Spring is approaching, and gasoline prices are once again climbing. But you may not know that this ritual of climbing prices happens almost every year about this time. If you check the history of gasoline prices at the Energy Information Administration’s (EIA) website you can see that gasoline prices almost always rise between January and May.
The primary reason this happens is due to a seasonal switch in gasoline blends. There are two key (although not the only) specifications that refiners must meet for gasoline. The gasoline must have the proper octane, and it must have the proper Reid vapor pressure (RVP). While the octane specification of a particular grade is constant throughout the year, the RVP specification changes with the seasons. (See Refining 101: Winter Gasoline for a more detailed explanation of gasoline blends).
The RVP is based on a test that measures vapor pressure of the gasoline blend at 100 degrees F. Normal atmospheric pressure varies, but is usually around 14.7 lbs per square inch (psi). Atmospheric pressure is caused by the weight of the air over our heads. If a liquid has a vapor pressure of greater than atmospheric pressure, that liquid boils. For example, when you heat a pan of water the vapor pressure increases until it reaches atmospheric pressure. At that point the water begins to boil.
In the summer, when temperatures can exceed 100 degrees F in many locations, it is important that the RVP of gasoline is well below 14.7 psi. Otherwise, it can pressure up your gas tanks and gas cans, and it can boil in open containers. Gas that is vaporized ends up in the atmosphere, and contributes to air pollution. Therefore, the Environmental Protection Agency (EPA) has declared that summer gasoline blends may not exceed 7.8 psi in some locations, and 9.0 psi in others. The particulars vary, but key considerations are the altitude and motor vehicle density of a specific location.
The EPA publishes a schedule for the RVP transition:
The schedule varies somewhat from region to region, but in general is as follows. After allowing vapor pressures as high as 15 psi in the winter, the limit drops starting on May 1st:
May: 9.0 psi
June – Sept. 15: 7/7.8 psi
More congested areas and hotter areas will tend to have a limit of 7.0 psi, while cooler climates generally opt for 7.8 psi. Some cooler climates maintain a 9.0 psi limit throughout the summer. One of the disadvantages of having different requirements for different areas is that summer gasoline is less fungible. This can cause price imbalances in different areas, and sometimes prevents product from flowing from one area into another to ease the shortage.
Refiners will start to pull down their inventory of winter gasoline well in advance of the May 1st deadline. On that date, all gasoline in the system has to meet the stricter requirements, and this “summer blend” is costlier to produce because it contains less butane.
Butane, which has an RVP of 52 psi, can be blended into gasoline in higher proportions in the winter because the vapor pressure allowance is higher. There are two advantages in doing this. First, butane is a cheaper blending component than most of the other ingredients. That makes fall and winter gasoline cheaper to produce.
But butane also adds to the total gasoline pool, so that means that gasoline supplies increase in the winter as more butane is added to the mix. Not only that, but this takes place after summer driving season, when demand typically falls off. These factors normally combine each year to reduce gasoline prices in the fall (even in non-election years). The RVP is stepped back down to summer levels starting in the spring, and this usually causes prices to increase.
One misconception some have is that they can save money by buying cheap gasoline in the winter and storing it for the summer. Remember that winter gasoline will pressure up as the weather heats up, and the contained butane will start to vaporize out of the mix. You will end up with less gasoline than you paid for, and that would also contribute to the air pollution problem that summer gasoline was designed to avoid.
If, on the other hand, you were to buy summer gasoline and try to store it until winter, you might find yourself having problems getting the fuel to ignite, due to the lower vapor pressure. This would be like putting a little bit of diesel in your gasoline – not very good for your car.
So how high might gasoline prices climb this spring? The EIA’s gasoline inventory database can provide some guidance. In the spring of 2007 gasoline prices spiked above $3.00 a gallon for the first time. But that year gasoline inventories also dropped sharply. Rapidly falling gasoline inventories are a good predictor of sharply higher gasoline prices. In the fall of 2005, Hurricane Katrica also caused a sharp drop in gasoline stocks, leading to an atypical fall price increase.
So far in 2010, gasoline inventories have been at very healthy levels. While some inventory draw down can be expected during the transition to summer gasoline, it is a pretty safe bet that the current high level of gasoline stocks will prevent a rapid escalation of prices this spring. I would expect no more than a mild price increase between now and summer, and at the current inventory levels it would not be surprising to see prices start to decline from present levels.
However if oil prices escalate, that could trump high gasoline inventory levels. This is why gasoline is presently about $1 more than it was last year at this time; oil prices were $30-$40 lower than they are now. But that’s a topic for a future essay.
Back home now, just trying to catch up on the energy news of note. Four stories that I want to highlight. First was POET’s announcement on their progress on cellulosic ethanol:
WASHINGTON – The head of the world’s largest ethanol producer, Sioux Falls-based Poet, said Wednesday that his company has drastically cut its cellulosic ethanol production costs.
It is a breakthrough that will allow cellulosic ethanol to compete with gasoline within two years.
