More Reality Checks for Algal Biodiesel

I have to admit, when I first heard about algal biodiesel, I thought it was really an incredible concept. As time went by and I learned a bit more, reality sank in. The reality was brought on by Krassen Dimitrov’s analysis of Greenfuel Technologies and their algae claims, as well as conversations I have had with John Benemann, who has been involved in algal biodiesel research for many years (and was co-author of the close-out report of the U.S. Department of Energy’s Aquatic Species Program.) Krassen’s analysis raised some eyebrows when he suggested that algal biodiesel would have to sell for $20.31 a gallon to be economically viable. That number was so far out there, that many people just dismissed it out of hand.

During my ASPO presentation last year (Biofuels: Facts and Fallacies) I discussed algal biodiesel, and mentioned Solix Biofuels by name and in my slides. Interestingly, Bryan Wilson, a co-founder of the company, just went on record and suggested Krassen was an optimist:

Algae Biodiesel: It’s $33 a Gallon

Algae biofuel startup Solix, for instance, can produce biofuel from algae right now, but it costs about $32.81 a gallon, said Bryan Wilson, a co-founder of the company and a professor at Colorado State University. The production cost is high because of the energy required to circulate gases and other materials inside the photo bioreactors where the algae grow. It also takes energy to dry out the biomass, and Solix uses far less water than other companies (see Cutting the Cost of Making Algae by 90%).

I can’t tell you how refreshing (but very rare) it is to see an admission like this. The biggest warning signal there is that high costs are due to high energy requirements. This suggests a very poor energy return, which means that as oil prices rise, algae won’t necessarily become more viable. It will be subject to the Law of Receding Horizons, which simply means that energy sources that require high energy inputs will always see their point of economic viability pushed farther out as energy prices rise. Remember when oil was $20 a barrel, and oil shale was going to be viable at $40 oil? By the time oil got to $100, I was hearing that it would be viable at $120 oil.

This won’t stop people from throwing money at algal biodiesel. As John Benemann once said to me “This is a good research project, but nowhere close to commercialization.” Somehow, I don’t think this is the reason investors are throwing their money in that direction. They are falling victim to the hype of ‘the next big thing.’

Note: I am about to hop a plane for London, and will be largely out of contact for 5 days.

The Nuclear Comeback

The natural gas crisis caused by the cutoff of supplies from Russia earlier in the year crystallized for many nations the threat of being overly dependent on another country for their energy supplies. Over the past decades, countries in Europe have shut down nuclear reactors, which caused them to turn to other energy supplies – like gas from Russia. Bulgaria began pushing for a return to nuclear power during the crisis, and concerns over gas supplies have already prompted Germany to reverse course and change their stance on phasing out nuclear power.

Italy has decided that this seems to be a prudent course of action:

After a 20-year ban, France helps Italy embrace nuclear energy

MILAN, ITALY – Twenty years after banning new nuclear plants, Italy is turning to France to restore its nuclear program.

On Tuesday, Italy’s Prime Minister Silvio Berlusconi signed a cooperation deal with President Nicolas Sarkozy for the construction of four power plants in Italy.

Italy shut down its four nuclear plants following a 1987 national referendum that rode a wave of fear and outrage over Russia’s Chernobyl reactor meltdown. Now it is joining a growing number of European countries – including Germany, Slovakia, and Bulgaria – that are returning to nuclear energy due to concerns both about carbon emissions and about the reliability of energy supplies from Russia.

Even without the gas crisis, this was inevitable because the long-term supply situation isn’t overly favorable for Europe. It is inevitable that the UK will turn back to nuclear power in a big way (lest their citizens freeze as fossil fuel supplies deplete) and it is inevitable that we in the U.S. will expand nuclear power in a big way in the decades ahead.

Regular readers know that I strongly favor an expansion of renewable energy, but renewable electricity is starting from a very small base. Electricity produced from renewables (minus hydropower) is less than 3% of total U.S. electricity production, and even with aggressive growth projections that is unlikely to change dramatically. Why? Total renewable electricity production in 2007 hit an all-time high of 105.3 million megawatt-hours. The growth over 2006 was impressive; almost 10 million megawatt-hours. (2008 numbers aren’t yet complete, but it looks like they will be about 10 million megawatt-hours than 2007). Yet the average annual growth of electricity demand over the previous 10 years was 66 million megawatt hours. At that rate, renewable electricity production could quadruple in the next 5 years and just about cover historical demand growth.

So if we are serious about moving away from coal, I believe we will have to expand nuclear power. We would need to add renewables at six times our current rate just to keep up with historical growth rates. Displacing much coal is out of the question unless demand can be curtailed. As I have said before, I am not opposed to nuclear power by any means. I understand that there are environmental issues that aren’t completely resolved. But you can make that case for just about any energy source.

I do know one thing about human nature, though. When energy starts to become sufficiently expensive – as gasoline did last summer – environmental concerns will take a back seat to economic concerns. Look no further than the popularity of the ‘drill here, drill now‘ campaign. This was one issue where John McCain did get some traction during the presidential campaign. If gas is $1.50 a gallon, people are concerned about the environmental impacts of expanded drilling. At $4.00 a gallon, they are prepared to let you drill in their back yard.

The same will be true of nuclear power. Opposition will be inversely proportional to the cost of electricity.

Peak Demand Before Peak Oil?

There has been a lot of talk in the media lately about the possibility that oil demand will peak soon (or has peaked already), which will render a geologically-induced peak in oil production irrelevant. In other words, peak oil is a non-issue because people won’t be demanding as much oil as can be produced (which is true presently). In fact, I just did a Google search of my blog, and the phrase “Peak Demand” shows up 239 times over the past 2 years. Regular reader Benjamin Cole was beating the peak demand meme long before I heard the media start to pick it up. (Here he is arguing this point two years ago).

