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Looks Like I Struck a Nerve

I started to notice a trend in the comments following my latest Forbes essay about the redundant nature of ethanol subsidies now that mandates via the Renewable Fuel Standard (RFS) are in place. Several comments in a row seemed to be regurgitated talking points that were just red herrings with respect to the point I was making. I knew that meant that somewhere a call had gone out to ethanol supporters to speak out against me. I now know the source, and at the end of this essay, I offer a debate challenge to the organization that issued the talking points.

To review, my point is simple. Someone said that it would be great if I could reduce it to a talking point, so here it is: Mandating ethanol while also subsidizing it is like paying people to obey speed limits.

If that isn’t self-explanatory, here is the logic behind the analogy. We have laws that govern the speed limits on our roadways. You can be penalized if you violate these limits, thus there is an enforcement mechanism in place that compels people to obey the law.

This is the same as the ethanol mandate. We have a law in place that directs refiners to blend a certain percentage of ethanol into their fuel. There are penalties for failing to meet those mandates, thus there is an enforcement mechanism in place.

Now would anyone think it was a good idea if we started using tax dollars to pull people over and pay them for complying with speed limits? I think most people would agree that this would qualify as a stupid idea and a waste of taxpayer money – especially when you consider that some government agency would have to run and audit the program for compliance. It would certainly be redundant given that there are already penalties in place for failure to obey.

With the ethanol subsidies, we are paying people to obey the speed limit. And the ethanol lobby was a little concerned that I had called attention to that fact. Turns out that Growth Energy, the ethanol lobbying organization whose co-chairman is General Wesley Clark, issued the following talking points to their members and asked them to rise up in a groundswell of opposition.

An excerpt from the e-mail they sent out (courtesy of this link):

Here are some points to consider, and remember to use these in your own words:

* What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry. Does Forbes really endorse raising taxes in this tough economic climate? Does Rapier really think raising taxes on an emerging industry is smart?

* With domestic, green energy the likely source of hundreds of thousands of new jobs in the United States, why would Forbes and Rapier force a job-killing tax increase on ethanol?

* If Rapier is so eager to tax American energy companies, why not end the massive tax subsidies and tax breaks that Big Oil and gas companies get? By some estimates, the oil and gas industry will get around $29 billion in tax breaks from 2008 to 2013. That’s an enormous handout to an industry that sends a billion dollars a day overseas – often to countries that are hostile to the United States.

* If the choice were to give a tax credit that helps an American farmer and an American engineer in an American ethanol plant, or giving a tax break to an oil man who is doing business in the Middle East, I’d rather the tax credit stay here on American shores..

* The VEETC has reduced farm payments and increased tax revenue that completely offsets whatever the cost of that tax credit is – and in fact generates additional revenue for the federal treasury. In 2007, the $3.3 billion VEETC costs saw farm payments reduced by $8 billion, and generated $8 billion in tax revenue, according to an Iowa State University study.

That is absolutely priceless. None of those talking points actually address my argument. But apparently they were counting on some of their members not being able to think for themselves and just go out and repeat the talking points. So, a few showed up at Forbes and did just that. I answered each one of them – pointing out the obvious flaws in their thinking –  and of course none of them responded because they didn’t have anyone telling them what to say. 

But hey, I am a big boy. I can take the heat. Let’s take their talking points and address them, just to show how silly they are.

Point 1: What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry.

Response: Right. Taking a tax credit away that is collected by the oil companies – which last year amounted to about $5 billion – and giving it back to taxpayers is a tax increase. That’s straight out of Lobbying 101, where up is down and green is red if that’s what your client wants.

I would love for someone to walk me through just how this amounts to a tax increase on this “innovative, domestic energy industry.” Anyone? Remember, the oil companies are still mandated to blend the same amount of fuel, whether they collect a subsidy or not. Point 1 – as silly as it was – refuted.

Point 2: With domestic, green energy the likely source of hundreds of thousands of new jobs in the United States, why would Forbes and Rapier force a job-killing tax increase on ethanol?

Response: Repeat the “tax increase” canard, and hope it begins to take hold with their members (and hopefully the public). “This guy wants to raise our taxes!” Remember, at issue here is $5 billion (and rising) of taxpayer money that is being paid out in unneeded subsidies. Eliminating that is a tax increase in their world? There are no words.

Point 3: If Rapier is so eager to tax American energy companies, why not end the massive tax subsidies and tax breaks that Big Oil and gas companies get?

Response: This one is a beauty. First, the point is completely irrelevant, given that the oil companies would still be under mandate to buy the product. Whether they are being subsidized by a trillion dollars a year has no bearing at all on this argument, as it doesn’t impact how much ethanol they are mandated to buy. It is just one more red herring.

But the really funny part about this point is the oil companies are the ones receiving the subsidy in this case. The ethanol industry has told us that many times. If Growth Energy is suggesting we get rid of oil company subsidies, aren’t they just making my point for me?

