I am traveling later this week, and will be on the road for nine days (Colorado, New York, Massachusetts). I was trying to wrap up the loose ends from my previous post with a much more comprehensive look at the ethanol/import issue before I travel. However, there are a couple of questions I had for the EIA before I finish up. As soon as I hear back from them, I will post a number of graphs and I will put my spreadsheet up so everyone can pick through it. But if I don’t hear back within a couple of days, it may be a while before I can put up the final installment.
But so far, it still looks like my initial observation was correct: Ethanol has not reduced our oil imports. Our oil imports have fallen over the past couple of years, but here is why:
I will clean that graph up in the final posting. It should be obvious, but the import scale is on the left. Bear in mind that the ethanol production numbers do show up in the demand numbers. Thus, whether petroleum demand was impacted by ethanol displacement is irrelevant in that demand number, since whatever is no longer counted as petroleum is counted as ethanol.
If you notice, “Imports” track “Demand” very closely, except demand fell faster in 2008 than did imports. If ethanol was actually impacting imports, what I would expect to see is the import line negatively trending away from the demand line. For instance, since ethanol began to really ramp up in 2002, we are producing an incremental 7 billion gallons per year with an energy content of over 250,000 bbl/day of finished petroleum products. The change in demand through 2002 was down slightly. Yet imports actually rose slightly. If ethanol was impacting imports this is where I would expect to see it; with imports falling faster than demand fell (or rising more slowly than demand rises as ethanol makes a contribution).
The MTBE Effect
One reader asked a great question – just the kind of question I like to get following these essays. The blending of the oxygenate methyl tertiary butyl ether (MTBE) was phased out in 2006. In order to meet the oxygenate requirements for specific areas of the country, ethanol replaced MTBE in the gasoline blending pool. So is it possible that the reason petroleum imports didn’t fall as ethanol ramped up was that ethanol was being used to replace MTBE? If MTBE was being made with domestic products that are not captured in the liquid demand summary, then it would be theoretically possible for ethanol to replace MTBE with no impact on imports. That sent me on a mission into the EIA archives digging through historical MTBE data.
The MTBE picture is complicated, and thus I expect there to be many opinions on how to handle it. Until 2008, the EIA published a monthly supply/demand picture on MTBE. The report is called Monthly Oxygenate Report, and the historical data are still all there. Figure 29 of this USGS report confirms that MTBE production had plateaued in the years 1999-2002 at just over 3 billion gallons per year. During 2002, production dropped sharply as it started to be phased out. If you look at this year end 2003 report, they show historical production separated into merchant plants and captive plants. (See Table D-4). The EIA defines a merchant plant as one that isomerizes normal butane to isobutane, dehydrogenates isobutane to isobutylene, and then reacts the isobutylene with methanol to produce MTBE. The definition of a captive plant is one that takes isobutylene, produced as a byproduct of refinery operations, and reacts it with methanol to produce MTBE.
The previous definitions are important for understanding how the MTBE phase-out should have impacted the import picture. Because butane is captured both in the import numbers and in the petroleum demand numbers, any ethanol that displaced MTBE should have backed out butane imports – thus lowering total imports. But, MTBE is partially produced from methanol, which is generally produced from domestic natural gas. Natural gas is not captured in the petroleum imports number, nor is it captured in the demand number. Thus, ethanol that backed out MTBE would not have impacted the natural gas piece that went into MTBE. So what we have then is that some of the ethanol ramp-up would have been diverted into MTBE replacement without being expected to have impacted demand.
How much? The portion that came from the natural gas. The MTBE reaction as stated above requires isobutylene and methanol. One molecule of MTBE has one molecule of embedded methane (via methanol). Let’s make the best case assumption that all MTBE production was replaced by ethanol. In 2002, ethanol production was really ramping up and MTBE was falling off the plateau. So let’s take the last year of strong production, 2001, and assume that must be replaced by ethanol. In 2001, MTBE production averaged 212,000 bbl/day for the year (per the previous historical report). The EIA did a comprehensive study of the MTBE replacement issue in 2006, and they concluded that from the oxygenate perspective, it takes 9 barrels of ethanol to replace 10 barrels of MTBE.
So to replace 212,000 bbl/day of MTBE was going to require 191,000 bbl/day of ethanol, which is 2.9 billion gallons per year. 191,000 bbl/day of ethanol production has the energy content of about 115,000 bbl/day of oil. In the absence of the MTBE issue, this is how much petroleum product imports I would expect to be backed out as ethanol displaced MTBE. But we need to prorate it by the isobutylene content, which is 64% of the mass of MTBEs. Thus, I would still expect the ethanol that backs out MTBE to displace imports equal to 64% of the 115,000 barrels, which would be 74,000 bbls.
There are two other factors that complicate matters even more. Since ethanol has a lower energy content, when ethanol displaces MTBE other components need to be added to compensate for the loss of energy. That may result in addition imports to keep the BTU content of the gasoline pool constant. Further, because the vapor pressure of ethanol is higher, certain components like butane and pentane must be backed out of the gasoline and replaced with other components that may need to imported. However, the latter shouldn’t have much impact on imports, because butane and pentane are already captured in both the import number and in the product supplied number.
Bottom line? We should still expect to see imports backing out even as MTBE is replaced by ethanol. Further, the MTBE phase-out was completed in the first half of 2006, so there is no longer any complication from that. And 2007 and 2008 also show no compelling case that ethanol is backing out imports.
It still appears to me that ethanol has had no impact on oil imports. However, it is not yet clear to me why this would be the case, so I am digging to better understand. It may be that we are just trying to see a change that amounts to noise in the overall demand picture. In that case, the ethanol contribution is really put into perspective and readers may understand why I am focused on other solutions; solutions that I think can ultimately make a bigger impact.
It may be that something is still missing from the picture, which is one of the reasons I have contacted the EIA for some additional clarifications. I think the conclusion in any case is that ethanol backs out approximately zero imports, plus or minus some very small number.
So those like the RFA who make claims like this – FACT: The production and use of 9 billion gallons of ethanol in 2008 displaced the need for 321.4 million barrels of oil – are simply promoting misinformation.
