R-Squared Energy Blog

Pure Energy

How to Break Through the Blend Wall

By now you have probably heard that the EPA has postponed issuing guidelines on whether to allow ethanol blends of higher than 10% into the gasoline pool. Going up to 15% ethanol blends would allow ethanol producers to put a lot more of their product into the market, which is currently bumping up against the limits of the current 10% ethanol blend allowance.

Ethanol producers and proponents have assured us that the higher blends will not damage engines. Small engine makers and boaters are very worried that the higher blends will damage their engines. In fact oil companies, having been mandated to use ethanol, are now facing a class action lawsuit over ethanol blends damaging boat motors. Even the auto industry has voiced concerns that they could be liable if the higher ethanol blends damage engines.

So how to break this impasse? A reader forwarded a link to a letter that appeared in the Financial Times that I think proposes a reasonable solution. The ethanol industry will be the main beneficiary of raising the amount of ethanol that can be blended. Since they are also the industry who has requested this increase, have them assume the liability if anything does happen. If they are correct and there are no problems, then they have nothing to worry about. If they are incorrect, then they can pay for the fallout instead of having it fall to the oil companies, car companies, and small engine makers.

How to do this? I think you have to get an ethanol trade organization like the Renewable Fuels Association to step forward and say “We are prepared to accept the liability risk for the potential reward.” Because the potential liability could be enormous, that would probably also need to be backed up by the U.S. government.

I think it is a reasonable suggestion that those who are proposing this change and who stand to benefit should accept any potential liability. But my guess is that the EPA will ultimately rule in favor of increasing the ethanol blends anyway, and the ones who reap the reward aren’t going to be the ones stuck with the bills if there are unforeseen problems.

December 8, 2009 Posted by | blend wall, EPA, ethanol, litigation | 61 Comments

Answering Reader Questions 2009: Part 4

This marks the final installment of answers to questions recently submitted by readers. This final installment covers the impact of E10 on fuel efficiency, my general optimism (or lack thereof), algal fuel, thermodynamics and energy limitations, Accoya, and litigation. Once again, thanks to the readers who submitted questions, and thanks to those who helped answer them. Without the help I received, this might have been a 10-part series.

Here are the links to the previous installments:

Part 1 – Covered plasma gasification, natural gas projections, free energy, promising alternative energy technologies, and GTL

Part 2 – Covered coal-to-liquids, technology hype, green gasoline, refining improvements, allocation of money toward renewables, electricity consumption, the Automotive X Prize, Big Oil, cellulosic ethanol, and Exxon’s recent algae announcement

Part 3 – Covered advice to engineering students and some books I recommend

The Questions

Wendell Mercantile wrote: The average fuel economy in Minnesota, which mandates E10, was 11% worse than in Wisconsin where drivers are allowed to choose. Minnesota drivers actually went fewer miles, while burning more fuel to do it. Answer

Melanie wrote: Reading over your last Q&A session, you seemed pretty optimistic. Have the events over the course of the last 2 years left you with the same amount of optimism or more/less? Answer

Mike wrote: I know your stance towards algae biofuel companies, but I want to bring a company to your attention called PetroAlgae. (I couldn’t find a reference to them on your blog.) I think they’re pursing a very nice model of licensing instead of building and also combining food with fuel production. They are claiming that the proceeds from the proteins should almost cover the costs of the whole process. With your expertise (and maybe knowledge about their processes), could you say something about the feasibility of those claims? Answer

Evan asked: 1 How can a nation/person “create” more energy/matter, if they do not take it from another nation/person?

2 Will renewable energy be able to account for the fundamental law of conservation of energy/mass? Economically?

3 If the US is the least efficient user of highly demanded fossil energy, why is its currency(time) worth so much? Do Americans just work too much?

4 Will we see currency exchange rate changes, which are weighted more upon per capita (person) energy efficiency? Answer

James Clary asked: What do you think about the economist article about hardening soft wood?

How to toughen up softwood: A hard act to follow Answer

takchess asked: Q: Do you envision that there will be a lot of IP lawsuit once cleantech is mainstream? Do you think this will be or is a disincentive for investment in this area? Answer

The Answers

Answer

This one was debated at length in the comments following the question thread, but I just wanted to add that I have posted a guest essay on this topic before: Wisconsin Tops Minnesota. It was written by Gary Dikkers.

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Answer

That’s a good question. I suppose in general I am more optimistic over the short term, primarily because I saw a relatively fast response to high oil prices. People did cut back on consumption, which was encouraging. The downside is that we are still dealing with fallout from those high oil prices. Not that I have ever been someone who could entertain the thought of a multi-billion person die-off due to peak oil, but I feel better about the overall prospects for humanity. I don’t feel as optimistic about the prospects for the economy, though. I think we are approaching The Long Recession (and may have entered it). I have never seen such a poor job market before. This is going to be extremely tough for a lot of people who have gotten used to a certain standard of living.

I am seeing this first hand in the engineering ranks right now. Since I started my career, demand for engineers has always exceeded supply. Presently, that is not the case (as I am finding because I am still trying to place some engineers that we recently laid off). The Wall Street Journal just reported that 50% of this year’s college graduates do not have jobs. If the job market is to improve, we have to have a recovery. If recovery causes demand for oil to increase, prices are going to climb and the recovery may stall. Wash, rinse, repeat.

I think the way we live is going to change. That’s not necessarily pessimism, because the way we live has to change. I don’t think many people would suggest that our current consumption (and not just of oil) is sustainable. The pessimistic side of me says that the way we live will change because that change will be forced upon us in unpleasant ways (e.g., people simply no longer able to maintain their standard of living), instead of governments making wise policy moves to prepare us for a future in which cheap energy is no longer plentiful.

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Answer

I have heard of PetroAlgae, and just spent a bit of time on their website. Let me first say that I think upwards of 90% of the bioalgae companies out there are being highly irresponsible with their investors. The technology isn’t close to being capable of producing cost-competitive fuel, and we have companies grossly over-promising (or even committing outright fraud).

On the other hand, I do believe that algae can be a niche solution. The problem is that it is being pedaled as a scalable solution, and therefore companies are popping up all over the place to take investors money. Most will inevitably declare bankruptcy after a few years.

