vehicles each year that can use E85.

Early this year, GM launched an advertising campaign to tout the use of the corn-based fuel in those vehicles. Its tagline: "Live green. Go yellow."

Last fall, GM approached Alan Lloyd, then secretary of the California Environmental Protection Agency, and proposed an ethanol demonstration. Mr. Lloyd suggested involving Chevron, since it is based in the state. In discussions that followed, Chevron officials "wanted a very limited number" of ethanol stations, and GM wanted more, Mr. Lloyd says.

David Barthmuss, a GM spokesman, confirms that account. "Until oil companies see there's money to be made in ethanol, they're going to lobby for petroleum," he says. "E85 is asking them to give up 85 percent of what they make." He says GM hopes to persuade Chevron and other oil companies that if they put in E85 pumps, the auto industry will build the vehicles to make those pumps profitable.

Chevron recently announced a new business unit that will focus on trying to make ethanol and other biofuels viable. But Chevron's Mr. Paul says the company has learned from California's history not to rush into potential oil alternatives. "If you're going to roll out a very large infrastructure and put what could be a lot of money into it, you don't want something that you're going to have to throw away," he says.

Today there's just one E85 station in California that is open to the public. It sits beside a highway interchange in San Diego. It was opened three years ago by Pearson Ford, a San Diego Ford dealer that was convinced alternative fuels would be the next big thing. The station offers gasoline and diesel, natural gas, propane, electricity, biodiesel and E85.

What it sells, though, is mostly gasoline and diesel. On a recent morning, it was offering E85 for $3.10 a gallon, about 6 percent less than the $3.30 per gallon it was charging for regular gasoline. But, because a gallon of E85 contains about 25 percent less energy than a gallon of gasoline, the E85 actually cost more per mile. Only a handful of cars pulled up to the E85 pump.

"I would like nothing better than to turn all my pumps over to alternative fuels," says Mike Lewis, the station's co-owner. "But I'm not willing to carry the alternative-fuel flag into bankruptcy."



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