R-Squared Energy Blog

Pure Energy

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

How Much Natural Gas to Replace Gasoline?

I Took This Picture of a CNG Bus on a Recent Trip to D.C.

You may have seen the news this week that a report by the Potential Gas Committee says natural gas reserves in 2008 rose to 2,074 trillion cubic feet. The New York Times and the Wall Street Journal (via Rigzone) both had stories on it, and T. Boone Pickens issued a press release. First, from the New York Times (and this is a really good article):

Estimate Places Natural Gas Reserves 35% Higher

Thanks to new drilling technologies that are unlocking substantial amounts of natural gas from shale rocks, the nation’s estimated gas reserves have surged by 35 percent, according to a study due for release on Thursday.

Estimated natural gas reserves rose to 2,074 trillion cubic feet in 2008, from 1,532 trillion cubic feet in 2006, when the last report was issued. This includes the proven reserves compiled by the Energy Department of 237 trillion cubic feet, as well as the sum of the nation’s probable, possible and speculative reserves.

The new estimates show “an exceptionally strong and optimistic gas supply picture for the nation,” according to a summary of the report, which is issued every two years by a group of academics and industry experts that is supported by the Colorado School of Mines.

The Wall Street Journal wrote:

US Has Almost 100-Year Supply of Natural Gas

The amount of natural gas available for production in the United States has soared 58% in the past four years, driven by a drilling boom and the discovery of huge new gas fields in Texas, Louisiana and Pennsylvania, a new study says.

…the Potential Gas Committee’s study was prepared by industry geologists who analyzed individual gas fields using seismic imagery and production data provided by gas producers. The surge in gas resources is the result of a five-year-long drilling boom spurred by high natural-gas prices, easy credit and new technologies that allowed companies to produce gas from a dense kind of rock known as shale. The first big shale formation to be discovered, the Barnett Shale near Fort Worth, Texas, is now the country’s top-producing gas field, and companies have made other huge discoveries in Arkansas, Louisiana and Pennsylvania. Together, the shale fields account for roughly a third of U.S. gas resources, according to the Potential Gas Committee.

Pickens had this to say:

T. Boone Pickens Statement on Surge in Estimated Natural Gas Reserves

Today’s report substantiates what I’ve been saying for years: there’s plenty of natural gas in the U.S. I launched the Pickens Plan a year ago to help reduce our dangerous dependence on foreign oil, and using our abundant supply of natural gas as a transition fuel for fleet vehicles and heavy-duty trucks is a key element of that plan. On the same day this report is going out, diesel prices are again on the rise, squeezing the trucking industry. Now more than ever we need to take action to enact energy reform that will immediately reduce oil imports.

The 2,074 trillion cubic feet of domestic natural gas reserves cited in the study is the equivalent of nearly 350 billion barrels of oil, about the same as Saudi Arabia’s oil reserves.

A number of people have rightly pointed out that a 100-year supply implies usage at current rates. But it got me to thinking about how much natural gas it would take to displace all U.S. gasoline consumption. So in the spirit of my previous essay Replacing Gasoline with Solar Power, I will do the same calculation for replacing gasoline with natural gas. The big difference between this calculation and the earlier one is that solar power still has some technical issues to resolve (e.g., storage) and electric vehicles are not yet ready for prime time. On the other hand we are perfectly capable, today, of displacing large numbers of gasoline-fueled vehicles with natural gas.

How Much Do We Need?

The U.S. currently consumes 390 million gallons of gasoline per day. (Source: EIA). A gallon of gasoline contains about 115,000 BTUs. (Source: EPA). The energy content of this much gasoline is equivalent to 45 trillion BTUs per day. The energy content of natural gas is about 1,000 BTUs per standard cubic foot (scf). Therefore, to replace all gasoline consumption would require 45 billion scf per day, or 16.4 trillion scf per year. Current U.S. natural gas consumption is 23 trillion scf per year (Source: EIA). Therefore, replacing all gasoline consumption with natural gas would require a total usage of 39.4 trillion scf per year, an increase in natural gas consumption of 71% over present usage.

