R-Squared Energy Blog

Pure Energy

My Top 10 Energy Related Stories of 2009

Here are my choices for the Top 10 energy related stories of 2009. Previously I listed how I voted in Platt’s Top 10 poll, but my list is a bit different from theirs. I have a couple of stories here that they didn’t list, and I combined some topics. And don’t get too hung up on the relative rankings. You can make arguments that some stories should be higher than others, but I gave less consideration to whether 6 should be ahead of 7 (for example) than just making sure the important stories were listed.

1. Volatility in the oil markets

My top choice for this year is the same as my top choice from last year. While not as dramatic as last year’s action when oil prices ran from $100 to $147 and then collapsed back to $30, oil prices still more than doubled from where they began 2009. That happened without the benefit of an economic recovery, so I continue to wonder how long it will take to come out of recession when oil prices are at recession-inducing levels. Further, coming out of recession will spur demand, which will keep upward pressure on oil prices. That’s why I say we may be in The Long Recession.

2. The year of natural gas

This could have easily been my top story, because there were so many natural gas-related stories this year. There were stories of shale gas in such abundance that it would make peak oil irrelevant, stories of shale gas skeptics, and stories of big companies making major investments into converting their fleets to natural gas.

Whether the abundance ultimately pans out, the appearance of abundance is certainly helping to keep a lid on natural gas prices. By failing to keep up with rising oil prices, an unprecedented oil price/natural gas price ratio developed. If you look at prices on the NYMEX in the years ahead, the markets are anticipating that this ratio will continue to be high. And as I write this, you can pick up a natural gas contract in 2019 for under $5/MMBtu.

3. U.S. demand for oil continues to decline

As crude oil prices skyrocketed in 2008, demand for crude oil and petroleum products fell from 20.7 million barrels per day in 2007 to 19.5 million bpd in 2008 (Source: EIA). Through September 2009, year-to-date demand is averaging 18.6 million bpd – the lowest level since 1997. Globally, demand was on a downward trend as well, but at a less dramatic pace partially due to demand growth in both China and India.

4. Shifting fortunes for refiners

The Jamnagar Refinery Complex in India became the biggest in the world, China brought several new refineries online, and several U.S. refiners shut down facilities. This is a trend that I expect to continue as refining moves closer to the source of the crude oil and to cheap labor. This does not bode well for a U.S. refining industry with a capacity to refine 17.7 million barrels per day when total North American production is only 10.5 million bpd (crude plus condensate).

5. China

China was everywhere in 2009. They were making deals to develop oil fields in Iraq, signing contracts with Hugo Chavez, and they got into a bidding war with ExxonMobil in Ghana. My own opinion is that China will be the single-biggest driver of oil prices over at least the next 5-10 years.

6. U.S. oil companies losing access to reserves

As China increases their global presence in the oil markets, one casualty has been U.S. access to reserves. Shut out of Iraq during the recent oil field auctions there, U.S. oil companies continue to lose ground against the major national oil companies. But no worries. Many of my friends e-mailed to tell me that the Bakken has enough crude to fuel the U.S. for the next 41 years

7. EU slaps tariffs on U.S. biodiesel

With the aid of generous government subsidies, U.S. biodiesel producers had been able to put their product into the EU for cheaper than local producers could make it. The EU put the brakes on this practice by imposing five-year tariffs on U.S. biodiesel – a big blow to U.S. biodiesel producers.

8. Big Oil buys Big Ethanol

I find it amusing when people suggest that the ethanol industry is a threat to the oil industry. I don’t think those people appreciate the difference in the scale of the two industries.

As I have argued many times before, the oil industry could easily buy up all of the assets of ethanol producers if they thought the business outlook for ethanol was good. It would make sense that the first to take an interest would be the pure refiners, because they are the ones with the most to lose from ethanol mandates. They already have to buy their feedstock (oil), so if they make ethanol they just buy a different feedstock, corn, and they get to sell a mandated product.

In February, Valero became the first major refiner to buy up assets of an ethanol company; bankrupt ethanol producer Verasun. Following the Valero purchase, Sunoco picked up the assets of another bankrupt ethanol company. If ExxonMobil ever decides to get involved, they could buy out the entire industry.

9. The climate wars heat up

There were several big climate-related stories in the news this year, so I decided to lump them all into a single category. First was the EPA decision to declare CO2 a pollutant that endangers public health, opening the door for regulation of CO2 for the first time in the U.S.

Then came Climategate, which gave the skeptics even more reason to be skeptical. A number of people have suggested to me that this story will just fade away, but I don’t think so. This is one that the skeptics can rally around for years to come. The number of Americans who believe that humans are causing climate change was already on the decline, and the injection of Climategate into the issue will make it that much harder to get any meaningful legislation passed.

Closing out the year was the United Nations Climate Change Conference in Copenhagen. All I can say is that I expected a circus, and we got a circus. It just goes to show the difficulty of getting countries to agree on issues when the stakes are high and the issues complex. Just wait until they try to get together to figure out a plan for peak oil mitigation.

10. Exxon buys XTO for $41 billion

In a move that signaled ExxonMobil’s expectation that the future for shale gas is promising, XOM shelled out $41 billion for shale gas specialist XTO. The deal means XOM is picking up XTO’s proved reserves for around $3 per thousand cubic feet, which is less than half of what ConocoPhillips paid for the reserves of Burlington Resources in 2005.

Honorable Mention

There were a number of stories that I considered putting in my Top 10, and some of these stories will likely end up on other Top 10 lists. A few of the stories that almost made the final cut:

The IEA puts a date on peak oil production

The statement they made was that barring any major new discoveries “the output of conventional oil will peak in 2020 if oil demand grows on a business-as-usual basis.”

AltaRock Energy Shuts Down

Turns out that deep geothermal, which the Obama administration had hoped “could be quickly tapped as a clean and almost limitless energy source” – triggers earthquakes. Who knew? I thought these were interesting comments from the story: “Some of these startup companies got out in front and convinced some venture capitalists that they were very close to commercial deployment” and “What we’ve discovered is that it’s harder to make those improvements than some people believed.” I am still waiting to see a bonafide success story from some of these VCs.

The biggest energy bill in history was passed

In total, $80 billion in the stimulus bill earmarked for energy was a big story, but I don’t know how much of that money was actually utilized.

The Pickens Plan derails

The website is still there, but the hype of 2008 turned into a big disappointment in 2009 after oil prices failed to remain high enough to make the project economical. Pickens lost about 2/3rds of his net worth as oil prices unwound, he took a beating in the press, and he announced in July that we would probably abandon the plan.

So what did I miss? And what are early predictions for 2010’s top stories? I think China’s moves are going to continue to make waves, there will be more delays (and excuses) from those attempting to produce fuel from algae and cellulose, and there will be little relief from oil prices.

December 24, 2009 Posted by | biodiesel, China, climate change, ethanol, ExxonMobil, geothermal, global warming, Media coverage, natural gas, oil consumption, oil demand, oil prices, oil refineries, T. Boone Pickens, valero | 27 Comments

Catching Up

Back home now, just trying to catch up on the energy news of note. Four stories that I want to highlight. First was POET’s announcement on their progress on cellulosic ethanol:

Poet hits ‘long shot,’ cuts cellulosic ethanol costs

WASHINGTON – The head of the world’s largest ethanol producer, Sioux Falls-based Poet, said Wednesday that his company has drastically cut its cellulosic ethanol production costs.

It is a breakthrough that will allow cellulosic ethanol to compete with gasoline within two years.

Jeff Broin, Poet chief executive, told reporters during a roundtable discussion that the company has reduced its cellulosic ethanol production cost during the past year from $4.13 a gallon to $2.35 a gallon.