It wasn’t so long ago that Brian Jennings, the executive vice president of the American Coalition for Ethanol – a fellow ethanol lobbying organization (there seem to be quite a few) – said matter-of-factly that the blender’s credit does not benefit ethanol producers, that “it is actually an incentive the petroleum industry receives for blending ethanol into gasoline.” Vinod Khosla has made the same argument. Here he is on this issue:

Ethanol has a subsidy, but the farmer doesn’t get any of that. What I heard, is that well past midnight when this was being debated in the conference committee, the oil companies inserted 2 words into the language, calling this subsidy a blender’s credit. So the person who is blending it with gasoline gets it. All $2 billion of it last year [2005] was collected by the oil companies. Like they needed more money.

So which is it, ethanol lobby? How exactly is a credit received by the oil industry for complying with a law to blend more ethanol supposed to benefit the ethanol industry? Are you afraid the oil company wouldn’t blend the ethanol if the subsidy wasn’t there? I know I am repeating myself, but you don’t seem to get it: They are compelled to do so by law regardless. Finally, why do you wish to protect the subsidy when members of the ethanol lobby have pointed out that it is really an oil company subsidy?

Point 4: If the choice were to give a tax credit that helps an American farmer and an American engineer in an American ethanol plant, or giving a tax break to an oil man who is doing business in the Middle East, I’d rather the tax credit stay here on American shores.

Response: But doesn’t the “oil man” get this tax credit? You guys are talking out of both sides of your mouth, and it isn’t a pretty picture. I think you have set a record for red herrings in a response.

Point 5: The VEETC has reduced farm payments and increased tax revenue that completely offsets whatever the cost of that tax credit is…

Response: Irrelevant even if true, because once more I remind you that the blender still has to buy the ethanol. So if it really had the offsets you claim, that won’t change by eliminating the subsidy.

If that’s the best you have, then I can safely conclude that the emperor has no clothes. You didn’t address my arguments at all, because you know you can’t. Of course people might be curious as to why you have responded in such a way, but I know why you did. The last thing you want is for people to confront the costs of ethanol at the pump, where they might start to think that our ethanol policy isn’t such a good idea after all. That is what you truly fear.

In conclusion, I would like to issue a debate challenge to Growth Energy. Instead of hiding behind e-mail messages to their members, I challenge them to take up a three-round written debate on the matter. I propose the following:

Resolved: Implementation of the RFS negates the need for the tax credit.

If you are up to it, pick the best person from your organization. Better bring your “A-Game”, though. Or, if that e-mail represents your “A-Game”, you might as well forfeit now.

February 18, 2010 Posted by | energy policy, ethanol mandate, ethanol subsidies, farm policy, Growth Energy, politics | Comments Off

A Redundant Subsidy

My latest is up at Forbes right now. It is about the redundant nature of our current ethanol subsidy:

A Redundant Subsidy

An excerpt:

As many ethanol producers have argued – the gasoline blender and not the ethanol producer receives the subsidy anyway. The gasoline blender – ExxonMobil for instance – buys ethanol for $1.70 per gallon (currently), receives a tax credit worth $0.45 per gallon (the credit was reduced to that level in 2009), and then blends it into gasoline that is presently wholesaling at approximately $1.90 per gallon. With the tax credit, the current price of ethanol on an energy equivalent basis to gasoline is just about equal to the $1.90 wholesale price of gasoline. So the tax credit compensates the gasoline blender for blending in a higher cost feedstock.

But what if the tax credit was not there? Would ExxonMobil blend less ethanol? No, they are mandated to blend a certain amount, and if they fail to do so they are penalized. So in the event that they did not get the tax credit, then the energy equivalent price they would pay for ethanol would be about $2.50 per gallon (based on ethanol’s current spot price). At a 10% blend, this would mean that at current prices the price charged for a gallon of ethanol-blended-gasoline would need to rise about six cents to keep the gasoline blender’s costs equivalent to the cost they currently have with the tax credit in place. The only difference would be that the cost would then be borne directly by drivers in proportion to the number of miles they drive.

I also walk through the history of U.S. ethanol subsidies. If they haven’t served their purpose by now, they never will.

February 16, 2010 Posted by | energy policy, ethanol mandate, ethanol subsidies, farm policy, politics | Comments Off

Prices of Various Energy Sources

As we continue to develop biomass as a renewable source of energy, it is important to keep the cost of energy in mind, because this has a very strong influence on the choices governments and individuals will make. I sometimes hear people ask “Why are we still using dirty coal?” You will see why in this post.

Last year I saw a presentation that projected very strong growth in wood pellet shipments from Canada and the U.S. into Europe. My first thought was “That doesn’t sound very efficient. Why don’t we just use those here in North America?”

It didn’t take very long for me to find out the answer to that. It is because wood pellets are much more expensive than natural gas in North America. On top of that it takes more effort to use wood for energy than it does natural gas. That combination means that wood has a tough time competing with natural gas in North America.