Jeff Broin, Poet chief executive, told reporters during a roundtable discussion that the company has reduced its cellulosic ethanol production cost during the past year from $4.13 a gallon to $2.35 a gallon.
Andrew Leonard of Salon asked me for some comments, which he included in a story on the news:
In addition to what made it into the story (and those comments were specifically about the kinds of risk factors POET faces), I said that I thought the guys at POET had done a nice job on this (that comment did make it into the follow-up story at Salon). One thing that isn’t clear to me is whether the production cost includes any capital recovery. If not, then they still have some distance to go to get that $2.35 into an economic range with ethanol presently trading at about $2.00 a gallon. [Edit: A comment from Nathan Schock of POET over at Green Car Congress indicates that this is in fact the total production cost - including depreciation]. Another question I would have is how their version of the process performs with other sources of biomass.
One other thing I said to Andrew (that didn’t make it into the story) is the really big challenge is in getting those ethanol titers up. Low titers mean lots of energy is spent in getting the water out. This is why I have always favored gasification technologies over hydrolysis technologies: You don’t have water to deal with, and thus the BTU efficiency is potentially going to be higher. (Probably your capital costs as well will be higher for gasification – depending on what you are producing from the syngas). If biomass costs rise in the future – as I expect them to – then there will be added incentive for maximizing BTU efficiency.
The second story was sent by a reader. In light of the amount of corn we produce, this could have significant ramifications:
A team of scientists led by The Genome Center at Washington University School of Medicine in St. Louis published the completed corn genome in the Nov. 20 journal Science, an accomplishment that will speed efforts to develop better crop varieties to meet the world’s growing demands for food, livestock feed and fuel.
The United States is the world’s top corn grower, producing 44 percent of the global crop. In 2009, U.S. farmers are expected to produce nearly 13 billion bushels of corn, according to the U.S. Department of Agriculture.
The next story is about a trend that I think will continue. In my presentation in Orlando, one of the trends that I pointed out is that more refineries are being built closer to the source of the oil. Saudi produces crude, but would like to capture more of that value chain by refining it as well. There are a number of very large refinery projects underway – especially in Asia and the Middle East – and in a world with stagnant oil production that means some refineries are going to shut down. In the U.S., our refining capacity is more than three times greater than our oil production rates. I see a dismal outlook for refining in the U.S., with a lot of refiners going out of business in the U.S. Valero just announced another refinery closing:
DELAWARE CITY, Del. — Valero Energy said this morning it plans to permanently close its Delaware City Refinery, eliminating hundreds of high-paying jobs, because of weak economic conditions, high local costs and chronic troubles at the 210,000 barrel-per-day complex.
Company spokesman Bill Day said that a plantwide maintenance shutdown, announced late last month, was already under way, and will convert to a final closing. Plant employees will continue on the payroll for 60 days under federal rules for large-scale layoffs.
Day said the plant — which produces about 70 percent of the gasoline sold on the Delmarva Peninsula— has lost $1 million a day since the start of 2009.
About 550 full time workers will be put out of work by the decision. Valero (VLO) also has notified companies that work closely with the refinery, Day said, but effects on those operations were not immediately available.
People forget that refining is a very tough business. They remember when refiners make money – as they were doing a couple of years ago – but forget that most of the time they aren’t making money. Plus, when they do make money they are subjected to accusations of gouging and calls from politicians to tax their windfall.
Finally, readers know that I have consistently avoided wading into the debate over global warming. It takes enough of my time just trying to keep up with the latest energy news, and I decided long ago to sit out the debate on climate change. It is far too politicized and people get too emotional over the issue. However, I do think it is important that the debate takes place, and I don’t like to see people trying to shut it down. Attaching labels like “denier” to people who question the science is an attempt to shut down debate, and I don’t care how right you think you are – in my view the debate needs to go on.
A couple of days ago it was announced that some e-mails from a climate research outfit in England had been hacked:
Global Warming Research Exposed After Hack
I have to say that some of the e-mails I have seen posted are troubling. Whatever history ultimately shows, some of those e-mails appear to be agenda-driven and not science-driven. There is no place for that.
Let the debate carry on, and let science – not agendas – determine the outcome.
The refining sector has been in the news a few times this week, and not in a good way:
A Fine Mess For U.S. Refineries
HOUSTON — Excess capacity, weak demand for fuels and rising product inventories continue to squeeze margins for U.S. oil refiners.
Sunoco, the second-largest refiner in the country that doesn’t produce its own oil, said late Tuesday that it will soon shutter its Eagle Point refinery in Westville, N.J., which has a capacity to handle 145,000 barrels of oil per day. During the second quarter, Philadelphia-based Sunoco lost $77 million in its refining business and told analysts Tuesday that the third quarter could be worse.
A point that I have tried to stress is that for the most part, refining is not a lucrative business. It is a risky business. You may have five poor years and then one or two really good years. And then when you have a good year, you are accused of gouging and everybody wants a bigger piece of the profits – while sharing none of the risk. You can’t find those people during the bad years; they only show up when times are good.