But let’s talk about the niches. In my opinion there are a couple of ways algae could work. If it is to be truly scalable so that it can be a big contributor to our fuel supplies, I only see one obvious path. Algae must be developed that can excrete oil. In this way, the algae can grow, you skim off the oil, and you avoid the materials handling nightmare of harvesting and processing the algae. But that is going to require new technology, and unfortunately the invention of new technology isn’t a given.

The second way that I think algae can work is if there is a valuable co-product that offsets the production costs. This is PetroAlgae’s claim. The problem I see with this approach is that it isn’t scalable. You are going to be limited by the ability to put co-product in the marketplace. If the co-product is sufficiently valuable (let’s say you engineer algae that can produce insulin), then you could indeed offset the expense of algae production. But as it scales, you start to flood the market with this valuable co-product, and it is no longer so valuable. Or, if the co-product is already a commodity, it isn’t going to command a high enough price to offset production costs. Thus, I think this approach will be limited to niches. The approach described in the previous paragraph is the only one I think can be scalable.

Specifically on PetroAlgae, let’s look at one of the claims made in the video hosted on their site. Executive VP Bill Haskell makes the claim that a commercial licensee of a PetroAlgae system can produce 1.5 million barrels of transportation fuel a year. Krassen Dimitrov has made a case (PDF warning) that I have yet to see seriously challenged that based on the solar insolation falling on the earth at best one might produce 1 gallon of algae-based fuel per square meter of area.

If we look at the 1.5 million barrel claim above, that ultimately translates into a land requirement of 15,560 acres for just growing the algae. That is a 24.3 square mile plot of land. To put that in perspective, this is a plot of land 4.5 times the size of the largest refinery in the U.S. (which also has a capacity of 140 times greater than that claimed for the algae production facility that occupies 4.5 times the amount of land). And we haven’t even begun to consider processing all that algae.

Bottom line? I think their claims are exaggerated. I suspect that if you asked them to produce data justifying that 1.5 million barrel claim, one would find that they are making projections from small experiments and don’t actually have data to back that up.

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Answer

Let me try to answer these questions all together, because they are driving at the same theme. This isn’t really about creation of energy. Both fossil fuels and biofuels are about harnessing solar energy. In the case of fossil fuels, that is solar energy that was gathered over millions of years and cooked at high pressures and temperatures by the earth. Discovery of this ancient solar energy provided a windfall of energy that most of us take for granted.

We know this windfall is going to run out some day, and we already don’t like the fact that we have to rely on other countries to sell us part of their windfall. So we try to come up with schemes for capturing that solar energy and processing it immediately. This can of course be done in many ways, from direct solar capture, through the growing and conversion of biomass into energy. Generally the attempts to use solar power in real time suffer from various shortcomings (as do fossil fuels). However, some of those shortcomings are masked by the fact that the solar power that is being capture in real time is supplemented to a large extent by that same fossil energy we are seeking to replace.

The core of the problem is that many people – and I would say that most of our political leaders – don’t really appreciate the huge differences in the net energy from fossil fuels and the net energy from most renewable fuels. I have seen schemes floated in which our fossil fuels are displaced by cellulosic ethanol. You know what’s missing from those scenarios? The energy to produce the cellulosic ethanol. When that is taken into account, the primary energy production required to run a world on renewable energy is far greater than the primary energy production required to run a world on fossil fuel. So we have to do one of two things. We have to get used to the idea of eventually using a lot less energy, or we have to find better schemes for converting sunlight. (Or we will have to devote huge amounts of manpower to energy production – diverting productivity from the rest of the economy). In the short term, we will continue to draw heavily upon our fossil fuel reserves, but that can’t last forever.

In closing, let me offer up an example of how primary energy would need to increase if we switched from the high energy returns offered by fossil fuels to the much lower energy returns of most fossil fuels. Here are some numbers I have put together in the past. In a fossil fuel-based society, the energy return is currently somewhere around 10/1. Of 85 million barrels per day, 8.5 million of those barrel equivalents were used to produce the oil. For the sake of this exercise, let’s assume that oil was used to make oil. That leaves us with a net of 76.5 million barrels with which to power the world.

[Note: Thanks to Engineer-Poet for pointing out a math error here.] Now, drop the energy return of that same society to a biofuel range of 1.3 to 1. We have to solve two equations here: Net Energy = Energy out – Energy in, and Energy return = Energy out/Energy in. Solving these two equations for a net of 76.5 million barrels of oil means we have to produce a total of 255 million barrels of oil equivalent. In the fossil fuel society, it takes 85 million barrels of total production to sustain it. In the low energy return society that approximates today’s biofuels, it takes 255 million barrels per day to sustain it. That means that if we tried to run the world on low energy return biofuels, we would need to triple the overall energy output over what we produce today.

People who say energy return doesn’t matter fail to grasp this point. Unless biofuels are able to substantially improve their energy return – or we have a huge reduction in consumption – a lot more resources are going to have to be devoted to the energy sector.

Of course caveats abound when using an energy return to evaluate a biofuel. As I pointed out in one of my essays on Coskata, it is also possible to have a very good energy return and not net out much energy. Consider an example in which you start with 100 BTUs of biomass, consume 99 BTUs of the biomass to convert it to 1 BTU of liquid fuel, and input 0.1 BTUs of fossil fuel in the process. You could argue that your fossil fuel energy return was 10/1, but your conversion efficiency was terrible. You started with 100 BTUs of biomass and ended up with 1 BTU of liquid fuel.

These are some of the considerations we have to undertake as we try to ramp up biofuels to displace fossil fuels.

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Answer

You probably knew this – which is why I imagine you asked the question – but I was interviewed for that article. The interview took place way back in January, and I had forgotten about it until someone sent me the link.

I thought the article captured the gist of the interview in a concise manner. The key points I make to people about Accoya are generally around the modification of the hydroxyl groups in the wood, and how that impacts the properties of the wood.

I do want to reiterate that despite the career change I am in the process of making, I still feel like Accoya is a fantastic product with a bright future. I will maintain an advisory relationship to Accsys/Titan Wood after I leave, so you will probably see me writing about it on occasion in the future.

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Answer

There are several lawyers who read this blog, and almost every time I make a negative comment about their profession, one or more of them sends me a note. And I will probably get one after this.

