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Looks Like I Struck a Nerve

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

February 18, 2010 Posted by | energy policy, ethanol mandate, ethanol subsidies, farm policy, Growth Energy, politics | Comments Off on Looks Like I Struck a Nerve

A Redundant Subsidy

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

A Redundant Subsidy

An excerpt:

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

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

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

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

Our Tax Dollars at Work

First off, a couple of announcements. After being able to stay at home for the past two months, I have a very heavy travel schedule over the next two weeks. My participation here will probably be limited. I am off to Seattle tomorrow, on to the Netherlands from there, will visit Switzerland and Germany, back to the U.S. mainland, on to Canada, and then back to Hawaii. I have essentially piled up eight visits I need to make into one big, exhausting trip. My ability to post and respond to comments and e-mails will be spotty at best.

Second, my first essay went up yesterday at Forbes: The Price of Energy. My intention is to put something up there every week or two, and my primary goal is to be educational with the essays. I don’t plan to do any major debunking of company claims there, although I will still do that here occasionally. I will generally first post the stories targeted for Forbes on my blog, modify as appropriate based on the comments (in the case that something is incorrect or unclear), and then post it at Forbes.

Now, on to today’s story. Yesterday I saw a story on what is one of the silliest ideas I have ever heard from a politician. It isn’t the first time I have heard it mentioned, but I believe it is the first time one of our legislators actually announced they were going to take action on it:

Braley Announces Legislation to Require Country of Origin Labeling for Fuels

Washington, DC – In an address to the Iowa Renewable Fuels Association today, Rep. Bruce Braley (D-Iowa) announced he will introduce legislation to require country of origin labeling for fuels. Braley will introduce the bill, Country of Origin Labeling (COOL) for Fuels, tomorrow when he returns to Washington, DC.

The bill will require the Department of Energy to conduct a study and implement its recommendations to ensure American consumers have the ability to decide at the gas pump whether they want to purchase domestic fuel products, such as biofuels produced in Iowa, or gasoline produced in hostile nations that many terrorists call home.

“When we fill up our vehicles, there’s no existing method for us to know where the fuel we’re purchasing comes from and which nations are deriving the economic benefit from that purchase,” Braley said. “When we put food in our bodies or clothes on our backs, we know exactly where those products come from. Americans should have the same opportunity to vote with their wallets at the gas pump.

The intent of the bill is not the reason this is a dumb idea. I think most people would appreciate a choice of the country of origin for their fuel. We would ideally prefer that fuel to be sourced domestically (unless of course we have to pay a premium for it), and beyond that many would prefer to buy fuel from Mexico over Venezuela. So to be clear, I understand the spirit of the bill.

The silly part comes about in the attempted execution. The petroleum supply chain does not segregate products by country. Sure, a supertanker may leave Saudi Arabia with 100% Saudi crude, but once it arrives it gets mixed with whatever else may be left in the pipelines and crude tanks. Then, as it goes through the refinery, there are streams from many different sources. Finally, when it goes into the pipeline and on to the retailer it gets mixed with products from many different locations. In fact, in many places the fuel you put in your car has portions from many locations.

There are exceptions; the Billings Refinery I used to work at only got crude domestically or from Canada because no supertankers have access to the refinery. But then once product ships to Denver or toward the West Coast, it will inevitably mix with product derived from elsewhere (e.g., product coming up from Texas to Denver will probably contain some Venezuelan crude).

I wonder if one of our government leaders will figure out that essentially all of the corn ethanol produced in the U.S. today is enabled by petroleum, and that petroleum is inevitably sourced from imports. So I suppose the corn ethanol should be labeled as well: “This ethanol was enabled by Saudi/Venezuelan/Russian crude.” No, I suppose we will keep that skeleton in the closet.

The purpose of this bill from the Congressman from Iowa is of course to try to tilt the playing field in the direction of corn ethanol. That’s understandable, as that is his job. But the idea is either very poorly thought out, or it is just an example of him posturing for his constituents.

I don’t believe this bill has any chance of passing, but presuming for a moment that it did, the labels would all have to look like those food labels that say something like “This food was processed in a facility that also processed peanuts. It may have in fact touched peanuts at some point.”