I couldn’t help but think of Oregon Senator Ron Wyden when I read about the shuttering of the Sunoco refinery. You see, Senator Wyden has devoted a lot of time to investigating these sorts of “shady” practices, where refiners shut down refineries just to limit capacity and boost profits. He produced a comprehensive report on this a few years ago:
Two excerpts from the report:
Specifically, the documents suggest that major oil companies pursued efforts to curtail refinery capacity as a strategy for improving profit margins; that competing oil companies worked together to subvert supply; that refinery closures inhibited supply; and that oil companies are reaping record profits, yet may benefit from a proposed national energy policy that would offer financial incentives to expand refinery capacity.
The major oil companies had a financial interest in seeing the closure of independent refineries. By reducing the overall supply of oil and gas and reducing the number of companies involved in producing it, the major oil companies can have tighter reins on the supply and the price.
You see, Senator Wyden believes that when refineries shut down, it is some sort of organized attempt by “the industry” to reduce capacity and boost prices. When prices are sky high, this may seem like a plausible explanation. When a refiner is losing millions quarter after quarter, it no longer seems so plausible. It looks like someone exiting a business they no longer find profitable.
I documented some of Wyden’s silliness in Gasoline Prices Part II: Long-Term Factors. The bottom line is that refiners may eventually once again benefit as excess supply is shut down. And that’s the way it works in any business. If you are producing too much of something, the price is low and marginal producers go out of business.
A lot of refiners are in trouble right now. Sunoco won’t be the last one to shutter a refinery. Maybe two or three years from now, we will once again see a short burst of profitability as the supply/demand balance tightens back up. But maybe Sunoco’s Eagle Point refinery has lost half a billion dollars by then. This is the calculation they have certainly gone through, and their conclusion is that they will be better off to shutter the refinery.
But what would Senator Wyden do if he owned Eagle Point? I have to conclude, based on his report above, that he would continue running it so prices remained low for everyone. In fact, I wouldn’t be surprised to see him expanding capacity. He might end up losing a few hundred million dollars each year, but hopefully he has a big pile of money to draw upon. It reminds me of the joke about the farmer who won the lottery. When asked what he would do with his winnings, he replied “I’m just gonna keep farming until the money is all gone.”
Senator Wyden – and a great many others who think as he does – would apparently keep refining until the money is all gone.
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.
In this installment, I continue to work my way through the list of questions recently submitted by readers. This post picks up where Part 1 left off, and covers coal-to-liquids, technology hype, green gasoline, refining improvements, allocation of money toward renewables, electricity consumption, the Automotive X Prize, Big Oil, cellulosic ethanol, and Exxon’s recent algae announcement.
Benny wrote: Arlington researchers’ work could lead to $35-a-barrel oil. Any chance of making oil from lignite? At these prices? Or are they just some guys who want research money? Answer
takchess wrote (and Doug also asked about): Thought this was interesting. If cost and technically feasible this would be cool.
DDHv wrote: The new ionic liquid technique allows easier extraction of cellulose. Do you know if we have enough information yet to do energy and/or economic balances? If so, what are the present results? Improvements are likely, given the novelty of the technique. Answer
John asked: What do you think of pyloric conversion to make “green gasoline”? What are it’s peak lite and environmental ramifications? Specifically referring to an article in the Boston Globe RE: Anellotech and UMAss on July 13th: The greening of gasoline Answer
PeteS asked: How likely is money spent today on renewables to be wasted in retrospect because of “grey swans”? Obviously nobody can predict the future, but I’m thinking more in terms of, say, a plan to completely power a country from wind turbines, versus low-to-medium-probability dramatic improvements in wind-power within a decade or two. Answer
SamG wrote: I hear many theories about electricity consumption and the utility business model (sell more make more). Do you see any mechanism that puts suppliers in the loop for the reduction of consumption (not just demand reduction via passing through higher prices)? Answer
takchess asked: Any comments on this Urea fueled entry into the XPrize auto race?
John wrote: Americans are being “taxed” at a rate of 200 billion bucks a year to fund the U.S. Military to “baby-sit” the Strait of Hormuz and other oil company interests in the mid-east, etc.
Factor that in and the bio-fuels look good, as do CNG, electric vehicles or bio-fuel-electric hybrids. Imagine that…. a bio-fuel-electric hybrid. That completely shuts out the oil companies and their little “gasoline forever” game. The fact that bio-fuels, CNG and electricity are already cheaper than gasoline must be giving the traditional oil companies nightmares already. Answer
LovesoiL wrote: 1) What is a reasonable pace towards commercialization of ’1st generation’ alternative fuels, e.g., cellulosic. Many ethanol advocates (DoE, USDA, EPA, US Congress) assume that while only 1 commercial scale facility is currently in construction (Range), somehow 1 billon gallons of annual capacity will get built during the next 3-5 years, and then we’ll build that much (30-40 plants) every year for the next decade?
