Alternative Fuel Paradigms

This article explores what I believe to be an issue of central importance to the alternative fuels industry, namely the overall business model or models to be embraced as the industry begins to reach market maturity within an ever greater number of sectors. I’ve previously aired a number of the ideas expressed herein, but never, I think, within a well articulated conceptual framework. So here goes.

A Framework for Change: the Nature of Technological Transformations

Alternative fuels, and alternative energy in general, for that matter, may be placed within the overall category of replacement technology. Replacement technologies, that is, substitutions of new and presumably improved technologies for those that are old and stagnant, in fact comprise a large part of all inventions and innovations, and one can cite examples almost at random without much prior reflection. For example, the compact disc was a replacement for the phonograph, the transistor was a replacement for the vacuum tube, Neoprene replaced natural rubber, cordite replaced black powder, and coal was a replacement for wood fuel. Similarly, methyl ester—so-called biodiesel—is a substitute for middle distillate petroleum products or diesel oil, while ethanol is a substitute for gasoline. Indeed, almost any innovation can be viewed as in some sense replacing a pre-existing artifact, or, in some instances, several specialized artifacts.

One could easily compose a book length treatise on the notion of replacement technologies while scarcely venturing beyond the fundamentals, let alone exhausting the topic. For if all of technological progress may be seen as species of replacement then one’s subject broadens enormously to encompass the totality of technological innovation and not merely one process within it. Still one strives to identify concepts of somewhat more limited scope, concepts which would appear to apply to alternative fuels specifically. And, when one does so, the following question naturally arises. Are such concepts to be found by limiting the inquiry to prior examples of the penetration of various types of alternative fuels into various markets? Or are replacement patterns within other technologies germane? Or, to put it another way, how do we refine the concept for maximum utility with respect to our own industry?

A Basis for Prediction

We will begin to answer these questions by noting that the notion of replacement technology is maddeningly imprecise. Rarely are replacement products used in exactly the same way as the products they are supposed supplant, indeed, a characteristic of most successful replacement technologies is that they quickly develop a range of capabilities lacking in their predecessors. For instance, cellular telephones may be regarded as replacements for the older IMTS car phones in use in the 1970s, but they quickly permutated into handheld phones, messaging devices, miniature computers, and most recently mobile televisions and music systems. Had they remained confined to the single function of providing telephone service in an automobile, the market perforce would have been limited. Likewise, vacuum tubes while representing a true technological revolution at the time they appeared, remained largely confined to analog communication devices. In contrast, transistors came to be used not only in the latter but in all manner of digital processors, servo systems, and signal processors supporting an endless range of products including smart vehicles and appliances. They were simply more useful than vacuum tubes. Same thing with synthetic fibers. In the beginning they were used as straight replacements for natural fiber textiles but they quickly spawned a huge range of composite structural materials like glass reinforced plastics.

Many though not all straight replacement technologies, i.e. ones which perform the exact functions of their predecessors also make use of at least some of the same infrastructure, repurposing it to fit the new product. More radical replacement technologies with multiple functions and market niches also tend to command their own infrastructure and owe less to the past.

Now let’s look at an ultimately unsuccessful replacement technology, one which is a little closer to home because it involved both the transportation sector and a new kind of transportation fuel.

What was the first form of mechanized transport involving a fuel burning engine? No, it was not the railway or the steamboat, but something else entirely—namely the English steam coach, first seen in commercial service in 1801.

The steam coach was exactly what the name implied, a vehicle resembling a traditional stage coach but using a steam engine for motive power instead of a team of horses.
Steam powered vehicles of one sort or another go back at least to the 1770s in France, but the first ones were only used for transporting heavy artillery and not as a means of public transport. The English commercial steam coach was something else entirely.

English steam coaches took advantage of the extensive network of asphalt paved roads that already existed in England and Scotland by 1800, the best interurban road system since the fall of the Roman Empire. Such roads provided a smooth surface permitting relatively high speed travel and a means of taking advantage of the superior driving power of the improved Watt steam engine burning energy-dense hard coal.