Our product label would read like “This crude may have been sourced from the U.S. and/or one or more of the following 30 countries…” This would appear on every gasoline and diesel pump in the U.S., and would therefore be ignored by everyone. In other words, trying to pass such a bill is simply a waste of time and taxpayer money.

Note: This story was also characterized very well at Bnet by Kirsten Korosec:

Label My Crude: Iowa Congressman Wants Americans to Know Where Their Fuel Was Born

In that essay, Kirsten pointed out the impracticality of implementing such a plan, and also linked back to my essay on the Top 10 suppliers of crude to the U.S. to show readers where U.S. crude imports actually do come from.

January 27, 2010 Posted by | energy policy, ethanol, farm policy, Iowa, politics | Comments Off on Our Tax Dollars at Work

Wood Versus Fuel

I know it has been a week since I put up something new. Some readers have also noticed that I haven’t been commenting much lately, and my e-mails are piling up. Things have just been really busy. I have a few guest posts that should be ready to go within a week or so, but I saw a topical story this morning that was worth commenting on:

The unintended ripples from the biomass subsidy program

The issue of incentives for biofuels increasing the demand for grains and thus helping drive up food prices is often called “Food versus Fuel.” There is also an incentive program (Biomass Crop Assistance Program) designed to encourage the use of biomass for heat, power, or biofuels. As is almost always the case, there were unintended consequences:

While it remains unclear whether Congress or the Obama administration will push to revamp the program, even some businesses that should benefit from the subsidy are beginning to question its value.

“It’s not right. It’s not serving any purpose,” said Bob Jordan, president of Jordan Lumber & Supply in North Carolina, even while noting that he might be able to get twice as much money for his mill’s sawdust and shavings under the program.

“The best thing they could do is forget about it. All it’s doing is driving the price of wood up.”

Sounds like “Food versus Fuel” except in this case it is the cost of wood – not food – that is being driven higher. The thing is that there are always trade-offs and always unintended consequences. We have to be wise enough to change policies in cases where the unintended consequences outweigh the benefits. But you have to look at the big picture as well. Were there also unintended benefits? Things like that must be considered.

In this case, I don’t know whether the unintended consequences outweigh the benefits. I think it is too early to know for sure. But in any case, higher cost biomass is something I expect in the future. I made this point in my presentation at the Pacific Rim Summit. If your business model is based on either tipping fees, or just free or very cheap biomass – then I doubt that model is sustainable. I think as more companies attempt to turn biomass into fuel, competition will heat up and free or negative-valued biomass will be a thing of the past.

Therefore, I think the safe bet is to plan for 1). Escalating biomass prices; 2). No government assistance. I have no objections to getting started with government assistance, but if you don’t have a clear plan for operating in a subsidy-free environment, then you may just be wasting taxpayer money up until the point that your business fails because conditions changed (in a way that you should have anticipated).

January 11, 2010 Posted by | biomass, energy policy, farm policy, politics, USDA | Comments Off on Wood Versus Fuel

The Questions I Didn’t Ask

I have been asked to submit a video question on ethanol policy that will be potentially answered in a video blog by someone who is very well-known in the energy business. I will keep the details quiet for now, including the question I did submit. (I thought I would be able to record my question with stunning Hawaiian scenery in the background, but alas it has been raining for two days).

I really had to brainstorm on exactly which question I would ask. I made a short list, and finally honed it down to one that I think is fair, but tough. But I had a number that I decided not to ask, either because I already knew how it would be answered (even if I disgreed with the expected answer) or the questions/answer to the question was so complex that it couldn’t be answered in a short video clip.

Here I discuss what I didn’t ask, but it really gets to the heart of the issues I have with U.S. ethanol policy. First, a bit of framework. I believe that I am, and have always been objective, and a realist. I don’t believe that we are ever going to have a moment where government leaders say “Let’s abandon this ethanol pathway.” We had an example of that with MTBE, but there was clear evidence that MTBE was getting into groundwater and lingering.

The issues around ethanol are more complex. Corn ethanol has been U.S. policy for the past 30 years, and it will be policy for the next 30 years. It is too embedded in agriculture policy, and I think it would be devastating for Midwestern economies if we changed direction on corn ethanol. Thus, I think we continue down that path, for better or worse.