In my opinion, litigation is attracted to big piles of money. Even if 99% of lawyers only go after cases with strong merit, there are always going to be some lawyers ready to file a suit at the slightest whiff of cash. My feeling is that we have too many lawyers, and the marginal lawyer has to find a way to make a living. So we get more lawsuits than we should have.

There is a lot of money flowing into the clean tech sector, and there are many people jumping in who may not have a clear picture of who owns various IP. That is a prescription for lawsuits. So, yes, I do expect more lawsuits as clean tech goes mainstream. That is the society we live in. Will it be a disincentive to invest? I don’t know. I do know that the money that flows out of the sector and into lawyers pockets won’t necessarily be invested back into the sector. So there will be a drain in my opinion. It could be that it is a tiny fraction in relation to the overall investments. Let’s hope so.

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OK, as far as I know I got the ones that hadn’t been addressed already (either in previous essays or by someone else in the comments). If someone feels like they didn’t get a question answered, ask in the comments following this essay and I will try to address it.

August 9, 2009 Posted by | algal biodiesel, E10, eroei, eroi, ethanol, fuel efficiency, litigation, Peak Oil, PetroAlgae, thermodynamics | 141 Comments

The Lawyers Win on Hot Gas

I recently wrote an essay called A Lost Litigation Opportunity in which I discussed the root of the so-called ‘hot gas’ issue. I firmly believe that this is all about the big business of lawyers who sue people for a living. The California Energy Commission had ruled out temperature compensation equipment, saying that consumers would pay more because retailers would pass on the cost of the equipment.

I thought the issue would now fade away, but a recent story involving Costco suggests that the litigators – like those behind certain ‘consumer organizations’ who have pushed this issue so hard – are starting to profit:

Petroleum Marketers Respond to Costco’s Attempt To Settle ‘Fair Fuel’ Lawsuit

Here are the interesting bits:

“But it [settlement] saves Costco the costs of defending themselves in this class-action litigation,” Gilligan added, noting there are 120 other retailers and groups being sued.”

“Unfortunately, trial attorneys have become quite skilled at presenting companies with difficult decisions: either incur significant expense to erect a legal defense against outrageous claims or cut costs by reaching some sort of settlement. Neither are attractive options when the retailer has done nothing wrong, but the trial attorneys are good at setting this trap.”

One other point: Costco’s agreement including payment of the plaintiffs’ attorney fees.

That’s what this is all about. It won’t save consumers a dime. In fact, it will cost consumers, and it will cost retailers. But trial lawyers that back phony consumer organizations who them drum up controversies should do OK.

May 3, 2009 Posted by | gasoline, litigation | 8 Comments

A Lost Litigation Opportunity

While the so-called ‘hot gas’ issue has been discussed here several times before, there are new developments out in California that have Oil Watchdog and the $295/hr lawyer behind this ‘consumer organization’ crying over lost litigation opportunities. Given the time, effort, and money they have put into this issue, the events described in this essay are quite a blow for them.

At least they will now have more time to devote to their other campaigns, such as 1). Stopping oil companies from donating money to universities; and 2). Berating oil companies for not giving enough to universities. (They make more sense if you view them as a satirical site along the lines of The Onion. The only problem is that Oil Watchdog is trying to be serious). I think it is particularly curious that the press uncritically accept and quote those associated with Oil Watchdog as consumer advocates trying to do the right thing by consumers, when a cursory investigation would show what they are (hypocritically) up to.

First, here are a few of the links to previous discussions of the issue:


Hot Gas Lawsuit in Utah

More on Hot Gas Lawsuit

Hot Gas Issue Heating Up

Hot Gas is a Bunch of Hot Air

In a nutshell, the issue is that gas expands when the temperature is warm, and so a gallon of ‘hot’ gas has less energy than a gallon of cooler gas. This means you aren’t getting the same amount of energy from your gasoline that is hot, therefore “you are being ripped off.”

This is the kind of issue that an organization like Oil Watchdog was built for. They can hype up the controversy, get outraged people to send them donations (after all, who is going to protect the little guy from Big Oil if not them?), and try to get some litigation going to benefit people like the professional litigator who is behind the site. His own website says that he “has focused on suing insurance companies that overcharge or mistreat consumers, in violation of state laws; cell phone companies for billing mistakes and poor service; and HMOs and health care companies for providing shoddy health care and refusing to pay people’s claims.” Just imagine the potential windfall if he can get a class action going by convincing enough people that deep-pocketed Big Oil is overcharging and mistreating them. That would certainly earn him more money than 99.99% of the “greedy” people in the oil industry.

Oil Watchdog – a spin-off of the Foundation for Taxpayer and Consumer Rights (see this story for the dirt on why they do what they do and evidence of who is behind the site) – has fought to force installation of temperature compensating equipment so that the gallon is corrected for temperature. That means when the gas is warm, you get a little more than a gallon, but when the gas is cold you get less. So what’s wrong with that? Basically, as I discussed at the links above, it belies a real misunderstanding of just what the outcome would be.

Imagine for a moment that you redefine a gallon so that the new volume is now equivalent to 1.5 of the old gallons. Do you think the price for a gallon of gasoline would stay the same? Of course it wouldn’t. You would pay 1.5 times as much for it. This is what Oil Watchdog and others pushing for this legislation could never absorb: It wasn’t going to work as they claimed, because as soon as the size of the gallon changes (which is what temperature compensation does), the price will change. You would probably find more variation in energy content just based on how the gasoline is blended. (Imagine how outraged they will be when they finally figure out that ethanol is contributing to gasoline with lower energy density, or that energy density varies between summer and winter.)

Oil Watchdog has really been on top of this issue, issuing press release after press release to make sure everyone knew how badly consumers were getting ripped off. Yet despite all that effort, the California Energy Commission has ruled against them:

Commission says fixing ‘hot fuel’ would drive up fuel prices

This is of course what I have been saying since this issue first cropped up. From the article:

The California Energy Commission says forcing retailers to install temperature-compensation devices on fuel pumps would drive up the price.

Officials with the Owner-Operator Independent Drivers Association challenge that claim, saying a one-time investment by fuel companies is part of doing business and would save consumers money in the long run.