When I was looking into that issue, I compiled a list of the price for various energy types on an energy equivalent basis. The price is as current as possible unless noted. I have converted everything into $/million BTU (MMBTU), and the sources are listed below.

My preference is to use EIA data over NYMEX data because the former is an archived, fixed number. I have included energy for heating and for various transportation options. For comparison I also included the cost of electricity and the cost of the ethanol subsidy/MMBTU of ethanol produced.

Current Energy Prices per Million BTU

Powder River Basin Coal – $0.56
Northern Appalachia Coal – $2.08
Natural gas – $5.67
Ethanol subsidy – $5.92
Petroleum – $13.56
Propane – $13.92
#2 Heating Oil – $15.33
Jet fuel – $16.01
Diesel – $16.21
Gasoline – $18.16
Wood pellets – $18.57
Ethanol – $24.74
Electricity – $34.03

Observations

It isn’t difficult then to see why wood pellets have a difficult market in the U.S. For people with access to natural gas, they are going to prefer the lower price and convenience of natural gas over wood. For Europe, their natural gas supplies aren’t nearly as secure, so they have more incentive to favor wood as an option.

The cost of the ethanol subsidy is interesting. We pay more for the ethanol subsidy than natural gas costs. However, if you consider that we are paying a subsidy on a per gallon basis – and a large fraction of that gallon of ethanol is fossil fuel-derived, the subsidy for the renewable component is really high.

For instance, if we consider a generous energy return on ethanol of 1.5 BTUs out per BTU in, that means the renewable component per gallon is only 1/3rd of a gallon. (An energy return of 1.5 indicates that it took 1 BTU of fossil fuel to produce 1.5 BTU of ethanol; hence the renewable component in that case is 1/3rd). That means that the subsidy on simply the renewable component is actually three times as high – $17.76/MMBTU. Bear in mind that this is only the subsidy; the consumer then has to pay $24.74/MMBTU for the ethanol itself.

Sources for Data

Petroleum – $13.56 (EIA World Average Price for 1/08/2010)
Northern Appalachia Coal – $2.08 (EIA Average Weekly Spot for 1/08/10)
Powder River Basin Coal – $0.56 (EIA Average Weekly Spot for 1/08/10)
Propane – $13.92 (EIA Mont Belvieu, TX Spot Price for 1/12/2010)
Natural gas – $5.67 (NYMEX contract for February 2010)
#2 Heating Oil – $15.33 (EIA New York Harbor Price for 1/12/2010)
Gasoline – $18.16 (EIA New York Harbor Price for 1/12/2010)
Diesel – $16.21 (EIA #2 Low Sulfur New York Harbor for 1/08/2010)
Jet fuel – (EIA New York Harbor for 1/12/2010)
Ethanol – $24.74 (NYMEX Spot for February 2010)
Wood pellets – $18.57 (Typical Wood Pellet Price for 1/12/2010)
Electricity – $34.03 (EIA Average Retail Price to Consumers for 2009)

Conversion factors

Petroleum – 138,000 BTU/gal
Gasoline – 115,000 BTU/gal
Diesel – 131,000 BTU/gal
Ethanol – 76,000 BTU/gal
Heating oil 138,000 BTU/gal
Jet fuel – 135,000 BTU/gal
Propane – 91,500 BTU/gal
Northern Appalachia Coal – 13,000 BTU/lb
Powder River Basin Coal – 8,800 BTU/lb
Wood pellets – 7,000 BTU/lb
Electricity – 3,412 BTU/kWh

January 19, 2010 Posted by | coal, EIA, electricity, Energy Information Administration, ethanol prices, ethanol subsidies, gas prices, oil prices | 1 Comment

Does Ethanol Reduce Petroleum Imports?

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. (SourceRFA: 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. (SourceEIA: 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 (SourceEIA: 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. (SourceEIA: 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.

Conclusions

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.

Methodology

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.

Notes

* 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.

September 27, 2009 Posted by | EIA, Energy Information Administration, ethanol, ethanol subsidies, gasoline imports, oil imports | 202 Comments

Oil Companies Acquire More Ethanol Plants

As I noted in my essay Big Oil Buys Big Ethanol, I expected that we would see more oil companies buying up troubled ethanol assets. Per the Houston Chronicle, Sunoco has become the latest:

Oil companies shop for discounted ethanol plants

FULTON, N.Y. — When Sunoco closed this week on the acquisition of a bankrupt ethanol plant for pennies on the dollar, it became just the latest oil refiner to step into the alternative fuels market.

Traditional refiners under pressure to reduce emissions are finding new avenues to meet evolving environmental standards, and finding big bargains along the way.

However, I think the article largely misses the point of why these transactions are taking place:

The plant is close to Sunoco’s main operations in the Northeast where many of its 4,700 gas stations are concentrated, but the shift in U.S. energy policy was a big motivator.