I am not pro-ethanol nor am I anti-ethanol. In one of my earliest essays in this blog, over 3.5 years ago, I talked about some of the things I would like to see happen in the grain ethanol industry, mostly aimed at improving the energy balance. I came out in favor of the approach of E3 Biofuels, who were trying to build a highly integrated ethanol complex that minimized fossil fuel inputs. I have endorsed such approaches on multiple occasions.

My concerns are, and have always been: What are the long-term consequences? I don’t limit this to ethanol; this is a question that I ask of all energy options. Dependence on oil has some significant long-term consequences. The most serious of which, for me, is the potential for building a world that is only sustainable as long as oil production continues to expand. I see significant risk there, so it has always been my position that we need to reduce our dependence on fossil fuels in general.

With respect to ethanol, consider this thought experiment that I posed following one of my previous essays: Would you consume 2 BTUs of natural gas to produce 1 BTU of ethanol? I think most people would conclude that this would be foolish; that your natural gas supplies would stretch much further if instead you simply use the natural gas in CNG vehicles (acknowledging of course that there are lots of things you have to evaluate in that scenario). For those who would answer “Yes” to that question, I would argue that your view of ethanol is entirely one-dimensional. You probably only care that it is homegrown, and you don’t worry much about the long-term consequences.

Of course the truth is more complicated than the example above. It doesn’t take 2 BTUs of natural gas to produce 1 BTU of ethanol. Estimates vary, but it is still safe to say that most ethanol operations in the U.S. continue to have substantial fossil fuel inputs. That is the way they were built, and that is the way they will continue to operate. Over the long-term, there is potential to change that equation by using biomass boilers, but those are more expensive to operate than a standard natural gas boiler.

So on average the ethanol industry does still have a heavy fossil fuel dependence, albeit largely domestic coal (for electricity) and domestic natural gas – with some petroleum inputs for trucks, tractors, etc. (One thing to note is that more than 50% of our fertilizer supplies – derived from natural gas – are in fact imported). So what if the question was “Would you spend 1 BTU of natural gas to make 2 BTUs of ethanol?” If you are doing a holistic analysis, the answer should be “It depends. What are the other impacts?”

There are those who wrap U.S. ethanol policy in patriotism and the American flag, and who would rather not get into those questions. These questions are hand-waved away with clichés like “I would rather support American farmers than Saudi sheiks.” I try to look at it from the perspective of an engineer, a scientist, and an environmentalist. I want to stack the columns up and figure out what is really happening as a result of our ethanol policy and subsequent rapid expansion of corn production. I want to look at it from the perspective of “What is going to be the impact on the world my children will inherit?”

Just a few of the key questions for me are the following:

  • Are we depleting fossil aquifers as a result of the expansion of corn in areas requiring irrigation – putting future food supplies at risk?
  • Are we at risk of contaminating water supplies with herbicides, pesticides, and fertilizer run-off?
  • What has been the measurable impact on our oil imports – the generally stated reason for our ethanol policy?
  • What is the long-term impact on soil as a result of erosion and pesticide usage?
  • What is the risk of major weather events impacting the corn crop, and subsequently causing a shortage of corn for ethanol and driving food prices much higher?
  • What are the other risks of closely linking together food supplies with fuel supplies?
  • In a nutshell, I want to know if we are compromising the future relative to other options, and/or relative to the status quo. These sorts of issues are generally ignored by most advocates. They believe our ethanol policy is the right thing to do, and then nothing else matters. I have debated people like this before, and they are simply not interested in the holistic picture. Often, it is because they are vested interests.

    Chief ethanol lobbyist Bob Dineen isn’t going to be at the forefront, trying to determine the answers to these questions. His job is to promote ethanol, period. He will get involved when one of these questions becomes persistent enough and loud enough, and his position will typically be that of defense attorney: Deflect the question if you can, and try to raise doubts that the question even matters.

    But I am not a vested interest dug into a bunker. If our ethanol policy is better than the status quo, then I am all for it. But you can’t know that unless you take a really comprehensive look. I would like to see an independent analysis of all of these issues, now that we are some 11 billion gallons per year into this experiment.