Coal itself was by then ubiquitous in England and had been for at least a couple of hundred years. It was widely used in both industry and in residential heating and thus was readily available in most places. So no need to build a massive refueling network for steam coaches. Most of it was already in place.

Steam engines themselves were commonplace in England by 1800, though contrary to received opinion they were not yet the norm in manufacturing. The only problem was that Watt financial interests still controlled key patents and charged exorbitant prices for licenses.

Thus in clear contradistinction to the railroads, the overall infrastructure for steam coaches was already established. Furthermore, construction of the vehicles was relatively easy since they used a preponderance of standard carriage parts. In other words, the existing technologies of the suspended enclosed horse carriage and paved roads could fairly easily be re-purposed to support motorized transport. Thus the steam coach was about as pure an example of a straight replacement technology as we’ll find.

So with a quarter century head start and vastly lower capital expenses than the railroads why didn’t the steam coaches prevail? After all, their indirect successors, the personal automobile and omnibus, succeeded in siphoning off most of the traffic that trains had carried in the twentieth century. Why didn’t we just skip the railroad age and go straight from steam coaches to cars and buses?

The short answer is that a replacement technology for the stage coach was not precisely what early nineteenth century England wanted or required, especially one that was only incrementally better.

England already possessed fast coaches known as Regulators which were express coaches pulled by relays of coach horses. Regulators could maintain speeds in excess of twenty miles per hour, and while not quite as fast as steam coaches, did not produce sooty smoke or a deafening din. Regulators were quite good enough for most people. Steam coaches became established on a few lines but never came close to replacing horse coaches generally, and were at a serious disadvantage in competing with railroads.

Railroads themselves were a very different story. They quickly attained speeds exceeding forty miles per hour, much faster than any horse drawn carriage, and they could carry immense cargos—precisely what the factory towns of the Industrial Revolutions required. Well suited to both freight and passenger traffic, they were much more versatile than steam coaches, if more expensive to build and operate. And, most significantly, railroads were not a straight replacement technology for any pre-existing transportation system. They were fundamentally new, and in fact were derived from coal mining machinery.

So what inferences may we draw from these examples? Straight replacement technologies, especially those that can make extensive use of established infrastructure, components, and manufacturing processes, will have a head start in the marketplace. But unless they are capable of evolving into entities with capabilities beyond those of the products they replace, they are not apt to flourish in the long run. And very often the fact that they make do with repurposed technology makes them ill suited to the functional adaptations needed to meet the requirements of new markets. Large parts of the design process are simply out of the control of the manufacturer of the straight replacement technology.

Looking at Fuels and Re-examining Our Model

If we rank alternative fuels along a continuum that goes from straight replacement technology to disruptive technology or radical innovation, we find that synfuels, heavy oil, and oil shale distillates occupy the right side of the line while something like hydrogen fuel resides at the extreme left. Natural gas, ethanol, and biodiesel would be somewhere in the middle with the sequence again extending from right to left along our innovation index line.

So why are synfuels and their ilk more or less classic replacement technologies? That’s simple. Synfuels work perfectly well in all conventional vehicles because they chemically closely resemble refined petroleum products, and they can be blended with the same and can utilize precisely the same storage and distribution networks. In some cases they can also be processed in the same refineries. They largely utilize the same basic infrastructure as well as closely resembling the very products they are supplanting.

Recently I interviewed a representative of one of the unconventional fossil fuel companies offering what is essentially a straight replacement for petroleum fuels, and he offered me an interesting perspective on the matter, one that is certainly germane to this discussion. Since I agreed not to identify this individual or his company, I can’t mention the segment of the industry in which he is involved. I believe I can safely paraphrase some of his remarks, however, and I think they’re worth pondering. I’ll just call him Smartass because he used that term several times when speaking of himself.

“Unconventional fossil fuels are going to win this race,” Smartass declared. “The biomass guys may get a tiny piece of the market, but we’ll prevail because we can use existing pipelines, existing tanks, and existing processing facilities, and we’ll work with any engine. We’re just like ordinary gasoline only from a different source. You take these ethanol people, they think all the gas stations will pay sixty grand to put in a special pump for them, and that the auto industry will retool for them, and that the tax payer will subsidize them indefinitely. Hey, Green is great, but when the public has to choose between a Greener or a cheaper source, what do you think they’ll choose?”