The entry of traditional oil companies is part of a natural industry evolution, [Matt] Hartwig [of the Renewable Fuels Association] said.

I don’t think these transactions are taking place because oil companies want to go green, or because they see this as a fantastic growth opportunity. They are doing this merely because they have been required to put ethanol in their gasoline. To meet their commitments, they can either purchase ethanol from the ethanol producers, or they can buy their own ethanol plants. If you can acquire ethanol plants for pennies on the dollar, it is cheaper for them to go that route. If, on the other hand they thought the mandates were going away, I don’t think they would be jumping in.

But don’t be surprised if the top U.S. oil companies — Exxon Mobil Corp., Chevron Corp. and ConocoPhillips — don’t make the leap, Kment said.

“For them, a 50 million gallon, or even a 100-million gallon plant would only produce a drop in the bucket of their total needs,” Kment said.

But again, it isn’t about their total needs. It is about meeting the ethanol mandate, which they can do by producing “a drop in the bucket of their total needs.” This isn’t about oil companies trying to become ethanol companies. The scale of ethanol is far too small for that. Even if the oil companies bought up all of the ethanol capacity in the country, it would still be only a drop in the bucket. But it would enable to them to fulfill the government mandate.

June 19, 2009 Posted by | ethanol mandate, ethanol subsidies, oil companies | 13 Comments

How to Calculate Ethanol’s Value

There was a comment following the previous post that claimed that ethanol producers are making money – minus subsidies – at $1.75 a gallon. I attempted to set the record straight in the comments, but I thought this was probably worth a post.

The way the blender’s credit works is that gasoline blenders get a credit – recently reduced to $0.45/gal – against the federal gasoline taxes they have to pay for each gallon of ethanol blended into the gasoline pool. However, it is not true that this subsidy actually benefits the oil companies. Ethanol proponents like to make that claim, but any time there is talk of getting rid of the credit, they are the ones who scream loudly. You won’t hear oil companies lobbying to keep it. Thus, it should be clear who really benefits.

If you think about it, though, isn’t it kind of silly to have a subsidy (and I haven’t even mentioned the additional state subsdies) on something that already has a mandate for its use? Are we going to use less ethanol if the subsidy is taken away? No, because we have a mandated amount that has to be blended into the gasoline pool. What would happen if the subsidy is removed – and this is why the subsidy stays – is that consumers would pay more for their gasoline, and ethanol’s impact on gasoline prices would be more transparent.

Anyway, at the current price of around $1.75 a gallon, gasoline blenders are getting a discount of $0.45, paid for by tax dollars. Thus, the real price they are paying for ethanol is $1.30 a gallon today – too low for the ethanol producer to make a living. That is why the ethanol industry – after 30 years of direct subsidies – still can’t survive without them. If you took away the mandates and the subsidies, the entire corn ethanol industry would go bankrupt. Actually, a fair chunk is going bankrupt even with subsidies and mandates.

You can also use a different route to determine that the real, unsubsidized price of ethanol today would be $1.30 a gallon. Last Friday on the NYMEX, gasoline closed at $1.95/gallon. (Note that this price does not include state and federal taxes). Because ethanol contains 67% of the BTU content of gasoline, the price should reflect this. Thus, if I am a gasoline blender, I would be willing to pay 67% of $1.95 for my ethanol, all other things being equal. That puts me at parity to what I am paying for gasoline. How much is that? $1.31. Ethanol would have to trade at or lower than this value, unsubsidized (and at the present price of gasoline) to compete in an open market.

So what if gasoline was trading at $3.00 a gallon? Then the gasoline blender would be willing to pay $2.00 a gallon for their ethanol. But when gasoline prices are rising, generally so are other fossil fuel prices. Because (corn) ethanol is so heavily dependent upon natural gas (for corn fertilizer and for distilling the ethanol) costs will generally have risen sharply for the ethanol producer. This is the vicious circle the ethanol producer is in, and it explains why the industry has been subsidized for 30 years.

Corn ethanol producers have to move away from fossil fuel inputs – or they need to otherwise find inputs that don’t normally track gasoline prices. This is why the sugarcane ethanol producer can compete on a level playing field with gasoline. The fertilizer inputs for sugarcane are much lower than for corn, and the distillation energy is provided by biomass. The only way the ethanol industry in the U.S. will be able to break free from the subsidies is to adopt similar practices.

June 7, 2009 Posted by | energy policy, ethanol, ethanol subsidies, politics, sugarcane ethanol | 77 Comments

Accoya, Ethanol, and an Anniversary

Coming up I have a book review ready to go for Green Algae Strategy: End Oil Imports And Engineer Sustainable Food And Fuel. However, I will wait another day or so to put that out there. For now, I will just share a couple of interesting links that readers sent to me. On the topic of my current job, a reader just noted that TreeHugger has an article (and pictures) on the bridge in the Netherlands that I have mentioned a couple of times:

Wood Bridge In Netherlands As Strong as Steel and a Lot Prettier

Have I mentioned that I love wood as a building material? If sustainably harvested it provides a strong, beautiful material that can last for centuries and sequester CO2 the whole time. People have built bridges from it forever, but in such exposed circumstances they don’t last forever.