2) How long is needed to operate a 1st gen facility to optimize its processing and demonstrate profitability before investors will agree to pay another ~$300 million build the 2nd facility?
3) Both Choren and Range fuels have gasification of woody biomass as the first step for their transformation process. Choren finished construction a year ago and has been in the commissioning process ever since. Range says they will finish construction 1Q 2010, and begin ethanol production in 2Q 2010. Can Range really begin production that soon?
4) Ask POET what they think of cellulosic from corn stover. They seem to say that stover has too many collection and handling problems (dirty, low density, etc), and that is one reason they are concentrating on cobs only. Many others assume corn stover will be the primary source of cellulosic feedstock. Answer
Anonymous wrote: While you’re in Alberta, ask about Iogen and when they’ll finally get their cellulosic plant started in Sask. Also, Enerkem has been making news lately, both with a 10 mgy MSW plant and their just-released plans to construct a $100 million R&D facility in Edmonton. EnerkemR&D EnerkemMSWPlant Answer
bts asked: Comments on this partnership between Venter and Exxon?
You always have to read between the lines. Sometimes people talk about where costs might be “in a few years” or “with technical breakthroughs” – as is often the case with algal biodiesel (and has been the case with oil shale for 100 years). Not that this is necessarily the case here, but those are the kinds of things I look for as I read these press releases. Is it possible to make oil from coal? Sure, it just traditionally takes a lot of energy. Coal into oil is essentially what you are doing with CTL, and there are several variations of the process (including non-gasification options). South Africa has been doing it for a while now.
So what the UTA researchers are describing is a chemical process for turning coal into oil. Such processes do exist, so the question is whether this is novel, cheaper, more efficient, etc. That will require peeling a few more layers of the onion than what one finds in a press release – where the best you may get is caveats. Generally speaking, press releases tend to over-simplify things a lot. If even a tenth of the press releases on “the next big thing” had turned out to be true, we would be living in a very different world. My favorite pasttime might be loading the family up in my cold fusion-powered hovercraft for a family outing. Or knocking out essays on my DNA-based computer (I remember in 1995 or so when this was going to put Intel out of business).
People have all sorts of motives for these press releases. Some are to announce something truly revolutionary. Those are a tiny fraction. More often, it is as you say; someone is trying to catch the eye of someone who might fund them. I have been in a position many times to issue just such a press release, and sometimes I think about that when I see one of these.
For instance, in 1994 at Texas A&M I had an idea to create a cellulose reactor based on the contents of termites’ stomachs. To my knowledge, I was the first person to attempt such a thing. The experiment didn’t turn out very well. My analysis detected only a small amount of butanol in the product. Had my imagination been big enough, here was the press release: “A&M Researcher Turns Trash into Fuel.” For the story, I could project increases in yields, renewable butanol bringing Arab sheiks to their knees, and an actual use for those pesky termites. Of course as my yield projections go up, my cost projections go down, and I could predict that this “may soon lead to sub-$1/gal fuel.” In reality, I considered it a failed experiment, stopped work, and wrote up my dissertation. But that is the sort of experience that always has me looking at these press releases in a pretty skeptical light.
Jim, this is along the lines of my last answer. People are working on these catalysts all the time. I have spent time in the lab working on gasification catalysts, and sometimes you come across something that looks pretty interesting. Then you try to scale it up and find that it isn’t stable in a larger reactor because the temperatures are hotter than they were in the lab.
Again, without peeling the onion and having a look at what everyone else is doing, it is impossible to tell whether this really amounts to something special. It could be that their competitors have already achieved these milestones and just didn’t issue press releases. Most organizations don’t. I was awarded several patents from my days at ConocoPhillips, but we never issued a press release even though the potential implications of some of them were pretty interesting.
One thing I will say is that from my time in a refinery, there wasn’t 7-9% efficiency gain to be had. We were already pushing the maximum possible conversion efficiency of oil into liquid products, and while you might have squeezed out another 2-3%, no way could you get up into the 8% range. There may be some really inefficient refineries out there that could benefit from this, but we will have to wait a couple of years and see if they actually start penetrating the market. Then you will know that they indeed invented something with a distinct advantage over the competitors.
There are a couple of developments in cellulose chemistry that I have been watching pretty closely: The ionic liquid techniques that you mentioned, and supercritical cellulose chemistry with either CO2 or ethanol.
Both of these techniques are energy intensive, so a lot of work needs to be done around the economics of these processes relative to competing technologies. A number of questions arise, such as “What other components are extracted along with the cellulose?” Or “What does it take to separate the cellulose from the component used to extract it?” That isn’t to say that these technologies aren’t well-worth further exploration. From an academic standpoint, they are very interesting. In the end, I think they will be hard pressed to compete with gasification if the intent is production of fuels. However, specialty chemicals might turn out to be a good niche application for these techniques.
Building on the previous answer, I think the more interesting developments in lignocellulosic chemistry are in chemical processing, as opposed to biochemical processing. I discussed this in an essay a couple of years ago, which was about Vinod Khosla’s investment into KiOR. This is their approach as well; to use catalytic processes to produce fuel.