Andrew Leonard of Salon asked me for some comments, which he included in a story on the news:


Who cares about peak oil when you have corn cobs?

In addition to what made it into the story (and those comments were specifically about the kinds of risk factors POET faces), I said that I thought the guys at POET had done a nice job on this (that comment did make it into the follow-up story at Salon). One thing that isn’t clear to me is whether the production cost includes any capital recovery. If not, then they still have some distance to go to get that $2.35 into an economic range with ethanol presently trading at about $2.00 a gallon. [Edit: A comment from Nathan Schock of POET over at Green Car Congress indicates that this is in fact the total production cost – including depreciation]. Another question I would have is how their version of the process performs with other sources of biomass.

One other thing I said to Andrew (that didn’t make it into the story) is the really big challenge is in getting those ethanol titers up. Low titers mean lots of energy is spent in getting the water out. This is why I have always favored gasification technologies over hydrolysis technologies: You don’t have water to deal with, and thus the BTU efficiency is potentially going to be higher. (Probably your capital costs as well will be higher for gasification – depending on what you are producing from the syngas). If biomass costs rise in the future – as I expect them to – then there will be added incentive for maximizing BTU efficiency.

The second story was sent by a reader. In light of the amount of corn we produce, this could have significant ramifications:

Amaizing: Corn Genome Decoded

A team of scientists led by The Genome Center at Washington University School of Medicine in St. Louis published the completed corn genome in the Nov. 20 journal Science, an accomplishment that will speed efforts to develop better crop varieties to meet the world’s growing demands for food, livestock feed and fuel.

The United States is the world’s top corn grower, producing 44 percent of the global crop. In 2009, U.S. farmers are expected to produce nearly 13 billion bushels of corn, according to the U.S. Department of Agriculture.

The next story is about a trend that I think will continue. In my presentation in Orlando, one of the trends that I pointed out is that more refineries are being built closer to the source of the oil. Saudi produces crude, but would like to capture more of that value chain by refining it as well. There are a number of very large refinery projects underway – especially in Asia and the Middle East – and in a world with stagnant oil production that means some refineries are going to shut down. In the U.S., our refining capacity is more than three times greater than our oil production rates. I see a dismal outlook for refining in the U.S., with a lot of refiners going out of business in the U.S. Valero just announced another refinery closing:

Valero refinery in Delaware City to close permanently

DELAWARE CITY, Del. — Valero Energy said this morning it plans to permanently close its Delaware City Refinery, eliminating hundreds of high-paying jobs, because of weak economic conditions, high local costs and chronic troubles at the 210,000 barrel-per-day complex.

Company spokesman Bill Day said that a plantwide maintenance shutdown, announced late last month, was already under way, and will convert to a final closing. Plant employees will continue on the payroll for 60 days under federal rules for large-scale layoffs.

Day said the plant — which produces about 70 percent of the gasoline sold on the Delmarva Peninsula— has lost $1 million a day since the start of 2009.

About 550 full time workers will be put out of work by the decision. Valero (VLO) also has notified companies that work closely with the refinery, Day said, but effects on those operations were not immediately available.

People forget that refining is a very tough business. They remember when refiners make money – as they were doing a couple of years ago – but forget that most of the time they aren’t making money. Plus, when they do make money they are subjected to accusations of gouging and calls from politicians to tax their windfall.

Finally, readers know that I have consistently avoided wading into the debate over global warming. It takes enough of my time just trying to keep up with the latest energy news, and I decided long ago to sit out the debate on climate change. It is far too politicized and people get too emotional over the issue. However, I do think it is important that the debate takes place, and I don’t like to see people trying to shut it down. Attaching labels like “denier” to people who question the science is an attempt to shut down debate, and I don’t care how right you think you are – in my view the debate needs to go on.

A couple of days ago it was announced that some e-mails from a climate research outfit in England had been hacked:

Global Warming Research Exposed After Hack

A climate change dust-up

I have to say that some of the e-mails I have seen posted are troubling. Whatever history ultimately shows, some of those e-mails appear to be agenda-driven and not science-driven. There is no place for that.

Let the debate carry on, and let science – not agendas – determine the outcome.

November 22, 2009 Posted by | cellulosic ethanol, genetic engineering, global warming, greenhouse gases, oil refineries, POET, refining, Salon, valero | 118 Comments

What Would Ron Wyden Do?

The refining sector has been in the news a few times this week, and not in a good way:

A Fine Mess For U.S. Refineries

HOUSTON — Excess capacity, weak demand for fuels and rising product inventories continue to squeeze margins for U.S. oil refiners.

Sunoco, the second-largest refiner in the country that doesn’t produce its own oil, said late Tuesday that it will soon shutter its Eagle Point refinery in Westville, N.J., which has a capacity to handle 145,000 barrels of oil per day. During the second quarter, Philadelphia-based Sunoco lost $77 million in its refining business and told analysts Tuesday that the third quarter could be worse.

A point that I have tried to stress is that for the most part, refining is not a lucrative business. It is a risky business. You may have five poor years and then one or two really good years. And then when you have a good year, you are accused of gouging and everybody wants a bigger piece of the profits – while sharing none of the risk. You can’t find those people during the bad years; they only show up when times are good.

I couldn’t help but think of Oregon Senator Ron Wyden when I read about the shuttering of the Sunoco refinery. You see, Senator Wyden has devoted a lot of time to investigating these sorts of “shady” practices, where refiners shut down refineries just to limit capacity and boost profits. He produced a comprehensive report on this a few years ago:

The Oil Industry, Gas Supply and Refinery Capacity: More Than Meets the Eye

Two excerpts from the report:

Specifically, the documents suggest that major oil companies pursued efforts to curtail refinery capacity as a strategy for improving profit margins; that competing oil companies worked together to subvert supply; that refinery closures inhibited supply; and that oil companies are reaping record profits, yet may benefit from a proposed national energy policy that would offer financial incentives to expand refinery capacity.

The major oil companies had a financial interest in seeing the closure of independent refineries. By reducing the overall supply of oil and gas and reducing the number of companies involved in producing it, the major oil companies can have tighter reins on the supply and the price.

You see, Senator Wyden believes that when refineries shut down, it is some sort of organized attempt by “the industry” to reduce capacity and boost prices. When prices are sky high, this may seem like a plausible explanation. When a refiner is losing millions quarter after quarter, it no longer seems so plausible. It looks like someone exiting a business they no longer find profitable.

I documented some of Wyden’s silliness in Gasoline Prices Part II: Long-Term Factors. The bottom line is that refiners may eventually once again benefit as excess supply is shut down. And that’s the way it works in any business. If you are producing too much of something, the price is low and marginal producers go out of business.

A lot of refiners are in trouble right now. Sunoco won’t be the last one to shutter a refinery. Maybe two or three years from now, we will once again see a short burst of profitability as the supply/demand balance tightens back up. But maybe Sunoco’s Eagle Point refinery has lost half a billion dollars by then. This is the calculation they have certainly gone through, and their conclusion is that they will be better off to shutter the refinery.

But what would Senator Wyden do if he owned Eagle Point? I have to conclude, based on his report above, that he would continue running it so prices remained low for everyone. In fact, I wouldn’t be surprised to see him expanding capacity. He might end up losing a few hundred million dollars each year, but hopefully he has a big pile of money to draw upon. It reminds me of the joke about the farmer who won the lottery. When asked what he would do with his winnings, he replied “I’m just gonna keep farming until the money is all gone.”

Senator Wyden – and a great many others who think as he does – would apparently keep refining until the money is all gone.

