Arnold Kling  

Economics of Hydrogen

Economics and its Enemies... The Budget Debate, VIII...

Lynne Kiesling has written a five-part article on hydrogen fuel cells. She looks at technical issues as well as economic issues, and each part in the series offers insightful analysis.

The last installment questions the wisdom of the Bush Administration's proposed subsidy for hydrogen fuel development. She writes,

Governments (and corporate bureaucracies, for that matter) have a very poor track record of picking technology winners, and we have little reason to believe that the success rate with hydrogen research will be any different.
It is important to remember that technological change is incremental and evolutionary, and that the most potentially important changes can be very different from what you might have expected at the beginning of the research. Predicting what will succeed and what will be a dead end is difficult, so any policy decisions that steer research along this unknown path could do more harm than good.

For Discussion. Some argue that government's role in energy markets is justified on ground of the externality of pollution or the risks of relying on
imported oil from unstable parts of the world. If this is true, how might the government encourage a horse race rather than backing the single horse of hydrogen?

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COMMENTS (18 to date)
nofie writes:

hi! just surfing in. nice site here...

Scott writes:

Some numbers to consider in your discussion. The average passenger vehicle in the US is driven 11,000 mile per year and gets 20 miles per gallon. That’s 550 gallons of gasoline per vehicle per year. At $1.50 per gallon, fuel cost per mile is 7.5 cents. Excise taxes make up 2.1 cents of that since they average 42 cents per gallon across the US.

Even with the recent run up in gasoline prices, over the long term, gasoline prices continue to fall. Hence you don’t merely have to overcome the economics of new engine technology, you also have to overcome falling fuel prices.

Chris writes:

The government should offer a reward, say $10 billion or some other suitably large number, to the first company that produces a working vehicle that runs on an alternative fuel, and can be produced dometically, and operated at an annual cost similar to what cars cost today. Basically, offer a prize and let private industry take the risk, instead of risking $7.5 billion in tax dollars on hydrogen, which may or may not be the answer.

Scott writes:

Would you put any constraints on the alternative fuel? We’ve already got stuff that runs on propane or natural gas. For years companies like Natural Fuels have been trying to get people to convert to natural gas. It still can’t compete economically with gasoline.

Eric writes:

The problem with economists is that they don't talk to engineers.

We need to go to first prinicples, in this case the fact that hydrogen is NOT an energy source, it is an energy storage medium. There are no hydrogen mines or wells. It has to be manufactured in some way from some other energy source, which in and of itself consumes energy.

My question is, what's the point? What are you gaining by going to hydrogen? What are you gaining by going to any other energy source other than oil?

Is it just about the Middle East? If so, it would seem to me to be much easier to change the nature of the regimes in the Middle East than to re-engineer our entire energy infrastructure from the ground up, which is what you are talking about with a switch to hydrogen. I mean, the war in Iraq is only costing $75 billion dollars. That's the cost of building maybe 4 nuclear reactors. We'd need hundreds of nuclear reactors if we wanted to use nuclear energy to produce hydrogen by electrolysis.

Common sense tells you that any so called energy policy that focuses on a technology that is NOT in and of itself energy is going to fail. California's Zero Emission Vehicle strategy was similar in its basic intellectual fallacy. Before the Feds go about trying to push hydrogen, perhaps they should review the fiasco that was the push for the electric car.

Arnold Kling writes:

I agree with the substance of your comments, but not with your accusation against economists. Lynne Kiesling makes exactly the same point that you make that energy is required to extract hydrogen.

About the Middle East, I made a similar point to yours in "Oil Econ 101" at

Eric writes:

Anyone, an economist or otherwise, who is interested in the issues of global warming, carbon dioxide emissions, hydrogen, etc. should be regularly reading Mechanical Engineering magazine ( Very interesting articles on carbon remediation, "green" technology, sustainability, etc.

If it is decided that carbon dioxide emissions from the burning of fossil fuels are actually causing global warming, which in turn is causing more problems than benefits, there ARE solutions short of re-engineering the entire energy infrastructure. There are ways of remediating CO2 from the atmosphere, as well as removing it from the exhaust stream of society and storing it safely and permanently. And it will be a hell of a lot cheaper than re-engineering for hydrogen.

The problem with the government being the driver in this process is that government is run by lawyers and others with no technical or scientific knowledge whatsoever. They have no ability to make decisions of a technical nature. So the understanding that it takes to make a decision about hydrogen, global warming, or many other technical and scientific questions is not there. More than likely, the wrong decision will be made.