During a business meeting Wednesday, March 11, the California Energy Commission recommended against forcing retailers to implement automatic temperature compensation, or ATC, at the pump.

Retail fuel is currently sold as a 231-cubic-inch gallon and does not take temperature into account. Elementary physics shows that all liquids expand and contract with temperature changes.

State and federal law does not require fuel retailers to compensate for temperature, but consumer groups and some lawmakers are trying to change that.

Directed by state law AB868, the California Energy Commission studied fuel temperature and evaluated the cost of implementing ATC at retail pumps.

“If retail station owners and operators continue (are) to grow and remain profitable, then retail station owners will most likely raise their fuel prices to compensate for selling fewer ‘gallons,’” commissioners wrote in the report. “If this is the case, then expected benefits for retail motorists will be essentially zero.”

Oil Watchdog of course wasn’t going to take that lying down, so they have issued a series of press releases charging conflicts of interest and anything else they think will stick (and draw attention away from all of their donors’ money they wasted on this). Here was their latest press release on the issue:

Documents Show Political Appointees Interfered With Cal. Energy Commission Study Of Hot Fuel Ripoff To Protect Oil Companies

Personally, I think that’s too subtle, but what do I know? I am not an ace journalist like the staff at Oil Watchdog.

As I have documented previously, Oil Watchdog started censoring comments following their stories because people were consistently demolishing their claims. Some of the comments are very good, though. So below I have copied one of those comments that Oil Watchdog conveniently put out of sight by default (and you will see why they started doing that). This is a typical sort of blistering rebuttal they often receive following some of their hysterical “essays”, which finally resulted in them frequently labeling those who disagree with them as “Shills for Big Oil.” What else were they going to do, debate the technical merits?

It is a bit long, but a highly entertaining example of what happens when an organization completely devoid of any technical people on their staff pumps out the misinformation they do. As the poster below points out, there seems to be no due diligence at all, but the reason for that becomes clear when one understands their actual objectives.

———————-

Oil Watchdog presents the hot fuel issue as one hoisted on the public by Big Oil. Without defining Big Oil, we have to assume she [Judy Dugan] means large refiners and integrateds, as opposed to retailers. Let’s examine the facts in this case, instead of the anecdotes.

The claim is that an annual $400,000,000 in excess revenue is generated dishonestly in California. As Oil Watchdog is clearly biased in this case (they are after all paid to criticize the oil industry), we can safely assume that this figure is probably at the very highest end of the impact spectrum. But let’s take it anyway, and break the figure down and see, to a reasonable approximation, just who is getting what from hot fuel. By the way, I’ll state here that the more accurately fuel can be dispensed, the better for consumers. But the real issue is, not what is the best technical solution, but whether consumers would benefit from ATC. Oil Watchdog sweeps the latter point under the rug and presents ATC purely as a morality play.

The simple analysis goes as follows:

$400,000,000: Oil Watchdog’s claimed ripoff. This is in the form of revenue to the retailers.

10% profit margin: we are here mixing refiners and integrateds, so it’s not a bad approximation. But we’ll reach the same conclusion below with any reasonable range of profitability assumptions.

$40,000,000: hot fuel profit to the industry.

Who is getting this? We know it only applies to the retail level (as Dugan has reported herself) since refiners sell their fuels corrected for temperature.

Here are the market shares of California refiners, as reported by the state of California:

Company CA Market Share, Gasoline
BP 19%
Chevron 19%
Valero 13%
ConocoPhillips 12%
Tesoro 11%
Shell 10%
ExxonMobil 6%
Big West 2%
Kern 1%
New West 1%
Petro-Diamond 1%
Tower Energy 1%
IPC 1%
Others 3%

In terms of industry concentration, this market does not look particularly concentrated when compared to other critical industries, such as automobiles, computers, or tires. So the case for conspiracy is weak on the basis of market share alone. At the level of the state of California, the Herfindahl Index for refining would be about 1300, well below the 1800 that might start getting attention at the Department of Justice. In fact, the DOJ considers industries in the range of 1000 to 1800 as being only “moderately concentrated.”

We now want to take the $40,000,000 hot fuel profit derived above, and allocate it to the state’s refiners. But first, as Dugan knows and has reported, we know that Big Oil has largely exited the retail sales business. In fact, she has quoted the widely published fact that about 97% of retail sales go to retailers, and not to Big Oil. So we need to allocate 3% of the $40,000,000, or $1,200,000, to Big Oil refiners by market share. When we do that we get the table below (here showing Big Oil shares).

Company Share of Hot Fuel Profit
BP $228,000
Chevron $228,000
ConocoPhillips $144,000
Shell $120,000
ExxonMobil $72,000
Combined Retailers $38,800,000

Clearly, the benefit to Big Oil, by Dugan’s own figures, of hot fuel in California would not even cover the cost of a lawyer for each company. In short, Big Oil could really care less about hot fuel in terms of impact to the bottom line. ExxonMobil’s hot fuel take in California represented about 0.00018% of its total profit. It probably spends many times that on landscaping or office water coolers.

And just as clearly, we see that the retailers should have a vested interest in the outcome. But when you consider that there are about 12,000 gas stations in California, you find that

$38,800,000/12,000 = about $3200 annual hot fuel profit per gas station.

In other words, the average California station doesn’t appear to be getting a huge jolt from this either. I think we can safely assume that this is not a profit grab by Big Oil, or even the retailers: the retailer opposition is probably based more on avoidance of ATC costs and maintenance.

But the really interesting point to be made here is that on the one hand Oil Watchdog charges this group of retailers with fraud, but on the other hand claims that the retailers will now absorb the cost of the equipment and maintenance, to the benefit of consumers. What if Oil Watchdog is wrong, and the consumers end up behind in the long run? This strong possibility is essentially ignored. For reference, the average consumer, if he drives 15,000 miles per year and gets 20 mpg, is paying a little under $19 per year on hot fuel (based on the $400,000,000 divided by gallons sold in California, or 2.6 cents per gallon). What if the retailers pass along an average of 4 cents per gallon? Why not? Aren’t they conspiring to rip us off now anyway? After all, each retailer will know that his competitors are facing the same new expense. The whole episode would probably be a futile exercise in money laundering in which no one benefits. This is one of the reasons why the American Trucking Associations, the nation’s spokesman for the trucking industry, opposes ATC. Any charge that the ATA has a vested interest in higher fuel prices is not credible.