Over the weekend I saw a new article that argued this point:

Study predicts oil demand will peak well before supplies run out

I think calling this a ’study’ is being very generous, and I have some big problems with multiple aspects of the article. Let’s have a look:

Management consultancy Arthur D Little has turned peak oil fears on their head with a report suggesting that the global economy will have begun to abandon oil well before supplies peak.

A bit of hyperbole, don’t you think? If anything has turned peak oil fears on their head it has been the collapse of oil prices – not the opinion of someone I never heard of. Hard to be concerned that there is a crisis around the corner when oil prices reflect a belief of an abundantly supplied market.

The Beginning of the End for Oil?, written by Peter Hughes a former executive at natural gas giant BG Group, address the prospect of falling demand for oil, rather than fears over dwindling supplies. It suggests that a mixture of drivers is forcing a broad policy change that will continue to reduce consumption. Fears over climate change, security of supply, and price volatility, will form a holy trinity to drive policy redirection, he said.

There are significant drivers for policy redirection, but working against those drivers is the issue of oil prices. They have already fallen to the point that they have spurred a recovery of demand. This is why I don’t subscribe to the peak demand > peak oil argument. We just don’t have anything that can compete with oil, especially at current prices. Crude oil is like a giant lake of underground energy that nature already did the heavy lifting on. Even though the lakes are becoming harder to access, they are still more economical than processes that require that humans do the heavy lifting (e.g., you have to input a lot of energy to turn straw into a liquid fuel). Peak demand is only going to occur if there are alternatives with low fossil fuel inputs that are competitive. Those are not on the immediate horizon, therefore demand is going to recover before it starts to shift to something else. Because I believe we will reach peak oil before anything is competitive with oil, I think peak oil will occur before peak demand.

Hughes also points to the Energy Information Administration’s (EIA) reduction of long-term oil consumption forecasts last year. It said the world would be using 10m barrels less per day in 2030 than it had predicted previously

Yet still more than we use today. And the current version of This Week in Petroleum reads “Under almost all EIA long-term projection scenarios, global demand for crude oil and petroleum liquids increases through 2030.”

But why does the EIA predict slower growth in petroleum demand? Because they are predicting that the ethanol mandates will result in production of almost 30 billion gallons of ethanol per year in 2030 – most of it cellulosic. (Less than two years ago the same agency was predicting less than a billion gallons of cellulosic in 2030 – amazing how effective mandates are at creating new technology!)

Despite the huge increase in ethanol production, they forecast a very modest rise in natural gas consumption. This begs the question “Where are all the energy inputs going to come from to drive production of 30 billion gallons of ethanol?” Because of the nature of ethanol production – which unlike oil does not comes to us as an underground lake that nature has largely processed – it takes substantial energy inputs to produce finished ethanol. That is not reflected anywhere in the EIA forecasts. It appears that the assumption is that it will take no incremental fossil fuel production to produce this much cellulosic ethanol. The problem is that no such technology has been invented, so the peak demand argument has to rely on new technologies yet to be invented. That is an incredibly weak argument.

Oil industry experts have predicted that any decline in oil demand in developed economies will be more than compensated by increased consumption in China and other BRIC countries as disposable income rises.

But Hughes argues that these emerging economies would be driven by the same desire to cut oil demand that is already being felt in developed economies. “The Chinese think very coherently and very long term,” he said. “They have identified the threat to the long-term sustainability of their growth path by relying increasingly on imported energy.”

I can’t make too much sense of this. China’s plan for long-term sustainability involves relying increasingly on imports? Wow, then the U.S. is really on their way to a sustainable future. We have increased our imports to something like 2/3rds of our liquid fuel needs.

The report has little in the way of numbers, and insiders admit it is more an opinion piece by Hughes based on almost 30 years in the energy business.

That’s pretty obvious.

But Hughes is not alone in predicting that fears over peaking oil supplies are largely unfounded, on the grounds that economies will find replacement sources of energy at a faster rate than the oil industry expects.

Amory Lovins, co-founder of the Rocky Mountain Institute, has been similarly outspoken on the subject of oil demand. “Oil is going to become, and has already become, uncompetitive, even at low prices, before it becomes unavailable even at high prices,” he said in a 2007 Newsweek interview. “So we will leave it in the ground. It’s very good for holding up the ground, but it won’t be worth extracting.”

Yes, Amory Lovins predicts the same. Now there is a great endorsement. As Robert Bryce pointed out in a 2007 article on Lovins, Lovins does not have a good track record with his predictions. Some of his past predictions:

1. Renewables will take huge swaths of the overall energy market. (1976)
2. Electricity consumption will fall. (1984)
3. Cellulosic ethanol will solve our oil import needs. (repeatedly)
4. Efficiency will lower consumption. (repeatedly)

Bryce systematically demolishes Lovins’ predictions in his article, and wonders why people still listen to him.

So I am firmly in the camp that we are going to see a peak in oil production before we see a massive move to alternatives. On the topic of peak oil itself, my current thinking remains as it has for several years. We are close, but not there yet. I have said several times that I expect oil to peak at around 90 million barrels per day (for ‘all liquids’ production). Christophe de Margerie, the CEO of Total, was recently quoted as saying he thought 89 million barrels per day will be the peak. Jim Mulva, CEO of ConocoPhillips, has expressed similar sentiments. After the IEA came out and predicted oil demand of 116 million barrels per day in 2030, Mulva said he didn’t see how we would ever get past 100 million barrels per day.