Not than engineers and scientists know everything. Not that we are un-political (have you read Scientific American lately? Bed wetting liberalism where you would least expect it!) But at least at some level, we have the background and knowledge to examine proposals on their merits, rather than solely on the basis of who is making the proposal and where they fall on the ideological spectrum. No lawyer is going to be able to do such a thing.

Eric writes:

I just though of some more to rant about.

Economists tend to be utopians. "If people just did things the way that I think that they should do them, all will be well".

I don't think that it is a coincidence that economists tend to fall on the boundaries of political thought, either being extreme leftwingers (even Communists), or libertarians on the other side.

It is unfortunate, but being people who make their living through intellect means that economists often do not live in the real world, where things get made. Despite being in a profession that focuses on production of goods and services, they don't actually know very much about how individual goods or services are produced.

Have you ever been in a refinery? It is an amazing thing. It is a huge system, as well integrated as a computer chip, but on an enormous scale. The crazy thing is that the processes within the refinery contain products that cannot be easily monitored for quality. There's nothing to look at, nothing that indicates to your 5 senses that the process is running well, or is dangerously out of control. It is only through sophisticaed quality control routines and high tech sensors that the process even works.

And then some politician comes along and changes the gasoline formula, as happens in Chicago every summer. And the politicians blame the oil companies when all hell breaks lose and gas goes up to $2.50 a gallon.

Or even worse, like in Europe, the politicians say that gasoline is no longer the favored fuel, switch to diesel. The impact to the refiner of such a change is enourmous. You can't just turn a valve and make such a change. In fact, in order to produce more diesel, you generally have to produce more gasoline, at least in the near term. So the Europeans are shipping their excess gasoline to the East Coast, lowering gasoline prices for Americans.

I just think that the majority of people who bitch about oil and oil companies just have no clue how the world works. They're not people involved in making things, they're academics and others that live in their own little world. In this group, I lump many economists.

But not all. I had some great economics professors in college. Mostly U of C PhDs.

Scott writes:

Eric – I have degrees in both engineering and economics. However, since I don’t commonly hold conversations with myself perhaps your issue with economists not talking to engineers is still valid. I have also worked in and around the minerals industry and spent a fair bit of time doing economic analysis in refineries.

I think that you are correct in saying that the majority of people that bitch about the oil industry and the price of gasoline don’t have a clue how the industry works. They also can’t tell you who the top 3 gasoline producers are in the US nor the market share they command. If you’re ready for a good laugh, just ask one sometime.

That being said, there are a number of economists that I’ve read that do know what’s going on in the oil markets. Like me, they’re also very skeptical of hydrogen fuel technology.

As for political leanings, I think more economists in the real world lean toward libertarian. That comes from understanding how free markets work and the benefits to society that they bring. Several have started out as avowed socialists only to end up as libertarian free market capitalists. The most recent Nobel prize winner is one.

BTW – the libertarians would prefer that the market, not the government sort out the next great energy technology.

Eric writes:


I've got an undergrad degree in economics, in addition to mechanical engineering. I'm almost done with a masters in mechnical engineeing, and I work in the petrochemical field.

Believe it or not, despite gas being $1.60+ a gallon in the Chicago area, this is an awful time in the petrochemical field. There are layoffs of an almost biblical quality. Not that this is any different than any other sector of the economy. I'm glad I don't work in telcom! But you would think that with supplies so tight and prices so high, there would be some expansion going on. It's just not happening.

A libertarian would look at how government is distorting the market for an answer to why the petrochemcial industry is so f-ed up. I wouldn't disagree. I wonder to what extent all this talk of hydrogen adds to the downturn.

While I probably lean libertarian on many issues, I'm a conservative, not a libertarian. I find too much of libertarianism based on utilitarian arguments: making the most people the happiest. To me, many issues fall into either moral areas of right/ wrong, or are just common sense, and are not things that can or should be measured by mere utility. Maybe in my old age I'm becoming too dogmatic, and unwilling to argue.

I'll give this to libertarians: they always have a logical, fact based argument for what they believe in. They have no need to lapse into name calling. I cetrainly repsect guys like Charles Murray, even if I don't agree with their overall philosophy.

Scott writes:

Eric – The economic history of mineral resources is a history of ever falling prices. Oil, as well as other minerals, continues to become more available, not scarcer, when measured in economic terms (price.) While there are fluctuations in the market, the long term trend is lower price.