    The problem is finding an independent agency to do such an analysis. The ethanol lobby hires their consultants, who conclude, “It’s all good.” Big surprise there. (By the way that is the same guy who wrote a paper stating that ethanol with the energy value of 64 million barrels of oil displaced 206 million barrels of oil).

    Energy policy in general is a complicated issue, and it is wrapped up deeply in politics. I doubt we will ever get the independent review I would like to see – and even if we did the lobbyists would immediately go to work trying to discredit the study. But I hope you can see why I decided not to ask that question. It might take 10 minutes to ask it, and then an hour to answer it – and I don’t think the answer would really get into the fine details that I am interested in.

    You will have to stay tuned to see the question I did ask.

    December 5, 2009 Posted by | energy policy, environment, ethanol, farm policy, politics | 201 Comments

    King Corn and Big Oil

    Over the weekend, I watched the documentary King Corn. It was released in October 2007, but I just now got around to watching it online at Netflix. The premise is that a pair of college friends from the East Coast wanted to learn more about where our food comes from. When they learn about the importance of corn in our food supply, they move to Iowa and decide to grow an acre of corn over a growing season in order to better understand its role in the food chain.

    As the movie progresses, U.S. farm policy with respect to corn is explored. It struck me during the movie that U.S. farm policy has many parallels to U.S. energy policy. Both systems have been set up with the goal of providing the cheapest prices to consumers. Both Big Oil and Big Ag work within the systems that have been created, but there are many negative consequences of these systems. I am grappling with the trade-offs.

    On the one hand, the movie made a point that I often hear in relation to the oil industry: Consumers are now spending less of their disposable income on food (or energy) than they have in decades. So the consumer benefits from having extra money to spend on other things. But that also means that less money is flowing to the farmers, which drives vicious cost-cutting and has decreased the viability of the small family farm.

    Cheap food and cheap energy also lower the financial penalty to consumers for over-consumption. Cheap, subsidized corn has led to cheap corn sweeteners, which can be found today in many of our foods. The rise of obesity and diabetes in the U.S. has been linked to the rise of high fructose corn syrup (HFCS) in our diets, which can be traced back to a farm policy that encourages over-production of certain crops. (I have to admit, if the choice is high fructose corn syrup or ethanol, I will choose ethanol).

    King Corn implicates former President Nixon’s Secretary of Agriculture Earl Butz as the man responsible for sending us down this path of industrialized agriculture with a radical rewriting of U.S. farm policy in the early 1970’s. (For more details on Butz’s legacy, see A reflection on the lasting legacy of 1970s USDA Secretary Earl Butz by Tom Philpott).

    Of course people are responsible for the choices they make. The government can’t be everyone’s mother. But they do put policies in place that influence choices. It is easy for me to choose not to over-consume if I can’t afford to do so. There is a reason most of us don’t eat lobster twice a week, and it isn’t because we don’t like lobster. But the calories from HFCS are much cheaper, so food dollars of those whose incomes are stretched gravitate in that direction.

    Thus, I grapple with the dilemma of whether it is better that consumers spend more disposable income on food and energy in order to limit consumption. I don’t want to see people starving, but I also don’t want to see people dying from diabetes. The annual costs attributed to obesity in America have been estimated to be $100 billion, and the cost of diabetes at over $200 billion. That is $1,000 per year for every man, woman, and child in the country – and a loss of the quality of life for those afflicted. Those costs are at least partially attributable to the policies that have led to over-production of food.

    I am both the product of an American farm, and a former employee of Big Oil. These experiences have shaped my views on and my interest in our respective agriculture and energy policies. I think these policies over the past few decades have led us to an unfortunate place: Fat, diabetic, and with a level of dependence of foreign oil that threatens to bankrupt the country. Further, there are entrenched lobbies that spend lots of money to maintain the status quo.

    I certainly don’t blame the farmer for this. As one man said during the movie “I will produce what consumers demand. If they demand (leaner) grass-fed beef over corn-fed beef, that’s what I will produce.” That’s the same reason oil companies produce gasoline and car companies have produce SUVs.

