R-Squared Energy Blog

Pure Energy

Oil Moving Back Up

On my latest trip to Amsterdam this week I saw 19 oil tankers parked off the coast in the North Sea (ironically next to a Dutch offshore wind farm). These tankers are being used for floating storage due to the glut of oil in the market. Despite this, oil prices have been on a steady climb. Oil passed $66 today – despite a global recession and all of that oil parked offshore. The Wall Street Journal thinks we are headed back to $75:

Oil Prices: $75 Crude, Here We Come

Oil prices aren’t rising because demand is recovering or because record-setting oil inventories are being burned off. Rather, Mr. Horsnell says, the market believes OPEC is coordinated enough to defend a price floor, presumably through acting together and keeping production in check. Add in a growing belief that the economy could be regaining its footing and oil prices will climb to the price that OPEC is willing and able to defend.

Some say this is all due to speculators. If the reason cited above is correct, then I guess speculation is a good way to describe the recent price rise. There is an expectation that OPEC will maintain discipline and push prices back above $70, which is what OPEC hopes for. Further, if the economy recovers, demand will recover somewhat, further supporting higher prices. Those expectations are being priced in, hence the price rise.

I just hope oil prices don’t make another swift run to $150. In the long run, I do favor higher oil prices because it incentivizes conservation of oil, but if prices change too quickly we are going to find ourselves in The Long Recession.

May 29, 2009 Posted by | oil prices, speculation | 36 Comments

Is the Dark Cloud Over Solar Energy Beginning to Break?

Sitting in DFW Airport, about to make my way back to Europe. I will be offline for a day or so. This seems like a good time for the latest from Money Morning, which as I explained last week will be featured here once a week or so. As always, normal caveats apply: I am not an investment advisor. I don’t endorse any specific stocks mentioned in the following story nor the ad at the end of the story. Personally, I have looked into investing in solar a couple of times, but the stocks always seem extremely pricey. But then that’s also why I never invested in Google. 🙂

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Is the Dark Cloud Over Solar Energy Beginning to Break?

By Jason Simpkins
Managing Editor
Money Morning

By sucking the air out of energy prices and sapping private investment, the financial crisis submarined solar energy last fall. But a silver lining has emerged around the dark cloud that has blanketed the sector for so long.

Oil prices have recovered, climbing over $60 a barrel, the recent stock market rally has lured many investors back off the sidelines, and President Barack Obama’s clean energy agenda has breathed some life back into the browbeaten sector.

Now, solar energy stocks – some that lost more than two-thirds of their value last year – have come roaring back.

After topping $300 a share last spring, shares of First Solar Inc. (Nasdaq: FSLR) plummeted to just $85.28 a share in November. But since then the company has bounced back, soaring 125% to Friday’s close of $191.72 a share. Shares of Trina Solar Ltd. (NYSE: TSL) hit $52 last summer before bottoming out at $5.61 in November. That stock is up more than 260% since Nov. 21.

Global economic growth is far from guaranteed at this early stage, but there’s good reason to believe that when a recovery does get underway, solar stocks will be shooting for the moon.

California’s Gold Standard

While many other solar energy companies have collapsed under the weight of the economic downturn, a small upstart out of California has managed to greatly expand its business.

That company is BrightSource Energy, which last week agreed to what the company’s Chief Executive Officer, John Woolard, called the “the largest solar deal in the world.”

Pacific Gas and Electric Co. agreed to purchase 1,310 megawatts (MW) of solar thermal power from BrightSource Energy for a sum that analysts’ believe tops $3 billion.

BrightSource had already agreed to transmit 900 MW of solar power to PG&E in a deal that analysts valued at $2 billion to $3 billion. The terms of the new deal, which expands upon the original 900MW agreement, will build on top of that figure.

BrightSource plans to build seven solar power plants in the Mojave desert of California that will use mirrors to direct sunlight onto a group of centralized water towers to create steam that will, in turn, power turbines. PG&E estimates that the amount of energy produced by the plants will be sufficient enough to power 530,000 homes.

Earlier this year, BrightSource signed a similar 1,300 MW agreement with Southern California Edison Co. – an indication that, despite economic hardship, the solar energy business is still hot.

But a lot of BrightSource’s recent activity has to do with California’s newly adopted state energy policy. In 2006, California passed a law that required electrical utilities to get 20% of their power from renewable sources by 2010.

However, on November 17, 2008, California Gov. Arnold Schwarzenegger took the state’s green energy mandate further by signing Executive Order S-14-08, which requires that utilities generate 33% of their power through renewable sources by 2020.

Indeed, the state of California has led the country in adopting renewable sources of energy, particularly solar.

Renewable energy accounts for 13.5% of the state’s energy consumption, and for the past three years, the California Energy Commission has been managing $400 million targeted for solar on new residential building construction. That includes an ambitious “Million Solar Roof” initiative that will create 3,000 megawatts of installed photovoltaic capacity by 2018.

But California is more than an energy pioneer. It’s an early indication of where U.S. energy policy is headed.

If President Barack Obama’s administration has its way, mandates similar to those issued in California will be employed across the country over the next 10 years. In fact, they already are.

Solar Shift

Obama announced Tuesday that he is making California’s standard for vehicle fuel efficiency and greenhouse gas emissions the new national standard.

Under Obama’s new proposals, vehicles would be 30% cleaner and more fuel efficient by 2016. And that’s just the beginning.

The President’s budget incorporated $646 billion in revenue from capping global-warming pollution, while allocating $150 billion to renewable energy investment over the next 10 years, making his green-funding initiative the largest such effort in U.S. history.