October 10, 2009 Posted by | oil refineries, refining, refining margins, Ron Wyden | 18 Comments

Bloggers Go to Billings

I should have Part 2 of the series of answering readers’ questions posted by tomorrow, but until then I was just sent the following link, which was of great personal interest to me:

A Green Refinery?

The gist is that last year the American Petroleum Institute flew a group of bloggers up to the ConocoPhillips refinery in Billings, Montana where I used to work to give them a perspective of life in a refinery. A video diary of the trip was recently posted to the link above. An excerpt from the link:

The refinery has twice been awarded EnergyStar designation by the EPA for its comparatively efficient production processes. It also established a Citizen’s Advisory Council to maintain an open dialogue between the community and ConocoPhillips. This council has been instrumental in tracking the plant’s social, economic, and environmental performance.

It was kind of funny to see my old managers there lecturing on how a refinery works, and what makes the Billings Refinery unique. (Yes, Tim Seidel looks unusually young to be a manager in a refinery, but he is very talented).

Here were some of the essays that bloggers wrote following the trip:

How Much at What Pressure and Temperature?

Semi-coherent and random thoughts about the Billings trip

Refined Refinery? ConocoPhillips in Billings, MT

I do have one comment on some of the write-ups I have seen. There seems to be some misinformation that the refinery was either built for, or relies upon the Alberta tar sands for feedstock. First, that certainly wasn’t why the refinery was built, as it was there long before tar sands became an industry. Second, unless things have changed in the 2.5 years since I left, the refinery actually utilizes little or no syncrude from tar sands. It is a refinery designed for heavy, sour oil, and as such is not ideal for the syncrude coming out of the tar sands.

Anyway, just thought this might be of some interest. More answers to readers’ questions tomorrow.

August 3, 2009 Posted by | American Petroleum Institute, api, Billings, ConocoPhillips, oil refineries, refining | 9 Comments

Gasoline Demand Has Recovered

It’s been taking place slowly, week after week, but low gas prices have brought gasoline demand back up. There has been anecdotal evidence that suggested demand might be heading higher, such as recovering sales of gas guzzling cars. But for watchers of This Week in Petroleum, the data confirm the anecdotes: Gasoline demand has recovered to the point that it is now higher in the U.S. than it was a year ago. This week’s Summary of Weekly Petroleum Data (off of which This Week in Petroleum is based) shows that the 4-week rolling average has for the first time in recent memory increased above (albeit slightly) the level of a year ago.

Another factor to keep an eye on as demand recovers is that refinery utilization is still quite low relative to what’s normal for this time of year. Percent utilization relative to the past 3 years is 3-5% lower for comparable weeks. This is starting to impact gasoline inventories. A typical January will see a healthy build of gasoline across the month, as refiners build stocks ahead of spring turarounds. This year, however, gasoline inventories have been flat across January, and this week in fact saw a drop of 2.6 million barrels. Inventories are still in decent shape, but they bear watching as we move toward spring.

Gasoline imports are also down marginally relative to the past two years, primarily a result of low gas prices. But the present trends of increasing demand, falling inventories, and low refinery utilization, suggest that prices will continue heading north.

February 11, 2009 Posted by | DOE, EIA, gas prices, oil refineries, refining, twip | 38 Comments

Critiquing the SPR Swap Plan

This morning, I read an interesting editorial in the Wall Street Journal:

Obama Has a Plan To Manage Our Oil Reserve

The editorial was written by John Shages, a former deputy assistant secretary for petroleum reserves at the Department of Energy. The editorial essentially argues that the composition of the Strategic Petroleum Reserve (SPR) is lighter than the composition of oil that most refineries run. Since lighter crude is also more expensive than heavier crude, Shages is suggesting that we sell some of the light crude and buy back some of the heavy crude. His argument – echoing the argument from Obama and various other government officials – is that this would generate cash and help drive down oil prices.

Some excerpts from the editorial:

Sen. Barack Obama is proposing a simple maneuver — called an exchange, or swap — that will help lower the price of oil for consumers, increase the amount of oil in the SPR, increase energy security, and leave taxpayers better off by about $1 billion. His proposal deserves to be adopted.

Today, with historically high oil prices, it is time to debate using the SPR. Some argue that the reserve should only be used in emergencies. Others say that we should use all the tools at our disposal to help consumers.

OK, let’s debate. Regular readers know that I strongly object to using the SPR in an attempt to influence prices. That is not what it is for. High prices – which are incidentally well off of their highs – do not constitute an emergency. Further, that line about taxpayers being better off by $1 billion misses a very large point. I could also trade in my house for a mobile home, and be better off by a few hundred thousand dollars. But that few hundred thousand has costs associated with it: Less home, a home that isn’t as safe in bad weather conditions, and a home that has less value when I wish to sell it. Likewise, there are costs associated with downgrading the quality of the SPR.

Mr. Shages continues:

The oil in the reserve now is all light crude, which is easier and cheaper to refine into gasoline, a reflection of refining capability at the time the SPR was created. Over the past three decades, however, U.S. refining capacity has become increasingly sophisticated and complex, because the world’s oil is increasingly heavy and harder to refine. Today, about 40% of our refining capacity is configured to handle heavier crude oil.

We now confront a mismatch between U.S. refining capacity and the oil mix in the SPR. In a 2007 report, the Government Accountability Office (GAO) found that in an emergency this mismatch could reduce U.S. refinery capacity by 5% or over 735,000 barrels per day in total as some refineries scale back production to accommodate the SPR oil. The GAO recommended that the Energy Department change the reserve’s oil mix to at least 10% heavy oil, roughly 70 million barrels.

It struck me as very odd that having oil that is too light could reduce refinery capacity. After all, light oil is much simpler to process – as is alluded to above. Yields are also higher. Yet the claim is that we would be better off with heavier oil in the SPR? This didn’t add up, so I dug up that GAO report that was referenced:

Improving the Cost-Effectiveness of Filling the Reserve

Some excerpts from that report:

Our analysis of DOE’s Energy Information Administration (EIA) data shows that, of the approximately 5.6 billion barrels of oil that U.S. refiners accepted in 2006, approximately 40 percent was heavier than that stored in the SPR.10 Refineries that process heavy oil cannot operate at normal capacity if they run lighter oils. For instance, DOE’s December 2005 found that the types of oil currently stored in the SPR would not be fully compatible with 36 of the 74 refineries considered vulnerable to supply disruptions. DOE estimated that if these 36 refineries had to use SPR oil, U.S. refining throughput would decrease by 735,000 barrels per day, or 5 percent, substantially reducing the effectiveness of the SPR during an oil disruption, especially if the disruption involved heavy oil.

If you know what the assays look like for heavy oil versus light oil (See The Assay Essay), this looks like a very improbable claim. I suppose if you didn’t try to optimize your refinery for light oil, then that might be a true statement. But refiners optimize their refineries on a daily basis. I used to work in a heavy oil refinery. We could run heavy oil through, or we could run light oil through. If we don’t change the refinery settings at all, and run light oil through, then the above argument may be correct. But we would never do that. The overall yields are in fact higher with the lighter crudes, but you have to make the necessary adjustments. You may end up shutting down some units – like cokers – that are designed to handle heavy crudes.

But there is a more significant factor that seems to be overlooked. Refiners are configured to run heavy crudes because they are cheaper. Why are they cheaper? One, because they are more readily available. What does that suggest? That it is much less likely that there would be a disruption of heavy crude supplies. Thus, Mr. Shages (and Obama’s) argument is based solely on what refiners typically run, and ignores the question of typical availability of supply.