    But somehow we have to change what consumers demand before it kills us all.

    July 28, 2009 Posted by | energy policy, farm policy, oil companies, politics | 105 Comments

    Redundant Ethanol Subsidies

    The proposed farm bill just sent to President Bush (and expected to be vetoed) contains several ethanol provisions. One is to cut the corn ethanol subsidy from $0.51/gal to $0.45/gal. Forbes explains:

    Ethanol For Everyone!

    It also includes $1 billion for energy-related programs, including several provisions related to ethanol and other biofuels. Notably, it reduces the tax credit paid to ethanol producers from 51 cents to 45 cents per gallon. The bill also establishes a sugar-to-ethanol program and includes a temporary tax credit of up to $1.01 per gallon for production of cellulosic ethanol, made from non-edible products like wood chips.

    “Now that the ethanol industry has matured, it is appropriate to curb the tax subsidy provided to ethanol,” says a Senate Finance Committee report on the tax provisions of the bill.

    A small reduction in the subsidy, for an industry that has “matured” completely misses the point, which is “Why is there a need for a subsidy?” Answers will vary, depending on who you ask, but every answer I have ever heard also misses the point: Ethanol is mandated. It seems that people don’t understand what this means. It means that it is mandatory that a certain amount of ethanol is blended into our gasoline supply. For 2008, it is required that we blend 9 billion gallons of ethanol into the gasoline supply. The cost of the ethanol is not a consideration in the mandate, so why is the subsidy required?

    In my opinion, the subsidy remains to hide the true cost of ethanol. If there wasn’t an offsetting credit, then the economics of ethanol blending look a lot worse. So what? It’s still mandatory. This means that if the economics look worse, the cost is now going to be passed on to consumers. Under the current system of a blender’s credit, our taxes subsidize drivers. People who don’t drive are subsidizing drivers. If you removed the subsidy, drivers would be forced to pay higher prices for fuel with less energy content – or start thinking about conserving.

    Digressing for a moment, this is certainly not the only case in which our taxes subsidize drivers. While some have argued that certain wars are hidden oil company subsidies, in reality this is just another example where the government subsidizes driving (which theoretically is still beneficial to oil companies, by keeping prices lower and demand high).

    The subsidy for cellulosic ethanol is a different matter. In the case where you want to influence a technology in a certain direction, those kinds of subsidies make more sense. It’s the same question I have asked before: “Do subsidies to oil companies ever make sense?” Only in the case that you are trying to influence their behavior in a certain direction. In the case of cellulosic ethanol, you are trying to wean producers away from using food. (For the record, I am not a big fan of governments trying to pick technology winners; I would prefer to raise carbon taxes and then let the alternatives compete with each other on a level playing field).

    But get rid of grain ethanol subsidies. They are redundant with a mandate in effect.

    May 16, 2008 Posted by | energy policy, ethanol subsidies, farm policy, politics | 26 Comments

    Google Solar, Hydrogen, and Farm Bills

    I wanted to briefly comment on several issues. Some of them deserve their own essays, but I am too pressed for time.

    Google Solar

    If you are into solar, Google’s Solar Panel Project is incredibly cool. They provide real time data on their solar energy production. One thing that I have noticed is that the assumption of peak power times 5 hours to get the overall daily solar production appears to be too conservative. For instance, according to the link above, yesterday power peaked at 877 KW at 1 p.m., but total energy production yesterday was 7021 KWh. I have to multiply by 8 hours to get that. In fact, that’s been a pretty consistent theme this month. It may be that 5 hours is the appropriate multiplier in the winter, and that may be where it comes from. I will have to make sure I track their production this winter (as well as California demand).

    Hydrogen

    A number of people have written to me at various times and asked why I never debunked hydrogen. The reason is that I felt like it was already thoroughly debunked. When President Bush pushed hydrogen in his 2003 State of the Union address, I was actually working with hydrogen in a GTL application. Hydrogen does some interesting things with flame speed and auto-ignition temperatures that I was exploring. But I didn’t know all that much about the issues of hydrogen as a large scale transportation fuel. So, I thought “That sounds pretty good.” Then, I went to work the next day, dug out the DOE’s hydrogen road map, saw what the problems were, and where the technology stood, and I concluded that there would be no hydrogen economy any time soon – probably not in my lifetime. I mean, the technology has to leap huge gulfs in several areas, which is much different than only have one or two technical challenges to resolve. So, I didn’t give hydrogen much more consideration after that.