But now there are better wood preservation techniques, and Kris De Decker of No Tech Magazine points us to a lovely new bridge in the Netherlands, purported to be the first wooden bridge in the world that can support the heaviest load class of 60 tons.

It is made from Accoya Wood, where source-certified sustainable species, including FSC certified wood, is treated by acetylation. The supplier, Titan Wood, writes:

Acetylation effectively changes the free hydroxyls within the wood into acetyl groups. This is done by reacting the wood with acetic anhydride, which comes from acetic acid (known as vinegar when in its dilute form). When the free hydroxyl group is transformed to an acetyl group, the ability of the wood to adsorb water is greatly reduced, rendering the wood more dimensionally stable and, because it is no longer digestible, extremely durable.

Second link, also brought to my attention from a reader, has the Wall Street Journal with their latest missive on ethanol:

Ethanol’s Grocery Bill

Both CBO and EPA find that in theory cellulosic ethanol — from wood chips, grasses and biowaste — would reduce carbon emissions. However, as CBO emphasizes, “current technologies for producing cellulosic ethanol are not commercially viable.” The ethanol lobby is attempting a giant bait-and-switch: Keep claiming that cellulosic ethanol is just around the corner, even as it knows the only current technology to meet federal mandates is corn ethanol (or sugar, if it didn’t face an import tariff).

As public policy, ethanol is like the joke about the baseball prospect who is a poor hitter but a bad fielder. It doesn’t reduce CO2 but it does cost more. Imagine how many subsidies the Beltway would throw at ethanol if the fuel actually had any benefits.

I close with a digression before returning tomorrow with regularly scheduled programming. Today, June 3rd, is my 20th wedding anniversary. Unfortunately, I am spending it in the Netherlands while my wife is in Texas. I don’t say this to generate sympathy, but rather to set the stage for some changes that I will be announcing soon. The nature of my job – having teams in both Texas and the Netherlands – means that I am away from home a lot. I knew I could do that for a while, but I have now been doing it for a year and a half. I always knew it wasn’t sustainable in the long run for me personally, and I am experiencing the limits of my sustainability. Interpret that as you will, but all will be made clear shortly.

Happy Anniversary Sandy. Wish I was home today.

June 3, 2009 Posted by | Accsys Technologies, ethanol subsidies, Titan Wood | 42 Comments

The 2009 EIA Energy Conference: Day 1

The Plenary

I covered Energy Secretary Steven Chu’s comments in the previous post. Here, I will cover the rest of Day 1. This is not so much a comprehensive summary as it is a collection of observations and things I otherwise found to be interesting. My notes at times are spotty, so if someone was there and feels like this essay contains an error, please let me know.

Following Chu’s talk, Professor William Nordhaus of Yale gave a talk entitled Energy and the Macroeconomy. I got called out during his talk, so I missed most of it. What I do remember him arguing is that oil embargoes are completely worthless, because oil is fungible. If Venezuela decided not to sell their oil to the U.S., they would end up selling it to someone else, which would displace some other seller, which at some point would end up with someone else selling it to the U.S. I missed the next point, but Gail Tverberg from The Oil Drum was there and said “a corollary of this is that there is no point in protecting the US oil and gas industry. We can just buy what we need elsewhere.”

Next up was John W. Rowe, CEO of Exelon, which has the largest market capitalization in the utility industry. John speaks very slowly, but he speaks with authority. I took quite a few notes during his talk. Rowe supports cap and trade as a way of controlling CO2 emissions. One thing that I am very interested in is the expected value of a ton of CO2 if a cap and trade law is passed (Full disclosure: This potentially impacts my current company as a price on carbon emissions could benefit us). John put up a slide that indicated (at least to me) that the price could be $125/metric ton. I saw other presenters who had values ranging from a few dollars up to $500. That last number was one that the presenter expected would be needed to make several of the more marginal technologies economical.

Rowe was clearly concerned about CO2 emissions, and pointed out that Exelon had far exceeded their targets for emission reductions by closing down inefficient coal plants. But he was also concerned about the impact cap and trade might have on electricity costs. In one example he gave, electricity costs in California could go from $0.18/kWh to $0.30/kWh.

The Future for Transport Demand

Thus ended the plenary, and I next attended The Future for Transport Demand. Speakers were Lew Fulton from the IEA, David Greene from Oak Ridge National Laboratory, and Lee Schipper from Stanford. The moderator was Andy S. Kydes from the EIA. Had the sessions not been concurrent, I would have attended What’s Ahead for Natural Gas Markets. But there is a pretty good summary of this session by Dave Summers.