In conclusion, a heavy oil refinery can run light crudes with some adjustments. A light oil refinery can’t run heavy oils without severely impacting yields. Further, a light oil refinery is much more likely to see supply disruptions because there is simply less light oil available. This is why swapping heavy oil for light oil is a bad idea. It is a misguided attempt to influence oil prices, and that is not the purpose of the SPR. If it is allowed to be used for this purpose, then all we are doing is speculating with the reserve.

Footnote: Headed back to Europe today; offline for a couple of days.

September 8, 2008 Posted by | assays, Barack Obama, oil prices, oil refineries, refining, SPR | 60 Comments

Chavez Had Me Fooled

It seems I have been wrong about Hugo Chavez. I had thought the man didn’t have a clue about the oil business. While companies like ConocoPhillips were pulling in $15.5 billion profits*, they were investing $15.3 billion back into the business. Chavez, on the other hand, was siphoning off the profits of the national oil company of Venezuela, PDVSA, and spreading them among the public in support of his socialist platform. (Shame on those who complain about food shortages). Some, like me, probably thought “A few years of this, and he won’t have any oil profits to spread among the public.” How little I understood of his master plan.

You see, at first glance it does seem like his strategy is backfiring, as PDVSA is reportedly “facing growing operational problems” because of its failure to focus on its core business. It seemed like Chavez was running the business into the ground, as if Oil Watchdog had suddenly started to run the show. But that was before I read a story yesterday that revealed the man’s brilliant strategy:

Citgo cuts hundreds of Louisiana contractors-sources

HOUSTON, Jan 17 (Reuters) – Citgo Petroleum Corp cut more than 500 contract maintenance workers in late December at its Louisiana refinery as part of a program to increase returns to corporate parent Venezuelan state oil company PDVSA, according to sources familiar with the company’s refinery operations.

PDVSA is a key revenue generator financing Venezuelan President Hugo Chavez’s social development programs, but has drawn criticism for ignoring operational problems that have reduced oil and refined product output in Venezuela.

“Citgo wants to send 100 percent of what it makes to Venezuela,” said a source. “They’re only spending what’s needed to meet legal and regulatory obligations.”

It’s sheer genius. The profits from the oil company operations can be used to pay for social programs, and then the savings from job cuts in the refinery can be used to fund the oil company operations. Oh sure, there are naysayers, even internally:

Without the contractors, preventative maintenance at the refinery may fall off, the sources said.

“I don’t see how effective a maintenance program can be if you’re just chasing urgent jobs,” said a source.

PDVSA sources have told Reuters of similar problems at the company’s Venezuela-based refineries, lamenting the fact the company is carrying out “corrective maintenance” rather than “preventative maintenance.”

I say to these people “Don’t be so pessimistic!” After all, it is “preventative maintenance.” It’s like wearing your seat belt or motorcycle helmet: No accident, no problem. Besides, things don’t go wrong at refineries.

No, I was wrong about Chavez. He is clearly a misunderstood genius in the spirit of Vincent van Gogh. Stand back and let the man create a masterpiece.

Note: I do own ConocoPhillips stock, and I still don’t care for Hugo Chavez. It’s going to take more than a few maintenance cuts to impress me. After all, does he really need all of those operators and engineers scurrying about?

January 18, 2008 Posted by | Citgo, ConocoPhillips, Hugo Chavez, oil refineries, PDVSA, Venezuela | 74 Comments

Answering Questions – Part II

OK, I think this finishes off the questions. Thanks to all who asked a question. I think this has been a productive exercise, and I hope you find my answers useful. I may do this again at some point, but for now, I am back to posting and then lurking.

The Questions

Jeff Sutherland asked: It seems to me that electricity is going to be the key energy source in the future….Biofuels, like ethanol, if produced with electrical equipment seems like a good method to store energy….What do you see as the best option for a transportable form of energy in the future? Answer

garsky asked: A couple of posts ago you mentioned some things you were doing to prepare for a worst-case scenario. How about some details? Especially the part about your savings. Answer

Rob asked: Have you given up hope? Based on your more recent posts, it certainly looks like it. Answer

ape man asked: Take a look at this Bloomberg story. Does the story indicate that there are too many tankers, or that OPEC is not following through with its promised production increase? Answer

Doug asked: What would be an optimal location to live in ten or twenty years from now? Answer

Armchair261 asked: There’s always a lot of press about gasoline prices and inventory levels. How are these inventories affected by demand for other products, like diesel, propane, or fuel oil? Are refiners having trouble meeting demand for those products too, and is this siphoning some crude away from gasoline production? Answer

Chris said: Dr. Ramey has created a new and more efficient method of production which increases the yield of butanol and decreases the number of and volume of byproducts….not all species of high oil yielding algae are perfect but there are plenty to choose from.

Questions:

1. Don’t you think that at least one of these species could efficiently produce oil if the electrical energy input was reduced?

2. What was the reasoning behind the #3 point saying that closed bioreators are “totally absurd”?

3. Since you have ruled out the two most efficient and promising fuel alternatives, what do you propose we replace gasoline and diesel with? Answer

anonymous asked: What is the motivation to maintain high gasoline inventories? Answer

mink asked: 1) How do you see the way forward for “peakoilers”? Here and on the oil drum you are interested in getting reliable information and predictions out to the public. But the number of people interested is small.

2) There will come a time when peak-oil will hit public awareness, and it will be an ugly sight. Panic is very possible, and this panic may be very destructive. How do we prevent this? Answer

optimist wrote: Here’s my request: write a posting describing how one might tell if a given technology is promising or not. I think this would be immensely helpful to non-technical readers. Answer

The Answers

Answer

First, I agree that electricity is going to be key. We have the ability to produce much more electricity than we do now, but I don’t think we have the ability to significantly increase our output of liquid fuels. However, I would not produce biofuels from electricity. It would be too inefficient to go that route. For instance, if I had biomass, I wouldn’t convert it into electricity, I would gasify it and convert it into a liquid fuel. The heat produced from the process could be used to produce electricity, but the energy efficiency of the biomass is going to be much higher if you go straight to liquid fuels (if that’s what you intend the final product to be).

As far as the best option, I think electric transport will be the core of our transport system long-term, but we will always have a need for liquid fuels. I think biofuels can fill part of this gap. But we have to get away from this belief that we are going to displace most of our current oil usage with biofuels. That kind of thinking is very dangerous, because it could divert too many resources and waste precious time that could be used on more sustainable long-term solutions. Right now, the government is banking far too much on biofuels as THE solution, when they should be spreading the bets a lot more than they are doing.

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Answer

My strategy is very long-term, and I do not advise anyone else to do what I do. It has worked for me, but it may not work for you. Going all the way back to the early 90’s, I put a lot of thought into a very long-term strategy. I didn’t want to time the market, so I tried to identify sectors that I thought would fare best over a 20-year period. Health care/biotech was one of the sectors that I could see outperforming, especially as the Baby Boomers grew older. People are going to spend money on health care. I still believe that, so I have a fair amount of money in that sector (and have had for many years).

In the late 90’s and early part of this decade, I partially abandoned my long-term strategy and jumped on the tech bandwagon like many others. I got burned like many others. Why did I get burned? Primarily, because I didn’t really understand the things I was investing in, and I was lured by the prospect of the incredible returns that tech stocks were delivering. I joined the flock with the other sheep and got sheared. So, I reevaluated, and decided: Stick to the areas that I really know, and focus on those. I brainstormed on what I thought the future held, and I concluded that higher oil prices looked very likely. But the U.S. is very dependent upon oil, so it appeared to me that the economy in the U.S. is very vulnerable to higher oil prices.

So, these assumptions were the basis of my strategy. I left my position in the chemical industry for a position in the oil industry. I figured that as oil supplies tightened up and the price rose, and people continued to need energy, the people providing that energy would have the greatest job security. To hedge against the dollar, I put about 20% of my portfolio into international funds (this is more than most financial advisors would recommend). I also made a bet that energy stocks were undervalued. More recently, with my position in the UK, I have further insulated myself against the falling dollar because my compensation is now tied to the British Pound.