    But it won’t die:

    Hydrogen can replace gasoline, scientist contends

    FLINT – Stanford Ovshinsky, founder and chief scientist of Energy Conversion Devices Inc. in Rochester Hills, told the Flint Rotary Club on Friday that the world has to convert to alternative forms of energy.

    He said current internal-combustion engines in cars and trucks can be converted to run on hydrogen.

    With hydrogen, he said, there’s no pollution, no climate-change issues.
    “All you need for fuel is water,” he said “You don’t need the Mideast.”

    All you need is water? Is he serious? How about an energy source to electrolyze the water? Why don’t we get our hydrogen from water right now (instead of from natural gas)? You need that as well. Free hydrogen doesn’t just hang about, waiting to be mined. Anyway, I was going to write a longer rebuttal, but my friend Chris Nelder beat me to it:

    Fuel Cells and Hydrogen Are No Panacea

    I’m going to make a prediction today: you will never drive a hydrogen fueled car.

    Although hydrogen does indeed have some benefits in certain applications, it’s my task today to separate the reality of useful fuel cells from the hydrogen hype.

    That may seem like a bold statement to you now, but by the end of this article, you’ll understand why.

    I think he did demonstrate the point, so I will merely refer you to his essay for a good debunking.

    Those Darn Farmers

    I say that with tongue in cheek, because I grew up on a farm that my family still owns and operates. But this one struck me as funny:

    House Farm Bill Includes Production Fee For ’98-99 Oil Leases

    WASHINGTON -(Dow Jones)- The U.S. House of Representatives included a measure that would impose a fee on production from controversial 1998-99 oil and gas leases in a farm bill it passed Friday.

    Lawmakers have been trying since last the Congress to force the companies to renegotiate the leases, which omit royalty price thresholds, saying the omission could end up costing tax payers $10 billion in lost royalty payments.

    The Government Accountability Office estimates that around $1 billion in royalties has already been lost as a result of the price-thresholds omissions, and that they could cost taxpayers an additional $9 billion in the future.

    Although six companies – including BP PLC (BP), Royal Dutch Shell PLC (RDSA), ConocoPhillips (COP) and Marathon Oil Corp. (MRO) – have agreed to pay royalties on the leases on production from October 2006, they only represent a fraction of the total lease owners.

    Around 40 companies representing 80% of the production haven’t agreed to renegotiate the leases, including Exxon Mobil Corp. (XOM), Total SA (TOT), Chevron Corp. (CVX) and Anadarko Petroleum Corp. (APC), according to Interior Department data. Democrats have been seeking royalty payments for all output from the leases.

    While I do note that my own company has agreed to pay royalties, I can’t get past the irony that a farm bill would attempt to rectify the situation. Perhaps in the next energy bill, we can get rid of those darn sugar subsidies. I mean, come on. I can argue a case for corn subsidies. I don’t want our corn farmers to be put out of business by cheap imports (even though we get subsidized high-fructose corn syrup as part of the deal). But sugar? Give me a break. Aren’t we fat enough already without subsidizing the problem?

    July 29, 2007 Posted by | energy policy, farm policy, hydrogen, solar efficiency, solar power | 31 Comments

    Google Solar, Hydrogen, and Farm Bills

    I wanted to briefly comment on several issues. Some of them deserve their own essays, but I am too pressed for time.

    Google Solar

    If you are into solar, Google’s Solar Panel Project is incredibly cool. They provide real time data on their solar energy production. One thing that I have noticed is that the assumption of peak power times 5 hours to get the overall daily solar production appears to be too conservative. For instance, according to the link above, yesterday power peaked at 877 KW at 1 p.m., but total energy production yesterday was 7021 KWh. I have to multiply by 8 hours to get that. In fact, that’s been a pretty consistent theme this month. It may be that 5 hours is the appropriate multiplier in the winter, and that may be where it comes from. I will have to make sure I track their production this winter (as well as California demand).