Fulton said that the expectation of the IEA is that oil production would reach 105 million bpd by 2030. There was quite a bit of consensus that non-OPEC production has pretty well maxed out, and that the new production would come from OPEC. Fulton also mentioned that there is a lot of skepticism out there on biofuels.

David Greene followed, and gave perhaps the most sobering talk of the conference. He referred back to Fulton’s comments on OPEC filling the void, and essentially said “With all due respect, that’s not going to happen.” He also said that cellulosic ethanol “makes no sense” and that the IEA was engaging in wishful thinking. I was quite impressed with Greene as someone who really understands the seriousness of the problem, and that the future is likely to be quite different than the rosy projections.

Lee Schipper was up next. Schipper was quite witty, and sounded to me just like Richard Dreyfuss. (You can see a short video by Schipper here). I have often commented that we don’t seem to understand the scale differences between the energy we use and what biofuels could reasonably be expected to contribute. Schipper had a similar observation: “Our problem is that we can’t count.” He went on to say that even though China has very low levels of motorized transport, Chinese cities are already becoming frozen by traffic. Finally, in the category of stating the obvious, he said that “Transport is very politicized.”

Meeting the Growing Demand for Liquid Fuels

The next session featured Eduardo González-Pier from PEMEX, David Knapp from the Energy Intelligence Group and Fareed Mohamedi from PFC Energy. The moderator was Glen Sweetnam from the EIA. Dave Summers attended this session as well, and has quite a thorough account on his blog.

This panel engaged in a round-table discussion, and covered different areas of the world with respect to potential for increasing production. I will just add a couple of observations to Dave’s account. David Knapp was asked about Venezuela, and said he was very pessimistic. Brazil, on the other hand, was viewed as a success story, and Petrobras was singled out by Fareed as having a bright outlook. Of course I feel the same way, which is why I loaded up on Petrobras stock last November. (As I write this, that investment is up 106% in about 5 months).

Two of the more eyebrow-raising comments came from González-Pier, who predicted: 1) PEMEX can stabilize production at 3 million bpd for many years; 2). Mexico won’t become a net oil importer for 2 decades. Consider me a skeptic.

The last interesting bit in this panel was that a slide was put up that projected production costs for various technologies. Gas-to-liquids (GTL) came in at $40-$110/bbl, coal-to-liquids (CTL) came in at $60-$110/bbl, and production from oil shale came in at $50-$110/bbl. Again, consider me a skeptic, particularly over the lower end of these ranges. There are a couple of problems with these projections. First, because all of these technologies are highly dependent on the cost of energy, they will proceed along a sliding scale (the so-called receding horizon problem). Second, there is really very little data on what the economics of commercial facilities might look like over the long haul, because very few facilities actually exist. (In the case of oil shale, no facilities exist to my knowledge). So the projections are subject to the same criticisms I have offered up for cellulosic ethanol economics: They are projections based on precious little scaled-up operating data.

Renewable Energy in the Transportation and Power Sectors

The speakers for this session were Matt Hartwig from the Renewable Fuels Association (filling in for Bob Dinneen who had been called away), Bryan Hannegan from EPRI, Denise Bode, an enthusiastic Okie and CEO of the American Wind Energy Association, and David Humbird, a fellow Aggie now with NREL. The moderator was Michael Schaal (who I had lunch with the next day), Director of the EIA’s Oil and Gas Division (which also covers biofuels).

While Humbird seemed to have a good understanding of the some of the challenges of commercial cellulosic ethanol production (he specifically mentioned the logistical issue that I predict will be the death knell for conventional cellulosic ethanol), he nevertheless put up a slide that suggested production costs for cellulosic ethanol at $2.61/gal, and for gasification at $2.40/gal. While I agree with the relative positions of cellulosic versus gasification (long-term, I think gasification can be commercially viable) I don’t think there is any chance that a commercial cellulosic ethanol plant can get close to $2.61/gal. Maybe he was factoring in a tax credit of up to $1.01/gal for cellulosic ethanol; in that case his numbers would be in the ballpark of production costs that I have seen of around $4/gal.

But the thing that isn’t usually discussed in these sorts of analyses is “What assumptions are you making?” Are you assuming you are getting biomass from the immediate vicinity, and the process steam comes from $3 natural gas (or even cheaper coal)? It is quite easy to make overly optimistic assumptions that grossly underestimate production costs. I have seen this happen numerous times, and these sorts of assumptions have doomed many plants (of all sorts) once they start up and have to start operating in the real world.

Humbird also mentioned that it would be better to find microbes and yeasts that can produce gasoline and diesel instead of ethanol. Because hydrocarbons phase out of water, have higher energy density, and are compatible with our current pipeline systems, this sort of solution is potentially more practical. As Humbird mentioned, there is a lot of research project going on, both government and in private industry, in this area. Companies that Humbird mentioned were LS9, Amyris, Virent, and Coskata.