Following the tech stock fiasco, my strategy since 2001 has paid off. My overall portfolio – which includes the money I have added into it – has increased at an average annual return of 36% for 6 years. If I exclude the savings, the returns alone have averaged 26% for 6 years. I am now in the process of using some of that capital to acquire land in various locations, which will provide further diversification.

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Answer

Absolutely not. In fact, I am more hopeful than I have been in some time. I believe I am realistic, in that we are going to have to reduce our energy usage. But I am cautiously optimistic that if things get really tough, we can change in ways that don’t seem likely at the moment. We don’t give ourselves enough credit for our adaptability. If oil did peak soon and the price went a great deal higher, a lot of people would find areas of fat that they could cut out. This sort of behavioral shift would give us added time to formulate a better strategy than counting on biofuels to provide the net equivalent of 40 or 50 million barrels per day of oil.

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Answer

Note that this story dates back to August, well before the OPEC announcement that they would supply more crude. So I wouldn’t read anything into it regarding whether OPEC is following through on their promised increase. In fact, reports so far indicate that Saudi has in fact advised Asian refiners that they will be bumping up deliveries there.

Now, as far as why tanker demand was down in September, I can’t say for sure. Spring and fall are typical turnaround seasons, in which refinery utilization goes down and crude demand follows. So what would be of interest would be to compare the tanker demand rate with the typical September rate, and also to look at the condition of oil inventories in the area. That might clarify the situation.

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Answer

I think it will be safe within the walls of my compound. 🙂

Seriously, if you strongly believe in a worst-case scenario, there are certain attributes that I would look for. I want to see a high ratio of farmland to surrounding population. I want to be relatively close to decent medical facilities. I would like to be close to transportation via rail or water. I want the place to have a reliable water supply. Those are just a few of the things that would be on my check-list, and there are some places that fit the bill. I think areas on both coasts of the U.S. will fare well. Needless to say, I think Scotland – which will still produce a lot of oil and gas for a long time – will fare well. I absolutely would not want to live (among others) in Houston, L.A., Phoenix, or Las Vegas (although one could argue that the latter two are well-placed for reliable solar energy).

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Answer

Refiners are always looking at margins on diesel and gasoline. When margins for diesel are higher than for gasoline, they will shift production toward diesel (which will also affect things like the propane balance). A typical refinery can shift between diesel and gasoline to a limited extent – perhaps 5%. If production is shifted toward diesel, then that should eventually improve the gasoline margins as supply is taken off the market, and as this happens they will shift some production back. And they literally look at this and adjust multiple times per week.

The one big caveat is that commitments to existing customers take precedence. So, if margins for diesel look better, but you would have to short an existing gasoline customer to take advantage, you are stuck. You can’t declare force majeure for something like that. Maintaining relationships with your customers sometimes means that you have to give up short-term profits.

Are refiners having trouble meeting demand? Yes. Refinery utilization has been down since Hurricane Katrina, and the only thing that has kept this from resulting in $4 gasoline are strong imports. If the imports dried up, refiners would attempt to maximize gasoline, and this may precipitate a distillate shortage. And we don’t import much in the way of distillates, because demand is high elsewhere in the world (unlike gasoline, which is produced in excess, allowing some to be exported).

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Answer

First of all, I certainly don’t want to denigrate Ramey’s patent. It is a good contribution. However, it is clear to me that many people do not understand the real problem with bio-butanol. It is not a problem of conversion rate or reaction speed. Those are the areas that Ramey addressed, and while those things are nice to have, there is a knock-out factor that has not been addressed. That is, if you read Ramey’s patent (which I have done many times), he is still talking about butanol concentrations in the range of 2.5%. That is the problem, not whether the conversion is 25% or 35%.

Butanol is very toxic to the bugs, so it is very difficult to increase the concentration of butanol in the solution. What is needed is a breakthrough that would allow the bugs to thrive at the solubility limit of butanol, which is about 8%. In that case, excess butanol production would phase out, and this would be much less energy intensive than a distillation. But you can’t afford to distill off a 2.5% solution of butanol. The energy inputs into the process will be far greater than the energy content of the butanol. I know this from experience. I have done a lot of work on butanol distillations. At a 3% concentration of butanol, we don’t even attempt to separate it out. Even using relatively cheap (at that time) natural gas, it didn’t make economic sense to extract that butanol. Those levels of butanol are sent to wastewater treatment for disposal.

Believe me, I have a soft spot for butanol. I want to see it work. But right now there are serious issues. That’s not to say that it isn’t worth pursuing. In fact, I am working on it myself. But I have to be realistic.

Now, your specific questions:

1. Don’t you think that at least one of these species could efficiently produce oil if the electrical energy input was reduced?

The collection is the problem. If you go back to first principles of solar insolation, in the absolute best case a square meter of water can produce about a gallon per year of biodiesel. Once you add up the costs and energy inputs to harvest that meter and process the oil, it becomes an exercise in economic futility. Will it ever be economical? I won’t say never. I will say that it is nowhere close.

2. What was the reasoning behind the #3 point saying that closed bioreators are “totally absurd”?

I didn’t write that. It was written by Dr. John Benemann, who was involved in the algal biodiesel work and coauthored the closeout report of the project. He has 30 years of experience in the field, and like me, he likes to reel in hype when it gets out of hand. That’s what he was doing. His reasoning is that the cost of closed bioreactors is far too high – by a couple of orders of magnitude – to justify the amount of biodiesel that you could produce from the process.

3. Since you have ruled out the two most efficient and promising fuel alternatives, what do you propose we replace gasoline and diesel with?

It’s going to take conservation, efficiency, inputs from biofuels, electric transportation, public transportation, etc. There is nothing out there, and nothing on the horizon, that can actually replace our current usage of gasoline and diesel. We have to come to grips with this as soon as possible, and start spreading our bets a bit more. Right now, everyone is counting too heavily on biofuels to deliver.

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Answer

Ideally you only keep inventories where they need to be to make sure that you are always able to supply product to your customers. If you keep inventories too high, you obviously have money tied up that’s not doing anything for you. So let’s say you were maintaining high inventories in 2005. Suddenly, Hurricane Katrina comes along, prices go through the roof, shortages start to crop up, but you are in fat city because you had high inventories. So, it’s a balancing act.

One thing you will see if you look back, is that after Katrina refiners started to keep their crude inventories much higher than before. They saw the effects of a supply disruption, so they played it cautious for a while. Over time, I think we will start to forget, and inventories will creep back into the normal ranges.

Gasoline inventories are a different matter. I think refiners would like to put more product on the market, especially back when margins were so high, but they just couldn’t make enough to satisfy demand and refill the tanks.

One other time that refiners are motivated to keep gasoline inventories high is when they are headed into a turnaround. You need to have very full gasoline tanks when you shut down, so you can supply your customers while you are down.

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Answer

This was one of the more difficult questions to answer. You are correct that the number of interested people is small, but that number is growing. I am seeing more references in the media (some of which are merely to denounce those “crackpot Peak Oilers”). It has been very important to me, and to many others who are concerned about future oil supplies, that we maintain credibility as we discuss this. Those who cherry pick data to support preconceived notions, or who merely ignore inconvenient data do a great disservice to us all. (See Stuart Staniford addressing that here).

Arguments must be sound, and criticisms must be addressed. Where matters are open to interpretation, you must make a convincing case for why your interpretation is correct. With a few exceptions, I think that convincing large numbers of people with factual arguments has largely been a dismal failure. To convince the masses, you have to start convincing the media. The more this pops up in the media, the more the rest of the media will pay attention. But if the media is being presented half-baked arguments, it does tremendous damage.