One of the main arguments in favor of ethanol production in the U.S. is that it supports the goals of energy independence by getting us off of foreign oil. After all, we could just tell the entire Mideast to take a hike while we grow our own fuel. In fact, there have been some truly grandiose claims made around this theme. Of course if we are making more ethanol, we are importing less oil as a result. Right? Maybe not. Has anyone actually taken a good look?
A couple of years ago, I looked at total gasoline consumption in an essay called The Mythical Ethanol Threat. My conclusion from that was that despite the rapid ramp up of ethanol, there was no apparent drop in gasoline demand. In fact, gasoline demand (which was corrected for ethanol content by backing that out) actually grew at a steady pace even as ethanol was ramping up sharply. But a couple of years have passed, and some comments following my last essay got me curious: Has U.S. ethanol production actually impacted petroleum imports?
From 2002 through 2007, ethanol production in the U.S. more than tripled: From 2.1 billion gallons per year to 6.5 billion gallons per year. (Source – RFA: Historic U.S. Fuel Ethanol Production). Yet total net petroleum imports (oil, gasoline, diesel, etc.) increased over that time period by 2.1 million barrels per day – from 10.2 million bpd in 2002 to 12.3 million bpd in 2007. (Source – EIA: Weekly U.S. Total Crude Oil and Petroleum Products Net Imports). So what does this mean?
I wasn’t going to jump to a hasty conclusion, so I started to dig. I started with several hypotheses. Perhaps U.S. oil production had fallen by 2.1 million barrels per day over that period of time, and the increase in imports were merely to compensate for that. So I checked. No, domestic production did fall over that period of time, but only by 682,000 barrels per day. Domestic production fell from 5.746 million bpd in 2002 to 5.064 million bpd in 2007 (Source – EIA: U.S. Field Production of Crude Oil). But one could allocate that much of the 2.1 million barrel per day import increase to the lower U.S. production.
Had demand growth accounted for the additional 1.4 million barrel per day increase in imports? Yes, in fact petroleum demand did grow (partially rebounding from the 9/11 attacks that reduced demand) from 19.8 million barrels per day in 2002 to 20.7 million barrels per day in 2007. (Source – EIA: U.S. Product Supplied of Crude Oil and Petroleum Products.) So of the remaining 1.4 million barrels per day of the increase in imports, 900,000 could be explained away as being due to an increase in demand. That still leaves a real increase in petroleum imports of 500,000 barrels per day – despite a tripling of ethanol production.
So how to explain this discrepancy? How can petroleum imports rise above and beyond the total increase in demand plus the drop in domestic production? There are two possibilities that I can think of. If the product in storage increased from 2002 to 2007, that can explain part of it. And we did in fact put a lot of oil in the Strategic Petroleum Reserve during those years (but not enough to account for 500,000 barrels per day).
Another portion can be allocated to declining energy returns as oil becomes heavier, and as we switch to lower energy return options like ethanol. For instance, as the quality of crude oil worsens – higher sulfur and lower gravity – it takes more energy inputs to refine it. Likewise as sulfur standards for clean products tighten; energy inputs increase and the net energy falls. This can result in some cannibalization of the oil. In a case with light, sweet crude you may end up with 9 BTUs of net products for 10 BTUs of petroleum inputs. As the crude gets heavier, the net BTUs may drop to 7 because of the need for higher energy inputs for processing. This can explain more of the discrepancy.*
The same is true of ethanol. It does take some liquid petroleum to grow corn and process ethanol, and as ethanol ramps up some of the petroleum imports will now be required in the ethanol industry. This is similar to the case of light, sweet crude gradually becoming heavier, more sour crude. You may have to increase the imports just to net out the same amount of fuel.
But one thing is pretty clear. Our petroleum imports have not fallen as ethanol has ramped up. So it is really hard to make a strong case based on the data that increased ethanol production is reducing our dependence on foreign oil. One reason for this is something I have talked about before, and that is scale. In 2007, our oil demand was 20.7 million barrels per day. When the lower energy content of ethanol is factored in, the 6.5 billion gallons of ethanol produced in 2007 is only worth 0.26 million barrels per day – just over 1% of our total petroleum consumption.** Factor in that some petroleum (and other fossil fuels as well) was used in the manufacture of the ethanol, and the net contribution falls even further.
Factor in all of the fossil fuel inputs that can also be used as fuels (diesel, natural gas, gasoline) and the total net contribution of ethanol toward our petroleum consumption ends up at under 0.5% (and that includes the energy credit from by-products). This relatively low contribution is another likely reason that there is no obvious impact on our imports from ethanol: The contribution may be simply too small to measure.
In closing, this more than anything explains why I often come out against our ethanol policy. It is being presented as a bigger solution than I think it can ever be – and yet we are throwing a lot of taxpayer money at it. That doesn’t mean that I am against ethanol. If you read a post like this, you might come to that conclusion. But I think ethanol is a fine fuel, and if we had a more efficient way to produce large amounts of it, I would happily support that. I strongly support attempts to get the fossil fuel inputs out of ethanol production. In fact, in my current job I keep a very close watch on ethanol developments – ready to jump in if I see one that I think has major long-term potential.
I also believe – as stated in my essay on Biofuel Niches – that corn ethanol may work out well in specific situations. For instance, it may never provide more than around 1% of net U.S. petroleum needs, but it may be able to supply a fair fraction of the needs in the Midwest. But then I also think that a local solution for Iowa – if it must be subsidized – should be subsidized by the taxpayers of Iowa. If the fuel is produced and consumed in Iowa, and the jobs are created in Iowa, then Iowa should support it. Try to scale it across the U.S., and again I think the net contribution will be lost in the noise – and money from taxpayers outside the Midwest won’t be well-utilized. In the latter case you essentially have a transfer of wealth from taxpayers across the nation into the Midwest.
I actually wanted to be wrong about my initial suspicions as I worked through this, because I don’t like the idea that there has been no measurable impact on imports from our massive ethanol ramp-up. But maybe a reader can spot a mistake that will change the overall conclusion.
In this exercise, I used data available from the Energy Information Administration website. I used annual averages to dampen out any noise. I looked at net petroleum imports, which includes those destined for the Strategic Petroleum Reserve (SPR). The reason for using net imports is that this subtracts out the imports that simply went into increased exports. For example, our exports of fuel oil have increased over the past few years, so the imports that ended up being fuel oil exports are excluded.