If the potential buyer of Judy Dugan’s $5000 used car finds a defect in the engine (perhaps a microscopic hole in a piston) that might cost him 8 extra gallons of gas per year (near our $19 hot fuel cost), and Dugan learns it will cost $500 to replace the piston, will it be a good thing for the buyer if she does that and charges him $5500? Dugan is, after all, selling a car which she knows has a hidden foot on the gas pedal. Or would she just negotiate a new price and let the market make the correction? Isn’t that in fact what retailers are doing? As the market shares above show, and as recent steeply falling gasoline prices have proven, the industry is competitive. Unless they conspire, it would seem that no one retailer could make incremental profit off hot fuel as long as a competitor somewhere was willing to cut into that profit to gain market share. The market will equilibrate to a rate of return acceptable to competing retailers. Introduce a retail cost perturbation into the system, as in ATC, and prices will tend to adjust to maintain that equilibrium margin, unless one believes that the retailers will now stop ripping us off and simply accept lower incomes.

One gets the sense that Oil Watchdog does not understand the concept of cost-benefit analysis, and instead subscribes to the simple belief that anything bad for the oil industry must be good for consumers. The representation of hot fuel as a willful fraud perpetrated by Big Oil, when Oil Watchdog has acknowledged that refiners deliver temperature corrected fuel to retailers, is negligent and cynical…. or just plain dishonest. There is an underlying perception that this issue is one of self-interest for Oil Watchdog, a feather in their cap so to speak, or perhaps justification for existence in a world where the recent steep drop in prices prove that oil companies cannot set those prices, thus muting many of Oil Watchdog’s past charges. The rug being pulled from under its feet, Oil Watchdog needs a new pretext for its sources of funding.

Now, Oil Watchdog may in fact be correct on this issue. There is a lot of uncertainty in the data and therefore conclusions on hot fuel cost estimates, and future market responses to ATC installation cannot be predicted with certainty. But they make no credible case, and reasonable calculations based on their own numbers raise legitimate doubts as to who really benefits. Unfortunately, instead of pursuing an impartial quantitative analysis, they turn ATC into a witch hunt and go after the usual suspects. Their motivation appears above all else to be giving the oil industry a black eye; consumer benefit is assumed, and not investigated. The possibility that they could be wrong, and therefore that they could be hurting consumers, takes a back seat. There does not appear to be any due diligence on Oil Watchdog’s part to demonstrate that their position on ATC would result in a net benefit to consumers.

March 18, 2009 Posted by | California, FTCR, gasoline, Judy Dugan, litigation, oil watchdog | 43 Comments

Amazing Ethanol Lawsuit Against Oil Companies

I did a double-take when I saw this headline:

Ethanol Lawsuit Proceeds against Oil Companies

It turns out that oil companies – forced to use ethanol in gasoline despite many protests – are now being sued because ethanol blends can corrode fiberglass tanks in boats.

NAPLES, Fla. — A Florida lawsuit against six oil companies that alleges negligence for failing to warn boat owners of potential harm from ethanol-blended gasoline, survived a motion to dismiss from the defendants, NaplesNews.com reported.

Plaintiff attorney Jeffrey Ostrow of Fort Lauderdale said the next step is pursuing certification to become a class-action lawsuit. The intent is to represent all Florida boat owners who have used ethanol-blended fuel and whose boats have been damaged by the fuel, Ostrow said. He filed the lawsuit in August 2008 on behalf of three plaintiffs.

The defendants include Chevron, Exxon, BP, Shell Oil, ConocoPhillips and Tower Energy Corp., a California-based independent petroleum wholesaler, the report stated.

Our judicial system never ceases to amaze me. Why not instead go after the lawmakers who thought it would be a good idea to rapidly increase the amount of ethanol in the fuel system without thoughtfully considering the impacts?

At issue is a state law adopted in spring 2008, which states all gasoline sold in Florida must contain 10 percent ethanol, called E10, by the end of 2010 as part of conservation measures. Two exemptions were included allowing ethanol-free gas to be sold for airplanes and boats. About half a dozen other states require ethanol additives in gasoline.

I guess it’s like Willie Sutton’s alleged answer about why he robbed banks: “Because that’s where the money is.” So, why sue oil companies for complying with this mandate that was forced on them? Because that’s where the money is.

January 23, 2009 Posted by | boats, ethanol mandate, litigation | 46 Comments

Where I Go for Comic Relief

I am going to have to start issuing my own press releases. That’s what our good friends at Oil Watchdog – the oil-hating arm of the FTCR, like to do. They write their own press releases – daily – and use as reference material other press releases they have written. Their sources are frequently “Insider”, who frequently says very silly things. Not the kind of things an actual insider would say. Things like this: “Oil companies have cut back production in refineries to a mere 87 percent of potential and the surplus in storage tanks is drying up fast.”

Sounds like someone never heard of fall turnaround season. You know, that time of year – every year – where utilization falls and finished product inventories tend to get pulled down. Let me make a stunning prediction: It will happen again next spring. And again next fall. An insider would know that, and they would know why it happens in fall and spring. But I digress.

Oil Watchdog had fallen to the level of occasional comic relief for me, but I see that their latest press-release has even been picked up by the New York Times, which apparently has very low standards:

Spike in Crude Oil Price to $88/Barrel Without New Runup in Pump Price Exposes Oil Industry Deception, Profiteering

“Oil companies exert nearly complete control over the supply of gasoline, through decisions about their refineries, their oil and gasoline imports, and the supply they keep on hand,” said Dugan. “They can roughly tune the supply to match their price targets.”

This is truly priceless. Let’s refresh our memories here.

They whined about oil company greed.
They whined about oil company generosity.

They whined when gas prices went high.
They whined when gas prices went low.

They whined that oil companies aren’t making biofuels.
They whined that oil companies are making biofuels.

They whined that oil companies were funding research into finding more oil.
They whined that oil companies were funding research into alternative fuels.

I could go on. Really. They wrote an article called Defining Gouging. I thought, “Finally. At least someone made an attempt.” Then I read the article. They didn’t define gouging. They just went on and on about the need for anti-gouging legislation. As far as I can tell, they must sit around in a room and brainstorm every day on how to put a negative slant on any story involving oil companies.