Among other things, Obama’s recent stimulus package provides a tax credit of up to 30% for home solar installations.

The Obama administration also advocates a policy that would require 25% of U.S. electricity demand be met by renewable energy by 2025. The President has the support of the Democrat-led Congress. U.S. Sen. Jeff Bingaman, (D – N.M.), Chair of the Senate Energy and Natural Resources Committee, is working on legislation that aims to make 20% of U.S. energy demand renewable by 2021.

While a renewable energy policy was largely neglected by the administration of George W. Bush, Obama’s effort can hardly be described as partisan. It is more representative of a shift in political ideology that arose when gas prices soared above $4 per gallon last summer.

A recent Gallup Poll showed that the majority of Americans support higher fuel efficiency standards such as those Obama announced Tuesday. In March, 80% of Americans said they favored higher fuel efficiency standards for automobiles.

Currently, just 28 states have renewable energy goals, but with the Obama administration’s effort and a shift in public opinion, it won’t be long before all 50 are enacting their alternative energy mandates.

According to a study by Allianz Global Investors, 78% of investors think green technology could be the “next great American industry,” and 97% of investors believe the development of alternative fuel sources will remain important even if oil prices remain relatively low.

And statistics bear that out. Venture capitalists invested $4.1 billion in alternative energy projects in 2008 – a 54% increase from the year prior, according to a report by PricewaterhousCoopers. What’s more, 45% of that money went to solar projects, compared to 23% in 2007.

“Alternative energy’s rise isn’t going to be smooth, but it’s going to be one of the great new growth industries,” Steven Berexa, managing director of research for RCM Informed, an Allianz subsidiary, told Kiplinger’s Personal Finance magazine.

A Global Industry

In addition to the United States, solar energy is gaining traction around the world.

After subsidizing 2,400 MW of solar projects last year, the Spanish government will subsidize an additional 500 MW this year. Japan aims to create more than 100,000 new jobs in its solar industry as part of an effort to jumpstart its flailing economy. Proposals for solar energy plants are also being considered in the Middle East and northern Africa.

Even BrightSource’s Woolard has attributed some of his company’s success to its overseas operations.

“PG&E looked hard at what we’d done,” Woolard told The San Francisco Chronicle. “They looked at the results from our plant in Israel, and that built a lot of confidence that we were meeting milestones and delivering.”

Most recently, Australia announced plans to build a solar power station that will rival BrightSource’s Southern California operation. The network is expected to produce about 1,000 MW of energy, but won’t be operational until at least 2015.

“We don’t want to be clean energy followers worldwide, we want to be clean energy leaders worldwide,” Prime Minister Kevin Rudd told the Financial Times.

The Australian government hopes renewable energy will account for 20% of the country’s power grid by 2020. Rudd said the government intends to spend about $1 billion (A$1.4 billion) of the $3.6 billion (A$4.7 billion) it has pledged to clean energy initiatives over the next decade.

Like in the United States, the Australian government hopes its alternative energy initiative will be a catalyst for private investment. John Connor, head of the Sydney-based Climate Institute, told the FT that Australia’s clean energy plan will drive an estimated $15.5 billion (A$20 billion) in private investment.

Another country with an ambitious solar agenda is China. A country with notoriously high greenhouse gas emissions, China installed about 50MW of solar capacity last year, more than double the 20 MW in 2007, Renewable Energy World reported.

Beijing plans to expand the installed capacity to 1,800 MW by 2020, as the demand for new solar modules in China could be as high as 232 MW each year from now until 2012.

China is also a good place to find promising solar companies. LDK Solar Co. Ltd. (NYSE ADR: LDK), Yingli Green Energy Holding Co. Ltd. (NYSE ADR:YGE), and JA Solar Holdings Co. Ltd. (NYSE ADR: JASO) have all been beaten down by the market, but could post a strong rebound when China’s solar initiative takes full flight.

Many analysts also like the aforementioned First Solar and Trina Solar Ltd., which stand a better shot of withstanding the recession because of their size and experience.

[Editor’s Note: This story is sponsored by Money Morning Investment Director Keith Fitz-Gerald, who is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this “New Reality” will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “Golden Age of Wealth Creation” The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and on this new market environment.]

May 27, 2009 Posted by | guest post, investing, Money Morning, solar power | 17 Comments

The White Revolution

When I was recently transcribing the interview that Vinod Khosla did for the Milken Institute, something he said caught my attention:

Hybrids are an uneconomic way to reduce carbon dioxide. If you go to hybrids or electric cars, your cost of carbon reduction is about $100/ton. If you have 10 ways of reducing carbon at $50/ton, why would you spend $100? My beef is not with hybrids; we are investing in hybrid batteries; there is a good market and we can make money at it. But do I believe it’s going to solve the climate change problem? No. Save yourself the five grand, and instead paint your roof white. You will save more carbon that way.

He then cited this paper by Art Rosenfeld at Lawrence Berkeley Lab: “White Roofs Cool the World, Directly Offset CO2 and Delay Global Warming“.

Yesterday, speaking in London, Energy Secretary Steven Chu picked up on that theme:

Obama’s climate guru: Paint your roof white!

Speaking in London prior to a meeting of some of the world’s best minds on how to combat climate change, Dr Chu said the simple act of painting roofs white could have a dramatic impact on the amount of energy used to keep buildings comfortable, as well as directly offsetting global warming by increasing the reflectivity of the Earth.