Have a look at other minerals and you’ll see where oil is headed. For the last 25 years US coal production has continued to increase in every basin. During the same time period, coal industry employment has been cut in half. Copper prices have been on a slow steady downward trend for as long as I can remember. Lots of people are no longer working in the copper industry. Lead, zinc, silver, gold, moly, they all have the same story.

If you’re going to work in petrochemicals, understand that every year you’ll have to do more with less or head out the door. And for the most part, the reason it’s happening is because the industry continues to find bright energetic engineers that rise to the challenge every year. In short, we keep getting smarter faster than we deplete the resource.

Check out Julian Simon’s The Ultimate Resource 2.

Eric writes:

Yes and no. Overall, yes, and I suppose it is no different than in any mature industry. Prices are going to fall over time, and everyone must become more productive.

But what does it mean when prices are high, there are obvious supply choke points that result in severe price spikes whenever the least thing goes wrong, yet there is still no industry expansion?

The entire energy sector is out of whack. In part we got into this recession back in 2000 because of the energy price spike. The recession itself solved the supply problem by decimating demand, but very little has changed since then. The next time economic growth ramps up, look for another severe price hike.

I think that it is an open question as to why the energy sector in this country is not performing as it should, as it would in a perfect free market. We have some serious issues with government regulations, especially environmental regulations, that are contraining the energy sector and resulting in extreme price volatility.

Anthony writes:

Why not just use hybrids?

Reading the recent coverage that Hydrogen has garnered from the mainstream press you would think North American civilization will collapse with out it. It won't and there are better alternatives.

Wired's recent article is pure hype. I have been riding a non-gasoline vehicle every day for over 20 years – it is called an electric subway.

1) Hydrogen is really no more efficient than gas
2) It isn't really any safer for the environment
3) Research on better batteries will have a more beneficial impact than hydrogen as batteries can be used a wide range of applications

There are huge hurdles to implement hydrogen system for refueling. And it isn't that cheaper or more efficient than gas. Batteries have made huge strides - particularly Lithium Polymer. This is a technology that works now. Nanotechnology that should be available from NEC in the next two years will significantly improve batteries.

Lets do some rough math on how to remove US dependence on Middle East Oil. There are 364 Million Americans who have 60 cars per 100 people, or a little over 218 Million vehicles. Roughly 50% of oil is imported to the US. The top selling vehicle in the US for years has been the Ford F-150, which gets mpg of 15 city/19 highway. The Toyota Prius gets 57 / 56 mpg (CVT) and the 2003 Ford Escape HEV 40 mpg city / 29 mpg highway while the Honda Insight gets something like 70/61 mpg. Both of these vehicles use nickel metal hydride (NiMH) style batteries, which are far less efficient than other available batteries. Without spending 100 Billion dollars the US could remove dependency on foreign oil simply by having 70% of drivers purchase hybrid vehicles. By using currently available technology average fuel efficiency could be more doubled - thereby stopping the flow of imports.

Governments should jump in and standardize of the batteries, thereby forcing companies to use batteries that can be switched between vehicles and upgraded. Cars can recharge by a timer at night when electricity charges are lower. A system for dealing with recycling batteries also needs to be put in place. Increased power could come from Geothermal holes (where you essentially dig a 20 mile hole and gather steam from water you sent into it) or nuclear.

- Batteries already have energy densities of over 200 Wh/kg (200 Miles Range)
- Poly-Li Batteries charge in 15 minutes
- 300 Wh/kg batteries would give a driving range of 300 Miles
- No new distribution system like hydrogen needed
- No additional safety risks
- 85% efficient vs 23% efficient Hydrogen
- With nanotech this could increase 50-100 times
- Newer Li/S Batteries from PollyPlus offer 510 Wh/kg at $0.13/W
This is enough for 1500 miles!

So the final problem is to reduce the cost of production. This can be done by standardization, competition, and government research or production subsidies.

Scott writes:

Eric – One of the choke points in the oil industry is US refining capacity. We haven’t built a new refinery in the US in 25 years nor have we really allowed the existing ones to expand significantly. Refinery utilization typically peaks at over 98% of capacity in the summer. That, along with the segmented summer market, causes price spikes.

To get refineries built, the government needs to relax some of the restrictions and the oil companies need to figure out how to make money in refining again.

Anthony – First, since oil is traded on a world market, the only way to completely eliminate the US dependence on Middle East crude is to reduce our consumption to 0.

Second, an electric vehicle has cost and performance issues when compared with gasoline powered vehicles. It’s not just the fuel, it’s the total cost that’s the issue. My brother drove an electric to work for a few years. He’s trying to get rid of it now since it won’t keep up with traffic on the highway and requires too much maintenance.