Assuming for the sake of argument that the 2,074 trillion standard cubic feet cited in the study is accurate, that the “probable, possible and speculative reserves” eventually equate to actual reserves, and that the gas is economically recoverable, that is enough gas for 53 years of combined current natural gas consumption and gasoline consumption. If you assume that only the proven plus probable reserves are eventually recovered, the amount drops to about 1/3rd of the 2,074 trillion scf estimate, still enough to satisfy current natural gas consumption and replace all gasoline consumption for almost 20 years.

We can also calculate in terms of oil imports. Right now the U.S. imports about 13 million barrels per day of all petroleum products. A barrel of oil contains around 5.8 million BTUs, but oil only makes up 10 million of the 13 million barrel per day figure. Other imports include things like gasoline (4.8 million BTUs/bbl) and ethanol (3.2 million BTUs/bbl). Scanning the list of imports, I probably won’t be too far off the mark to presume that the average BTU value of those 13 million bpd of imports is about 5.4 million BTUs/bbl. On an annual basis, this equates to 25.6 trillion scf of natural gas, which would be an increase over current natural gas usage of 111%. Going back to the 2,074 trillion scf from the study, this would be enough to displace imports of all petroleum products (again, at current usage rates and not factoring in declining U.S. oil production) for 43 years.

What’s the Cost?

Natural gas is presently trading at about $4 per million (MM) BTU (although December 2009 is trading at almost $6). Oil is presently trading at $71/bbl, which equates to $12.24/MMBTU. Gasoline is presently trading at over $17/MMBTU. Thus, natural gas is a bargain relative to oil or gasoline. Incidentally, I just checked on seasoned wood and wood pellets, and they range from $8-$12/MMBTUs. So it is cheaper to heat your house with gas than with wood. I am not sure I would have guessed that.

While natural gas is a bargain relative to gasoline, converting a gasoline-powered vehicle to natural gas isn’t cheap. According to this source, it can cost $12,500 to $22,500 to convert a gasoline-powered car to natural gas. Honda makes a compressed natural gas (CNG) vehicle, but according to this review in Car and Driver the premium over the gasoline version is $8780. A person would need to drive an awful lot to justify that premium. However, that’s what fleets do. They drive a lot. The large price differential explains why fleets would be interested in running their vehicles on natural gas.

Conclusions

So, the good news is that the United States could be energy independent if the newly released natural gas reserve numbers are remotely accurate. It also appears that we have enough natural gas available that civilization isn’t going to end any time soon due to lack of energy supplies. There are three caveats. First, energy independence via natural gas could require us to spend significantly more for personal automotive transportation. Second, “possible” reserves may never materialize. Finally, a large chunk of the calculated reserves are based on shale gas, and that requires gas to be in the $6-$8/million BTU range to be economical. Still, it is a bargain compared to gasoline, and it explains why fleets are more receptive to conversion to natural gas than the general public is likely to be for their personal vehicles.

June 19, 2009 Posted by | CNG, energy consumption, gasoline, gasoline demand, gasoline imports, natural gas, oil consumption, oil imports, T. Boone Pickens | 63 Comments

Where Our Gasoline Imports Come From

I started this post almost a year ago, but forgot about it. But someone at The Oil Drum just said they wished they had more information on where our gasoline imports come from. No need to wonder, because the EIA publishes this information.

For 2007, our Top 10 importers of finished gasoline into the U.S. in thousand barrels were:

1. United Kingdom (Thousand Barrels) 25147
2. U.S. Virgin Islands (Thousand Barrels) 23590
3. France (Thousand Barrels) 11209
4. Canada (Thousand Barrels) 10605
5. Netherlands (Thousand Barrels) 10518
6. Norway (Thousand Barrels) 8406
7. Germany (Thousand Barrels) 8351
8. Russia (Thousand Barrels) 7387
9. Italy (Thousand Barrels) 7239
10. OPEC Countries (Thousand Barrels) 5516

Europeans demand more diesel. Since you get diesel and gasoline from the refining process, they get rid of their excess gasoline by sending it to the U.S. That helps keep gasoline prices in check. Take a look at diesel prices to see what gasoline prices might look like if not for the imports.

Source: U.S. Imports by Country of Origin

April 16, 2008 Posted by | EIA, gasoline imports | 4 Comments

   

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