“If that building is air-conditioned, it’s going to be a lot cooler, it can use 10 or 15 per cent less electricity,” he said. “You also do something in that you change the albedo of the Earth – you make it more reflective. So the sunlight comes down and it actually goes back up – there is no greenhouse effect,” Dr Chu said.

When sunlight is reflected off a white or light-coloured surface much of that light will pass through the atmosphere and back into space, unlike the infrared radiation emitted from the Earth’s warmed-up surface, which is blocked by greenhouse gases and causes global warming. “What we’re doing is that, as we put in more greenhouse gases, we’re putting in more insulation for infrared light. So if you make white roofs and the sunlight comes in, it goes right through that [insulation],” said Dr Chu.

The principle could also be extended to cars where white or “cool colours” designed to reflect light and radiation could make vehicles more energy efficient in summer. “If all vehicles were light-coloured, there could be considerable savings because then you can downsize the air conditioning… and downsizing the air conditioner means more efficient air conditioning and a considerable reduction in energy,” he said.

Asked about whether the US administration has any plans to manipulate the climate artificially using large-scale geoengineering programmes, Dr Chu said there were no such plans “at this time”. But painting surfaces white is one geoengineering proposal that he is taking seriously.

I have to admit that I haven’t read the paper, so I can’t comment whether there may be major flaws in the idea. It is certainly interesting, though I do wonder about the scale of painting everything white. But it would be a lot easier to paint roofs white than to go down some of the other pathways that have been floated for slowing carbon emissions. The only down side I can see is that I will have to spend more money on sunglasses. Just thinking about white roads makes my eyes hurt.

May 27, 2009 Posted by | climate change, global warming, Steven Chu | 25 Comments

Book Review: Why Your World Is About to Get a Whole Lot Smaller

Oil 101 by Morgan Downey

Jeff Rubin – the former chief economist at CIBC World Markets – has always struck me as someone who “gets it.” I have seen him do a number of interviews, both on television and in print – and he consistently sounds the alarm on peak oil. He understands very well that cheap oil is the lifeblood of the global economy, yet this is an era that will soon come to an end. His new book – Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization – goes through the peak oil story in a way that I initially thought of as “Kunstleresque“, but I changed my mind as I got deeper into the book.

Some will certainly describe Rubin as a ‘doomer.’ However, by the end of the book I had concluded that there are some significant distinctions between the overall message that Rubin is trying to convey and the message Jim Kunstler conveys in The Long Emergency. Maybe it’s because The Long Emergency really slapped me out of complacency, but I recall being mildly shocked after reading Kunstler. I did not experience that same sense of shock while reading Rubin – but those who are only mildly familiar with peak oil may be.

Rubin covers many familiar themes, such as the domestic cannibalization of exports by energy producers, the need to produce and consume more goods locally, corn ethanol (which he describes as a ‘head fake’), and the overall impact of high oil prices on the global economy. For regular readers, you will find that much of the book is familiar territory, and for a while I was thinking “There is nothing here that I haven’t seen before.” But the book ultimately grew on me, partly because there are two themes that distinguish it from other books I have read about peak oil.

The first involves a discussion of carbon dioxide emissions. In a chapter called “The Other Problem with Fossil Fuels”, Rubin started to make a argument that I have often made: Ultimately it is futile to attempt to regulate carbon emissions, because China is literally bringing several coal-fired power plants online every week. Rubin wrote that between now and 2012, over 500 new coal-fired plants are scheduled to come online – just in China. This was the theme of my essay Why We Will Never Address Global Warming. My belief has been that there really isn’t much that will convince China and other developing countries to cut back on their emissions. While I still think carbon dioxide emissions will continue to rise until we simply run out of fossil fuels, Rubin provided an interesting argument that caused me to think that a different approach might work.

Rubin argues that if we put a price on carbon emissions in the U.S., Canada, Europe, and other developed countries – we can apply a carbon tariff on imports to level the playing field. Rubin states that energy usage per GDP in China is four times that of the U.S. economy. By putting a carbon tariff on Chinese steel, for instance, two things are accomplished. First, the Chinese then have a much greater incentive to become more efficient. Second, domestic energy intensive industries (like steel production) suddenly become much more competitive. The flip-side of course is that it makes energy-intensive products more expensive.

The second theme that distinguishes Rubin’s book is that it is ultimately a hopeful book. About half way through the book, you won’t have that impression. Sometimes when I read books on peak oil, the message is essentially “Abandon all hope; all exits are closed.” I was 116 pages into the book and still thinking that this was standard peak oil fare. But then it started to become apparent that although Rubin sees and understands that this is a very serious and unprecedented challenge, he sees a world emerging with some distinct advantages. He also expects that there will be some technical breakthroughs that we simply can’t anticipate that will likely make our landing into this unfamiliar territory bumpy, but survivable.

Make no mistake, Rubin’s overall message will be sobering to the uninformed. The world Rubin foresees will contain less convenience than today’s world. Gone are fresh fruits and vegetables out of season, cheap Brazilian coffee, and New Zealand mutton. Replacing them will be more expensive, but more locally produced goods. There will be new opportunities and benefits in this changing world. Because of that, I think this book will be important for scaring people into action without causing them to simply abandon hope.

Conclusion

A couple of years ago, I took a road trip from Montana to Texas (described in My Last Long-Distance Car Trip). In that essay – described by some readers as gloomy – I mused about a world in transition. In the concluding chapter of his book, Rubin does the same. He is on a fishing trip in Canada, and he discusses what higher oil prices will mean for 1). The ability of people to fly to remote locations for holidays; 2). The impact on those who depend on those tourist dollars; 3). The future of entire populations in remote areas (much like I did when I drove through Wyoming). While fishing trips to Canada aren’t something most of us can relate to, we can certainly all relate to the idea that expensive energy is going to fundamentally change our lives – and that is the message he conveys.