The challenge is that biomass isn’t very energy dense, and these processes require elevated temperatures and pressures. So a key question is how much energy (and in what form) it takes to transport one BTU of biomass and process it into one BTU of fuel. Presently I think the processing energy is a pretty high fraction of the contained energy. Those energy inputs are going to have to come down before these sorts of technologies make much of an impact. The research is certainly promising, and I favor continued government funding. Would I invest in a company based on this concept? Not at this stage of development.
Generally speaking, I think we are going to look back and see that we wasted tremendous money, time, and resources chasing dead ends. As you say, nobody knows what developments are in front of us. But many are betting that there are revolutionary developments that will transform the energy sector. As a result, they are throwing a lot of money in a lot of different directions. I don’t have a big problem with this if the proper due diligence is done, especially if private money is being used to fund these various ventures. I do agree with Vinod Khosla’s philosophy of spreading his bets across many different technologies. What I find annoying is that often the proper due diligence is not done, and often taxpayer money ends up funding these dead ends. That is money that is truly wasted.
However, one thing to keep in mind with respect to your “grey swans” is that they also have entrenched lobbies to contend with. It may turn out that the grey swan finds itself in a difficult fight to penetrate the market. One particular example I am thinking of is the decision of Congress to kill support for more efficient 2nd generation green diesel production because the inefficient 1st generation producers argued that it would put them out of business. Add in the fact that it was an oil company involved in the 2nd generation technology, and we find that grey swan struggling to survive.
Sam, I don’t see an easy answer to that. Utilities are in the business of making money. When people reduce consumption it costs them money. Is there a way that they can benefit from that? I suppose in a world in which we are taxing carbon emissions, the savings from lower emissions would partially offset the loss of the sale of the electricity. But truthfully, that will be a small fraction at best. I always had the same issue when I was in the oil business. I wanted to see lower consumption, and I couldn’t see any way the oil companies could benefit directly from that. I think an effective mechanism for enabling suppliers to benefit from lower consumption would really be a game changer. If you think of something, let me know.
When I first saw this, I thought “That’s one of the strangest energy-related stories I have ever seen.” It reminded me of my reaction to a recent story: Greenland shark may become new source of biofuel. I like the wild and wacky, and both of these fall into that category. But can it make an impact? The problem with the urea idea is that the fuel is actually ammonia and hydrogen. Where do those come from? Mostly from natural gas. If you look at the efficiencies of the processes involved, you would be far better off just to burn the natural gas. So I don’t see it going far in its current form, but I applaud the creativity. Who knows, maybe this will evolve into something more promising.
John, while I agree that we are spending dollars in the Middle East because of oil, I disagree with several of your points. First, we aren’t spending that money to guard oil company interests. It is being done with the intent to keep cheap oil flowing to the American consumer. So the key interest here is that of the U.S. government, so the voting public is kept happy. Not that there is no benefit to the oil companies, but the government views a military presence there as an important issue of national security – not one of oil company security. If the oil did get cut off, the average person is going to bear the consequences.
I also disagree with your comment that biofuels are cheaper than gasoline. There are some exceptions – like sugarcane ethanol from Brazil – but for the most part gasoline is cheaper based on energy content. For instance, at today’s close ethanol on the CBOT for September delivery was trading for $1.65 a gallon. Gasoline on the NYMEX today was trading for $2.07/gal. However, because of the difference in energy content, the cost of this ethanol was $21.71/MMBTU and the gasoline was $18/MMBTU. With rare exceptions over the years, this has always been the case – and at times the differences have been quite large.
Further, you are kidding yourself if you think the oil companies are running scared. As I have pointed out before, it is a matter of scale. If corn ethanol started to look like a viable, long-term business model for them, the oil companies would just buy their way in as Valero recently did. Oil companies won’t sit around and go extinct because some fancy new biofuel put them out of business. They have big R&D budgets, and their efforts likely cover every biofuel you ever heard of (and many options you probably haven’t).
1. Put me down as someone who believes that the one currently under construction – Range Fuels – is going to see their schedule continue to slip, and I believe they are going to have a difficult time meeting production goals. Multiple sources are telling me that they have some issues.
Further, the national projected ramp-up in cellulosic ethanol – if it happens at all – will be a fraction of what has been projected. Right now there isn’t even a clear pathway. It’s like marking out the road map for curing various cancers over the next few years. It is great to have such a road map, but you are assuming technological breakthroughs that may not happen. Right now cellulosic ethanol still looks to me like a niche, and not a scalable, mainstream fuel.
2. That’s a good question, because I am aware of just such a situation now. Investors are dragging their feet on Plant #2 because Plant #1 is still not producing per the plan. In general, I think if a 1st gen facility comes online and starts to deliver per expectations, money will start to flow pretty quickly. I would think within 6 months of delivering, investors will be ready to jump in. But it is going to take more than 6 months to optimize production to optimize one of these next generation plants once it starts up. There isn’t a blueprint for success, and novel problems are going to be encountered and have to be solved.
