The Transition

Path dependence: institutions are self reinforcing.  Initially, the market offers a wide range of solutions to a problem.  Over time, various economic effects tend to cause consolidation.  The market “chooses”, and other alternatives are left by the wayside.  Consumer choice is traded off in the long-run for total surplus.

Consider the typical example (quoted from the wikipedia page linked above):

Two mechanisms can explain why the small but early lead gained by VHS became larger over time. The first is the bandwagon effect of VCR manufacturers in favor of the VHS format in the U.S. and Europe, who switched because they expected VHS to win the standards battle. The second was a network effect: videocassette rental stores observed that more people had VHS players and stocked up on VHS tapes; this in turn led other people to buy VHS players, and so on until there was complete vendor lock-in to VHS.

This cycle repeats itself every time technology is refreshed.  VHS eventually became outdated and MMCD and SD formats squared off, with the DVD (the successor to the SD spec) emerging as the victor.  More recently, HD-DVD and Blu-Ray went head-to-head and Blu-Ray won out.  Markets go from periods of experimentation to periods of consolidation.

In transportation energy capture, the story reads similarly but over a much longer time horizon.  Transportation energy capture from 1800 to now has had three dominant technogies:

• Steam: 1800-1890


• Electricity: 1890-1910


• Oil: 1910-present

In between each of these periods of stasis was a period of significant research and experimentation.  Anyone every heard of the steam-powered sub?  The Swedish government tried it, but eventually decided that the electric sub was a better option.  These periods of upheaval are capitalism’s brainstorming sessions: no idea is too crazy.

We are in the middle of one such period now.  With increasing oil prices, concern for climate change, and national security considerations all in the mix, the world has begun the search for its next transportation fuel.  Stop and appreciate how momentous that is: oil has been the dominant transportation fuel for 100 years.  Participating in the market that defines the next fuel is an exciting task.

Interestingly, this time around the search for a new technology has a novel feature.  The problem is being separated into two sub-problems: generation and storage.  This separation allows much more flexibility.  An internal combustion engine is formulated for gas or diesel, but not both.  A steam engine is designed to burn wood or coal, but not both.  An electric car, however, can have its electricity generated any way you want.  A hydrogen fuel-cell vehicle can have its hydrogen supplied in any way you want.  This flexibility is a very good thing and is a hopeful sign that our next technology doesn’t have to be monolithic for 100 more years.  We can swap out new engines and new fuels independently of one another.

This press release got me started down this train of thought.  Researchers at Monash University took the next step on figuring out how to generate hydrogen in the same way that a plant does: photosynthesis.  This technology won’t be commercialized for many years yet.  Fortunately, we don’t have to wait: if you have a hydrogen-powered BMW today, you’ll be able to plug in to this new power source whenever it comes along.