I only considered data from 2002 through 2007 for two reasons. First, the ethanol ramp-up was pretty steep over those years. An impact should be noticeable as ethanol production tripled. Second, the end of 2007 approximately defines the beginning of the current recession. Imports definitely fell during 2008, but overall consumption fell even more. So inclusion of 2008 would make it more difficult to separate out cause and effect, especially considering the speed at which demand fell. But it will be interesting as we come out of the recession – and as ethanol continues to scale up – whether we eventually see a sustained drop in net petroleum imports.
* While it can explain some of the phenomenon, it can’t explain a whole lot, because most of the energy used to remove the sulfur from oil is derived from natural gas. Some may be cannibalized from fuel gas produced as the oil is refined, and in that case it would show up as an incremental increase in the barrel inputs into a refinery to produce the same amount of net products. That could translate into higher imports in order to keep production steady.
** A barrel of oil contains around 5.8 million BTUs of energy. It takes approximately 500,000 BTUs to process that barrel into finished products, for a net energy content of finished products of 5.3 million BTUs, or 126,000 BTUs per gallon. Ethanol contains 76,000 BTUs per gallon, so one gallon of ethanol is worth 76,000/126,000 = 0.6 gallons of oil.
Thanks to a reader for this story:
NEW YORK (Dow Jones) – If you order a beer in New York, the odds are growing that it was delivered by a truck running on natural gas.
Beer distributors are among a growing vanguard of private trucking fleets encouraged by cheap natural gas and new government funding to adopt compressed natural gas, known as CNG, as a cleaner alternative to diesel.
As I have argued before, I think it makes a lot of sense for fleet vehicles to migrate to compressed natural gas (CNG). Natural gas is historically a lot cheaper fuel than liquid fuels such as diesel or gasoline. A quick check of prices today shows natural gas for October delivery at $3.78 per million BTUs (MMBTU). By contrast, gasoline is currently trading at $1.62/gallon (spot market, no taxes included) which works out to be $14 per MMBTU. Ethanol is trading on the CBOT at $1.66/gal for October delivery, which works out to be $21.84 per MMBTU. (In 2006, Popular Mechanics put together a graphic comparing different fuel options. See The Great Alt-Fuel Rally).
But more importantly than where prices are today is where prices are going. Natural gas will have a lot of resistance trying to sustainbly break through the $7-$8/MMBTU range because shale gas starts to become economical in that range – and we have a lot of shale gas resources. So if you are planning for the future, the odds are with you over the next few years if you are betting on moderate natural gas prices. Oil prices, on the other hand, are far more uncertain in my opinion.
The caveat of course is that the conversion can be quite expensive (the reasons for that were explained in a previous essay). The article explains that lawmakers are tackling that issue as well:
Paying for CNG conversions is still a problem. Federal funds are available to cover up to $32,000, or roughly two-thirds, of the additional costs associated with purchasing a CNG truck as opposed to a diesel one.
A company that gets the full $32,000 in federal funds should be able to make back its investment in less than three years, according to Natural Gas Vehicles for America.
Lawmakers in Congress are trying to shorten the time it takes to recoup costs on a CNG vehicle. Senate Majority Leader Harry Reid, D-Nev., is among legislators backing a bill, dubbed the NAT GAS Act, that would cover 80% of the incremental cost of a natural gas vehicle and give a $100,000 property tax credit to any company that builds a CNG fueling station. The bill has yet to come up for a vote.
The price differential between CNG and diesel/gasoline/ethanol-powered vehicles is quite large (around $10K for an individual vehicle), which is why natural gas may not make sense for individuals unless they drive a great number of miles. But that’s what fleets do, so it may make more sense to convert fleets over (and the localized nature of fleets also improves the economics of putting in CNG refueling stations). It all boils down to how many miles a year you drive and your expectation for the price differential between natural gas and gasoline/diesel/ethanol over the time you will drive the vehicle.
Finally, in the spirit of my previous post, fleet conversions are one more way to reduce our dependence on imported petroleum.
I consider the level of dependence of the U.S. on imported petroleum to be a very large financial risk endangering the country’s future. There are certainly other import-related risks as well, but here I want to talk about the financial risk.
I consider it similar to having a mortgage upon which you pay interest each month – but in which the interest rate can fluctuate wildly. If you typically pay 7% interest on your mortgage, but your rates quickly climb to 12%, a lot of people would find themselves in a deep financial hole. Come to think of it, a lot of people did when they found themselves in a similar situation. They gambled on the future and lost.
With respect to oil prices, we are also gambling on the future. We import a bit over 9 million barrels per day of crude oil (we also import gasoline, diesel, etc.) Each $10/bbl increase in the price of oil means that consumers pay $33 billion more each year for oil. We are now paying $100 billion more each year for oil than we were just a few short years ago, and that money comes out of all of our pockets. This acts as a tax upon the U.S. economy, albeit one that doesn’t primarily benefit U.S. citizens.
The drain on the U.S. economy is one thing, but the risk is quite another. Why do we tolerate that sort of price risk? In my opinion, it is because tolerating the status quo is viewed by politicians as the cheapest, most politically safe option. And even if they are concerned about the risks, when economists say that oil might be going back down to $30, politicians are paralyzed from taking action. The uncertainty is a killer.
A story I read this morning highlights that uncertainty, and points to some of the consequences:
The single biggest factor determining the success or failure of high-tech fuel-efficient cars is not battery technology, legislation, tax incentives, new model introductions, or infrastructure. It’s gas prices. The price at the pumps is the elephant in the room when it comes to green cars.
I would imagine that there is general agreement on that. When gas prices raced ahead, the Toyota Prius began to outsell the Ford Explorer. When gas prices fell back to $2/gal, SUV sales surged and Prius sales plunged.
The fundamental problem is that many people don’t make long-range plans with energy prices in mind. When gasoline goes to $2/gal, some expect it to stay there and so that SUV purchase doesn’t look bad – until gasoline is back to $4/gal. And the inability to plan is compounded by analysts who give mixed messages on which way oil prices are going:
Japanese broker Ryoma Furumi said oil prices will stay rangebound at $70-$75 a barrel; analysts at Mirae Asset Securities said prices are likely to consolidate between $65 and $75; and Jim Ritterbusch, president of Ritterbusch & Associates, said crude could be pushed toward the $75 mark.
