Don’t let the Big Oil money confuse you on Prop. 87, part II

October 30, 2006 | Vinod Khosla | Comments |

If you agree with the discussion below, please email a link to this blog to ten California voters and ask them to email to ten others.

My first piece talked about why gas prices won’t go up. Here I want to talk about how and why prices for gasoline will decline.

Given the current oil situation the ONLY way oil prices will go down is if we have alternatives to oil. In my opinion the alternatives exist today but the oil interests don’t want us to have them. Given the massive profits they make on oil they wouldn’t want a cheaper alternative in the marketplace. That is fair except if they use unfair means to perpetuate their stranglehold. It is also unfair if they use their political clout to wrangle billions of dollars of subsidies from American taxpayers. And they often make us pay for their R&D. “California drives have few alternatives to driving and oil companies are fully prepared to use this leverage to increase their profits to new record highs” says Jamie Court, Foundation for Taxpayer Rights and Consumer Rights.

The world uses about 12 billion gallons of ethanol today. If that was removed form the market, oil prices would spike up. If we produce more, oil prices will decline as supply increases. For the last thirty years, R&D in energy has been declining. A hugely profitable company like Exxon spends 0.2% of its revenue on R&D and most of that is directed towards finding or extracting more oil. A few token projects to “sound green” are thrown in but almost no money goes into finding real alternatives to oil. Even the small technology oriented Silicon Valley company can spend 20% of its revenue on R&D. Isn’t it time we had a policy of more research and innovation in energy? Prop 87 directs significant funds to University based research in energy alternatives. This is the only way we can and will get alternatives to oil and reduced oil prices.

California recently passed Assembly Bill 32. It mandates that by 2020 we reduce our carbon emissions to 1990 levels. If we continue using fossil fuels and don’t find alternatives (both cleaner sources as well as efficiency improvements) we will end up with punitive taxes on all fossil fuels. Without alternatives we will be paying a lot more for gasoline. Prop 87 will create both more alternatives to oil and reduce its consumption by helping finance efficiency improvements. It will help finance alternative fuel vehicles like flex fuel cars and plug-in hybrids, reducing petroleum consumption.

A Saudi sheik is often quoted as having warned decades ago that the stone age did not end for the lack of stone. What is not reported is that he went on to say that “technology is our enemy”. Why? Because technology can create alternatives. And Prop 87 will help rush technologies and alternatives to market. Maybe, finally the consumer will have a choice • including a choice to not buy gasoline. To get real choices we need vehicles capable of alternative fuels. But we won’t get vehicles capable of alternative fuels till we have the fuels. And we wont have fuels till we have vehicles. Prop 87 will help solve this chicken and egg problem. And we will get choices. Already Richard Branson, who has committed a 100% of all profits from all his transportation businesses, estimated to be $3 billion over ten years to clean energy investments, has said he would invest a lot more of that money in California if Prop 87 passes. He has talked about opening Virgin Fuels, a renewable fuel brand. This extra investment will help increase competition and reduce prices for gasoline in a permanent way.

The oilies are scare mongering with their massive dollars. Many of them don’t want us to stop being hostage to oil. President Clinton has said ethanol is 33% cheaper. I know it is cheaper to produce, even with the subsidies oil currently manages to get.

In my next blog, Part 3, I will discuss “extensive health and environmental costs of oil”. Later I will address the unfair oilie tactics, and the benefits to be had from freedom from their stranglehold.

As Tom Freidman says: “Passage of Prop 87 would be huge”. Vote Yes on 87!

Next Story: The Prop. 87 “oil tax” showdown at VentureBeat
Previous Story: VC investors doing well, mega buyout guys doing even better

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About the Author, Vinod Khosla

Vinod Khosla is founder of venture capital firm Khosla Ventures,. He is a former partner at Kleiner Perkins Caufield & Byers, and co-founder of Sun Microsystems.

  • Daniel
    "California recently passed Assembly Bill 32. It mandates that by 2020 we reduce our carbon emissions to 1990 levels. If we continue using fossil fuels and don’t find alternatives (both cleaner sources as well as efficiency improvements) we will end up with punitive taxes on all fossil fuels"

    "Punitive" taxes on fossil fuels, i.e. a carbon tax, is a better solution than a government beauracracy and has already been implemented in several European countries. It will let the market rather than Mr. Khosla decide if we should pursue biofuels, and if so which biofuels, or electric cars or plug-in hybrids or compressed air cars or smaller cars etc. etc. etc.
  • The prior comment implies we should punish the small interests, and let the big ones off tax free. Only California has no extraction tax - Louisiana, Texas, and Alaska have already.

    Khosla points out that price may largely be unaffected - meaning that the net effect is diverting high oil profits into subsidizing alternatives. As a shareholder, I'd not like that. As a California, it means I'll see more alternatives to the pump monopoly. I like that.

    If you recall, the insurance companies threatened to pull out of California if an insurance proposition passed. It did, and they are still here. Face it, the oil companies will pay the tax, and still market price products at the price they will bear, as they are currently doing.

    Time to call the bullies' bluff.
  • alpha24seven
    I will look at supporting 87 if both Khosla and Doerr recuse themselves and their respective VC firms from taking any of this money and placing it in their RE/AE funded companies. I would ask all the other major supporters to pull their funding as limited partners in any VC fund that would get any of this funding.

    If they take 87 money and place it in their portfolio companies, this is a conflict of interest of epic proportions. 87 smacks of a way to build portfolio companies without limited partners. Of course, when said company has a positive liquidity event -- the VC firm would greatly benefit by not having to redistribute any to the LPs which of course will greatly benefit ($$$$$) the GP's -- Mr. Doerr and Mr. Khosla.

    They need to address this sooner than later because it does -- NOT -- pass the sniff test.