So, you can see why I finally got bored with Oil Watchdog. After a while, you figure out that your opponent has an energy IQ of 60, and then you realize that there is no sport in the debate. After all, look what Oil Watchdog did in response to being challenged on their claims.

First, they chose to hide the comments. Originally they were visible by default. Second, they chose to label critics with: “This commentor has been flagged as a suspected shill for BigOil. You can view the history of their comments by clicking on the user’s screen name at the end of this entry.” But, they must have felt like they were still getting pummeled, because now they have taken the step of requiring comments to be approved before posting. That’s right, they now censor those who challenge their ludicrous claims. For their current entry, it looks like they have locked comments. Don’t know if this is the newest trend.

Perhaps the biggest irony is their frequent criticisms of oil companies donating money to various causes. Why? Because they won’t reveal the source of their own funding. It has been established that they are a front for trial lawyers. Their many articles on the “hot gas lawsuit” could have provided a hint. Not that there is anything wrong with that. But don’t be hypocrites. Be up front about what you are doing. Let the world know why you are promoting anti-gouging legislation and hot gas lawsuits. Who might benefit there?

You could have used your organization to promote an actual discussion of the critical energy issues facing the world. Instead, by hiding behind the veil of “consumer advocates”, and by writing about subjects that you are ignorant of, you have made yourselves into laughingstocks.

October 17, 2007 Posted by | Chevron, ConocoPhillips, ExxonMobil, FTCR, Jamie Court, Judy Dugan, litigation, Shell | Comments Off on Where I Go for Comic Relief

Where I Go for Comic Relief

I am going to have to start issuing my own press releases. That’s what our good friends at Oil Watchdog – the oil-hating arm of the FTCR, like to do. They write their own press releases – daily – and use as reference material other press releases they have written. Their sources are frequently “Insider”, who frequently says very silly things. Not the kind of things an actual insider would say. Things like this: “Oil companies have cut back production in refineries to a mere 87 percent of potential and the surplus in storage tanks is drying up fast.”

Sounds like someone never heard of fall turnaround season. You know, that time of year – every year – where utilization falls and finished product inventories tend to get pulled down. Let me make a stunning prediction: It will happen again next spring. And again next fall. An insider would know that, and they would know why it happens in fall and spring. But I digress.

Oil Watchdog had fallen to the level of occasional comic relief for me, but I see that their latest press-release has even been picked up by the New York Times, which apparently has very low standards:

Spike in Crude Oil Price to $88/Barrel Without New Runup in Pump Price Exposes Oil Industry Deception, Profiteering

“Oil companies exert nearly complete control over the supply of gasoline, through decisions about their refineries, their oil and gasoline imports, and the supply they keep on hand,” said Dugan. “They can roughly tune the supply to match their price targets.”

This is truly priceless. Let’s refresh our memories here.

They whined about oil company greed.
They whined about oil company generosity.

They whined when gas prices went high.
They whined when gas prices went low.

They whined that oil companies aren’t making biofuels.
They whined that oil companies are making biofuels.

They whined that oil companies were funding research into finding more oil.
They whined that oil companies were funding research into alternative fuels.

I could go on. Really. They wrote an article called Defining Gouging. I thought, “Finally. At least someone made an attempt.” Then I read the article. They didn’t define gouging. They just went on and on about the need for anti-gouging legislation. As far as I can tell, they must sit around in a room and brainstorm every day on how to put a negative slant on any story involving oil companies.

So, you can see why I finally got bored with Oil Watchdog. After a while, you figure out that your opponent has an energy IQ of 60, and then you realize that there is no sport in the debate. After all, look what Oil Watchdog did in response to being challenged on their claims.

First, they chose to hide the comments. Originally they were visible by default. Second, they chose to label critics with: “This commentor has been flagged as a suspected shill for BigOil. You can view the history of their comments by clicking on the user’s screen name at the end of this entry.” But, they must have felt like they were still getting pummeled, because now they have taken the step of requiring comments to be approved before posting. That’s right, they now censor those who challenge their ludicrous claims. For their current entry, it looks like they have locked comments. Don’t know if this is the newest trend.

Perhaps the biggest irony is their frequent criticisms of oil companies donating money to various causes. Why? Because they won’t reveal the source of their own funding. It has been established that they are a front for trial lawyers. Their many articles on the “hot gas lawsuit” could have provided a hint. Not that there is anything wrong with that. But don’t be hypocrites. Be up front about what you are doing. Let the world know why you are promoting anti-gouging legislation and hot gas lawsuits. Who might benefit there?

You could have used your organization to promote an actual discussion of the critical energy issues facing the world. Instead, by hiding behind the veil of “consumer advocates”, and by writing about subjects that you are ignorant of, you have made yourselves into laughingstocks.

October 17, 2007 Posted by | Chevron, ConocoPhillips, ExxonMobil, FTCR, Jamie Court, Judy Dugan, litigation, Shell | 1 Comment

Hot Gas is a Bunch of Hot Air

The Owner Operator Independent Drivers Association (OIDA) has launched a new website to “educate” people on the issue of hot gas. And by educate, I mean misinform and obfuscate. I can’t help but wonder about their headline story:

Hot Fuel Costs Consumers More Than 2.3 Billion Dollars Annually

Let’s see, Americans consume 140 billion gallons of gasoline and over 60 billion gallons of diesel each year. That means that even if their headline above was correct, the “rip-off” amounts to just over 1 cent a gallon. And given that pricing is set by supply and demand, what will happen with temperature compensation is that the average gasoline price will go up by just over 1 cent a gallon, plus a bit more as every retailer tries to recoup the cost of temperature compensation equipment. Who wins? The makers of the temperature compensation equipment, and the lawyers. Even in the best case, the average consumer who uses about 600 gallons of fuel a year would win $6 a year if you could suspend the laws of supply and demand.

Their new section on myths and facts is an excellent source of misinformation:

Hot Fuel Myths & Facts

Let’s look at some of their “myths”, and the facts as they see them. And of course the facts as I see them. 🙂

MYTH: Fill up in the morning when it’s cooler.

FACT: 35,000-gallon tanks do not dramatically change temperature in daily cycles.