Verleger, the energy consulting firm, predicts a drop in oil this year—all the way down into the $30s. The firm bases this prediction on crude stockpiles in the US being 14 percent higher than a year ago, and gasoline supplies up by 2.2 percent. Also, OPEC is currently pumping 600,000 barrels a day more than the world needs.
Meanwhile, Christophe de Margerie, chief executive of French oil giant Total, this week said he sees a risk of oil rebounding to $100 a barrel unless there’s greater investment in exploration. He warned of a possible oil shortage between now and 2015 if immediate action is not taken to invest in exploration. “The reserves of oil are there but if you don’t invest they don’t come on the market,” de Margeries said.
Would we plan differently if we knew that oil prices were going to be $100/bbl? Of course we would. We have already seen consumers respond as oil prices went over $100/bbl. But while consumers were responding, a lot of damage was done to the U.S. economy. The airline industry and the auto industry took a beating, as did many personal budgets that suddenly had to cope with much higher weekly fuel outlays.
Enough gambling on oil prices! Let’s raise the price of petroleum via taxes so that people can make energy plans that incentivize them to become more fuel efficient. As I have argued before, you can direct that back at people in the form of a tax credit. The idea would be to trade energy taxes for income taxes.
The benefit would be that we would start moving toward a higher level of fuel efficiency without having to legislate CAFE mandates that end up being gamed. With increased fuel prices, people will demand more efficient vehicles. Automakers will know which cars they need to build. Renewable energy – particularly those varieties that aren’t heavily reliant on fossil fuels – would also see a boost. Not only would they be competing against higher priced fossil fuels, but project developers could have more assurance that oil prices aren’t going to fall to $30 and destroy their project economics.
The benefits would be substantial. Most importantly, our consumption would fall. I consider it very important to stretch our remaining fossil fuel endowment as far as we can, and we can do a better job of that if we manage it. We need to buy time, because renewables are not ready to fill the supply gap that will result if we burn through our remaining oil too quickly.
I don’t think there is any question our oil imports would fall as people started to change their transportation arrangements. Following the high prices of mid-2008, total petroleum imports over the following 12 months fell by 700,000 barrels/day over the previous 12 months (although it is hard to say how much of that was recession-induced).
I have long complained that government energy policies that vacillate every time a different political party comes into power have long been an impediment for companies trying to do long-range project planning, both for fossil fuel and renewable energy projects. Volatile prices have much the same impact. I have had my disagreements with Vinod Khosla in the past, but his call to put a floor underneath oil prices has merit (see Point 14 here).
Having a price floor would would allow companies – especially energy companies and auto makers – to do a better job of long range planning. I don’t fault automakers for getting caught with an oversupply of SUVs as oil prices skyrocketed. They were just making cars that people in a low-oil-price scenario had long demanded. With the certainty of higher prices, the auto companies needn’t gamble that SUV sales are going to come back strong. They would know that they need to shift to the more efficient vehicles that consumers will demand.
I have no problem with taking calculated risks, but I do not gamble. Living on the Gulf Coast of Texas without hurricane insurance is gambling, because the hurricane probability is too high. I don’t see that as much different than the risk we place on the economy by not taking more proactive steps to insulate the economy against price spikes. But we didn’t learn that lesson in 1973, nor in the 1974-75 recession that followed. I don’t expect we are much wiser today.
It succors and drowns human life. And for the last eight years, oil — and the people and places that make it — was my obsession. – Peter Maass
Today a new book by Peter Maass was released. The book is called Crude World: The Violent Twilight of Oil. Peter Maass is a name you may know from a 2005 article that he wrote for the New York Times called The Breaking Point. The story was a comprehensive look at where he thought oil production/prices were headed – and what the implications might be. Maass focused on Saudi Arabia in the article, and spent a lot of time covering Matt Simmons’ viewpoints. It was after reading this story that New York Times columnist John Tierney offered to bet Simmons on the future direction of oil prices. Thus arose the Simmons-Tierney bet.
I thought Maass’ 2005 article was well-researched, and it was a captivating read. So when Mr. Maass e-mailed and asked if I would like a copy of his new book, I thought it would probably be a book I would enjoy. I still have a stack of books that have been sent to me to review, but I jumped this one to the front of the queue. I hadn’t really intended to, as I am working on two other books right now*, and would normally finish those before starting another. But once I picked this book up and started thumbing through it, I couldn’t put it down.
The subtitle of the book is The Violent Twilight of Oil. The book talks about the twilight of oil, but as the chapter titles imply the focus is less on the twilight and more on the seedy side of the business. The book notes that there are some countries like Norway, Canada, United Arab Emirates, Kuwait and Brunei to which oil appears to have generally benefited the population as a whole. But then there are also many cases in which the discovery of oil seems to have brought many problems to the population. (The book suggests that countries with established democracies and strong self identities are less likely to suffer following the discovery of oil).
The chapters read like the Seven Deadly Sins: “Plunder”, “Rot”, “Fear”, “Greed”, and “Desire” are a few of the ‘sins’ covered in various chapters. Within each chapter, Maass then takes a look at an example that embodies that particular “sin.” That sort of style reminded me of a really good book I read a few years ago written by Matt Ridley. It was called Genome: The Autobiography of a Species in 23 Chapters. Each chapter of that book tells the tale of one gene from each chromosome. In Crude World, Peter Maass tells the story of oil one dysfunctional example at a time.
The book picked up where the New York Times story left off. In fact, Chapter 1 – Scarcity – was mostly about Saudi Arabia and incorporates much of that 2005 story. And if you liked his New York Times story, you will probably enjoy the book as the same style is evident. But I use the word “enjoy” loosely, as it is a sober read. You will find yourself shaking your head at some of the things that have been carried out as a result of the world’s desire for oil.
In Chapter 2 – Plunder – the book covers the case of Equatorial Guinea. The oil wealth was plundered, with the help of international oil companies, banks that looked the other way as government officials brought suitcases of money in for deposit, and governments eager for access to the resource. While he was investigating the oil story in Equatorial Guinea, Maass was accused of being a spy and kicked out of the country.