3. No, the schedule for Range will slip because they still have kinks to work out. Write it down and hold me to it.
4. Here is what POET said about stover: “The yield of cobs is 0.65 tons/acre, and we can collect them commingled with grain with a modified combine. Or we can collect them with stover coming out of the back of the combine. The bulk density for cobs is higher than for stover, and that makes them easier to separate. We make sure sufficient stover is left on the field for erosion control and nutrition. We are focused on cobs because the bulk density for cobs is better than for stover, and cobs have 16% more carbohydrates than the stover. We don’t have to leave all stover in the field necessarily over soil depletion issues; we have just chosen to focus on cobs. How much one can remove depends on soil type, location, and tillage practice. Cobs take those variables away.”
I did ask about both Iogen and Enerkem while I was in Alberta. My hosts were quite skeptical that Iogen will ever build a commercial plant. I will say that they have enough demonstration level experience that it is suspicious that they don’t have plants sprouting up everywhere. After all, they have been producing cellulosic ethanol at small scale for 5 years. There are people that have been producing it for 0 years who are in the process of building plants. Given that governments are throwing money at anything looking like cellulosic ethanol, I think this puts a big question mark over their true commercial viability (at least at the present state of their technology).
There was less talk about Enerkem, and frankly before the trip I didn’t know much about them. The talk I did hear was that Enerkem is really only focused on the front end of a GTL plant (the gasification step). Enerkem’s view is that their post-gasification steps are flexible, and they can produce a variety of chemicals. They have announced that one site will produce ethanol (this is not the most efficient usage of syngas, by the way). Enerkem’s Press Release page certainly implies that they are busy with projects.
I think there are two approaches to algal fuel that might work. One is if algae can be made to naturally excrete oil. If so, then it may be possible to let the oil layer build up and then skim it. This avoids the materials handling nightmare of separating the algae from the water, and then the oil from the algae. This is apparently the focus of the research. Still, it is a long shot. Exxon’s VP for R&D was quoted as saying “I am not going to sugarcoat this — this is not going to be easy. Any large-scale commercial plants to produce algae-based fuels are at least 5 to 10 years away.” I think that is a realistic assessment. If the breakthrough came tomorrow then you are still looking at piloting and finally commercialization. I don’t think that is likely to happen in 5 years. So first you have to have some technical breakthroughs – and those aren’t a given – and if you pass through that gate then you won’t see this on the market for 10 years. I believe that is a realistic assessment.
The second approach that might work is if a valuable product – such as a pharmaceutical – is being produced as the primary product, and oil is being produced as a co-product. The expense of collecting and processing algae is just too great for oil to be the primary purpose of the operation.
I should have Part 2 of the series of answering readers’ questions posted by tomorrow, but until then I was just sent the following link, which was of great personal interest to me:
The gist is that last year the American Petroleum Institute flew a group of bloggers up to the ConocoPhillips refinery in Billings, Montana where I used to work to give them a perspective of life in a refinery. A video diary of the trip was recently posted to the link above. An excerpt from the link:
The refinery has twice been awarded EnergyStar designation by the EPA for its comparatively efficient production processes. It also established a Citizen’s Advisory Council to maintain an open dialogue between the community and ConocoPhillips. This council has been instrumental in tracking the plant’s social, economic, and environmental performance.
It was kind of funny to see my old managers there lecturing on how a refinery works, and what makes the Billings Refinery unique. (Yes, Tim Seidel looks unusually young to be a manager in a refinery, but he is very talented).
Here were some of the essays that bloggers wrote following the trip:
I do have one comment on some of the write-ups I have seen. There seems to be some misinformation that the refinery was either built for, or relies upon the Alberta tar sands for feedstock. First, that certainly wasn’t why the refinery was built, as it was there long before tar sands became an industry. Second, unless things have changed in the 2.5 years since I left, the refinery actually utilizes little or no syncrude from tar sands. It is a refinery designed for heavy, sour oil, and as such is not ideal for the syncrude coming out of the tar sands.
Anyway, just thought this might be of some interest. More answers to readers’ questions tomorrow.
I am not a big believer in a commercial future for the biochemical conversion of cellulose into fuels. There are many big hurdles in place that are going to have to be overcome before cellulose is commercially converted to ethanol. In a nutshell, one is the logistical problem, which I have covered before. Beyond the logistical problem is the issue that biochemistry often starts to malfunction as the conditions in a reactor change, and with cellulosic ethanol that means that if you get a 4% solution of ethanol in water, you are doing well. But from an energy return point of view, a 4% solution is about like the trillions barrels of oil shale reserves we have. If it takes over a trillion barrels of energy to extract and process them, that largely defeats their usability.