Panic is only going to happen if things change rapidly. Anger is going to be a common emotion as oil prices spiral higher and higher, and people feel that their hard-earned money is flowing into the coffers of OPEC and the oil companies. The thing I have always believed in is educating people, which is the reason I do this. The best we can do is continue to chip away with sound arguments, and hope that the message starts to sink in. If people understand why things are happening, then we should be in better shape with respect to formulating solutions. If we simply blame the usual suspects (it’s those gouging oil companies!), then we may sit around and point fingers as we drive off a cliff.

Return to Top

Answer

If it was that easy, people wouldn’t keep offering me large sums of money to vet technologies for them. Seriously, there seems to be a great big vacuum in this area. I get questions from intelligent people who can look at an energy idea with a major flaw, but they can’t see it.

There is no magic formula. I think it requires experience, and you have to take them on a case by case basis. If someone brought me a potential breakthrough in biotechnology, I would be in the same boat as a lot of people are when they try to interpret the latest hyped energy breakthrough. Even though biotech is an interest/hobby of mine, it may be difficult for me to spot a fatal flaw. A molecular biologist may take one look, and say “You see that step where they say ‘insert gene A into position B?’ Well, the status of the technology is nowhere close to being able to do that.”

I think it just pays to be a skeptic first. There is nothing wrong with being a skeptic, even though many people confuse skepticism with negativity. I always tell people that I am a skeptic, but also a problem-solver. I am not shooting these ideas down for fun; I want some of them to work. But you have to sort the wheat from the chaff.

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October 12, 2007 Posted by | algal biodiesel, biobutanol, biofuels, ethanol, gas inventories, oil production, oil refineries, Peak Oil, refining margins, Saudi Arabia | Comments Off on Answering Questions – Part II

Answering Questions – Part II

OK, I think this finishes off the questions. Thanks to all who asked a question. I think this has been a productive exercise, and I hope you find my answers useful. I may do this again at some point, but for now, I am back to posting and then lurking.

The Questions

Jeff Sutherland asked: It seems to me that electricity is going to be the key energy source in the future….Biofuels, like ethanol, if produced with electrical equipment seems like a good method to store energy….What do you see as the best option for a transportable form of energy in the future? Answer

garsky asked: A couple of posts ago you mentioned some things you were doing to prepare for a worst-case scenario. How about some details? Especially the part about your savings. Answer

Rob asked: Have you given up hope? Based on your more recent posts, it certainly looks like it. Answer

ape man asked: Take a look at this Bloomberg story. Does the story indicate that there are too many tankers, or that OPEC is not following through with its promised production increase? Answer

Doug asked: What would be an optimal location to live in ten or twenty years from now? Answer

Armchair261 asked: There’s always a lot of press about gasoline prices and inventory levels. How are these inventories affected by demand for other products, like diesel, propane, or fuel oil? Are refiners having trouble meeting demand for those products too, and is this siphoning some crude away from gasoline production? Answer

Chris said: Dr. Ramey has created a new and more efficient method of production which increases the yield of butanol and decreases the number of and volume of byproducts….not all species of high oil yielding algae are perfect but there are plenty to choose from.

Questions:

1. Don’t you think that at least one of these species could efficiently produce oil if the electrical energy input was reduced?

2. What was the reasoning behind the #3 point saying that closed bioreators are “totally absurd”?

3. Since you have ruled out the two most efficient and promising fuel alternatives, what do you propose we replace gasoline and diesel with? Answer

anonymous asked: What is the motivation to maintain high gasoline inventories? Answer

mink asked: 1) How do you see the way forward for “peakoilers”? Here and on the oil drum you are interested in getting reliable information and predictions out to the public. But the number of people interested is small.

2) There will come a time when peak-oil will hit public awareness, and it will be an ugly sight. Panic is very possible, and this panic may be very destructive. How do we prevent this? Answer

optimist wrote: Here’s my request: write a posting describing how one might tell if a given technology is promising or not. I think this would be immensely helpful to non-technical readers. Answer

The Answers

Answer

First, I agree that electricity is going to be key. We have the ability to produce much more electricity than we do now, but I don’t think we have the ability to significantly increase our output of liquid fuels. However, I would not produce biofuels from electricity. It would be too inefficient to go that route. For instance, if I had biomass, I wouldn’t convert it into electricity, I would gasify it and convert it into a liquid fuel. The heat produced from the process could be used to produce electricity, but the energy efficiency of the biomass is going to be much higher if you go straight to liquid fuels (if that’s what you intend the final product to be).

As far as the best option, I think electric transport will be the core of our transport system long-term, but we will always have a need for liquid fuels. I think biofuels can fill part of this gap. But we have to get away from this belief that we are going to displace most of our current oil usage with biofuels. That kind of thinking is very dangerous, because it could divert too many resources and waste precious time that could be used on more sustainable long-term solutions. Right now, the government is banking far too much on biofuels as THE solution, when they should be spreading the bets a lot more than they are doing.

Return to Top

Answer

My strategy is very long-term, and I do not advise anyone else to do what I do. It has worked for me, but it may not work for you. Going all the way back to the early 90’s, I put a lot of thought into a very long-term strategy. I didn’t want to time the market, so I tried to identify sectors that I thought would fare best over a 20-year period. Health care/biotech was one of the sectors that I could see outperforming, especially as the Baby Boomers grew older. People are going to spend money on health care. I still believe that, so I have a fair amount of money in that sector (and have had for many years).

In the late 90’s and early part of this decade, I partially abandoned my long-term strategy and jumped on the tech bandwagon like many others. I got burned like many others. Why did I get burned? Primarily, because I didn’t really understand the things I was investing in, and I was lured by the prospect of the incredible returns that tech stocks were delivering. I joined the flock with the other sheep and got sheared. So, I reevaluated, and decided: Stick to the areas that I really know, and focus on those. I brainstormed on what I thought the future held, and I concluded that higher oil prices looked very likely. But the U.S. is very dependent upon oil, so it appeared to me that the economy in the U.S. is very vulnerable to higher oil prices.

So, these assumptions were the basis of my strategy. I left my position in the chemical industry for a position in the oil industry. I figured that as oil supplies tightened up and the price rose, and people continued to need energy, the people providing that energy would have the greatest job security. To hedge against the dollar, I put about 20% of my portfolio into international funds (this is more than most financial advisors would recommend). I also made a bet that energy stocks were undervalued. More recently, with my position in the UK, I have further insulated myself against the falling dollar because my compensation is now tied to the British Pound.

Following the tech stock fiasco, my strategy since 2001 has paid off. My overall portfolio – which includes the money I have added into it – has increased at an average annual return of 36% for 6 years. If I exclude the savings, the returns alone have averaged 26% for 6 years. I am now in the process of using some of that capital to acquire land in various locations, which will provide further diversification.

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Answer

Absolutely not. In fact, I am more hopeful than I have been in some time. I believe I am realistic, in that we are going to have to reduce our energy usage. But I am cautiously optimistic that if things get really tough, we can change in ways that don’t seem likely at the moment. We don’t give ourselves enough credit for our adaptability. If oil did peak soon and the price went a great deal higher, a lot of people would find areas of fat that they could cut out. This sort of behavioral shift would give us added time to formulate a better strategy than counting on biofuels to provide the net equivalent of 40 or 50 million barrels per day of oil.

Return to Top

Answer

Note that this story dates back to August, well before the OPEC announcement that they would supply more crude. So I wouldn’t read anything into it regarding whether OPEC is following through on their promised increase. In fact, reports so far indicate that Saudi has in fact advised Asian refiners that they will be bumping up deliveries there.