Chapter 3 – Rot – was all about Nigeria. I won’t tell you how that one turns out, but I am amazed at the (dangerous) lengths Maass went to for the story. Rot describes his journey deep into the Niger Delta in a leaky canoe, courtesy of one of the local warlords. It is well known in the oil industry that Nigeria is a dangerous place to operate. Oil companies generally pay very big premiums to get workers to agree to an assignment in Nigeria. Oil workers are kidnapped in Nigeria regularly (but rarely harmed) and held for ransom from the oil companies operating there. Warlords are constantly doing battle there, and Maass described his visit to one village that had been attacked. Shell also featured prominently in this chapter.
Chapter 4 – Contamination – tells the story of Ecuador, with special focus on the Chevron lawsuit. Maass notes the irony that California – one of the most environmentally conscious states – receives the largest portion of Ecuador’s exports.
The rest of the book’s ten chapters covers a litany of oil-induced miseries. Iraq, Russia, and Venezuela are all profiled. Former ExxonMobil CEO Lee Raymond is presented as the face of “Greed” (albeit it in the “Fear” chapter). There is an interesting explanation in “Greed” on why companies function as they do. Maass discusses a court case between Henry Ford and the Dodge brothers, in which the court ruled that a company’s mission “is organized and carried on primarily for the profit of its shareholders.” Thus, Maass argues that if Mr. Raymond had decided to run ExxonMobil in a more altruistic manner, the board would have removed him for not operating in the best interests of the shareholders.
The complaint that some will have about the book is that it isn’t balanced. There are a number of villains portrayed, but the oil companies really stand out. It seems that those who are telling the tales of misdeeds are generally trusted in the book, but those who are interviewed for balance are treated with suspicion. For instance, in the chapter on Nigeria, the author interviewed the director of Shell’s operations in Nigeria. The interview appears to proceed like a cross-examination. A Nigerian warlord’s words, on the other hand, seem to be taken mostly at face value.
But this is not intended to be a balanced book. It is a book designed to highlight the downside of our oil dependence. We can all think about ways in which oil has made our life better, but in the Western world we are generally spared from the nasty side of the business. In this book, Maass brings that message home loud and clear.
Crude World was released today, September 22, 2009. The general theme of the book is that the world’s dependence on oil has come at a very high price. This is not a book on peak oil, climate change, or renewable energy. It is not a technical book on the oil industry (for that see Morgan Downey’s Oil 101). The book covers the misery – the wars, the corruption, and the ruined lives – brought about primarily by greed from the lure of black gold. The book highlights the irony that oil could be used to improve the lives of a country’s citizens, but in far too many cases a country’s citizens end up being worse off after oil is discovered. The book was a fascinating read, and I couldn’t put it down once I started it. Now I can get back to my regularly scheduled reading.
* The other books I am working on right now are Axis by Robert Charles Wilson and Outsourcing Energy Management by Steven Fawkes. The former is a science fiction book that I picked up because I really enjoyed Wilson’s previous book Spin. The latter has been a difficult read; I have been working on the book for six months. I met the author earlier in the year when he visited the Titan Wood plant in the Netherlands. We had quite a lot in common, and he sent me a copy of his book. But it is really a textbook, and so I have been reading it in small doses.
I am going to be pretty busy for the next few days, and probably won’t be able to put anything new up until at least mid-week. Until then, over the past few days there have been a lot of headlines about a recently released study from the Environmental Law Institute. The study concluded that over the past seven years, fossil fuels have benefited from some $72 billion in subsidies. Their headline was innocent enough:
U.S. Tax Breaks Subsidize Foreign Oil Production
(Washington, DC) — The largest U.S subsidies to fossil fuels are attributed to tax breaks that aid foreign oil production, according to research to be released on Friday by the Environmental Law Institute in partnership with the Woodrow Wilson International Center for Scholars. The study, which reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008, reveals that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases.
The research demonstrates that the federal government provided substantially larger subsidies to fossil fuels than to renewables. Fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled only $29 billion. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol, the climate effects of which are hotly disputed. Of the fossil fuel subsidies, $70.2 billion went to traditional sources—such as coal and oil—and $2.3 billion went to carbon capture and storage, which is designed to reduce greenhouse gas emissions from coal-fired power plants. Thus, energy subsidies highly favored energy sources that emit high levels of greenhouse gases over sources that would decrease our climate footprint.
Let me be perfectly clear here. I am very opposed to policies that subsidize our usage of fossil fuels. But I am also opposed to painting with very broad brushes. In the case of the oil subsidies, three things stand out. First, the taxes the oil companies paid over that time period are about an order of magnitude higher than those so-called subsidies. Second, many of these so-called subsidies would merely be called tax deductions in any other industry. Finally, many of the so-called subsidies didn’t even go to Big Oil.
One of my diligent readers took the time to actually read the study, and broke it down:
I was a little puzzled by this ELI study. First of all, the itemized subsidies only added up to $68 bn, not $72. Maybe they were just listing the largest items – I didn’t read the fine print. I thought it would be useful to see just what was being subsidized rather than blurting out “BIG OIL Subsidy!!” I found it useful to consider 10 categories of fossil fuel subsidies.
1) 22%, or $15 billion of the $68 billion listed, was allocated to the Foreign Tax Credit you referenced. Not $72 billion.
2) 23% went to subsidize production in high cost environments, areas that may have otherwise been commercially marginal (although that of course depends on price). This seems like a legitimate use of subsidy to me, if without it most of these projects would have not been undertaken. [RR: As I have argued before, it makes sense to subsidize things that are deemed important, but otherwise uneconomic].
3) 11% went to various accounting conventions, particularly treatment of intangible costs.
4) 10% went to assumed loss stemming from lower than expected offshore lease government take. This seems very arbitrary to me. As I understand it, the ELI is assuming some globally fair government take, and calculates that the feds could get more. Maybe. But there’s no free lunch. A higher take might mean lower bids or less development.
5) 9% went to a low income housing energy assistance program. This is money paid to states to insure low income families get access to fuels. Hardly a Big Oil subsidy.
6) Another 9% went to government storage programs, the SPR and two other minor programs. This is a government initiative, not a handout to the oil industry.
7) 8% went to an accounting rule benefiting independent producers, not Big Oil.