I do continue to be bemused by those who suggest that oil production peaked in 2005. When I was posting regularly at The Oil Drum, this was an issue that frequently found me at odds with many of the readers. I felt like there was insufficient evidence, and that many of the arguments suggesting an immediate peak were flawed. That didn’t stop people like Matt Simmons and Ken Deffeyes from making definitive statements that peak oil has passed. Both have been saying for several years now that we are past peak. Here’s Deffeyes in February 2006 saying that oil peaked in December 2005 and claiming “I can now refer to the world oil peak in the past tense. My career as a prophet is over. I’m now an historian.” JD at Peak Oil Debunked points out that peak oil has been a moving target for Deffeyes. Here’s Simmons in early 2007 saying that the world has peaked. T. Boone Pickens called the peak in 2004. Here’s one of the TOD contributors calling “Peak Total Liquids of 85.52 million barrels/day on Aug 2006.”

So where do things stand? All of these guys were wrong. Per the EIA database, 2008 eclipsed 2005 as far as total oil produced, and the present monthly record is now July 2008 for crude production plus condensate. In the ‘all liquids’ category, daily production in 2008 was about a million barrels per day higher than it was in 2005 at 85.6 million barrels per day (and several months checked in just short of 87 million barrels per day).

If anyone can point me to a place where any of the “Peak Oil Historians” admitted to being in error, I would appreciate it. Prior to the credit crisis I thought we would see peak by 2012 at no more than 90 million barrels per day. With the crisis, it may delay peak by a year or so, but also make it less likely that we make it to 90 million barrels per day. We are certainly knocking on the door of peak oil (IMO), and if someone suggests that for all practical purposes we are there I couldn’t disagree. But I think it demolishes credibility to go on TV and make a claim like “Peak Oil occurred in May 2005.” I have advised people that no matter how sure you are about that, if you stick your neck out and are wrong, you are the boy who cried wolf and your message will lose any semblance of credibility.

At the present time, demand has been destroyed the point that there are several million barrels per day of excess capacity. I think that most of the rise in oil prices since 2002 can be explained by my Peak Lite scenario, which boils down to erosion of excess capacity. When prices got out of hand, significant demand was destroyed and we find ourselves with 2002-like spare capacity. I think going forward, we are going to see the gradual return of Peak Lite. The only question in my mind is when the climb begins. But since I am a long-term investor, I have the patience to wait it out.

Investing in Ethanol: A Case Study of Terrible Investment Advice

Comically Terrible Timing

In June 2006 I read an article at Financial Sense that promoted ethanol as a great place to put your money:

Investing in Ethanol: A “New” Stock Play on Soaring Energy Prices and Why Now is the Time to Invest in this “Fuel of the Future”

Among the gems in the article were these:

Strap on your seatbelt… an alternative energy source is set to take the world by storm. In this research report, we’ll take a close look at the booming ethanol industry… and how investing in ethanol could prove to be an extremely profitable move for investors.

With a mandate from the U.S. government and the obvious need for change, we see this as a fantastic opportunity for investors to earn serious profits.

Take a look at recent investments made by some of the richest and most successful people in the world:

* Bill Gates, the richest man in America, allocated $84 million into Pacific Ethanol, Inc. (Nasdaq: PEIX), a company poised to control a considerable share of the ethanol industry.

Not So Fast

Mary Puplava at Financial Sense had asked me if I would contribute an article there, and I had procrastinated up to that point. But the article above prompted me to write a rebuttal. I told Mary that investors “are going to get trounced” if they take the advice from that article, and I wrote to her in an e-mail that “fundamentally something like Pacific Ethanol is a very poor investment (despite what Bill Gates thinks).” My rebuttal:

Ethanol Investing Counterpoint

In the three months following that rebuttal article, ethanol stocks fell across the board by about 40%, including Pacific Ethanol which I highlighted in the article. (An analyst at one brokerage firm told me that they advised clients to sell ethanol stocks after reading my article). I followed up a few months later with:

The Ethanol Bubble has Burst

I am getting around to the point here, which isn’t actually to argue that I am a financial genius. (As a matter of fact, my portfolio since last summer looks like almost everyone else’s: Down sharply). No, what I want to focus on here is just how that article – and investors like Bill Gates – could have missed so horribly with ethanol stocks. The reason this is pertinent is that I get an e-mail every week or so from someone wanting to know which cellulosic ethanol play I would recommend. For similar reasons to why I disputed that 2006 article on investing in ethanol, the answer is “none of them.”

Why the Advice Was Wrong

The initial article was correct on one key point: On the back of mandates and heavy subsidies, the ethanol industry was poised to grow dramatically. But there were two really big problems for prospective investors wishing to capitalize, and a third if you happened to be an investor in Pacific Ethanol. First, the fact that ethanol has to be mandated to gain market share should have been a strong tip-off that the economics didn’t look all that good. The companies simply were not poised to compete in the marketplace, hence the mandates.

Then there was problem number two: Producing ethanol isn’t rocket science. The barriers for entry into the marketplace are low, meaning competitors were going to sprout up everywhere. I documented a number of cases where complete amateurs decided they were going to get into the ethanol business. I can assure you that complete amateurs don’t go around building oil refineries, because the capital costs and technical challenges pose a very high barrier that Bob the Dentist and his buddies aren’t going to overcome by pooling their money and channeling their passions.

So as a result, ethanol capacity was overbuilt, there was too much competition, and margins vanished. This has led to a wave of ethanol bankruptcies and plant closings. In hindsight, it is clear that ethanol was not the place to sock away your money.