The last chapter is a melancholy chapter in which Rubin sees an era coming to an end – with huge global implications. He admits that he doesn’t know how this is going to play out, but he thinks that our world is once again going to become a whole lot smaller. And that’s not all bad.

May 24, 2009 Posted by | book review, carbon tax, global warming, Jeff Rubin | 46 Comments

Book Review: Why Your World Is About to Get a Whole Lot Smaller

Oil 101 by Morgan Downey

Jeff Rubin – the former chief economist at CIBC World Markets – has always struck me as someone who “gets it.” I have seen him do a number of interviews, both on television and in print – and he consistently sounds the alarm on peak oil. He understands very well that cheap oil is the lifeblood of the global economy, yet this is an era that will soon come to an end. His new book – Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization – goes through the peak oil story in a way that I initially thought of as “Kunstleresque“, but I changed my mind as I got deeper into the book.

Some will certainly describe Rubin as a ‘doomer.’ However, by the end of the book I had concluded that there are some significant distinctions between the overall message that Rubin is trying to convey and the message Jim Kunstler conveys in The Long Emergency. Maybe it’s because The Long Emergency really slapped me out of complacency, but I recall being mildly shocked after reading Kunstler. I did not experience that same sense of shock while reading Rubin – but those who are only mildly familiar with peak oil may be.

Rubin covers many familiar themes, such as the domestic cannibalization of exports by energy producers, the need to produce and consume more goods locally, corn ethanol (which he describes as a ‘head fake’), and the overall impact of high oil prices on the global economy. For regular readers, you will find that much of the book is familiar territory, and for a while I was thinking “There is nothing here that I haven’t seen before.” But the book ultimately grew on me, partly because there are two themes that distinguish it from other books I have read about peak oil.

The first involves a discussion of carbon dioxide emissions. In a chapter called “The Other Problem with Fossil Fuels”, Rubin started to make a argument that I have often made: Ultimately it is futile to attempt to regulate carbon emissions, because China is literally bringing several coal-fired power plants online every week. Rubin wrote that between now and 2012, over 500 new coal-fired plants are scheduled to come online. This was the theme of my essay Why We Will Never Address Global Warming. My belief has been that there really isn’t much that will convince China and other developing countries to cut back on their emissions. While I still think carbon dioxide emissions will continue to rise until we simply run out of fossil fuels, Rubin provided an interesting argument that caused me to think that a different approach might work.

Rubin argues that if we put a price on carbon emissions in the U.S., Canada, Europe, and other developed countries – we can apply a carbon tariff on imports to level the playing field. Rubin states that energy usage per GDP in China is four times that of the U.S. economy. By putting a carbon tariff on Chinese steel, for instance, two things are accomplished. First, the Chinese then have a much greater incentive to become more efficient. Second, domestic energy intensive industries (like steel production) suddenly become much more competitive. The flip-side of course is that it makes energy-intensive products more expensive.

The second theme that distinguishes Rubin’s book is that it is ultimately a hopeful book. About half way through the book, you won’t have that impression. Sometimes when I read books on peak oil, the message is essentially “Abandon all hope; all exits are closed.” I was 116 pages into the book and still thinking that this was standard peak oil fare. But then it started to become apparent that although Rubin sees and understands that this is a very serious and unprecedented challenge, he sees a world emerging with some distinct advantages. He also expects that there will be some technical breakthroughs that we simply can’t anticipate that will likely make our landing into this unfamiliar territory bumpy, but survivable.

Make no mistake, Rubin’s overall message will be sobering to the uninformed. The world Rubin foresees will contain less convenience than today’s world. Gone are fresh fruits and vegetables out of season, cheap Brazilian coffee, and New Zealand mutton. Replacing them will be more expensive, but more locally produced goods. There will be new opportunities and benefits in this changing world. Because of that, I think this book will be important for scaring people into action without causing them to simply abandon hope.

Conclusion

A couple of years ago, I took a road trip from Montana to Texas (described in My Last Long-Distance Car Trip). In that essay – described by some readers as gloomy – I mused about a world in transition. In the concluding chapter of his book, Rubin does the same. He is on a fishing trip in Canada, and he discusses what higher oil prices will mean for 1). The ability of people to fly to remote locations for holidays; 2). The impact on those who depend on those tourist dollars; 3). The future of entire populations in remote areas (much like I did when I drove through Wyoming). While fishing trips to Canada aren’t something most of us can relate to, we can certainly all relate to the idea that expensive energy is going to fundamentally change our lives – and that is the message he conveys.

The last chapter is a melancholy chapter in which Rubin sees an era coming to an end – with huge global implications. He admits that he doesn’t know how this is going to play out, but he thinks that our world is once again going to become a whole lot smaller. And that’s not all bad.

May 24, 2009 Posted by | book review, carbon tax, global warming, Jeff Rubin | 18 Comments

Chemistry: The Future of Cellulose

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):

Single-step conversion of cellulose to 5-hydroxymethylfurfural (HMF), a versatile platform chemical

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:

Abstract

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.