8) 5% went to the coal industry.
9) 1% went to incentives for clean fuels.
10) 1% went to a variety of small miscellaneous programs.
So, of these
- Numbers 1 and 3 may have room for revenue take ($22 bn);
- Number 4 possibly but would have the side effect of lower US production (how could it not?) $7 bn;
- Number 2 would clearly have a negative impact on US production ($16 bn);
- Number 7 would hurt smaller companies but may be minor source of revenue ($5 bn)
- The rest are not really benefiting the oil industry very much.
I view this as $22 bn in possibly vulnerable oil industry subsidies, another $23 bn in at least partly defensible subsidies, and $27 billion (getting back to $72 bn) in subsidies that don’t benefit the large mutlinationals much at all.
Again, let me make it clear that I oppose true fossil fuel subsidies. In fact, I support “antisubsidies” – higher taxes – for fossil fuels in order to incentivize conservation and promote renewables (and again, I think it can be done in a revenue-neutral manner). But I do think the discussion should be intellectually honest, and we shouldn’t lump money destined for research into carbon sequestration into all-encompassing “oil subsidies.”
Yesterday the American Petroleum Institute conducted a blogger’s conference call to talk about various energy issues that they are focused on. I used to regularly attend these calls, but things have been quite busy and it has been a while since I participated. But I thought it would be worthwhile to check in and find out which issues they are currently occupied with. I asked one question on cap and trade during the call (see below).
The API listed three key areas that they are focused on. These are the Waxman-Markey climate bill, which they think will cost jobs (particularly in the energy industry), domestic access to petroleum resources, and taxation of the oil and gas industry. Participating from the API were:
MODERATOR: Jane Van Ryan, API
Jack Gerard, President and CEO, API
John Felmy, Chief Economist, API
Doug Morris, API
Kyle Isakower, API
The bloggers on the call included:
- Byron King, Whiskey and Gunpowder
- Gail Tverberg, The Oil Drum
- Geoff Styles, Energy Outlook
- Lew Waters, Right in a Left World
- Nan Swift, FreedomTalks
- Robert Rapier, R-Squared
The audio and transcript can be found here. In his opening statement, Jack Gerard happened to mention recent testimony of Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist of the US Treasury, in which he justified higher taxes on the oil industry by suggesting that current tax policies have led to overproduction by the industry. That is simply astonishing. Yes, it must be overproduction that has caused our oil imports to increase year after year to the point that we import 60% of what we use. One wonders what the import level will reach once this domestic “overproduction” is reined in through punitive taxes. For a bit more on Krueger’s testimony, see:
Alan B. Krueger, assistant US Treasury secretary for economic policy, mentioned that the administration was looking at other industries’ tax breaks during a Sept. 10 hearing by the Senate Finance Committee’s Energy, Natural Resources, and Infrastructure Subcommittee on the White House’s Fiscal 2010 oil and gas tax proposals.
When a subcommittee member, Jim Bunning (R-Ky.), asked him if the administration was currently singling out the oil and gas industry as it seeks tax incentive repeals, however, the US Department of the Treasury official replied, “That is correct.”
Gerard said he continues to be amazed by Obama administration statements that oil and gas tax incentives should be repealed to prevent overproduction of domestic resources. “The Treasury Department’s Green Book says there’s too much oil and gas production in the United States. We think that’s laughable. We think there needs to be some serious dialogue about what these proposals mean and about ways to get back to producing more oil and gas,” he said.
Also see Geoff Styles’ analysis of the issue:
Back to the call, I get concerned about proposals in which the price tag is vaguely defined. I would much rather see a direct tax on gasoline in which the impact can be modeled, over a new system whose overall impact on prices is uncertain. The latter is a big economic risk to me. So I asked a question about cap and trade, with Geoff Styles following-up.
11:16 MS. VAN RYAN: Another question? Robert, I know that you sent one to me by e-mail. Would you like to pose that question yourself?
11:24 MR. RAPIER: Yeah, I’ll do that. Yeah, the question was, I understand the concern about the cap-and-trade legislation; I have similar concerns. I am wondering if you have an alternative proposal; if there is any kind of legislation for cap-and-trade that you could get behind that achieves the same goals?
11:46 MR. GERARD: We haven’t. There has not been a proposal out there yet, Robert, that we have gotten behind. We think now is the time for a reset. There was a lot of focus on this early on in the Waxman-Markey bill. There was a lot of effort gone into it and it just came out in the wrong place. So what we have been attempting to do over the past few months is to point out the significant flaws in that legislation with the hope and expectation that we can help educate policymakers and the public.
And what we found is that when you begin to educate, not only does it resonate but it is clearly understood. The House exercise was focused primarily on the utility area or consumers’ bills, industrial bills that we often think of that you get at home to pay for your heating, your cooling, et cetera. But it almost totally left out the fuels question. And that is why 44 percent of all the emissions – or I should say refineries – will be held responsible for 44 percent of all the emission and yet given only 2.25 percent of allowances to transition us to a carbon-constrained world. So the net effect of that is – and I am oversimplifying this now – is that you’ve shifted the cost onto those who use fuels.
And that is why you see the farm bureau, you see the truckers, you see small business and others. When they began to see through the dust of the activity in the House, they say, well, what happened is we are looking at our utility bills and the Congress made an effort to transition us over time to a carbon-constrained world and they tried to provide some mitigating factors – in this case, allowances – to do that, but on the fuel side, we got totally forgotten. So anybody who drives a pickup truck, a car, rides the bus, the train, flies on an airplane is going to have an almost immediate impact as a result of Waxman-Markey.
And so in educating on that front, I believe we now have their attention that we have got to look at that question. And we internally, and as an industry, are developing further thoughts and ideas, if you will, as to how best address the fuel question and how it fits into the broader framework of a carbon-constrained world.
14:13 MR. STYLES: Jack, this is Geoff Styles. Could I follow up on that?
14:16 MR. GERARD: Please.
14:17 MR. STYLES: Because I certainly share your concern about the disproportionate way that Waxman-Markey doles out the free emissions allowances. In conversations with some of the folks who have been supporting the bill, I get a sense that there is a belief out there that, to some extent, maybe to a significant extent, they feel that the costs that would be imposed on the refining sector would somehow be absorbed by the refining sector and not actually passed on to consumers. Has API done anything looking at, you know, to what degree, any degree, of cost absorption by the refining sector as opposed to simply shifting the market pricing points, and in effect, pushing it on to consumers would take place?