Chemistry is a different matter, which is why I favor gasification processes over fermentation processes. But even beyond gasification, I have wondered about chemically processing cellulose in a refinery. I used to have a guy who e-mailed me all the time and told me he had invented a chemical process for reacting cellulose to hexane, which can then be turned into gasoline. If you look at cellulose (there is a graphic of a segment of cellulose at the previous link), you can envision that it could be done. (Whether he had actually done it is a different story).
But the chemistry pathway isn’t limited to fuels. With that preface, I want to thank a reader for bringing this story to my attention. In a recently published story in Applied Catalysis A: General (available online at Science Direct), scientists at Pacific Northwest National Laboratory have reported on a new process for converting cellulose directly into an important chemical building block (e.g., for plastics and fuel):
Now we all know that you can do lots of neat things in the lab that can’t really be done on a larger scale. But this particular process does not appear to be overly complicated. The abstract from the paper explains what they are doing:
The ability to use cellulosic biomass as feedstock for the large-scale production of liquid fuels and chemicals depends critically on the development of effective low temperature processes. One promising biomass-derived platform chemical is 5-hydroxymethylfurfural (HMF), which is suitable for alternative polymers or for liquid biofuels. While HMF can currently be made from fructose and glucose, the ability to synthesize HMF directly from raw natural cellulose would remove a major barrier to the development of a sustainable HMF platform. Here we report a single-step catalytic process where cellulose as the feed is rapidly depolymerized and the resulting glucose is converted to HMF under mild conditions. A pair of metal chlorides (CuCl2 and CrCl2) dissolved in 1-ethyl-3-methylimidazolium chloride ([EMIM]Cl) at temperatures of 80–120 °C collectively catalyze the single-step process of converting cellulose to HMF with an unrefined 96% purity among recoverable products (at 55.4 ± 4.0% HMF yield). After extractive separation of HMF from the solvent, the catalytic performance of recovered [EMIM]Cl and the catalysts was maintained in repeated uses. Cellulose depolymerization occurs at a rate that is about one order of magnitude faster than conventional acid-catalyzed hydrolysis. In contrast, single metal chlorides at the same total loading showed considerably less activity under similar conditions.
So they take cellulose and react it with two metal chlorides at 80–120°C for a direct conversion of cellulose into HMF – which can be easily converted to fuel or plastics. I would think then the important considerations would be 1). What happens to the lignin and hemicellulose in the biomass?; and 2). How much energy does it take? The second item is particularly important if fuel is the objective.
While it is too early to tell whether there is a fatal flaw, this one certainly bears watching. It also strengthens my conviction that in the long-run, the right way to process cellulose is chemically.
Implicit in the previous post on the recovery of gasoline demand is that the conditions are setting up for a gasoline supply crunch – and the price rise that goes along with that. As I pointed out, refiners are cut back, but they can turn that around pretty quickly. The low utilization numbers could lead to a short-term supply crunch, but as prices recover refiners can bring capacity up quickly.
What they can’t do quickly is implement new capacity additions. Due to the collapse in oil and gas prices, projects are being delayed, both in upstream oil production and in downstream refining. This is setting up for another run on prices as demand begins to recover. More on this from Reuters:
NEW YORK (Reuters) – The stage is being set for a fuel supply crunch in the United States once the economy rebounds now that refiners have pushed back more than $10 billion worth of upgrades they had on the drawing board.
Pressured by the oil price collapse and the economic malaise, companies have also either slowed or scrapped expansions which could threaten 340,000 barrels per day of new capacity, spelling a return to lagging processing capability that helped push pump prices higher until last year.
“If the economy comes back faster than expected, we are going to be caught flat-footed and we’re going to see a big spike in prices,” said Phil Flynn, an analyst at Alaron Trading in Chicago.
This isn’t something that will play out short term, but if your strategy for investing is more long term (as mine is), these project postponements will come home to roost in the next 2-3 years. Gasoline prices in the next few years should be higher, and maybe much higher than they are right now.
Think back to Hurricane Katrina. We got a big price spike in the wake of Katrina. That was the short term impact. But longer term, a lot of refinery capacity was offline for a very long time, and that helped lead to two straight years of record-breaking gasoline prices.
It’s been taking place slowly, week after week, but low gas prices have brought gasoline demand back up. There has been anecdotal evidence that suggested demand might be heading higher, such as recovering sales of gas guzzling cars. But for watchers of This Week in Petroleum, the data confirm the anecdotes: Gasoline demand has recovered to the point that it is now higher in the U.S. than it was a year ago. This week’s Summary of Weekly Petroleum Data (off of which This Week in Petroleum is based) shows that the 4-week rolling average has for the first time in recent memory increased above (albeit slightly) the level of a year ago.
Another factor to keep an eye on as demand recovers is that refinery utilization is still quite low relative to what’s normal for this time of year. Percent utilization relative to the past 3 years is 3-5% lower for comparable weeks. This is starting to impact gasoline inventories. A typical January will see a healthy build of gasoline across the month, as refiners build stocks ahead of spring turarounds. This year, however, gasoline inventories have been flat across January, and this week in fact saw a drop of 2.6 million barrels. Inventories are still in decent shape, but they bear watching as we move toward spring.