Pacific Ethanol faced an additional challenge: They built their plants far from the raw materials needed to run the plants. I could foresee that an ethanol plant in Iowa could put ethanol in Pacific Ethanol’s backyard for cheaper than they could do it themselves after the logistics of corn imports and DDGS exports were taken into account. The fall for Pacific Ethanol has been steep. Once boasting a market capitalization of over $1 billion (in 2006), that has now fallen to $23 million. Bill Gates eventually decided that Pacific Ethanol wasn’t what he thought it was, and sold out his shares.

The Game is Now Cellulosic Ethanol

So now here we sit in 2009, and many now want to know how to make money with cellulosic ethanol – the next big thing. As I told someone last week, “this is a low margin business.” Why do you think the government not only has to mandate ethanol, but then put extra mandates and goodies in for ethanol made from cellulose? Because the economics look horrible. No producer is going to be able to gain a decided advantage over others. There will be producers of cellulosic ethanol. That technology exists. It just doesn’t exist economically, and nobody is going to do it and make consistently high margins.

Take Verenium, for instance. There was a recent story in the news that they have teamed up with BP on a cellulosic ethanol venture:

BP and Verenium form cellulosic ethanol venture

Within that story was a little detail that I found interesting:

The joint venture expects to break ground on the Florida site in 2010, the press release said, and the estimated construction cost for this 36 million gallon-per-year facility is between $250 million and $300 million.

Ah, capacity and capital costs. That’s the sort of information we can put to good use. What do we find? Capital costs for this 2300 barrel a day facility amount to almost $130,000 per daily barrel. (To put that scale into perspective, a 60,000 barrel a day oil refinery is considered to be small). The following is starting to become a little dated, but I still like it for its relative comparisons:

Capital Costs of Fuel Facilities
Source: EIA Annual Energy Outlook 2006

When someone argues that coal-to-liquids companies might make for good investments, for instance, I point out that capital costs are about double those for gas-to-liquids (GTL), and those GTL projects are being canceled because their costs are too high. So think now about the capital costs of this Verenium venture, and consider the fact that corn ethanol plants with a fraction of the capital costs are going bankrupt. This is not to say that Verenium won’t successfully produce cellulosic ethanol. I just predict that the economics will not allow them to compete with other energy options, and they will live or die by the mandates. Likewise, I believe the same is true for most companies that have aspirations of making ethanol from cellulose.

Are There Any Investment Opportunities Here?

OK, I did say ‘most companies.’ I am hedging a bit, because some company might come up with something slightly advantageous. Will this make cellulosic ethanol a high-margin business for them? No, and if you want to play this game, you are trying to pick a winner out of a pack of losers. Safer in my opinion to stick with a sector that looks like an overall winner.

Look for a company that enables cellulosic ethanol. Buy the company that makes the novel enzyme for cellulose hydrolysis or the membrane system for the separation, not the company that uses them to make ethanol. Profit margins on the former might be good. Profit margins on cellulosic ethanol will at best mimic those of other commodity energy sources.

Investing in Ethanol: A Case Study of Terrible Investment Advice

Comically Terrible Timing

In June 2006 I read an article at Financial Sense that promoted ethanol as a great place to put your money:

Investing in Ethanol: A “New” Stock Play on Soaring Energy Prices and Why Now is the Time to Invest in this “Fuel of the Future”

Among the gems in the article were these:

Strap on your seatbelt… an alternative energy source is set to take the world by storm. In this research report, we’ll take a close look at the booming ethanol industry… and how investing in ethanol could prove to be an extremely profitable move for investors.

With a mandate from the U.S. government and the obvious need for change, we see this as a fantastic opportunity for investors to earn serious profits.

Take a look at recent investments made by some of the richest and most successful people in the world:

* Bill Gates, the richest man in America, allocated $84 million into Pacific Ethanol, Inc. (Nasdaq: PEIX), a company poised to control a considerable share of the ethanol industry.

Not So Fast

Mary Puplava at Financial Sense had asked me if I would contribute an article there, and I had procrastinated up to that point. But the article above prompted me to write a rebuttal. I told Mary that investors “are going to get trounced” if they take the advice from that article, and I wrote to her in an e-mail that “fundamentally something like Pacific Ethanol is a very poor investment (despite what Bill Gates thinks).” My rebuttal:

Ethanol Investing Counterpoint

In the three months following that rebuttal article, ethanol stocks fell across the board by about 40%, including Pacific Ethanol which I highlighted in the article. (An analyst at one brokerage firm told me that they advised clients to sell ethanol stocks after reading my article). I followed up a few months later with:

The Ethanol Bubble has Burst

I am getting around to the point here, which isn’t actually to argue that I am a financial genius. (As a matter of fact, my portfolio since last summer looks like almost everyone else’s: Down sharply). No, what I want to focus on here is just how that article – and investors like Bill Gates – could have missed so horribly with ethanol stocks. The reason this is pertinent is that I get an e-mail every week or so from someone wanting to know which cellulosic ethanol play I would recommend. For similar reasons to why I disputed that 2006 article on investing in ethanol, the answer is “none of them.”

Why the Advice Was Wrong

The initial article was correct on one key point: On the back of mandates and heavy subsidies, the ethanol industry was poised to grow dramatically. But there were two really big problems for prospective investors wishing to capitalize, and a third if you happened to be an investor in Pacific Ethanol. First, the fact that ethanol has to be mandated to gain market share should have been a strong tip-off that the economics didn’t look all that good. The companies simply were not poised to compete in the marketplace, hence the mandates.

