The Oil Drum: Local

Last night on the Change.gov website, the major 'categories' for the transition administration included the usual headings: 'Commerce', 'Defense', 'Education', etc. But there was a curious entry in the list: "Energy and the Environment", (which is no longer there). My eyes expected to see "Energy" and "Environment" under separate headings. (Todays listing of cabinet positions is now identical to the current admininistrations.) But for a brief, heart pounding moment, I thought this might be a sneak preview into a sea change in the way policy leaders see the world, one unified Cabinet position, linking two critically interconnected areas, Energy and the Environment. I expect it was a snafu, or I misunderstood what I was seeing. As such, this brief post is not about advocating or predicting such a cabinet position will emerge. But as we go forward in these challenging Liebigs Law times, such a cabinet position might be the first step in recognition both of limits, and of the wide boundary impacts of our internalize profits / externalize costs social system. Of course there are risks with such a union...

One of the considerable differences between the ongoing financial problems of the world, and the coming energy crisis lies in the nature of the commodity of concern. In the first case the problem focuses around money, though not really the physical and tangible cash that one uses less and less to pay for groceries, the rent, or the occasional book. The US has already transitioned to a point that more than half the time we use credit and debit cards to pay the bill. (The quote is from a year ago)

As debit card and credit card purchases become increasingly popular, check and cash payments continue to lose out. These traditional payment methods now account for less than half of all transactions, and a recent rule change by the Federal Reserve Board should tilt the balance even further away from paper transactions and toward plastic payments.

As a result, for the vast majority of us who do not keep our money in the mattress, financial solvency and insolvency is defined by electronic statements about the nature of our accounts, without there being a pile of gold sitting in the bank to define it. And, when the banks and other companies holding such accounts get into trouble, loans can and have been arranged for them, that are similarly electronic transactions, without large trucks pulling up at either Fort Knox, where 147.3 million ounces currently sit, or to the Federal Reserve Bank in New York, that holds about 216 million ounces. Rather the transactions occur electronically, and there is relatively little need for the physical presence of the cash.

Contrast that with the realities of an energy crisis. We cannot heat our homes with the promises of oil, or the electronic transfer of ownership of fragments of a tanker load making its way from Ras Tanura to the Gulf ports. We need the physical presence of the oil, natural gas or wood that we will consume. When we run out, we need to get some more.

I have a strong distaste for companies or individuals who overpromise and underdeliver. Changing World Technologies (CWT) and their thermal depolymerization (TDP) technology is probably the poster child for companies that promised lots and delivered little. The hype was that they had the "technological savvy" to "turn 600 million tons of turkey guts and other waste into 4 billion barrels of light Texas crude each year." Further, they were going to "make oil for $8 to $12 a barrel." (See TDP: The Next Big Thing).

Of course as time went by, the hype unraveled. But not before the hype resulted in CWT getting earmarks for building their plant (money that went down the drain as documented here) as well as a tax credit inserted by Missouri Congressman Roy Blunt to specifically benefit CWT. That money came out of the pockets of American taxpayers, and could have been better utilized. But it was hijacked by CWT and their overpromises.

These are the sorts of implications that cause me to be very skeptical of companies that make seemingly far-fetched claims. I don't want technologies receiving legal and tax benefits because of hollow boasts. This is also the reason I have been critical in my assessments of some of the cellulosic ethanol claims made by ethanol evangelists like Vinod Khosla.

A few days ago I participated in a conference call (recording available here) about biofuels with an organization called Biotechnology Industry Organization (BIO). In this article, I will discuss some things I found interesting, including a new technique for making biodiesel that involves feeding biomass to algae.

The call had three speakers. The first, Jim McMillan of the National Renewable Energy Laboratory gave an overview of the current US biofuel situation. According to him, a lot of current interest is in cellulosic ethanol, since corn ethanol doesn't scale up very well. At this point, the cost of cellulosic ethanol seems to be double or more that of corn ethanol. The economics are still being clarified by demonstration projects. Until there is some sort of climate legislation that raises the price of carbon, it will be difficult to overcome the price gap.