Gasoline imports are also down marginally relative to the past two years, primarily a result of low gas prices. But the present trends of increasing demand, falling inventories, and low refinery utilization, suggest that prices will continue heading north.
This morning, I read an interesting editorial in the Wall Street Journal:
The editorial was written by John Shages, a former deputy assistant secretary for petroleum reserves at the Department of Energy. The editorial essentially argues that the composition of the Strategic Petroleum Reserve (SPR) is lighter than the composition of oil that most refineries run. Since lighter crude is also more expensive than heavier crude, Shages is suggesting that we sell some of the light crude and buy back some of the heavy crude. His argument – echoing the argument from Obama and various other government officials – is that this would generate cash and help drive down oil prices.
Some excerpts from the editorial:
Sen. Barack Obama is proposing a simple maneuver — called an exchange, or swap — that will help lower the price of oil for consumers, increase the amount of oil in the SPR, increase energy security, and leave taxpayers better off by about $1 billion. His proposal deserves to be adopted.
Today, with historically high oil prices, it is time to debate using the SPR. Some argue that the reserve should only be used in emergencies. Others say that we should use all the tools at our disposal to help consumers.
OK, let’s debate. Regular readers know that I strongly object to using the SPR in an attempt to influence prices. That is not what it is for. High prices – which are incidentally well off of their highs – do not constitute an emergency. Further, that line about taxpayers being better off by $1 billion misses a very large point. I could also trade in my house for a mobile home, and be better off by a few hundred thousand dollars. But that few hundred thousand has costs associated with it: Less home, a home that isn’t as safe in bad weather conditions, and a home that has less value when I wish to sell it. Likewise, there are costs associated with downgrading the quality of the SPR.
Mr. Shages continues:
The oil in the reserve now is all light crude, which is easier and cheaper to refine into gasoline, a reflection of refining capability at the time the SPR was created. Over the past three decades, however, U.S. refining capacity has become increasingly sophisticated and complex, because the world’s oil is increasingly heavy and harder to refine. Today, about 40% of our refining capacity is configured to handle heavier crude oil.
We now confront a mismatch between U.S. refining capacity and the oil mix in the SPR. In a 2007 report, the Government Accountability Office (GAO) found that in an emergency this mismatch could reduce U.S. refinery capacity by 5% or over 735,000 barrels per day in total as some refineries scale back production to accommodate the SPR oil. The GAO recommended that the Energy Department change the reserve’s oil mix to at least 10% heavy oil, roughly 70 million barrels.
It struck me as very odd that having oil that is too light could reduce refinery capacity. After all, light oil is much simpler to process – as is alluded to above. Yields are also higher. Yet the claim is that we would be better off with heavier oil in the SPR? This didn’t add up, so I dug up that GAO report that was referenced:
Some excerpts from that report:
Our analysis of DOE’s Energy Information Administration (EIA) data shows that, of the approximately 5.6 billion barrels of oil that U.S. refiners accepted in 2006, approximately 40 percent was heavier than that stored in the SPR.10 Refineries that process heavy oil cannot operate at normal capacity if they run lighter oils. For instance, DOE’s December 2005 found that the types of oil currently stored in the SPR would not be fully compatible with 36 of the 74 refineries considered vulnerable to supply disruptions. DOE estimated that if these 36 refineries had to use SPR oil, U.S. refining throughput would decrease by 735,000 barrels per day, or 5 percent, substantially reducing the effectiveness of the SPR during an oil disruption, especially if the disruption involved heavy oil.
If you know what the assays look like for heavy oil versus light oil (See The Assay Essay), this looks like a very improbable claim. I suppose if you didn’t try to optimize your refinery for light oil, then that might be a true statement. But refiners optimize their refineries on a daily basis. I used to work in a heavy oil refinery. We could run heavy oil through, or we could run light oil through. If we don’t change the refinery settings at all, and run light oil through, then the above argument may be correct. But we would never do that. The overall yields are in fact higher with the lighter crudes, but you have to make the necessary adjustments. You may end up shutting down some units – like cokers – that are designed to handle heavy crudes.
But there is a more significant factor that seems to be overlooked. Refiners are configured to run heavy crudes because they are cheaper. Why are they cheaper? One, because they are more readily available. What does that suggest? That it is much less likely that there would be a disruption of heavy crude supplies. Thus, Mr. Shages (and Obama’s) argument is based solely on what refiners typically run, and ignores the question of typical availability of supply.
In conclusion, a heavy oil refinery can run light crudes with some adjustments. A light oil refinery can’t run heavy oils without severely impacting yields. Further, a light oil refinery is much more likely to see supply disruptions because there is simply less light oil available. This is why swapping heavy oil for light oil is a bad idea. It is a misguided attempt to influence oil prices, and that is not the purpose of the SPR. If it is allowed to be used for this purpose, then all we are doing is speculating with the reserve.
Footnote: Headed back to Europe today; offline for a couple of days.
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