Then there was problem number two: Producing ethanol isn’t rocket science. The barriers for entry into the marketplace are low, meaning competitors were going to sprout up everywhere. I documented a number of cases where complete amateurs decided they were going to get into the ethanol business. I can assure you that complete amateurs don’t go around building oil refineries, because the capital costs and technical challenges pose a very high barrier that Bob the Dentist and his buddies aren’t going to overcome by pooling their money and channeling their passions.

So as a result, ethanol capacity was overbuilt, there was too much competition, and margins vanished. This has led to a wave of ethanol bankruptcies and plant closings. In hindsight, it is clear that ethanol was not the place to sock away your money.

Pacific Ethanol faced an additional challenge: They built their plants far from the raw materials needed to run the plants. I could foresee that an ethanol plant in Iowa could put ethanol in Pacific Ethanol’s backyard for cheaper than they could do it themselves after the logistics of corn imports and DDGS exports were taken into account. The fall for Pacific Ethanol has been steep. Once boasting a market capitalization of over $1 billion (in 2006), that has now fallen to $23 million. Bill Gates eventually decided that Pacific Ethanol wasn’t what he thought it was, and sold out his shares.

The Game is Now Cellulosic Ethanol

So now here we sit in 2009, and many now want to know how to make money with cellulosic ethanol – the next big thing. As I told someone last week, “this is a low margin business.” Why do you think the government not only has to mandate ethanol, but then put extra mandates and goodies in for ethanol made from cellulose? Because the economics look horrible. No producer is going to be able to gain a decided advantage over others. There will be producers of cellulosic ethanol. That technology exists. It just doesn’t exist economically, and nobody is going to do it and make consistently high margins.

Take Verenium, for instance. There was a recent story in the news that they have teamed up with BP on a cellulosic ethanol venture:

BP and Verenium form cellulosic ethanol venture

Within that story was a little detail that I found interesting:

The joint venture expects to break ground on the Florida site in 2010, the press release said, and the estimated construction cost for this 36 million gallon-per-year facility is between $250 million and $300 million.

Ah, capacity and capital costs. That’s the sort of information we can put to good use. What do we find? Capital costs for this 2300 barrel a day facility amount to almost $130,000 per daily barrel. (To put that scale into perspective, a 60,000 barrel a day oil refinery is considered to be small). The following is starting to become a little dated, but I still like it for its relative comparisons:

Capital Costs of Fuel Facilities
Source: EIA Annual Energy Outlook 2006

When someone argues that coal-to-liquids companies might make for good investments, for instance, I point out that capital costs are about double those for gas-to-liquids (GTL), and those GTL projects are being canceled because their costs are too high. So think now about the capital costs of this Verenium venture, and consider the fact that corn ethanol plants with a fraction of the capital costs are going bankrupt. This is not to say that Verenium won’t successfully produce cellulosic ethanol. I just predict that the economics will not allow them to compete with other energy options, and they will live or die by the mandates. Likewise, I believe the same is true for most companies that have aspirations of making ethanol from cellulose.

Are There Any Investment Opportunities Here?

OK, I did say ‘most companies.’ I am hedging a bit, because some company might come up with something slightly advantageous. Will this make cellulosic ethanol a high-margin business for them? No, and if you want to play this game, you are trying to pick a winner out of a pack of losers. Safer in my opinion to stick with a sector that looks like an overall winner.

Look for a company that enables cellulosic ethanol. Buy the company that makes the novel enzyme for cellulose hydrolysis or the membrane system for the separation, not the company that uses them to make ethanol. Profit margins on the former might be good. Profit margins on cellulosic ethanol will at best mimic those of other commodity energy sources.

This is a Good Idea?

Update: Obama Says ‘No Way’

WASHINGTON – President Barack Obama on Friday rejected his transportation secretary’s suggestion that the administration consider taxing motorists based on how many miles they drive instead of how much gasoline they buy.

“It is not and will not be the policy of the Obama administration,” White House press secretary Robert Gibbs told reporters, when asked for the president’s thoughts about Transportation Secretary Ray LaHood’s suggestion, raised in an interview with The Associated Press a daily earlier.

————————-

Regular readers know that I would be strongly in favor of increasing gasoline taxes in exchange for income tax credits. I think such an idea would be politically palatable, provided it is clearly communicated to everyone that 1). If they make efforts to conserve, this system would be better for them financially; and 2). Higher gasoline prices will push us in the direction of less energy dependence by encouraging conservation and alternatives. Those who love the idea of energy independence and hate the idea of sending our dollars to OPEC should love the idea of changing our tax system in this way.

But some have a different idea of changing the way we are taxed:

Transportation Secretary LaHood eyes taxing miles driven

WASHINGTON, D.C. — Transportation Secretary Ray LaHood says he wants to consider taxing motorists based on how many miles they drive rather than how much gasoline they burn – an idea that has angered drivers in some states where it has been proposed.

A tentative plan in Massachusetts to use GPS chips in vehicles to charge motorists by the mile has drawn complaints from drivers who say it’s an Orwellian intrusion by government into the lives of citizens. Other motorists say it eliminates an incentive to drive more fuel-efficient cars since gas guzzlers will be taxed at the same rate as fuel sippers.

Yeah, count me among those who would say that. While it doesn’t eliminate the incentive to drive fuel efficient cars – after all, there is still the matter of the gasoline bill itself – it does remove some of the incentive for choosing fuel efficiency. It also decreases the incentive for choosing alternatives to gasoline-powered vehicles. It seems inherently unfair that the person who drives the new Ford Fusion hybrid should pay the same road taxes as the person who drives a Hummer. I want to encourage people to drive the Fusion.

Besides a VMT tax, more tolls for highways and bridges and more government partnerships with business to finance transportation projects are other funding options, LaHood, one of two Republicans in President Barack Obama’s Cabinet, said in the interview Thursday.