15:11 MR. GERARD: Let me answer that generally. And I will turn to our chief economist, John Felmy, afterwards to see if he can add anything to it. My simple response would be unless you can repeal the laws of economics and supply and demand, that is the only conditions under which that thought would work because it just doesn’t make any sense.
What we are talking about here is significant costs. We are not talking about nuances around the edge. And just as I mentioned earlier, some of our analysis shows you would drive gasoline over $4 a gallon in the current environment. And so, you know, potential job loss of 2 million jobs. We are not talking a penny or two here. We are talking about quarters and dollars.
And how they could come to that conclusion might give them some political cover in trying to justify what they have asked for in the bill. But I don’t see how it makes any economic sense and frankly, it is unrealistic. Now, let me turn to an economist to give you a real answer. How is that?
16:14 JOHN FELMY: Well, if I could just add, I mean, that is absolutely right. There are two key factors. First of all, the emissions that the refiners themselves produce – they are competing on a world scale with international refiners. And we had commissioned EnSys to take a look at that. And it clearly showed that it would be a severe and negative implication for refining capacity in the U.S. because of an inability to be able to compete.
But more importantly on the consumption side and a sense of being responsible for the emissions from the tailpipes of your users, I think it is helpful to look at the current refining situation right now. In the second quarter of this year, almost every refiner lost money. And in the fourth quarter of last year, basically, there was a complete inability to pass along any cost changes.
And so with that kind of market conditions, primarily driven by international competition with a lot of, for example, gasoline on world markets from places like Europe and so on, I fail to understand how there is that ability to be able, from an economic sense, to have that happen. Analytically, you have got a weak gasoline market. You have got a lot of supply on world markets. And that competitive aspect, by most analysts, is expected to remain.
17:33 MR. STYLES: So in effect then, John, what you are saying, I think, is what I concluded a long time ago, which is if refineries are expected to absorb this, they will absorb it by going out of business.
17:44 MR. FELMY: Exactly. If you are already losing money and you raise your costs and you have no ability to address that, the margins already were low when they were positive, and when they are negative, there is nothing to give away.
17:58 MR. STYLES: Thank you.
18:00 MR. FELMY: And with, you know – we have got three broad classes of refiners in this country. You have got the big ones, which are about 50 percent; you have got about 25 percent, which are the big independent ones that are not integrated; and then a lot of very small refiners that would really take a beating in that environment.
Following that exchange, I got a bit distracted with juggling cats and never had a chance to ask another. But if you are interested in the rest of the discussion, you can access the transcript and audio at the link.
Thanks to a reader for bringing this story to my attention:
The Minnesota-based startup turns cellulosic biomass into something called levulinic ketal, a brand-new molecule that can be made into a host of industrial chemicals.
Segetis wants to make mixed biomass into a hitherto unknown chemical, and turn it into a variety of industrial chemicals. That could give it an entrée to the trillion-dollar global chemical market, if it can scale up to the task.
Thanks to a $15 million investment from Khosla Ventures, doled out in $5 million per year increments starting in 2007, the two-year-old startup has started making its new chemical – levulinic ketal – at a 300,000 pound-per-year test plant that opened in January, CEO Jim Stoppert said Wednesday.
Just to clarify, “brand new” ignores a lot of history. I have seen this many times before. A few years ago “ethanol from cellulose” was all the rage. This “brand new” process was going to end our dependence from foreign oil. In fact, cellulosic ethanol was commercialized in the U.S. a hundred years ago. Today’s efforts are mostly variations on that 100-year-old theme.
I can’t trace the history of levulinic ketal back 100 years, but there are substantial commercial efforts that precede the work of Segetis. A company called Biofine Renewables, LLC, of Waltham, Massachusetts started up a 1 ton per day pilot plant in 1998 to produce levulinic acid from biomass – and then built a commercial scale facility in Italy. Biofine had partnered with several branches of the U.S. government on this effort, including NREL and PNNL. You can read a bit more about their technology here.
The story above discusses levulinic “ketal”, which is produced from levulinic acid. That isn’t new either; here is a patent from 1991 that mentions the synthesis of levulinic ketal. In fact, it is very rare that something “completely novel” is invented. Almost all inventions build upon a rich body of previous work. When one reads about a “brand new biochemical”, the historical context is often lost. (If you really want to dig into the details, see the Segetis patent here, which indicates that the ketal is in fact being produced from the acid in a separate step).
Not to say that the Segetis work isn’t quite interesting. I am very interested in thermochemical processing of biomass. I think there is a brighter future there than for biochemical processing of biomass. There are also lots of interesting specialty chemicals that one can make from various thermochemical processes (like pyrolysis). Cellulose, hemicellulose, and lignin are very interesting starting materials for a chemical process, and due to their complexity you might expect that some pretty novel chemicals could be built from them.
I will be interested to see what else is co-produced in the Segetis process. When you are working with biomass, because it is composed of a variety of different materials, reactions often lead to a variety of end products. I am trying to work my way through their patent, and they are laying claim to a wide variety of molecules, which I suspect are some of the co-products from the process. Their patent, by the way, has 141 claims, which is an awful lot compared to most patents I have looked at. Claims 1-22 have been canceled, however, which I suspect was because they discovered there was some history preceding the claims,
A couple of years ago I was thinking about the possible fates of various nations in a world in which depleting oil reserves begin to have a very strong impact on oil prices. I had visions of $100+ oil and eventually $5-10 gasoline, which would place a crushing burden on the U.S. economy.
Of course higher prices will motivate people to conserve (and will contribute to recession), and then you may find yourself in a situation in which the supply/demand balance once again tips toward excess supply (as we found ourselves in as oil approached $150/bbl). Prices fall. The economy starts to recover. What happens then? Prices rise, putting the brakes on recovery. This is what I postulated in The Long Recession. Today I saw that someone else had weighed in with the same general thesis:
“The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession,” wrote Steven Kopits, managing director for U.K.-based energy-consulting and -research firm Douglas-Westwood LLC in New York.