I had to take a call during the presentations, and only caught pieces of the rest. For Denise Bode’s, two things stood out. First, she was by far the most enthusiastic speaker I saw; a combination cheerleader and firebrand. Second, she mentioned that the U.S. is now the world’s largest producer of electricity from wind, a story that I had somehow missed when it was announced in February. I unfortunately missed all of Bryan Hannegan’s talk.

Matt Hartwig’s talk was what one would expect from a non-technical person who works for the ethanol lobby. We got the standard talking points, a couple of which bear repeating. When asked if corn ethanol could ever be competitive without the subsidies, he not suprisingly claimed that the ethanol subsidy actually benefits oil companies. This is of course incredibly misleading. While the blender’s credit is indeed received by the oil companies (initially as an incentive to buy ethanol that was otherwise uncompetitive), the primary beneficiary is the ethanol industry. If you disagree, ask yourself which industry – oil or ethanol – is constantly lobbying to keep the credit. Hint: It isn’t the oil industry. So one would certainly be puzzled by the notion – if Hartwig’s claim is true – why the ethanol industry lobbies to keep a credit that benefits the oil industry. If you ever hear an ethanol booster make that claim, tell them “Then let’s get rid of the credit.”

The other notable thing Hartwig did was fire a preemptive complaint over the upcoming EPA ruling on GHG reduction for ethanol. In 2007, Congress ruled that ethanol must reduce emissions relative to gasoline by 20%. The problem – which I warned about at the time – is that politics are going to play a big role. While the methodology and results have yet to be announced, ethanol interests are jockeying for position which is exactly what would be expected given the way this was set up.

Imagine that the EPA comes up with the wrong answer – according to the current administration. What happens then? Political pressure to come up with the right answer. In this case, Hartwig was complaining about inclusion of land use issues (explained in this article) which some studies have found cause ethanol to come out worse than gasoline with respect to GHG emissions. The industry will of course fight that tooth and nail. However, such a ruling would be a strong incentive for the industry to minimize fossil fuel usage in the production of ethanol.

Thus concluded Day 1. In the next installment, I will cover the panel session that I was on, as well as the session Investing in Oil and Natural Gas.

April 11, 2009 Posted by | EIA, Energy Information Administration, ethanol, ethanol subsidies | 5 Comments

The WSJ Hates Ethanol

Actually, according to them everybody hates it:

Everyone Hates Ethanol

I can assure them that corn farmers, ethanol producers, and ethanol lobbyists don’t hate ethanol. :-) But they are correct that a coalition of strange bedfellows has united in opposition to our ethanol policy.

The article makes a lot of good points, but it is quite harsh:

These days, it’s routine for businesses to fail, get rescued by the government, and then continue to fail. But ethanol, which survives only because of its iron lung of subsidies and mandates, is a special case. Naturally, the industry is demanding even more government life support.

Corn ethanol producers — led by Wesley Clark, the retired general turned chairman of a new biofuels lobbying outfit called Growth Energy — want the Obama Administration to make their guaranteed market even larger. Recall that the 2007 energy bill requires refiners to mix 36 billion gallons into the gasoline supply by 2022. The quotas, which ratchet up each year, are arbitrary, but evidently no one in Congress wondered what might happen if the economy didn’t cooperate.

I laid out this scenario in A Vicious Circle. It goes like this.

1. First we create policies to subsidize, and when that doesn’t work well enough to mandate ethanol usage.

2. Overbuilding of capacity occurs, especially since the barriers to market entry are so low.

3. Margins fall, so producers find themselves in financial trouble.

4. Now we need more mandates, to keep the producers that were created in Step 1 from going bankrupt. Suddenly ethanol looks great, and given those low barriers to entry…

WSJ explains that a complicating factor is that fuel demand is down, so the amount of ethanol forecast to be produced is now more than the market is likely to absorb:

Americans are unlikely to use enough gas next year to absorb the 13 billion gallons of ethanol that Congress mandated, because current regulations limit the ethanol content in each gallon of gas at 10%. The industry is asking that this cap be lifted to 15% or even 20%. That way, more ethanol can be mixed with less gas, and producers won’t end up with a glut that the government does not require anyone to buy.

The amazing thing – and this is already starting to take place – is that oil refiners are potentially liable for any damages that result if higher blends damage engines:

The biggest losers in this scheme are U.S. oil refiners. Liability for any problems arising from ethanol blending rests with them, because Congress refused to grant legal immunity for selling a product that complies with the mandates that it ordered. The refiners are also set to pay stiff fines for not fulfilling Congress’s mandates for second-generation cellulosic ethanol. But the cellulosic ethanol makers themselves already concede that they won’t be able to churn out enough of the stuff — 100 million gallons next year, 250 million gallons in 2011 — to meet the targets that Congress wrote two years ago.