Perhaps hybrids will become economic. However, I suspect that they won’t. I’d have to look it up, but I think the average cost of operating a passenger vehicle is around 40 cents a mile. Note that less than 20% of that cost is for fuel. So, if you’re hoping that cutting fuel costs in half or more is going to pay for the dual power systems required in hybrids, be aware that you’ve only got a few pennies per mile to deal with.

Eric writes:

Lets not get hybrids confused with electic cars. Hybrids are conventional vehicles that have a much larger alternator than a conventional car, that can recover some of the energy normally lost as heat during braking. By recovering some of this energy, storing it in a battery pack, and using this energy to accelerate the vehicle after braking has ceased, the efficiency of the vehicle is increased.

An electic car is quite different. There is no gasoline engine, the powertrain consists of an electric motor and a batterypack.

Hybrids never need to be plugged in to recharge the batteries. The batteries are charged by the alternator when the vehicle brakes. Thus, recharge times and energy densities are not an issue, and Nickel Metal Hydride and NiCad batteries work fine. There is no need for exotic batteries with this technology.

Electric cars, on the other hand, have real issues with recharge times and energy densities. The GM Impact, the only electric car to ever be marketed semi-successfully by a major auto manufacturer in modern times, had a range of 75 miles with a lead-acid batterypack, and maybe 145 miles with a Nickel Metal Hydride batterypack in version 2.0.

Electric cars have been shown to be a non-starter. They were too expensive, with too little range, and had some unresolved safety issues.

I think Honda and Toyota have shown that Hybrids can work in the real world. The question is, can they be made economically. The price difference between a normal Honda Civic and the Hybrid Civic is about $4000. The benefit is an increase of about 20 MPG in the city. That's not much of a return on investment when gas is $1.50 per gallon. Maybe you save $300 a year on gas. Your payback period is slightly less than forever, unless the technology can be made much more economically.

And maybe it can. Economists consitantly underestimate the power of economies of scale. If Honda could build 1 million hybrid vehicles per year, maybe they could get the cost down to $1000 per vehicle for the hybrid technology. Maybe that is an argument for the government mandating this technology, making hybrid technology as common as the airbag and the catalytic convertor.

That's a lot of maybes! Too many for my taste.

Scott writes:


“Your payback period is slightly less than forever”

Yes it certainly is. And yes, economies of scale may reduce that period of time to slightly less than the useable lifetime of the vehicle. But while you’re doing that, remember that the technology used by the competition is also getting updated…

Eric writes:

I was looking through Consumer Reports, and they bought and tested a Civic Hybrid. They say that it costs a $3000 premium and they expect to save a whopping $150 per year on gas. Ouch.

What's the economic term that I'm looking for? The economic growth you give up because you're investing in something else with a lower return? Opportunity cost? We have to beware of the opportunity cost of mandated energy efficiency schemes like hybrid technology. I can think of a LOT better things to invest in that have a payback much less than 20 years!!! If that's the economics of hybrids, we don't need any.

Anthony writes:

"The Question is, can they be made economically"

I think you are comparing apples and oranges. DVDs were initially much more expensive than VHS players but they came down in price. Hybrids are still far down the S-Curve. Four things will make them take off: Mass Production, Improved Technology, Oil Scarcity, and Regulations.

GM, Ford and others are ramping up their hybrid lines. Particulary I think you will see governments, and some fleet purchasers buying them. Some governments already give a $2000 rebate (IL and the UK?) The price will come down. But like VHS it will take a very long time to become cheaper than old technology without go
vernment intervention.

Improved Technology:
80% of the internal combustion engine energy is lost:
Newer systems will improve and tap into engine energy loss. I think you also see diesel-hyrids as well from VW or MercedesChrysler.

I would like to see manufacturers allow me to tap into off peak rates for electricity. Many places (Canada, Europe) tax home electricity much less than oil.

Oil Scarcity:
World automakers have a lot of excess capacity.So much so that firms like Fiat may close. Meanwhile the China auto market is on fire - 43% growth last year. Morgan Stanley is forecasting that the Chinese market will reach the US market size in 12 years. Obviously there is still a lot of available oil (Saudi, Iraq) and more will become available when prices increase (Oil Sands etc). So this will take a while.

Due to the Kyoto accord some countries (Canada, Japan etc) may increase taxes on activity associated with CO2 production. Obviously the US isn't one of them. California has dropped their zero emissions requirements and Bush didn't sign the accord and gave no alternatives.

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