Now, as far as why tanker demand was down in September, I can’t say for sure. Spring and fall are typical turnaround seasons, in which refinery utilization goes down and crude demand follows. So what would be of interest would be to compare the tanker demand rate with the typical September rate, and also to look at the condition of oil inventories in the area. That might clarify the situation.

Return to Top

Answer

I think it will be safe within the walls of my compound. 🙂

Seriously, if you strongly believe in a worst-case scenario, there are certain attributes that I would look for. I want to see a high ratio of farmland to surrounding population. I want to be relatively close to decent medical facilities. I would like to be close to transportation via rail or water. I want the place to have a reliable water supply. Those are just a few of the things that would be on my check-list, and there are some places that fit the bill. I think areas on both coasts of the U.S. will fare well. Needless to say, I think Scotland – which will still produce a lot of oil and gas for a long time – will fare well. I absolutely would not want to live (among others) in Houston, L.A., Phoenix, or Las Vegas (although one could argue that the latter two are well-placed for reliable solar energy).

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Answer

Refiners are always looking at margins on diesel and gasoline. When margins for diesel are higher than for gasoline, they will shift production toward diesel (which will also affect things like the propane balance). A typical refinery can shift between diesel and gasoline to a limited extent – perhaps 5%. If production is shifted toward diesel, then that should eventually improve the gasoline margins as supply is taken off the market, and as this happens they will shift some production back. And they literally look at this and adjust multiple times per week.

The one big caveat is that commitments to existing customers take precedence. So, if margins for diesel look better, but you would have to short an existing gasoline customer to take advantage, you are stuck. You can’t declare force majeure for something like that. Maintaining relationships with your customers sometimes means that you have to give up short-term profits.

Are refiners having trouble meeting demand? Yes. Refinery utilization has been down since Hurricane Katrina, and the only thing that has kept this from resulting in $4 gasoline are strong imports. If the imports dried up, refiners would attempt to maximize gasoline, and this may precipitate a distillate shortage. And we don’t import much in the way of distillates, because demand is high elsewhere in the world (unlike gasoline, which is produced in excess, allowing some to be exported).

Return to Top

Answer

First of all, I certainly don’t want to denigrate Ramey’s patent. It is a good contribution. However, it is clear to me that many people do not understand the real problem with bio-butanol. It is not a problem of conversion rate or reaction speed. Those are the areas that Ramey addressed, and while those things are nice to have, there is a knock-out factor that has not been addressed. That is, if you read Ramey’s patent (which I have done many times), he is still talking about butanol concentrations in the range of 2.5%. That is the problem, not whether the conversion is 25% or 35%.

Butanol is very toxic to the bugs, so it is very difficult to increase the concentration of butanol in the solution. What is needed is a breakthrough that would allow the bugs to thrive at the solubility limit of butanol, which is about 8%. In that case, excess butanol production would phase out, and this would be much less energy intensive than a distillation. But you can’t afford to distill off a 2.5% solution of butanol. The energy inputs into the process will be far greater than the energy content of the butanol. I know this from experience. I have done a lot of work on butanol distillations. At a 3% concentration of butanol, we don’t even attempt to separate it out. Even using relatively cheap (at that time) natural gas, it didn’t make economic sense to extract that butanol. Those levels of butanol are sent to wastewater treatment for disposal.

Believe me, I have a soft spot for butanol. I want to see it work. But right now there are serious issues. That’s not to say that it isn’t worth pursuing. In fact, I am working on it myself. But I have to be realistic.

Now, your specific questions:

1. Don’t you think that at least one of these species could efficiently produce oil if the electrical energy input was reduced?

The collection is the problem. If you go back to first principles of solar insolation, in the absolute best case a square meter of water can produce about a gallon per year of biodiesel. Once you add up the costs and energy inputs to harvest that meter and process the oil, it becomes an exercise in economic futility. Will it ever be economical? I won’t say never. I will say that it is nowhere close.

2. What was the reasoning behind the #3 point saying that closed bioreators are “totally absurd”?

I didn’t write that. It was written by Dr. John Benemann, who was involved in the algal biodiesel work and coauthored the closeout report of the project. He has 30 years of experience in the field, and like me, he likes to reel in hype when it gets out of hand. That’s what he was doing. His reasoning is that the cost of closed bioreactors is far too high – by a couple of orders of magnitude – to justify the amount of biodiesel that you could produce from the process.

3. Since you have ruled out the two most efficient and promising fuel alternatives, what do you propose we replace gasoline and diesel with?

It’s going to take conservation, efficiency, inputs from biofuels, electric transportation, public transportation, etc. There is nothing out there, and nothing on the horizon, that can actually replace our current usage of gasoline and diesel. We have to come to grips with this as soon as possible, and start spreading our bets a bit more. Right now, everyone is counting too heavily on biofuels to deliver.

Return to Top

Answer

Ideally you only keep inventories where they need to be to make sure that you are always able to supply product to your customers. If you keep inventories too high, you obviously have money tied up that’s not doing anything for you. So let’s say you were maintaining high inventories in 2005. Suddenly, Hurricane Katrina comes along, prices go through the roof, shortages start to crop up, but you are in fat city because you had high inventories. So, it’s a balancing act.

One thing you will see if you look back, is that after Katrina refiners started to keep their crude inventories much higher than before. They saw the effects of a supply disruption, so they played it cautious for a while. Over time, I think we will start to forget, and inventories will creep back into the normal ranges.

Gasoline inventories are a different matter. I think refiners would like to put more product on the market, especially back when margins were so high, but they just couldn’t make enough to satisfy demand and refill the tanks.

One other time that refiners are motivated to keep gasoline inventories high is when they are headed into a turnaround. You need to have very full gasoline tanks when you shut down, so you can supply your customers while you are down.

Return to Top

Answer

This was one of the more difficult questions to answer. You are correct that the number of interested people is small, but that number is growing. I am seeing more references in the media (some of which are merely to denounce those “crackpot Peak Oilers”). It has been very important to me, and to many others who are concerned about future oil supplies, that we maintain credibility as we discuss this. Those who cherry pick data to support preconceived notions, or who merely ignore inconvenient data do a great disservice to us all. (See Stuart Staniford addressing that here).

Arguments must be sound, and criticisms must be addressed. Where matters are open to interpretation, you must make a convincing case for why your interpretation is correct. With a few exceptions, I think that convincing large numbers of people with factual arguments has largely been a dismal failure. To convince the masses, you have to start convincing the media. The more this pops up in the media, the more the rest of the media will pay attention. But if the media is being presented half-baked arguments, it does tremendous damage.

Panic is only going to happen if things change rapidly. Anger is going to be a common emotion as oil prices spiral higher and higher, and people feel that their hard-earned money is flowing into the coffers of OPEC and the oil companies. The thing I have always believed in is educating people, which is the reason I do this. The best we can do is continue to chip away with sound arguments, and hope that the message starts to sink in. If people understand why things are happening, then we should be in better shape with respect to formulating solutions. If we simply blame the usual suspects (it’s those gouging oil companies!), then we may sit around and point fingers as we drive off a cliff.

Return to Top

Answer

If it was that easy, people wouldn’t keep offering me large sums of money to vet technologies for them. Seriously, there seems to be a great big vacuum in this area. I get questions from intelligent people who can look at an energy idea with a major flaw, but they can’t see it.