May 23, 2009 Posted by | biomass gasification, cellulose, chemistry, refining | 44 Comments

With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

[RR note: This blog occasionally posts guest posts, and energy investing is a topic that is visited on a fairly regular basis. The website Money Morning recently noticed that I had linked to one of their articles, and asked if I would be interested in publishing some of their original energy-related content. Because their energy posts are generally consistent with the theme of this blog – and because I often find myself with little time to post – I will be posting some of their original content here. This doesn’t imply that I endorse everything in the story, but then again that was never the case previously with guest posts. These posts are designed to educate and promote discussion, and I will participate in the comments following these posts.]

With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

The U.S. news media has convinced many investors that oil consumption is falling because of the global recession. While that may be true, it’s a disservice to millions of investors because production is declining at a pace that’s actually three times faster.

And that suggests higher oil and gasoline prices in coming months – perhaps as much as 50% – 70% higher, or more – particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

For consumers, the continued economic malaise will mean fewer trips to the store, less-ambitious vacations, and car-pooling to school or work . For businesses, the cutbacks by consumers will clearly translate into canceling trips where conference calls will suffice and using lower-cost shipping alternatives for the decreased sales volumes most U.S. companies will experience.

According to the U.S. Energy Information Administration, oil consumption fell by nearly 50,000 barrels a day throughout 2008. According to the latest figures, the EIA suggests that global oil demand may slump to 83.4 million barrels a day in 2009 – nearly 2.4 million barrels below 2008 consumption levels. On a percentage basis, that’s almost a 3% drop. I have my doubts that we’ll actually see a decline of this magnitude, but if it does occur, it will be the first time ever that consumption has declined for two straight years. That alone is pretty noteworthy in this era of cohesive and powerful global growth.

The reason I have my doubts about such a steep decline in demand is this: While overall consumption is dropping in such developed economies as the United States, Europe and Australia, it’s being at least partially offset by continued growth in China, the Middle East and Latin America. Because the data produced there is less than transparent, I can’t help but think that analysts are underestimating the growth we’ll be seeing in those markets, where consumption is accelerating strongly. And it’s entirely possible that growth in those markets will outstrip any fall here in the developed world.

Even if the growth in the emerging markets doesn’t quite offset the decline in their developed brethren, analysts seem to be forgetting that oil prices are a function of two variables – consumption and production. And it’s the change in production that’s going to catch a lot of people by surprise.

After a run of record high oil prices punctuated by frantic resources development, we’re now seeing the opposite scenario. The long period of lower than anticipated oil prices following oil’s meteoric rise last year means that the entire industry is no longer making the investments needed to sustain production capacity or actual production.

And not many folks recognize this fact.

For instance, direct project investment in drilling may be down as much as 20%, while the number of drill rigs in operation in America alone has dropped by more than 40%. Various estimates from the EIA and private sources suggest that actual U.S. production may fall by as much as 320,000 barrels a day. While the amount is a matter of debate, the fact that production is declining is not.

More than 20% of total U.S. oil production comes from tiny wells located in remote areas that were marginally profitable producers when crude oil was trading at $100 a barrel. With oil currently at about $61 a barrel, those producers are practically worthless now. So the “mom-and-pop” shops that own them are actually abandoning entire fields and equipment without a moment’s thought.

To be fair, at least part of the drop in demand can be attributed to increased reliance on methanol, ethanol and other types of biofuel, but that’s hard to quantify at the moment because the long period of low oil prices has eroded the economic viability of alternative fuels – at least for now.

The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody’s fancy only 24 months ago. Now we’re seeing Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), StatoilHydro ASA (NYSE ADR: STO) and Petro-Canada USA (NYSE: PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez – the perennial motor mouth and longtime U.S. critic – is eating crow. He’s begrudgingly invited (read that to mean “is begging”) the oil companies whose assets he nationalized only a year ago to “come back” into the market.

He has no choice. Venezuela’s oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country’s hard-to-reach reserves.

Chavez’s Chavez’s government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there’s simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn’t matter whether the decline is prompted by depletion, war, or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on but I think you get the picture.

Now imagine what could happen to oil-and-gasoline prices when normalized demand resumes. Not only will there be less oil in storage, but virtually the entire industry – exploration, production, refining and sales – is going to be caught sitting on its heels when the world needs it to be zooming along in high gear. And that means the companies that make up this industry will have to ramp up again to meet the newly increased consumption demands.

This whole process could take two years – or even longer – to play out.

As for prices, history is replete with examples of what happens when there are major shortages of key commodities.

In the Energy Crisis of 1973-74, for example, I can still remember the numbingly long gas lines and waiting in the car for hours to get a fill-up. My father and grandfather vividly remember that prices quadrupled in a matter of months. I’m sure you do, too.

Only a few years later, in 1979, we got another oil shock when prices quadrupled again. Because it was coupled with stagnant economic growth and virulent inflation (stagflation), this period was an economic disaster for the United States.

For those who had learned from the earlier crisis, however, it was a mondo- profit opportunity.

The same can be said for 2007-2008, when the huge spike in oil prices that I predicted contributed to the bear market in stocks, tight credit and recessionary conditions that led to the current malaise that continues to grip the U.S. economy. As much as anything else, high oil prices contributed to the carnage we’ve seen in the auto-making and airline industries, and to the financial crisis that started here before spanning the globe.
Which brings us full circle.

Many investors will refuse to believe we’ve arrived at this new energy nexus, especially given all the hype we’ve seen surrounding alternative fuels, hybrid vehicles and the new “green” mentality that’s taken hold here in this country. If you listen to some of the real believers, they’ll tell you that we could be living in a petroleum-free Nirvana – as early as tomorrow.

While I personally would like that, too, it’s a misleading argument if for no other reason than there are millions of consumer items we use – from plastic bags to makeup – still created using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum, and even the most aggressive estimates suggest that it will take the world decades to shift away from them.