“What I see this administration doing is this – thinking outside the box on how we fund our infrastructure in America,” he said.

I am all for outside the box thinking. But let’s be clear: There is a reason ideas are outside the box, and sometimes it’s because they are just really bad ideas.

LaHood said he firmly opposes raising the federal gasoline tax in the current recession.

Think for a second about what he is saying. He opposes raising the gasoline tax. Why? Well I presume he would say that he doesn’t want to increase people’s tax burden. OK, then why do you propose to change taxes on the basis of miles driven? Is it to raise less money? The same amount of money? No, you are trying to raise more money, because there have been shortfalls as people have reduced their consumption:

Among the reasons for the gap is a switch to more fuel-efficient cars and a decrease in driving that many transportation experts believe is related to the economic downturn. Electric cars and alternative-fuel vehicles that don’t use gasoline are expected to start penetrating the market in greater numbers.

Further, you are going to increase the costs of vehicles by requiring the GPS chips be installed. But I guess it could make it much easier to give speeding tickets. Imagine with a GPS system in your car just how easily it would be to catch speeders. Surely we can all embrace a system that could be utilized to send you a speeding ticket any time you drive 2 miles an hour over the speed limit.

Am I off base here? Someone convince me that this is a good idea. I think people are going to be much more resistant to this than what I have proposed.

Survival Training Pays Off

When I was working in Aberdeen, Scotland in 2007 I had to fly out to oil and gas platforms in the North Sea. Regulations there require that anyone doing so has to undertake survival training in case a helicopter goes down in the sea while transporting people to the platforms. I previously documented my experience with survival training in Surviving Survival Training.

There have been a number of deadly crashes in the North Sea, and steps have been taken to mitigate the risk. One is that everyone has to wear a survival suit when they get on the helicopter. This allows them to survive for a long period of time if they find themselves in the frigid North Sea.

Part of survival training involves proper usage of the survival suits. Another part involves understanding how to escape from a helicopter that has been plunged underwater. Training people to do this involves strapping yourself into a helicopter simulator, and escaping after it has been plunged to the bottom of a 10-foot deep swimming pool. This exercise is repeated seven times, with three of them involving escape after the simulator has been turned upside down. This is what it looks like to escape the simulator, from the actual school that did my training:

Escaping the Helicopter Simulator

Survival training just paid off in a big way for sixteen rig workers and two pilots who had to ditch their Super Puma in the North Sea on the way to a rig:

Helicopter crash: 18 saved from sea

Not surprising that several had to go to the hospital after suffering from cold and shock. But this crash had a happy ending:

Sixteen oil workers and two pilots had an amazing escape last night after their helicopter was forced to ditch in the icy waters of the North Sea, 500 yards from a rig. All those on board were rescued and reported safe and well following a massive operation involving four helicopters and a flotilla of rescue craft.

Three of those from the Super Puma chopper were rescued by another helicopter. The other 15 were recovered by a platform lifeboat and taken to the installation.

The drama began shortly before 7 pm yesterday after the helicopter was forced to ditch in poor visibility 500 metres short of its destination, the BP platform 125 miles east of Aberdeen. Workers on the platform saw it come down and alerted Aberdeen Coastguard, which immediately sent out a mayday.

At least three emergency flares were set off from the helicopter. But, in a textbook operation involving a Nimrod aircraft from RAF Kinloss, and three other helicopters, including a Coastguard copter and a Sea King from RAF Lossiemouth, as well as a number of vessels, all the men were saved within two hours.

This is an amazing story. Sadly, the results aren’t usually so positive. Since 1969 there have been more than 30 fatal accidents involving helicopters in the North Sea. One incident in 1986 claimed 45 lives. Regardless of the amount of training, when a helicopter falls out of the sky the passengers don’t usually get the chance to put their training into action. But in this case they had a chance to put their training into action after they found themselves in a situation nobody ever wants to find themselves in.

Survival Training Pays Off

When I was working in Aberdeen, Scotland in 2007 I had to fly out to oil and gas platforms in the North Sea. Regulations there require that anyone doing so has to undertake survival training in case a helicopter goes down in the sea while transporting people to the platforms. I previously documented my experience with survival training in Surviving Survival Training.

There have been a number of deadly crashes in the North Sea, and steps have been taken to mitigate the risk. One is that everyone has to wear a survival suit when they get on the helicopter. This allows them to survive for a long period of time if they find themselves in the frigid North Sea.

Part of survival training involves proper usage of the survival suits. Another part involves understanding how to escape from a helicopter that has been plunged underwater. Training people to do this involves strapping yourself into a helicopter simulator, and escaping after it has been plunged to the bottom of a 10-foot deep swimming pool. This exercise is repeated seven times, with three of them involving escape after the simulator has been turned upside down. This is what it looks like to escape the simulator, from the actual school that did my training:

Escaping the Helicopter Simulator

Survival training just paid off in a big way for sixteen rig workers and two pilots who had to ditch their Super Puma in the North Sea on the way to a rig:

Helicopter crash: 18 saved from sea

Not surprising that several had to go to the hospital after suffering from cold and shock. But this crash had a happy ending:

Sixteen oil workers and two pilots had an amazing escape last night after their helicopter was forced to ditch in the icy waters of the North Sea, 500 yards from a rig. All those on board were rescued and reported safe and well following a massive operation involving four helicopters and a flotilla of rescue craft.

Three of those from the Super Puma chopper were rescued by another helicopter. The other 15 were recovered by a platform lifeboat and taken to the installation.