    Hydrogen

    A number of people have written to me at various times and asked why I never debunked hydrogen. The reason is that I felt like it was already thoroughly debunked. When President Bush pushed hydrogen in his 2003 State of the Union address, I was actually working with hydrogen in a GTL application. Hydrogen does some interesting things with flame speed and auto-ignition temperatures that I was exploring. But I didn’t know all that much about the issues of hydrogen as a large scale transportation fuel. So, I thought “That sounds pretty good.” Then, I went to work the next day, dug out the DOE’s hydrogen road map, saw what the problems were, and where the technology stood, and I concluded that there would be no hydrogen economy any time soon – probably not in my lifetime. I mean, the technology has to leap huge gulfs in several areas, which is much different than only have one or two technical challenges to resolve. So, I didn’t give hydrogen much more consideration after that.

    But it won’t die:

    Hydrogen can replace gasoline, scientist contends

    FLINT – Stanford Ovshinsky, founder and chief scientist of Energy Conversion Devices Inc. in Rochester Hills, told the Flint Rotary Club on Friday that the world has to convert to alternative forms of energy.

    He said current internal-combustion engines in cars and trucks can be converted to run on hydrogen.

    With hydrogen, he said, there’s no pollution, no climate-change issues.
    “All you need for fuel is water,” he said “You don’t need the Mideast.”

    All you need is water? Is he serious? How about an energy source to electrolyze the water? Why don’t we get our hydrogen from water right now (instead of from natural gas)? You need that as well. Free hydrogen doesn’t just hang about, waiting to be mined. Anyway, I was going to write a longer rebuttal, but my friend Chris Nelder beat me to it:

    Fuel Cells and Hydrogen Are No Panacea

    I’m going to make a prediction today: you will never drive a hydrogen fueled car.

    Although hydrogen does indeed have some benefits in certain applications, it’s my task today to separate the reality of useful fuel cells from the hydrogen hype.

    That may seem like a bold statement to you now, but by the end of this article, you’ll understand why.

    I think he did demonstrate the point, so I will merely refer you to his essay for a good debunking.

    Those Darn Farmers

    I say that with tongue in cheek, because I grew up on a farm that my family still owns and operates. But this one struck me as funny:

    House Farm Bill Includes Production Fee For ’98-99 Oil Leases

    WASHINGTON -(Dow Jones)- The U.S. House of Representatives included a measure that would impose a fee on production from controversial 1998-99 oil and gas leases in a farm bill it passed Friday.

    Lawmakers have been trying since last the Congress to force the companies to renegotiate the leases, which omit royalty price thresholds, saying the omission could end up costing tax payers $10 billion in lost royalty payments.

    The Government Accountability Office estimates that around $1 billion in royalties has already been lost as a result of the price-thresholds omissions, and that they could cost taxpayers an additional $9 billion in the future.

    Although six companies – including BP PLC (BP), Royal Dutch Shell PLC (RDSA), ConocoPhillips (COP) and Marathon Oil Corp. (MRO) – have agreed to pay royalties on the leases on production from October 2006, they only represent a fraction of the total lease owners.

    Around 40 companies representing 80% of the production haven’t agreed to renegotiate the leases, including Exxon Mobil Corp. (XOM), Total SA (TOT), Chevron Corp. (CVX) and Anadarko Petroleum Corp. (APC), according to Interior Department data. Democrats have been seeking royalty payments for all output from the leases.

    While I do note that my own company has agreed to pay royalties, I can’t get past the irony that a farm bill would attempt to rectify the situation. Perhaps in the next energy bill, we can get rid of those darn sugar subsidies. I mean, come on. I can argue a case for corn subsidies. I don’t want our corn farmers to be put out of business by cheap imports (even though we get subsidized high-fructose corn syrup as part of the deal). But sugar? Give me a break. Aren’t we fat enough already without subsidizing the problem?

    July 29, 2007 Posted by | energy policy, farm policy, hydrogen, solar efficiency, solar power | Comments Off on Google Solar, Hydrogen, and Farm Bills