We’re in much the same situation when it comes to hybrid vehicles. There isn’t a mass-produced electric vehicle available today that could offset the coming rise in recovery-driven demand for oil and gasoline. There’s a strong effort underway, but I’m not aware of a single company ready to field the solution in cost-affordable quantities by 2010 – which is when most analysts say a recovering economy will stoke demand for oil.

Of course, U.S. President Barack Obama’s much-lauded efficiency and greenhouse-gas-standards mandate will help significantly, but that’s like bolting the barn door after the horses have run for the fields. The irony of watching auto executives “applaud” his press conference was almost too much to watch with a straight face. But that’s a story for another time.

The bottom line is this: Our society will be highly dependent on oil for many years to come and investors should plan accordingly.

If governments around the world really want to get serious, they could collectively work to eliminate the fuel subsidies that are part of the price paid for gasoline in Asia or sugarcane ethanol in Brazil. We could also stop our own energy pork barreling. But given the complete lack of transparency that surrounds this issue – not to mention the influence wielded by vested industry interests, and the scores of well-paid lobbyists that patrol the halls of power in our nation’s capital – I don’t think we’ll see any big changes anytime soon.

So I’m left with one inescapable conclusion, at least in the intermediate term. Every investor needs to have at least some sort of energy strategy – preferably one that includes a range of drillers, producers and suppliers to cover the spectrum from wellhead to consumer.

That way, we can profit from an increase in energy prices that we can only hope rise fast enough to jump-start the oil industry’s production arm but not so fast that it snuffs out the badly needed economic recovery.

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this “New Reality” will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “Golden Age of Wealth Creation” The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and on this new market environment.]

May 22, 2009 Posted by | guest post, investing, Money Morning | 25 Comments

With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

[RR note: This blog occasionally posts guest posts, and energy investing is a topic that is visited on a fairly regular basis. The website Money Morning recently noticed that I had linked to one of their articles, and asked if I would be interested in publishing some of their original energy-related content. Because their energy posts are generally consistent with the theme of this blog – and because I often find myself with little time to post – I will be posting some of their original content here. This doesn’t imply that I endorse everything in the story, but then again that was never the case previously with guest posts. These posts are designed to educate and promote discussion, and I will participate in the comments following these posts.]

With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

The U.S. news media has convinced many investors that oil consumption is falling because of the global recession. While that may be true, it’s a disservice to millions of investors because production is declining at a pace that’s actually three times faster.

And that suggests higher oil and gasoline prices in coming months – perhaps as much as 50% – 70% higher, or more – particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

For consumers, the continued economic malaise will mean fewer trips to the store, less-ambitious vacations, and car-pooling to school or work . For businesses, the cutbacks by consumers will clearly translate into canceling trips where conference calls will suffice and using lower-cost shipping alternatives for the decreased sales volumes most U.S. companies will experience.

According to the U.S. Energy Information Administration, oil consumption fell by nearly 50,000 barrels a day throughout 2008. According to the latest figures, the EIA suggests that global oil demand may slump to 83.4 million barrels a day in 2009 – nearly 2.4 million barrels below 2008 consumption levels. On a percentage basis, that’s almost a 3% drop. I have my doubts that we’ll actually see a decline of this magnitude, but if it does occur, it will be the first time ever that consumption has declined for two straight years. That alone is pretty noteworthy in this era of cohesive and powerful global growth.

The reason I have my doubts about such a steep decline in demand is this: While overall consumption is dropping in such developed economies as the United States, Europe and Australia, it’s being at least partially offset by continued growth in China, the Middle East and Latin America. Because the data produced there is less than transparent, I can’t help but think that analysts are underestimating the growth we’ll be seeing in those markets, where consumption is accelerating strongly. And it’s entirely possible that growth in those markets will outstrip any fall here in the developed world.

Even if the growth in the emerging markets doesn’t quite offset the decline in their developed brethren, analysts seem to be forgetting that oil prices are a function of two variables – consumption and production. And it’s the change in production that’s going to catch a lot of people by surprise.

After a run of record high oil prices punctuated by frantic resources development, we’re now seeing the opposite scenario. The long period of lower than anticipated oil prices following oil’s meteoric rise last year means that the entire industry is no longer making the investments needed to sustain production capacity or actual production.

And not many folks recognize this fact.

For instance, direct project investment in drilling may be down as much as 20%, while the number of drill rigs in operation in America alone has dropped by more than 40%. Various estimates from the EIA and private sources suggest that actual U.S. production may fall by as much as 320,000 barrels a day. While the amount is a matter of debate, the fact that production is declining is not.

More than 20% of total U.S. oil production comes from tiny wells located in remote areas that were marginally profitable producers when crude oil was trading at $100 a barrel. With oil currently at about $61 a barrel, those producers are practically worthless now. So the “mom-and-pop” shops that own them are actually abandoning entire fields and equipment without a moment’s thought.

To be fair, at least part of the drop in demand can be attributed to increased reliance on methanol, ethanol and other types of biofuel, but that’s hard to quantify at the moment because the long period of low oil prices has eroded the economic viability of alternative fuels – at least for now.

The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody’s fancy only 24 months ago. Now we’re seeing Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), StatoilHydro ASA (NYSE ADR: STO) and Petro-Canada USA (NYSE: PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez – the perennial motor mouth and longtime U.S. critic – is eating crow. He’s begrudgingly invited (read that to mean “is begging”) the oil companies whose assets he nationalized only a year ago to “come back” into the market.