Smartass went on to boast that he was closing a two hundred million dollar round of investment and added that “money talks and bullshit walks.” As far as he was concerned, the real movers and shakers in the energy business had already spoken, and that was that.

Smartass was abrasive, no doubt about it, and he had all kinds of nasty things to say regarding the intelligence of venture capitalists investing in biofuels and the mendacity of politicians backing ethanol, but if you’re a journalist you tend to welcome that kind of opinionated rant because it makes for a good interview. Indeed, I’m sorry I agreed to talk to Smartass on a not for attribution basis. And it’s not just that he was frothing at the mouth. He was actually making a good deal of sense on a certain level. All of the advantages he cited, the typical advantages of a straight replacement technology, happen to be true. So then why have so many straight replacement products failed, and will that be the case in the alternative fuels realm?

I mentioned versatility. None of the alternative fuels except for synfuels can match the versatility of petroleum. Ethanol, methanol, biodiesel, natural gas, liquid petroleum gas, and DME are all restricted as to the niches in which they can play. None is in a position to challenge petroleum effectively across the full spectrum of fuel applications, let alone within the vast petrochemical sphere. That makes the case for most of the bio-based alternatives less than compelling—if you believe that historical patterns of technology adoption will continue to prevail—because in this case it is the straight replacement that is most versatile, not the disruptive technology.

But, on the other hand, synfuels are not nearly as big a presence in the market or on the investment scene as biofuels. Aside from a sprinkling of gas-to-liquids plants in South Africa, Qatar, and Malaysia, there isn’t really much activity, nor is there that much investment, Smartass’s purported 200 million notwithstanding. Nor is there much startup activity compared to what’s taking place in the biofuel scene. What we’re seeing appears to be the precise opposite of what has occurred historically with replacement technologies where straight replacements held the initial edge and then lost it over time.

One could argue, of course, that synfuels have already had their chance and failed in the marketplace. Synfuels were manufacturered on a massive scale in World War II in Nazi Germany and later in Apartheid South Africa. Furthermore, the U.S. set up a costly program during the Carter Administration that went nowhere, and both private and public monies in the billions of dollars have gone into pilot oil shale programs in the U.S. which have also gone nowhere. Up until now synfuels have been mostly losers.

Of course one can argue that synfuels failed because they couldn’t compete with conventional petroleum at twentieth century prices except in cases where petroleum was embargoed, and that is undoubtedly true. But what happens when light crude oil prices stay permanently high? We may be about to find out.

It could be, however, that the real answer can only be discerned by exploring the second paradigm, that of the divergent replacement technology, more closely. And so we shall.

The Second Paradigm

Ever since Thomas Kuhn published his famous “The Structure of Scientific Revolutions” back in the sixties and spoke of “paradigm shifts” every pseudo-intellectual on the planet appears to have latched on to the term. Maybe we should just use the word model instead. But I figure if I say paradigm instead people will take me more seriously. So paradigm it is.

I’ve already discussed what divergent replacement technologies are and how they characteristically follow a different course than the products they have replaced. In addition, they generally have another characteristic that is equally important for their progress in the marketplace and that is the fact that they are generally promoted by companies that are not market leaders, at least not initially, and, moreover, they are often introduced in the context of assembled systems or technological ecosystems which are themselves novel.

A few of examples will help illustrate this concept.

The transistor, perfected though not invented by Bell Labs in 1948, was not produced by any of the companies active in the manufacture of vacuum tubes at the time such as RCA, Sylvania, Mullard, Philips, and others, nor was it used in any of the popular consumer electronics or professional audio or video equipment made in the early fifties. The first use was in hearing aids, digital computers, and in the little pocket radios popularized by Sony, still a corporate nonentity in the mid fifties. Texas Instrument, far from the giant it is today, was the most active company in manufacturing transistors themselves.

In effect solid state launched a sneak attack, establishing itself first in marginal market sectors. Then, in the mid sixties, the Japanese electronics firms launched a frontal assault against consumer and professional audio and video throughout the world. The rest, as they say, is history.