Long recession, perpetual recession – the idea is the same. If demand starts bumping back up against supply because economies are heating back up, it will be very tough to dig out of a recession for very long for countries that rely heavily on oil imports. Maybe we aren’t there yet. Maybe we have another cycle to go. But I see this as a very plausible scenario.
One country that I have long felt is very well-equipped to thrive as oil prices go higher is Brazil. In fact, as I was preparing to buy Petrobras last year, I debated whether to instead buy into a closed end Brazil fund called iShares MSCI Brazil Index (EWZ). My reasoning was that as oil prices climb, the Brazilian economy stands to benefit in multiple ways.
There is of course the obvious in that Brazil has very large oil reserves relative to their population size, and their oil production is on the rise. It therefore stands to see cash flow into the country increase as they begin to export oil. I would expect to see consumer spending rise, benefiting many sectors in the country. For countries that wish to replace oil with alternative energy, Brazil is a key provider there as well. There is probably nobody better at efficiently producing ethanol from sugarcane. Their location in the tropics also means they have good solar insolation, improving the prospects for solar power (as well as for biomass, since they also get ample rain). All in all, they are abundantly blessed with fossil and renewable energy.
I saw another story today from MarketWatch that emphasized some of these very points and reminded me why I selected Brazil as a country with a bright outlook as oil production worldwide depletes:
SAN FRANCISCO (MarketWatch) — The Brazilians are coming and they are buying, securing a firm foothold in weakened corners of U.S. agriculture. JBS S.A., the world’s biggest beef producer, just added Pilgrim’s Pride to its empire, speeding the Texas-based chicken producer’s exit from bankruptcy with an $800 million cash payment that will give JBS 64% of the company’s new stock.
JBS is not the only Brazilian outfit feeling its protein these days. The country’s economy is on a tear, much of it fueled by resurgent commodities. It posted surprisingly strong 1.9% GDP growth in the second quarter, making it the first Latin-American nation to emerge from the global recession.
Petrobras (PBR), Brazil’s state-controlled oil company, is in the thick of it. Over the past few weeks, it announced several major new deepwater oilfield discoveries, prompting talk that it might swap some of its bulging reserves for up to $25 billion worth of new shares in the company.
The new found oil wealth augments Brazil’s already booming sugar cane-based ethanol exports and vast hydroelectric supplies. Together, they have put the country in the enviable position of becoming a net energy exporter.
The article goes on to say that the Brazilian stock market is up 60% for the year.
So far, my decision to buy PBR over EWZ has proven to be the correct one. In the not quite 10 months since I bought it, the PBR is up 160%. The return from EWZ has been nothing to sneeze at though, up 117% over the exact same time period. This reiterates my belief that Brazil will be a safe haven in an oil-induced financial storm.
I just read an interesting story from Reuters courtesy of a reader:
DUNSFOLD PARK, England (Reuters) – A compost bacteria bred by a British company could be set to transform both the profitability and environmental credentials of the U.S. ethanol industry.
“The application of our technology results in the greening of corn ethanol,” Hamish Curran, chief executive officer of TMO Renewables Ltd said in an interview on Tuesday.
OK, I am listening. Just to reiterate, I don’t think the political support in the U.S. for corn ethanol is ever going to go away, so I would certainly like to see it “green up.” Despite sometimes being viewed as simply “anti-ethanol”, this has been my position for years. (See here or here). So I am certainly interested in technologies that can improve ethanol’s energy balance.
Incidentally, as I frequently do when I hear about a “new” technology, I dug back in my G-mail to see if I had any references to it. I have over 10,000 G-mails archived, so sometimes it is hard to recall if I have e-mails regarding a specific technology. In fact, I have exchanged about a dozen e-mails about TMO Renewables over the past 2 years. I even had some questions answered by their Technical Director over costs and ethanol tolerance of the microbes.
Curran said the TMO technology uses a by-product of the U.S. corn ethanol industry, distillers’ grains (DDGS), converting it into additional ethanol and boosting production levels by about 15 percent.
He said U.S. corn ethanol plants also currently use large amount of energy drying the DDGS before selling it as fodder for livestock.
The TMO process uses the material while still wet, allowing substantial energy savings as well as additional output, raising profit margins by 50 to 60 percent, he said.
Therein lies a potential accounting problem that could result in a conclusion of no greenhouse gas savings. The current energy balances for corn ethanol (the “official” balances calculated by the GREET model, which the U.S. government relies on) already use the DDGS to help improve ethanol’s energy balance. If they consume the DDGS in the process, they may run into a problem based on the way we have historically calculated the energy balances.
Consider this example (for illustrative purposes only, but not far off from the 2004 USDA report on ethanol’s energy balance). Let’s say I put 100 BTUs of fossil fuel into my ethanol production process. In the process, I make 110 BTUs of ethanol and some quantity of DDGS. The way the USDA has accounted for the energy balance is that they assign some quantity of the energy inputs to the DDGS. For instance, let’s say I allocate 45 BTUs of the energy inputs to the DDGS. That leaves 55 BTUs for the ethanol, and voila, my energy balance for ethanol is 2/1 (110 BTUs out/55 BTUs in).
So we now lose the ability to allocate energy inputs to the DDGS because we are now using DDGS to produce ethanol. While the “true” energy return might indeed be better, the previous accounting method may not reflect that because we can no longer split those energy inputs.
Now the energy return might look something like this. If we can produce an additional 15% ethanol in our previous example, we now might have something like 130 BTUs of ethanol out and 100 BTUs of fossil fuel in (in fact there would be additional BTUs needed to distill the new ethanol production, but savings from not having to dry the DDGS). All of the energy inputs get allocated to ethanol now, and even if we presume a generous 25% savings on energy inputs due to not having to dry the DDGS, the prior accounting method that USDA has used may show a drop in the energy return (unless they again change the accounting method). This could result in little or no calculated greenhouse gas savings (since earlier savings were based on the earlier accounting method), and thus no “greening” credit.
This is not to say that this new bacteria may not be well worthwhile. But some people have gotten quite creative with ethanol accounting by using DDGS, and we have long heard how wonderful DDGS is and how it helps out with the ethanol story. This new bacteria may giveth, but it also taketh away a story that the ethanol lobby has come to rely heavily upon.
- Accsys Technologies
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