I have also said on numerous occasions that there is no way the cellulosic mandates will be met. Congress still hasn’t figured out that they can’t mandate technological breakthroughs. They keep assuming that if they pass laws, aspiring entrepreneurs will form companies and figure out the needed breakthroughs. If it was that simple, cancer and heart disease wouldn’t still be with us.

The article notes the irony that financially successful but politically unpopular business like oil companies are potentially liable for a product that has been politically forced upon them through companies that wouldn’t exist without generous subsidies and mandates. Their closing paragraph echos my previous essay on why this is a vicious circle that we are unlikely to break any time soon:

To recap: Congress and the ethanol lobby argue that if some outcome would be politically nice, it should be mandated (details to follow). Then a new round of market interventions is necessary to fix the economic harm resulting from the previous requirements, while creating more damage in the process. Ethanol is one of the most shameless energy rackets going, in a field with no shortage of competitors.

Once again, I note that it isn’t ethanol the fuel that I have a problem with. What I have always had a problem with is the system we have set up, which seems to have been done without giving enough consideration to potentially unintended consequences. If the government had spent more time listening to critics, instead of just dismissing them as shills trying to protect their interests, we may have been able to avoid some of this mess.

I have said before that I am a big fan of incentives, but not such a big fan of mandates. Incentives over time can – and should be rolled back as an industry starts to become established. If it can’t become established, going to a mandate means you are now trying to force something that is highly uneconomical. The problem with a mandate like this – which followed 30 years of subsidies that couldn’t get the industry to a self-sufficient state – is it forces you to purchase the fuel regardless of the cost. In the case of the subsidies, at least you have an idea about how much money is being funneled into the industry to keep it afloat. Mandates dictate that no matter how much it costs, we are going to blend 10.5 billion gallons of ethanol into the fuel supply in 2009.

The irony is that we could rely heavily on oil and coal for the ethanol production production, and yet the final product is ‘renewable’ and therefore heavily subsidized. That’s why I have frequently said that ethanol subsidies are indirect fossil fuel subsidies.

Note: I will be traveling for a couple of days, so probably no comments from me. I have set up another essay to automatically publish while I am away.

March 17, 2009 Posted by | energy policy, ethanol, ethanol mandate, ethanol subsidies, politics | 34 Comments

Government and Industry Incompetence

I fear that gross incompetence in our federal and state governments – as well as in some of our major industries – is going to make life much more challenging for our children and grandchildren. The list this year alone is long. The financial sector took too many risks that didn’t pay off while showering their executives with huge bonuses, so they needed bailing out. We offered up a $700 billion (and counting) package. The auto industry got caught with big inventories of the wrong kinds of cars when oil prices skyrocketed. Another bailout. Then the SEC failed to act on tips that Bernie Madoff was in the process of frittering away $50 billion – and the taxpayer is going to get stuck with part of that bill as well.

It should come as no surprise then that in this environment the ethanol industry – an industry that the government created – is looking to be bailed out as well:

An Ethanol Bailout?

The commodity bust has clobbered corn ethanol, whose energy inefficiencies require high oil prices to be competitive. The price of ethanol at the pump has fallen nearly in half in recent months to $1.60 from $2.90 per gallon due to lower commodity prices, and that lower price now barely covers production costs even after accounting for federal subsidies. Three major producers are in or near bankruptcy, including giant VeraSun Energy.

So here they go again back to the taxpayer for help. The Renewable Fuels Association, the industry lobby, is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion.

Of course, the ethanol industry wouldn’t even exist without the more than $25 billion in taxpayer handouts over the past 20 years.

I have been warning of this for quite some time. Yet there is no end to this mess, as we have created – through government support – an industry that will implode and take down entire Midwest economies without continued government support. As I pointed out back in March, when the ethanol industry finds itself in financial trouble – and it was inevitable – look for the lobbyists to start asking for an increased mandate. The lobbying is underway:

Ethanol Questions Fuel a Pushback Over Regulation Changes

The question of whether cars can safely run on higher blends is a murky one. At the moment, federal law allows gasoline used in regular cars to contain no more than 10 percent ethanol. The ethanol industry says the proportion could go higher—to 15 percent or even 20 percent—without significantly affecting how cars drive or hold up or how their emissions control systems perform. Some industry representatives are asking the Environmental Protection Agency, which has final say in these matters, to quickly approve 12 or 13 percent blends.

Here is an industry that can’t survive even with a combination of mandates and subsidies – and our government couldn’t see any of this coming. So the industry asks for more subsidies, and our kids get the bill.

So what’s the solution? I don’t favor a quick end to the mandates at this point, or the economic fallout will be pretty severe. But the escalating mandates need to stop, or the bailouts are going to keep getting larger. This would also send a message to those thinking about building more ethanol capacity to think twice about it.

December 26, 2008 Posted by | energy policy, ethanol, ethanol subsidies, politics | 40 Comments

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