California recently moved forward with state financing for the construction of a network of hydrogen refueling stations for fuel-cell vehicles. The California Energy Commission has granted FirstElement Fuel Inc. $27.6 million to spur expansion of a project that was initially funded by loans from Honda and Toyota–prominent fuel-cell vehicle manufacturers–totalling $13.8 million. The network will include 19 hydrogen stations throughout the state, enabling fuel-cell vehicle owners to drive from the Redwood Forest to the Mexican border without ever running short on fuel.
If you were to listen to the network’s enthusiasts, you’d be under the impression California just scaled an economic hurdle never before encountered.
Fuel-cell vehicles are revolutionary, they insist, but potential buyers, afraid they’ll be unable to find a place to refuel–a trauma they call “range anxiety”–have shied away from the purchase. Without the infrastructure to support it, network enthusiasts allege, the miracle car would never see the road. This product-infrastructure conundrum served as the justification for the multimillion dollar government intervention.
But is this problem of “range anxiety” and investor and consumer caution all that unique? 100 years ago, when the automobile itself was new to the market, wouldn’t we have seen a similar economic situation with a promising technology awaiting the infrastructure to facilitate its embrace?
IER Founder Robert Bradley’s book, Oil, Gas, and Government, comments extensively on this topic. By diving in, we’ll see that at the turn of the 20th century it wasn’t government, but the market that supplied answers to these same problems:
Early in the automobile age, gasoline sales joined those of kerosene in multipurpose establishments such as grocery stores, hardware stores, and drug stores. Even coal, lumber, and ice dealers sold gasoline as a sideline. Blacksmith shops and machine shops evolved into auto garages, which became prominent distributors of motor fuel. Typically, gasoline was stored in a large open container, and customers would fill a self-brought container, pay at the counter, and lug the gasoline home or to a car. This was self-service, but it was a slow inconvenient process for motorists. Gasoline was subject to spillage, evaporation, and the hazard of explosion or fire. Some customers circumvented these problems with tank-wagon deliveries, but storage expenses, ranging from facility construction to holding costs, made this an imperfect alternative.
What was needed was a marketing breakthrough. This came in 1910 with a new dispensing device that gauged and pumped gasoline from an enclosed container to the fuel tank through an open hose. The fuel pump eliminated earlier problems. Product loss was minimized, and underground tank storage reduced hazards. The motorist could fill up without leaving the car with little wait. Competition between retailers would ensure that.
Garages were the first to adopt the new dispensing method, and competition between sellers led to free auxiliary services such as air for tires, water for radiators, and lubrication for doors and other areas. Complaints about lackadaisical service and irregular pricing by garages were heard, however, and some motorists began frequenting bulk stations as an alternative. Bulk stations welcomed the business. With delivery expenses bypassed, quantity discounts were passed through, and bulk stations offered extra services to lure business their way. When brisk business began to interfere with regular bulk-station operations, some plants physically split the wholesale and retail functions and opened “filling stations” on the curb of the street. A new era in petroleum marketing was born.
Simultaneously with bulk-station retailing, refiners recognized opportunities to open service stations that would offer expedient service and competitive pricing. Two types of stations emerged: curbside pumps to service hurried motorists in noncongested areas and drive-in stations offering wider services to more customers with a short wait. Early drive-in stations sprang up in St. Louis (1905), Seattle (1907), Denver (1909), Dallas (1911), and Memphis and Cincinnati (1912). By 1914 the novelty of filling stations had caught on, and head-to-head competition led to efforts to improve the appearance and cleanliness of stations and their attendants. Windshield cleaning, expanded hours, credit, and in some cases coupon purchases came into use. Restrooms became a major attraction. National advertising of retail gasoline brands began. With expanded road systems and long-distance travel, brand-name identification became important to assure the motorist of standard quality. All these developments accompanied great sales and station growth. By 1920, an estimated 15,000 service stations dotted the American landscape.
The development and early operations of gasoline marketing were a market phenomenon. Consumer demand dictated the evolution of gasoline retailing from the general store to the garage to the bulk station and finally to the service stations. Government intervention was perfunctory. (Bradley, p. 1309-1311)
With gasoline, it wasn’t the power of government that created the modern, convenient network of fueling stations we frequent today, but thousands of people working to figure out a better product and service as they competed with other gasoline dispensers. Through fits and starts, with failed experiments along the way, a solution to the product-infrastructure conundrum emerged. In the absence of a top-down solution, market processes brought about an answer.
Existing gas stations seem like the logical starting point for hydrogen fill-ups, but we’ll now never know what creative ideas the market may have spit out. Hydrogen and gasoline, admittedly, are not perfect economic analogues, but that’s precisely why organic market processes would have been of value. Who’s to say consumers wouldn’t have demonstrated a preference for hydrogen stations outside of the yoga studio or next to that farmers market with the killer kombucha? By entrenching the conventional gas station paradigm, the State of California short-circuited a great opportunity for us to watch the market (and gratuitous virtue signaling) play out.
What’s more, by co-signing the loan for FirstElement Fuel Inc., the State of California has undermined prospective competition. Would you want to take the risk of opening your own hydrogen station when FirstElement Fuel has the California Energy Commission propping it up? Odds are, you wouldn’t. In the near-term this will surely give fuel-cell vehicle sales a boost, but in the long-term this intervention costs consumers by sapping creativity and competition from the marketplace.