Well, I agree with this one. 35,000 gallon tanks DO NOT dramatically change temperature in daily cycles. That means when the temperature outside rises to 90 degrees, the temperature of the fuel is about the same as it was in the middle of the night when the temperature was 60 degrees.

MYTH: In-ground tanks at gas stations keep fuel at 60 degrees Fahrenheit.

FACT: The insulated, fiberglass tanks tend to keep fuel at the temperature it was delivered… for a long time. Also, larger retailers turn over fuel supplies very rapidly, greatly reducing the time the fuel spends in the tanks.

And as I showed in an earlier essay, the NIST found that the average annual temperature of fuel stored in those underground tanks was 64.7 degrees.

The fuel temperature data was gathered by the National Institute of Standards and Technology from storage tanks at 1,000 gas stations and truck stops in 48 states and the District of Columbia during a period from 2002 to 2004.

The NIST data revealed that the average temperature of fuel across the country and year-round was 64.7 degrees Fahrenheit — almost 5 degrees higher than the government standard of 60 degrees.

So, how many gallons does the “ripoff” then amount to? The OIDA site discusses that in their next myth:

MYTH: Temperature only causes tablespoons of difference in amount of fuel delivered.

FACT: A 25-gallon fill-up of 75 degree F gasoline equates to a loss of nearly one quart. The same fill-up at 90 degrees F equates to nearly a half gallon.

But we aren’t filling up with gasoline at 75 degrees, are we? The NIST investigation – which started this whole thing – established that. And again, as I showed in the previous essay, the difference between gasoline at 60 degrees F and gasoline at 64.7 degrees F is 0.27%. Therefore, in a 25 gallon fill-up, the difference is 8.6 ounces (17.3 tablespoons). But suggesting that people are regularly getting gasoline at 75 degrees or even 90 degrees is just outright misinformation.

MYTH: 90 percent of fuel retailers are small “mom and pop” operations.

FACT: Several large oil production companies and refiners own 25 percent of the stations that sell their brand fuel.

You have to love this one. The myth is that 90 percent of fuel retailers are small, but the reality is that 25 percent are NOT SMALL. Or, according to them, 75 percent are small, but contrasting 90 to 75 must not have felt impressive enough. But they are wrong anyway, according to a 2007 report:

Who Sells Gas – and For What – May Surprise You

In reality, less than 3 percent of the more than 112,000 convenience stores selling gasoline are owned and operated by major oil companies.

Of course not all gas is sold at convenience stores, so we have to account for the stand-alone gas stations to get the total that are owned by Big Oil. According to the extensive report by the NACS, found here:

It’s estimated that less than 5 percent of the approximately 168,000 retail gasoline facilities in the United States are owned and operated by the major oil companies.

So much for the idea of sticking it to Big Oil. I understand that this is why this issue has taken off, but that’s not who is going to get stuck.

MYTH: The cost to retro-fit the pumps will far outweigh the benefit to the consumers.

FACT: The one-time cost to retro-fit retail pumps is very close to the extra amount consumers already pay annually for hot fuel.

Yet that doesn’t contradict the “myth”, does it? That doesn’t mean that after the retro-fit, consumers won’t be paying even more. And based on the estimates that I have seen, to put temperature compensation on all of these pumps will cost in the range of $6 billion to $12 billion ($3,000-$4,000 per pump times 2-3 million pumps). So even if we accepted the premise of $2 billion extra from consumers each year, I have a hard time accepting that this is “very close” to the cost of the new equipment.

And they close with one supported by nothing by a great big dose of wishful thinking:

MYTH: The cost of retro-fitting the pumps will raise the price of fuel for all consumers.

FACT: Consumers have borne the burden of hot fuel sales for decades. Once the problem is fixed they will reap the benefits for future decades.

Sadly, another story at the OIDA website said that that on July 11, 2007 the National Conference on Weights and Measures failed to approve a measure to approve guidelines for states, should they ever decide that they wanted temperature compensation. Again, they couldn’t even pass a measure for a non-binding guideline. Those voting against must be in the pockets of Big Oil.

Stuff like this really drives me crazy. A waste of time for the parties who are supposed to reap benefits, an annoyance for people trying to run service stations, an issue that allows politicians to pander, while the real beneficiaries are the attorneys.

July 17, 2007 Posted by | gas prices, litigation, price gouging | 12 Comments

Hot Gas is a Bunch of Hot Air

The Owner Operator Independent Drivers Association (OIDA) has launched a new website to “educate” people on the issue of hot gas. And by educate, I mean misinform and obfuscate. I can’t help but wonder about their headline story:

Hot Fuel Costs Consumers More Than 2.3 Billion Dollars Annually

Let’s see, Americans consume 140 billion gallons of gasoline and over 60 billion gallons of diesel each year. That means that even if their headline above was correct, the “rip-off” amounts to just over 1 cent a gallon. And given that pricing is set by supply and demand, what will happen with temperature compensation is that the average gasoline price will go up by just over 1 cent a gallon, plus a bit more as every retailer tries to recoup the cost of temperature compensation equipment. Who wins? The makers of the temperature compensation equipment, and the lawyers. Even in the best case, the average consumer who uses about 600 gallons of fuel a year would win $6 a year if you could suspend the laws of supply and demand.

Their new section on myths and facts is an excellent source of misinformation:

Hot Fuel Myths & Facts

Let’s look at some of their “myths”, and the facts as they see them. And of course the facts as I see them. 🙂

MYTH: Fill up in the morning when it’s cooler.

FACT: 35,000-gallon tanks do not dramatically change temperature in daily cycles.

Well, I agree with this one. 35,000 gallon tanks DO NOT dramatically change temperature in daily cycles. That means when the temperature outside rises to 90 degrees, the temperature of the fuel is about the same as it was in the middle of the night when the temperature was 60 degrees.

MYTH: In-ground tanks at gas stations keep fuel at 60 degrees Fahrenheit.

FACT: The insulated, fiberglass tanks tend to keep fuel at the temperature it was delivered… for a long time. Also, larger retailers turn over fuel supplies very rapidly, greatly reducing the time the fuel spends in the tanks.

And as I showed in an earlier essay, the NIST found that the average annual temperature of fuel stored in those underground tanks was 64.7 degrees.