Modelling Biofuel Production as an Infectious Growth on Food Production

Biofuel capacity or production as a fraction of food supply for three different cases, along with sigmoidal (ie logistic) projections, 1998-2018. Plum curves show US corn ethanol processing capacity in service or under construction as a fraction of ethanol potential of entire US corn crop. Brown curve shows actual production of US ethanol as a fraction of ethanol potential of US corn crop. Violet curve shows global biofuel production as a fraction of estimate of biofuel potential of entire global human food supply. Sigmoidal curves all have K = 1/3 (infection doubling time of three years), and cross the 50% line at 2008, 2010.8 and 2014.2 respectively. Sigmoids are scenarios, not forecasts. Actual biofuel production growth will depend heavily on oil prices and policy responses to increasing food prices. See text for sources and methods.

(Ed note: Stuart has been an important part of this team, but no, he is not "back." It has just been more than six months since he wrote this article, and it seemed like it might be a good time to revisit it.)

I have seen the question frequently arise as to whether the ethanol blending mandate is based on rigid numbers (e.g., 9 billion gallons in 2008) or whether it is actually a percentage requirement, and the number is an estimate based on projected gasoline sales. In other words, let's say that hypothetically gasoline sales this year are only half the level of last year. Is the mandate still for 9 billion gallons, or does it drop to 4.5 billion gallons?

Also, a claim was recently made here that refiners are underblending ethanol this year, and are likely to end the year in violation of the mandate. So, I also sought some clarification around this issue. I contacted Peter Gross at the EIA, who seemed to be their expert in this area. He was kind enough to reply, and clarified both issues:

At least I hope it is my last one. I have made a few long-distance trips by car in my life. The first few were a lot of fun. I was seeing the country for the first time. But after crisscrossing Nebraska, Kansas, and Oklahoma a few times, I would honestly rather have a root canal than have to do it again - especially when it means 25 hours on the road with three impatient kids in the car.

Things have changed quite a bit since my last trip, though. When I was in college, my first long distance road trip took me from College Station, Texas to Gaspé, Quebec (2,600 miles) and back. My most recent long-distance trip, in 2005, had taken me 1,150 miles from Northern Oklahoma to Montana (twice). This time, I drove from Montana to North Texas (1430 miles). For reference, New York to Los Angeles is about 2,800 miles. Here are my observations.

When we left Montana, I noticed that traffic was very light. That is unusual for Montana in the summer, because a lot of traffic passes through Billings on I-90 headed to Yellowstone National Park. The road is usually packed with RVs, but I was well into Wyoming before I saw the first RV. In fact, in the first 300 miles of driving, I saw only one RV on the road. This theme was consistent throughout the trip: Light traffic, and very few RVs. My wife commented that high gas prices had really done a number on the traffic. I told her that I thought an era had passed and that going forward we would start looking at personal mobility in a different manner.

In the last year, the price of gasoline has risen by 38%. The prices of other fuels have risen much more--diesel has risen by 64% and jet fuel has risen by 91%, and the price of West Texas Intermediate (WTI) crude oil has risen by 100%. Why aren't gasoline prices rising more than they are? Some will recognize this as the "crack spread" issue.

I see several possible explanations, including a long term shift in prices valuing diesel (or "distillate") more highly than gasoline; political pressure to keep gasoline prices low; and integrated oil companies not really needing a high gasoline pricing margin to keep overall profits at an acceptable level. I do not see ethanol as playing a significant role at this time. Regardless of the explanation, refineries and gasoline stations that are not part of oil conglomerates may find this a difficult storm to weather.

Figure 1 shows that the differential between the retail price of gasoline and the per-gallon cost of crude oil has recently dropped dramatically, leaving a much smaller margin to cover expenses and profit. It is this shift that I am discussing in this article.

Figure 1. Average gasoline price minus WTI crude price; average diesel price minus WTI crude price; and average jet fuel price minus WTI crude price. (Averages are for full years, except 2008 which is for 6 months; crude prices have been converted to a per gallon basis.)

Executive Summary: The current cost to produce a gallon of ethanol is approximately $3/gal. The current price of ethanol is $2.86/gal, which explains why ethanol producers are shutting down. If corn and natural gas prices remain high, I think ethanol has to rise to something like $3.40-$3.60/gal to make it worthwhile to ethanol producers. So, if I was a commmodities investor, I would probably go long ethanol right now. The only risk factors I can see - given that there is a mandated (and rising) demand for ethanol - is if corn or natural gas prices collapse. The other remote possibility is that that mandate is repealed, but I don't see that happening.

The hydrogen and ethanol powered car

[Editor's note, 10:30 UK Tuesday: Andris now has 44 excellent comments to contemplate (up from 10 on Friday). All are well worth reading. If you feel strongly about this then please leave him a message.]