There is no magic formula. I think it requires experience, and you have to take them on a case by case basis. If someone brought me a potential breakthrough in biotechnology, I would be in the same boat as a lot of people are when they try to interpret the latest hyped energy breakthrough. Even though biotech is an interest/hobby of mine, it may be difficult for me to spot a fatal flaw. A molecular biologist may take one look, and say “You see that step where they say ‘insert gene A into position B?’ Well, the status of the technology is nowhere close to being able to do that.”

I think it just pays to be a skeptic first. There is nothing wrong with being a skeptic, even though many people confuse skepticism with negativity. I always tell people that I am a skeptic, but also a problem-solver. I am not shooting these ideas down for fun; I want some of them to work. But you have to sort the wheat from the chaff.

Return to Top

October 12, 2007 Posted by | algal biodiesel, biobutanol, biofuels, ethanol, gas inventories, oil production, oil refineries, Peak Oil, refining margins, Saudi Arabia | 11 Comments

Answering Questions – Part I

Back in Aberdeen after some very interesting meetings in London, some of which I hope to be able to discuss in the not too distant future. I started working my way through the list of questions while I was in London and had some spare time. Some of the questions really warrant a stand-alone post.

Instead of posting one very long blog, I am going to break this up into at least 2 parts. I have been working my way through the questions in the order they were posted. Click on each answer link below the question and it will take you to the answer in the essay.

The Questions

Tad asked: Where do you see the oil industry in 20 years? Answer

Fat Man asked: You said you were going to cut back on blogging in order to spend more time with your family. You seem to be a blogging as much, or more, as you were before that promise. Are you doing what you said you would, or are you shorting your family? Answer

Anonymous asked: Oil production has been flattish over the last couple years, and consumption is up in many places (with China receiving the most attention in this regard). Is there a source that I can access that shows who has been getting by with less oil? Answer

Anonymous asked: What’s your favourite Aberdeen pub? I’ll be making a stop there in November and always appreciate a local tip. Answer

Anonymous asked: Would ethanol make more sense if it was simply burned at the production facility to make electricity vs trying to build infrastructure to transport it? Or is the EROI still to low even in that case? Answer

Rice Farmer asked: …can ethanol be produced by powering the farm machinery and trucks on ethanol and still come out ahead? I think not. So it seems to me that ultimately, the large-scale biofuel industry will collapse and that biofuels will just be produced locally and on a small scale for local needs. Powering the current huge fleet of cars and trucks on biofuels is just a pipe dream.

So what’s your take? Answer

Anonymous asked: Then would the EROI of using biomass for electrical generation actually work out to be favorable from an realistic economic standpoint (i.e., not completely propped-up by subsidies)? Or is it still a big enough sink as far as energy consumed per unit created that it would still be unfeasible to use for energy production? Answer

scp222 asked: Refining margins are quite low now after been about $30 a while back. What do you think the future holds for crack spreads and the refining business in general? Answer

The Answers

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I think the oil industry is going to evolve quite a bit over the next 20 years. There will still be a lot of oil in 20 years. I don’t believe supplies can possibly meet the demand growth projections I have seen, which of course means continued high prices.

I see a fairly high probability that the U.S. government will pass punitive measures as the public continues to be outraged at the cash flowing out of their pockets into oil company coffers. It won’t matter. I have yet to see a punitive measure that I truly believe will result in lower prices for consumers.

Now, while there will be oil in 20 years, I don’t think there will be enough oil. So, oil companies are going to be tuned to developments in alternative energy. A number are already involved in these areas. Even the pure oil companies like ExxonMobil will find themselves moving into this space. And because of continued high oil prices, they will find themselves with the cash to get into any field that looks promising.

The apparent widespread perception that oil companies will sit around twiddling their thumbs while alternative energy companies put them out of business is ludicrous. I have said before that if they wanted, the oil industry could own the ethanol industry. The entire ethanol production of the U.S. only amounts to the output of 1 mid-sized oil refinery. So, why don’t they own the ethanol industry? Because they see that their capital is better employed elsewhere at the moment. But if that changes – or if a significant breakthrough occurs in butanol, for instance – the oil companies have the infrastructure and the expertise to capitalize.

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Answer

You are correct that I am blogging about as much as I did before. However, I realized that it wasn’t the blogging that was taking time away from the family. I write very fast. I can knock out an essay very quickly, and I usually do it when I am up early before everyone else. But it’s all of the peripheral stuff that was taking up so much time: Answering e-mails (this was consuming over an hour every day), getting involved in debates (another hour), answering questions in the comments section, etc. I have cut those things out.

I have taken my e-mail address offline (although a number of people still have it, and others still find me), and this has cut down the time required to handle e-mail by 90%. While I still have essays put up at The Oil Drum, I haven’t commented there since August. I rarely comment here anymore (and this post was an attempt to catch and address a lot of comments at once.

Now, do I ever short my family as a result of the blog? Sure, sometimes I have to tell my kids to wait just a bit as a finish something up. But do I come home from work and spend the rest of the evening doing correspondence? No. I think I have found a reasonable compromise, and one that my family is pretty happy with.

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Benjamin Cole provided some information on this. You can’t find information on all countries, and therefore there is much reliance on anecdotal information. A comment that I remember someone once making was “I am tired of hearing stories like, A lightbulb went out in Bangladesh, therefore Peak Oil.” I agree with this sentiment completely. We can’t rely on anecdotal accounts that there is a fuel shortage here or there. There have always been fuel shortages.

The best sources for this kind of information, though, are the BP Statistical Review of World Energy (as Benjamin mentioned), the IEA and the EIA (for more timely information than BP’s stuff). If you look at the two latter options, you will find that the vast majority of the world’s oil usage is covered. This table from the EIA is a good starting point.

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I am not a big pub guy, so I went to my friend Euan Mearns, who also lives in Aberdeen. Here’s what he said:

Depends what your looking for.

West end chique – try Simpsons on Queens Road. (crap beer but nice wine – the house Merlot is excellent)

My favorite of late is “No 10” – Rubislaw terrace – good ales

Popular spots down town are The Prince of Wales and Ma Camerons

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Joules answered this question in the same way I would have: You would burn the biomass directly to produce the electricity. The EROEI is not the problem; capital costs for biomass-to-electricity plants are much higher because it is more difficult to handle the biomass. But long-term, I think this option will be one that we will count on heavily.

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I agree. I believe that if ethanol had to be used to provide energy to grow the corn and produce the ethanol, the whole thing would collapse. Remember, the energy balance is already very marginal. The only reason it is 1.3 or so is because of the credits for DDGS byproduct. On a fuel in versus fuel out basis, it is very close to parity.

I am convinced that we have to learn to get by on a lot less energy, but biofuels will provide a portion of our energy needs. I personally believe that the bulk of the solution must come from electricity. I contend that it is simply not possible for the world to produce enough biofuels to displace our current usage of petroleum. Conservation, greater efficiency, and electricity are going to have to be big parts of the equation.

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I am a fan of biomass gasification to produce electricity. In the long run, I think we really need it. But as I stated above, it isn’t the energy balance that is the problem; capital costs are much too high to enable it to compete with coal or natural gas. If carbon emissions were taxed, it would give the biomass to electricity option a boost.

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With gasoline inventories still so low, I think crack spreads are likely to explode again – certainly by late spring. Right now, with oil as high as it is, and with gasoline inventories where they are, it doesn’t make much sense that gasoline prices are soft. There is a bit of disconnect here, but one that I have seen frequently. This situation should put to rest any notion that refiners are in control of their margins, such that they boost profits by boosting margins. I know this seems to be a very popular notion, especially among those with the Oil Watchdog mentality, but any time I hear someone say it, I immediately know that at least on that topic, they are ignorant of the facts.

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October 11, 2007 Posted by | biofuels, ethanol, gas inventories, oil production, oil refineries, refining margins | Comments Off on Answering Questions – Part I