Now let’s look at fuels and at our old friend gasoline.

Gasoline was often simply discarded by oil refineries up until the eighteen nineties. It was close to being a nonproduct. It was too volatile for use in illumination, and was only employed as a solvent.

Gasoline really only found a market as a fuel with the commercial introduction of the internal combustion engine at the end of the eighties. A certain number internal combustion engines were used in factories, generally burning illuminating gas for fuel, but the biggest market was as a power source for small boats, a small and inconspicuous market that had not been successfully penetrated by steam. Automobiles were the next market, and eventually, of course, the biggest, but they were economically insignificant as well through the entire first decade of their existent.

The very first production automobile, the 1888 French Serpollet, used powdered coal and an extremely innovative high output steam engine, but steam quickly lost ground to gasoline powered internal combustion engines, while conversely gasoline saw no application in locomotives, large watercraft, or any of the traditional markets for steam engines. Again, gasoline represented a stealth technology.

Diesel oil, the second insurgent fuel type to appear, also throve within entirely new markets such as farm machinery and earth moving equipment though it also competed successfully with steam in small ships.

So what are the emerging transportation technologies utilizing divergent alternative fuels such as biodiesel, DME, or hydrogen?

In the case of hydrogen, the fuel cell automobile appears to represent just such a fundamentally new transportation model, but unfortunately that market has never really developed, and, moreover appears to be the exclusive province of the major auto manufacturers who would seem to have every incentive to keep making the same kind of uninnovative vehicles they’ve been making for decades.

So to date, there has no been no clear repetition of the historical adoption pattern with respect to divergent alternative fuels.

More on the Second Paradigm

A comment I frequently hear from individuals with an interest in alternative fuels is that if any alternative threatens to take major market share from the oil companies they will either suppress it or absorb it. A similar assumption has it that the major auto makers will maintain their positions of dominance through the twenty-first century, and that the transportation system fifty, seventy-five, and even hundred years hence will be much the same as today.

Does the history of technology in fact show a pattern of entrenched economic interests maintaining their economic power indefinitely and crushing or co-opting innovation? That obviously is important for the alt fuel folks to know because if it’s true, they’re doomed.

Actually the more usual pattern is for the hegemonists to ignore innovation until they are all but overwhelmed. So alt fuel guys take heart.

I have already indicated how the vacuum tube manufacturers who controlled the electronics industry failed to perceive the importance of solid state and failed to maintain dominance as a result. In computing we see a similar lack of perception in the companies, principally IBM and Sperry Rand, who controlled the mainframe business. While IBM did eventually get a piece of the PC market, it never became the dominant player.

An even more relevant example may be seen in the clash between the streetcar lines and the auto and petroleum industries during the early twentieth century, a clash often cited by left leaning individuals as an indication that the entrenched corporate powers always win. In fact they have it precisely backward. A hundred years ago the street railways were the dominant form of urban transportation in the U.S. and were controlled by powerful trusts who often owned the electrical utilities in the same municipalities and were frequently involved in large scale real estate transactions where suburban housing was built and sold beside the expanding streetcar lines. These streetcar lines were financed by the largest investment banks including the House of Morgan, and because the street rail systems and electrical utilities were regulated utilities, their owners were well connected with government officials and highly adept at defending their economic interests before regulatory commissions and political bodies. The street rail owners were the ones that represented entrenched economic power, not the struggling auto companies of the time. And yet the auto companies won.

It is in fact difficult to find a single significant example in the history of technology where entrenched economic interests within a capitalist society succeeded in permanently suppressing an innovative technology with a competitive advantage over the incumbent technology. If that were generally the case there would be no technological progress, and one can scarcely argue that position with much conviction. The Bell Telephone System certainly tried to suppress innovation and competition, and the fragments that form the regional Bell operating companies still try to do so today, but the amount of technological innovation in telecommunications has grown steadily greater, and little of it emanates from Lucent, the successor to Bell Labs.

So will the oil companies make a clean break with history by ultimately defeating the alternatives and preserving a petroleum economy indefinitely? To be continued.