The fuel temperature data was gathered by the National Institute of Standards and Technology from storage tanks at 1,000 gas stations and truck stops in 48 states and the District of Columbia during a period from 2002 to 2004.

The NIST data revealed that the average temperature of fuel across the country and year-round was 64.7 degrees Fahrenheit — almost 5 degrees higher than the government standard of 60 degrees.

So, how many gallons does the “ripoff” then amount to? The OIDA site discusses that in their next myth:

MYTH: Temperature only causes tablespoons of difference in amount of fuel delivered.

FACT: A 25-gallon fill-up of 75 degree F gasoline equates to a loss of nearly one quart. The same fill-up at 90 degrees F equates to nearly a half gallon.

But we aren’t filling up with gasoline at 75 degrees, are we? The NIST investigation – which started this whole thing – established that. And again, as I showed in the previous essay, the difference between gasoline at 60 degrees F and gasoline at 64.7 degrees F is 0.27%. Therefore, in a 25 gallon fill-up, the difference is 8.6 ounces (17.3 tablespoons). But suggesting that people are regularly getting gasoline at 75 degrees or even 90 degrees is just outright misinformation.

MYTH: 90 percent of fuel retailers are small “mom and pop” operations.

FACT: Several large oil production companies and refiners own 25 percent of the stations that sell their brand fuel.

You have to love this one. The myth is that 90 percent of fuel retailers are small, but the reality is that 25 percent are NOT SMALL. Or, according to them, 75 percent are small, but contrasting 90 to 75 must not have felt impressive enough. But they are wrong anyway, according to a 2007 report:

Who Sells Gas – and For What – May Surprise You

In reality, less than 3 percent of the more than 112,000 convenience stores selling gasoline are owned and operated by major oil companies.

Of course not all gas is sold at convenience stores, so we have to account for the stand-alone gas stations to get the total that are owned by Big Oil. According to the extensive report by the NACS, found here:

It’s estimated that less than 5 percent of the approximately 168,000 retail gasoline facilities in the United States are owned and operated by the major oil companies.

So much for the idea of sticking it to Big Oil. I understand that this is why this issue has taken off, but that’s not who is going to get stuck.

MYTH: The cost to retro-fit the pumps will far outweigh the benefit to the consumers.

FACT: The one-time cost to retro-fit retail pumps is very close to the extra amount consumers already pay annually for hot fuel.

Yet that doesn’t contradict the “myth”, does it? That doesn’t mean that after the retro-fit, consumers won’t be paying even more. And based on the estimates that I have seen, to put temperature compensation on all of these pumps will cost in the range of $6 billion to $12 billion ($3,000-$4,000 per pump times 2-3 million pumps). So even if we accepted the premise of $2 billion extra from consumers each year, I have a hard time accepting that this is “very close” to the cost of the new equipment.

And they close with one supported by nothing by a great big dose of wishful thinking:

MYTH: The cost of retro-fitting the pumps will raise the price of fuel for all consumers.

FACT: Consumers have borne the burden of hot fuel sales for decades. Once the problem is fixed they will reap the benefits for future decades.

Sadly, another story at the OIDA website said that that on July 11, 2007 the National Conference on Weights and Measures failed to approve a measure to approve guidelines for states, should they ever decide that they wanted temperature compensation. Again, they couldn’t even pass a measure for a non-binding guideline. Those voting against must be in the pockets of Big Oil.

Stuff like this really drives me crazy. A waste of time for the parties who are supposed to reap benefits, an annoyance for people trying to run service stations, an issue that allows politicians to pander, while the real beneficiaries are the attorneys.

July 17, 2007 Posted by | gas prices, litigation, price gouging | 11 Comments

Hot Gas Issue Heating Up

Several people have asked me about this recently, and it has been in the news quite a bit, so this is a good time for an update. I have previously written 2 essays on the “hot gas” issue:

Hot Gas Lawsuit in Utah

More on Hot Gas Lawsuit

If you are unfamiliar with this, this issue is that most gas pumps are not temperature compensated, so consumers are being “ripped off” on hot summer days. The funny thing is that gas is stored underground, and the temperature is very near the 60 degree temperature a gallon is based upon. Here is a story from USA Today explaining the issue:

Motorists sue oil titans, retailers over ‘hot fuel’ losses

Think gas is expensive? It’s even more expensive on hot summer days. Gasoline expands as temperatures rise. That means motorists get less energy from a gallon of so-called “hot fuel” than from a cold one.

When Brent Donaldson, a restaurant owner in Kansas City, Mo., discovered that fact earlier this year, he joined hundreds of consumers in more than a dozen states who are suing oil companies and gas retailers, alleging that they have been overcharged by billions of dollars.

“The consumer is repeatedly being ripped off and not given a fair deal,” Donaldson says. He says he spends $60 a week filling his Acura.

This is such a non-issue. The variation in BTU content from blend to blend is greater than any variation from hot gas. And of course if gas is hot in the summer, it is cold in the winter. What’s the overall effect? Not much.

A reader wrote and pointed me to the USA Today story, mentioning the claim that the industry fought for temperature compensation in Canada. My response:

I have asked and asked someone for any proof of the claims that they fought the practice in Canada, and every single time it traces back to a story in a Kansas newspaper. I swear, people don’t understand the first thing about supply and demand. First thing, the gas is in underground tanks near 60 degrees, so when people talk about their gas being at 90 degrees or whatever, they are full of crap. But second, let’s say that it was true. That would mean that people would be getting a bit more gas for the same price, effectively lowering their cost for gas. This will of course spur demand, and cause prices to rise until supply and demand are again balanced. On balance, if they are being “ripped off” by 1%, and this situation is corrected, then I expect gas prices to rise by 1% due to that correction.

What’s going to happen is that they are going to sue and potentially cause this equipment to be installed, then wonder why their gas prices are even higher. They simply can’t drive up costs for the oil companies and not expect their prices to go up.

There is no free lunch. Consumers who think they are going to get a bit of free gas are going to find themselves paying more for gas than they were. You can send your thank you notes to the FTCR, as they have been on this bandwagon for quite some time. Here they are saying oil companies are behaving like tobacco companies over this issue.

July 5, 2007 Posted by | FTCR, gas prices, litigation | 19 Comments