The drama began shortly before 7 pm yesterday after the helicopter was forced to ditch in poor visibility 500 metres short of its destination, the BP platform 125 miles east of Aberdeen. Workers on the platform saw it come down and alerted Aberdeen Coastguard, which immediately sent out a mayday.

At least three emergency flares were set off from the helicopter. But, in a textbook operation involving a Nimrod aircraft from RAF Kinloss, and three other helicopters, including a Coastguard copter and a Sea King from RAF Lossiemouth, as well as a number of vessels, all the men were saved within two hours.

This is an amazing story. Sadly, the results aren’t usually so positive. Since 1969 there have been more than 30 fatal accidents involving helicopters in the North Sea. One incident in 1986 claimed 45 lives. Regardless of the amount of training, when a helicopter falls out of the sky the passengers don’t usually get the chance to put their training into action. But in this case they had a chance to put their training into action after they found themselves in a situation nobody ever wants to find themselves in.

The Biggest Energy Bill in History

At least according to the New York Times, if you pull out the energy-related provisions from the just passed stimulus package, the $80 billion “would amount to the biggest energy bill in history.”

An $80 Billion Start

An excerpt from the NYT editorial:

RENEWABLE ENERGY In addition to new money for research into alternative fuels, the measure provides roughly $20 billion in tax incentives for wind, solar, hydroelectric and other renewable power sources. These incentives, which are crucial for future development, were the subject of endless Congressional bickering last year, and it is heartening to see them enshrined in law.

MASS TRANSIT Federal transportation spending has long favored highways over mass transit by a 4-to-1 margin, even though mass transit is far more effective in reducing oil consumption and greenhouse gas emissions. The package improves this ratio while providing $17.7 billion for mass transit, Amtrak and high-speed rail, nearly a 70 percent increase over present spending levels.

I have spent some time trying to read through the bill and pull out energy related items, but it is quite an undertaking. You can read through the bill, and all of the amendments, summaries, and committee reports here:

American Recovery and Reinvestment Act of 2009

I have yet to see a good summary of the energy provisions. My skimming of the bill indicates that the energy section is primarily just amendments to the Energy Policy Act of 2005, the Energy Independence and Security Act of 2007, and various other energy bills from previous years. I doubt that anyone read through it carefully before passage, and a lot of surprising provisions are likely to be uncovered as people have a chance to digest it all.

Electric Vehicle Update

In 2009 and 2010 we should see a lot of hybrids and fully electric cars hitting the roads. I spent a little time this weekend reviewing the potential offerings. Here is where some of the more frequently-mentioned offerings stand.

1. The Aptera 2e

The Aptera 2e

This is probably the most unusual offering. I first mentioned the Aptera in a story last year, and the roll-out is still on target for Q4 of this year. It is a 3-wheeled vehicle, made of light-weight composites. The shape is very aerodynamic to minimize wind resistance. The batteries recharge in 8 hours, and the car reportedly has a range of 100 miles. The cost is going to be in the range of $30,000, and the company reports that they already have deposits down for 4,000 vehicles.

The company has put together a veteran team, and by all appearances they are building an impressive car. Road and Track recently got an exclusive look:

Exclusive: Aptera 2e

Some excerpts:

The business model looks sound; nearly 4000 deposits have been placed (Robin Williams among the clientele), enthusiastic investors are locked in, and co-founders Steve Fambro and Chris Anthony have assembled a team that balances Detroit low-volume niche-production experience with California “anything is possible” attitude. Chief engineer Tom Reichenbach was formerly vehicle engineering manager for both Ford GT and Shelby GT500 programs; and CEO Paul Wilbur has a storied history at Ford, Chrysler and ASC. And Fambro, a biotech engineer and private pilot intrigued by his aircraft’s composite construction, and Anthony, a composites specialist with a background in boat design and fluid dynamics, seemed predestined for this partnership.

There’s a large hooded digital speedometer and bar-graph battery state-of-charge indicator, along with a central infotainment screen that offers mind-boggling possibilities. Leg- and head room were surprisingly generous for even my 6-foot-3 frame. And safety is preeminent in the Aptera’s design — the final version will have both frontal and side airbags. And if there was any doubt about the strength of the composite construction, it was quelled as eight Aptera employees stood on the roof of a development shell. And that was after the shell had gone through government roof-crush testing!

The car will initially be available only in California, but I will be watching closely to see how well it sells. Will it be accepted by the public? I have given thought to how I would feel about driving one around. I think the police would pull you over a lot, thinking the car isn’t street legal. Regardless, I am certainly rooting for it to be a success.

2. The Ford Fusion

The big news over the past week is that the Ford Fusion has been put to the test, and three major publications concluded that it was the best hybrid yet built. Yes, better than the Toyota Prius, which has been the most popular hybrid for many years. USA Today writes:

The 2010 Ford Fusion hybrid is the best gasoline-electric hybrid yet. What makes it best is a top-drawer blend of an already very good midsize sedan with the industry’s smoothest, best-integrated gas-electric power system. It’s so well-done that you have to look to the $107,000 Lexus LS 600h hybrid to come close.

U.S. News and World Reports says:

If you’re in the market for an ultra fuel-efficient hybrid that makes a convincing family sedan, your best choice has always been a Toyota — until now. Toyota’s Camry Hybrid and Prius have been the only realistic alternatives for many. Most American-built hybrids simply haven’t matched their fuel economy, and the Nissan Altima Hybrid remains rare and hard to find.

The Fusion Hybrid qualifies for a federal tax credit of $3,400 until the end of March, but few of the cars will reach dealerships by then – if you’re in the market, you might want to consider ordering yours before the credit disappears. If any Ford product has your eye, you should be aware that Ford is offering some of the deepest discounts we’ve seen in years this month.