He has no choice. Venezuela’s oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country’s hard-to-reach reserves.

Chavez’s Chavez’s government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there’s simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn’t matter whether the decline is prompted by depletion, war, or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on but I think you get the picture.

Now imagine what could happen to oil-and-gasoline prices when normalized demand resumes. Not only will there be less oil in storage, but virtually the entire industry – exploration, production, refining and sales – is going to be caught sitting on its heels when the world needs it to be zooming along in high gear. And that means the companies that make up this industry will have to ramp up again to meet the newly increased consumption demands.

This whole process could take two years – or even longer – to play out.

As for prices, history is replete with examples of what happens when there are major shortages of key commodities.

In the Energy Crisis of 1973-74, for example, I can still remember the numbingly long gas lines and waiting in the car for hours to get a fill-up. My father and grandfather vividly remember that prices quadrupled in a matter of months. I’m sure you do, too.

Only a few years later, in 1979, we got another oil shock when prices quadrupled again. Because it was coupled with stagnant economic growth and virulent inflation (stagflation), this period was an economic disaster for the United States.

For those who had learned from the earlier crisis, however, it was a mondo- profit opportunity.

The same can be said for 2007-2008, when the huge spike in oil prices that I predicted contributed to the bear market in stocks, tight credit and recessionary conditions that led to the current malaise that continues to grip the U.S. economy. As much as anything else, high oil prices contributed to the carnage we’ve seen in the auto-making and airline industries, and to the financial crisis that started here before spanning the globe.
Which brings us full circle.

Many investors will refuse to believe we’ve arrived at this new energy nexus, especially given all the hype we’ve seen surrounding alternative fuels, hybrid vehicles and the new “green” mentality that’s taken hold here in this country. If you listen to some of the real believers, they’ll tell you that we could be living in a petroleum-free Nirvana – as early as tomorrow.

While I personally would like that, too, it’s a misleading argument if for no other reason than there are millions of consumer items we use – from plastic bags to makeup – still created using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum, and even the most aggressive estimates suggest that it will take the world decades to shift away from them.

We’re in much the same situation when it comes to hybrid vehicles. There isn’t a mass-produced electric vehicle available today that could offset the coming rise in recovery-driven demand for oil and gasoline. There’s a strong effort underway, but I’m not aware of a single company ready to field the solution in cost-affordable quantities by 2010 – which is when most analysts say a recovering economy will stoke demand for oil.

Of course, U.S. President Barack Obama’s much-lauded efficiency and greenhouse-gas-standards mandate will help significantly, but that’s like bolting the barn door after the horses have run for the fields. The irony of watching auto executives “applaud” his press conference was almost too much to watch with a straight face. But that’s a story for another time.

The bottom line is this: Our society will be highly dependent on oil for many years to come and investors should plan accordingly.

If governments around the world really want to get serious, they could collectively work to eliminate the fuel subsidies that are part of the price paid for gasoline in Asia or sugarcane ethanol in Brazil. We could also stop our own energy pork barreling. But given the complete lack of transparency that surrounds this issue – not to mention the influence wielded by vested industry interests, and the scores of well-paid lobbyists that patrol the halls of power in our nation’s capital – I don’t think we’ll see any big changes anytime soon.

So I’m left with one inescapable conclusion, at least in the intermediate term. Every investor needs to have at least some sort of energy strategy – preferably one that includes a range of drillers, producers and suppliers to cover the spectrum from wellhead to consumer.

That way, we can profit from an increase in energy prices that we can only hope rise fast enough to jump-start the oil industry’s production arm but not so fast that it snuffs out the badly needed economic recovery.

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this “New Reality” will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “Golden Age of Wealth Creation” The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and on this new market environment.]

May 22, 2009 Posted by | guest post, investing, Money Morning | 31 Comments

Thoughts on New Fuel Efficiency Standards

After I wrote The Problem with CAFE a couple of years ago, a lot of people concluded that I am against higher CAFE standards. That’s not exactly the case. In a nutshell, my problem with CAFE is that I feel like it addresses the problem from the wrong side of the equation. In light of the new announcements on stricter CAFE standards, this might be a good time to review the issue. First, the new policy:

Stricter mpg rules may be boon for automakers

By issuing rules aimed at sharply boosting vehicle gasoline mileage and slashing greenhouse gas emissions, experts say the Obama plan is just what carmakers need given the prospect of higher gas prices and worries about global warming.

Automakers, in fact, reversed decades of opposition to stricter mileage standards by supporting the administration’s new rules — likely spurred in part by the industry’s heavy reliance on bailout money from U.S. taxpayers. Auto executives, for their part, said they like the plan’s unified approach to rulemaking.

The plan’s 30 percent boost in fuel economy would translate into a 35.5 mile per gallon average for cars and light trucks in 2016, four years earlier than the existing law called for. New passenger cars sold here would need to average 39 mpg, up from the current 27.5 mpg. Light trucks, which include pickups and sport-utility vehicles, would need to average 30 mpg, up from 23.

So what could possibly be wrong with that? The problem I have with it is that it mandates that automakers build vehicles that people are not demanding. There are very fuel efficient cars available right now. In fact, that’s about all you see in Europe, and you can certainly get them in the U.S. Why is the demand high in Europe? High fuel prices. People demand fuel efficient cars when fuel prices are high, as we saw last summer when SUV sales plummeted and hybrids were flying off of the car lots. Europe doesn’t have to mandate that they are built; the demand is there. This was the thrust of my argument in 2007, and CNN has picked up on that theme as well:

Gas prices: The key to fuel economy

The Obama administration estimates these rules will add about $600 to the cost of a car. That’s on top of an estimated $700 added by changes to fuel economy rules that have already been enacted. All this may keep consumers from buying a new car, some say.