Finally, Car and Driver had this to say:

Ford has pulled off a game changer with this 2010 model, creating a high-mpg family hauler that’s fun to drive. That achievement has two components: First, the machinery is unexpectedly refined—call it Toyota slickness expressed with car-guy soul. Second, the electronic instrument cluster involves the driver, invites you into the hybrid game, and gives you the feedback needed to keep increasing your personal-best mpg number.

I have to say this is quite an exciting development. I am now in my 12th month without a car, but it may be time to go ahead and purchase one. Given that I could get the tax credit if I order by the end of March, I may go ahead and pull the trigger.

3. The Chevy Volt

GM’s Chevy Volt

First announced in 2007, the Chevy Volt looks to finally make an appearance in late 2010 (although 2011 won’t be a surprise). Per GM’s website:

The Extended-Range Electric Vehicle that is redefining the automotive world is no longer just a rumor. In fact, its propulsion system is so revolutionary, it’s unlike any other vehicle or electric car that’s ever been introduced. And we’re making this remarkable vision a reality, so that one day you’ll have the freedom to drive gas-free.

Chevy Volt is designed to move more than 75 percent of America’s daily commuters without a single drop of gas.(2) That means for someone who drives less than 40 miles a day, Chevy Volt will use zero gasoline and produce zero emissions.(1)

Unlike traditional electric cars, Chevy Volt has a revolutionary propulsion system that takes you beyond the power of the battery. It will use a lithium-ion battery with a gasoline-powered, range-extending engine that drives a generator to provide electric power when you drive beyond the 40-mile battery range.

So it isn’t a purely electric car, but does have a pretty good battery range for a full-sized car. Plus, there are apparently provisions in the auto bailout that make the Volt eligible for a $7,500 tax credit. But there are certainly skeptics that the Volt will ever live up to the hype.

4. The Tesla Roadster

Speaking of hype, the all-electric Tesla Roadster reminds me of some of the more exotic and overhyped biofuels. We have heard about it forever, but the costs keep going up and the roll-out date for mass production keeps getting pushed out. The price is now up to $109,000, and even though performance reports of the handful that have been built are very impressive, there are serious questions as to whether this experiment will ultimately be successful.

Based on a Lotus platform, and assembled at the Lotus factory in Hethel, England, the Tesla has been mired in controversy throughout its short history. The latest setback was that Tesla lost a legal ruling to up and coming competitor Fisker Automotive, themselves creating a worthy competitor to the Roadster in the Fisker Karma. The Karma is an extended range hybrid that can go 50 miles before the gasoline engine has to kick in. (The Karma is expected to hit the road in 2010).

By all accounts Tesla is building a car with impressive specifications, and they plan to follow the Roadster up with the Tesla Model S that will be quite a bit cheaper than the Roadster. But Tesla has had cash flow problems and has been forced to lay off people. From the various accounts I have read, I don’t expect the Tesla to be in the race in the long run. One website got so tired of the hype that they turned their ‘Tesla birth watch’ into a ‘Tesla death watch.’ Still, I think the company is to be commended for their innovation, and I hope they get the problems worked out. (On an amusing personal note, former CEO Martin Eberhard has reportedly read this blog, and got a kick out of my tangles with Vinod Khosla).

5. Plug-in Toyota Prius

I wanted to limit this list to 5 cars, and there were a number of contenders worth a mention. But I would be remiss not to include the next generation Prius among the list of offerings. While at least one private company has already been modifying the Prius to be a plug-in hybrid, Toyota is working furiously to be the first to put large numbers of plug-in hybrids on U.S. roads. Initially announced for 2010, Toyota has moved up the schedule for the plug-in Prius and plans to have the first 500 on the road by the end of 2009 (150 in the U.S.). The downside is that the first prototypes can only go about 7 miles on battery power alone, which is well-short of the average person’s commute. So you can expect the plug-in Prius to run on gasoline most of the time.

Other Contenders

There are a number of other electric offerings worth a mention. Nissan has announced plans to put electric cars on U.S. roads by 2010. BMW has begun producing all-electric versions of their popular Mini Cooper, and so far can’t keep up with demand. ZAP is putting a sporty 3-wheeled electric car out (the Alias), along with offerings such as an electric truck and sedan. The Alias can reportedly go 100 miles on a charge.

Finally, Toronto-based Zenn Motor Company says they will put an electric car on the roads in 2009. This one is particularly noteworthy because of their intention to use EEStor’s ultracapacitor to power the vehicle. EEStor claims that their ultracapacitor is 1/10th the weight and volume of conventional battery technology. While potentially a game-changer, many feel that EEStor is a classic case of vaporware, and many capacitor experts say that it will never see the light of day. In response, Zenn says that their electric vehicles are not contingent upon the success of the ultracapacitor. And in fact, according to their website I can buy an all-electric Zenn vehicle here in the Dallas area right now. There are two dealers to choose from in the Dallas-Fort Worth area, and one of the dealers claims a 260 mile range on a single charge. I think I will try to make a trip down to see if they really have something in stock.

Conclusion

Based on the large number of electric offerings to be rolled out over the next two years, I would be surprised if some don’t stick around for the long run. A return to $4.00 gasoline should accelerate public acceptance of electric vehicles. The Aptera looks like a winner, provided buyers embrace the futuristic design. The Ford Fusion hybrid also looks like it is ready to make major inroads into the market share of the Toyota Prius. And don’t be surprised to see lots of electric Mini Coopers showing up on the roads soon. Now I just need to figure out if I am ready to be a part of the experiment and buy one of these vehicles.