Also with fuel prices still low, consumers may want larger vehicles, but these will never be as efficient as small cars. Without soaring gas prices pushing drivers to conserve, it will be difficult for makers of larger vehicles to meet the administration’s efficiency goals.

“You could achieve the standards today with ultralight, really small cars,” said Jeremy Anwl, chief executive of the automotive Web site Edmunds.com, “but how many people are really going to buy those?”

“They’re continuing to focus on the wrong program,” said Todd Turner, an analyst with Car Concepts Automotive Research.

Bingo. The problem with this is that the end result may very well result in better fuel efficiency, but it will be an inefficient process. By making cars that aren’t in demand, you may increase the price of the larger cars (e.g. SUVs) that are in demand. This may shift demand to smaller cars. But this could be accomplished by my proposal to exchange higher fuel taxes for reduced income taxes.

I think that’s reality. But in the alternate reality where technology is magically mandated to fix problems, we get thinkers like this:

Obama’s fuel home run

America finally has a smart leader, not a good old boy from Texas and his sidekick who were in the hip pockets of the Saudis and oil interests at home and abroad. Yesterday’s announcement of dramatically enhanced fuel efficiency standards on vehicles recognizes that environmental, economic, trade and foreign policies converge and can be addressed all at once.

I think these sorts of stories are incredibly naive. I suspect everyone is for higher fuel efficiency. What these sorts of proposals suggest is that it is a painless fix. Detroit will bear the costs, while consumers can continue to drive their Lincoln Navigator, only now it will get 30 miles per gallon instead of 14. Somehow, this magic wave of the wand is going to do this, and Obama is a genius for recognizing it.

Heck, if it is that easy, I don’t understand why he didn’t mandate that all vehicles achieve 100 mpg. For that matter, I still can’t understand why we don’t mandate a cure for cancer.

May 21, 2009 Posted by | CAFE, fuel efficiency | 82 Comments

Pacific Ethanol Plants Declare Bankruptcy

I don’t actually enjoy posting “I told you so” stories, especially when the news is negative. This means someone has failed, and I don’t enjoy seeing people fail. But when I put a spotlight on a company, naturally I am going to follow that company. If it does fail, then that will be reported upon, as has been the case previously with Xethanol and later on with algal biofuel producer GreenFuel. If a company that I have cast doubts on goes on to success, I will highlight that as well, but I don’t believe that has happened yet. If Coskata proves me wrong, or Vinod Khosla goes on to great success as a biofuel magnate, I will write about it.

Today Pacific Ethanol (PEIX), one of the companies that I have tracked the longest, declared bankruptcy for Pacific Ethanol, Inc. This is not bankruptcy for the entire company, but it is bankruptcy for the ethanol plants themselves, which apparently leaves the marketing branches (Kinergy Marketing LLC and Pacific Ag. Products LLC) intact. I state that as a matter of fact, not with any smug satisfaction.* I recognize the people who work at these plants are hard-working people with families to support, and I don’t delight at seeing anyone out of work. As I told someone recently (in fact, we were talking about Pacific Ethanol and Coskata) “This is never personal. I am just stating my opinions.” With that preface, I offer my sincere condolences to all the people impacted by this development.

It was in July 2006, in the wake of a very positive article on investing in ethanol that I wrote an article for Financial Sense that suggested that ethanol stocks were overvalued. I focused on Pacific Ethanol, stating that I would “take a look at Pacific Ethanol to show why I think the underlying fundamentals make it a very risky investment.” Here was the problem as I saw it in a nutshell:

Another factor working against Pacific Ethanol’s success is the ability to secure cheap corn supplies for their plant. According to http://www.ethanol.org/FAQs.htm [RR: This link and the next one are both now dead], an important factor to consider when building an ethanol plant is proximity to corn. Local grain supplies, preferably within 50 miles of the plant, are important for keeping costs down. Yet California produces little corn. In recent years, California’s corn crop amounted to barely over 1% of the corn crop in Iowa (http://www.corn.org/web/uscprod.htm). This makes it likely that PEIX will have to import corn from out of state, driving up production costs. It will probably be cheaper for a producer to produce ethanol in the Corn Belt, and then ship the ethanol to California than it would be to ship the corn there and produce it locally. There is a reason that California is not a hotbed of ethanol activity, despite the fact that Californians consume ethanol. It’s too far from the corn, so it is more cost effective to ship in finished ethanol.

I just never thought they were going to be able to compete with the guys in the Midwest. When you ship all that corn from Iowa, you are shipping all of the waste products and all of the water as well. You end up with byproducts in greater quantities than the local markets can absorb. It always made more sense to me to produce ethanol in Iowa, feed the byproducts to cattle in the area, and ship the finished ethanol to California. To me, that was going to be the low cost producer for ethanol in California (with the possible exception of ethanol from Brazil).

On top of the geographical problem, the sector as a whole has been in big trouble as too many producers joined the party. While PEIX was at one time fairly well-capitalized, they were ultimately unable to withstand the problems plaguing the sector in general. My prediction is that the plants will end up being auctioned off as the Verasun assets were.

* OK, maybe a tiny bit of satisfaction toward people who suggested that since Bill Gates had invested in PEIX, I must be an idiot for criticizing it.

May 19, 2009 Posted by | Pacific Ethanol, PEIX, Xethanol, XNL | 87 Comments