R-Squared Energy Blog

These Engineers Still Need Jobs

2009-11-06T15:53:00.008-10:00

Once again, I am asking for help in placing some of my former engineers who lost jobs in July. As you know, this is a difficult job market across most sectors. Unemployment numbers were released today, and the unemployment rate went over 10% for the first time since 1983.

A number of stories have noted the grim statistics:

College Graduates Face Toughest Job Market in Years

According to a survey from National Association of Colleges and Employers, the class of 2009 is leaving campus with fewer jobs in hand than their 2008 counterparts. The group's 2009 Student Survey found that just 19.7 percent of 2009 graduates who applied for a job actually have one.

In comparison, 51 percent of those graduating in 2007 and 26 percent of those graduating in 2008 who had applied for a job had one in hand by the time of graduation.

College graduates face a tough road ahead

The unemployment rate for 20- to 24-year-olds has topped 14 percent for the first time in more than 25 years. With the notable engineering exceptions, starting salary offers have fallen by 3.1 percent compared with last year, according to CollegeJobBank.com.

Small wonder about 1 in 4 of this year's grads plans on graduate school instead of getting a job.

During my career, engineers have always had an easy time finding jobs. And that last story implies that the job market is still OK for engineers. That has not been my observation. As I reported back in July, my previous company had to let go of a number of engineers. In fact, one of my last tasks was to sit down with most of these engineers and tell them that they no longer had jobs. It was the hardest thing I have ever done in my career. The fact that all of these engineers were doing a great job for us made it much more difficult. Here it is over 3 months later, and these engineers are still looking for jobs. While a couple of them have significant experience, the problem for the others is that they have less than 3 years of experience. It seems that everyone looking for engineers is looking for more than 5 years of experience.

So in the hopes that someone out there needs some good engineers, I want to highlight them once again and link to their resumes. The last time I did this I asked people to e-mail me for their information, and that caused an unnecessary bottleneck. This time you can click on their resumes and contact them directly. As always, I am happy to get on the phone and talk to you about any of these engineers. They are all top-notch, and someone should be utilizing their skills.

Here is a brief description of each, followed by a link to their resume. (Please be forgiving on any small formatting issues, as there are some formatting changes when these get converted from Word into Google Documents).

1. First year chemical engineer out of Arizona State with a 3.6 GPA. Spent 8 years in the U.S. Army. Gets along very well with everyone, and established himself very quickly as a promising engineer in our Arnhem (Netherlands) plant. Ideally would like to work in chemicals/petrochemical or energy. Resume link.

2. MS in Chemical Engineering from Princeton, with a BChE Summa cum Laude from the University of Delaware. Was excellent in an R&D role for us. Interests are process design and improvement in the chemical, biochemical, pharmaceutical, or energy industries. Willing to relocate within US and Canada. Preferences within the following areas: Mid-Atlantic, New England, Pacific Northwest. Resume link.

3. Chemical engineering graduate from Villanova. Enormous potential, but had barely started with us when the reorganization was announced. The all around best of a very good group of candidates I interviewed from the recent graduating Class of 2009. Some experience in pharmaceutical quality control, product development, process optimization, and coal gasification. Would prefer to stay in the PA, NJ, NY, DC, MD, or VA area, but open to other areas for the right career development opportunities. Resume link.

4. Mechanical engineer by training with a substantial blend of operations management and process improvement experience. Has been successful in roles such as Six Sigma Black Belt, Manufacturing Manager, Plant Manager, and Global Process Improvement Manager. Ideal role would be as Operations Director or Director of Process Improvement. Resume link.

5. Ph.D. chemical engineer with more than 20 years of experience, 32 granted patents, and numerous publications. Former professor at a major U.S. university. Has a combination of industry and academic experience. Resume link.

Merica Acquires Majority Stake in Choren

2009-11-05T15:20:00.001-10:00

Today it was announced that my new company, Merica International, has acquired Shell's stake in Choren Industries. This is something we have been actively pursuing for some time. This transaction gives Merica a great deal more flexibility than we had previously.

The primary reason for the acquisition is that it gives us freedom to pursue the projects we want to pursue. While I have the greatest respect for Shell, our interests obviously would not always align with theirs. We are first and foremost a bioenergy company, and that is not their core business.

Further, if Choren wanted to make any major capital expenditures, it hinged on getting Shell's agreement. As Shell is in a major cost-cutting mode, a lot of the projects we want to pursue could have been potentially impacted. Shell Fischer-Tropsch technology will still be used in Choren's Freiberg BTL facility, but future decision-making will be simplified.

Here are excerpts of the story from Reuters:

Shell sells stake in German biofuel firm Choren

HAMBURG, Nov 5 (Reuters) - Oil major Royal Dutch Shell has sold its shareholding in German second-generation biofuels company Choren, Choren said on Thursday.

Choren is building Germany's first biofuels plant using new generations of non-food raw materials as feedstock and is likely to start initial commercial production in 2010.

Shell had sold its minority shareholding to other shareholders which comprise German vehicles groups Volkswagen and Daimler plus a consortium of investors largely from the Hamburg region, Choren said in a statement.

Merica is within that "consortium of investors", and is in fact the majority shareholder of the company now.

The Energy Conundrum

2009-11-04T22:42:00.008-10:00

The following is a guest post by Paul Winstanley, the Director of Energy Initiatives from the Stevens Institute of Technology.

1. Introduction

This paper was written as preparation for the recent Discover and Shell sponsored “Fossil Fuels 2050” event in October 2009 at Stevens Institute of Technology, Hoboken, New Jersey.

Energy demand continues to increase rapidly. For example, the worldwide marketed energy consumption has been forecast to increase by 44% to 678 quadrillion British Thermal Units (BTUs) from 2006 to 2030 [1]. Within this period, fossil fuels (oil, natural gas and coal) are anticipated to remain the dominant energy source. Against this avaricious appetite for fossil fuel there is ambiguity over the reserves [2]. In addition to the issues associated with the demand for fossil fuels the environmental impact associated with burning these fuels is an equally large concern.

Therefore, the future energy challenge is complex and highly interdependent. Specifically, we need to:

Consider the continued availability of fossil fuels;

Whilst we introduce credible energy alternatives;

Whilst we ameliorate environmental damage.

These three themes will now be considered in more detail.

2. Continued Availability of Fossil Fuel

Exploration of hitherto difficult reserves will continue. This will be driven by increasing energy costs and the availability of new technology that enable economic exploitation. Examples of technological advances include:

Exploration in deep ocean water;

The production of hydrocarbons from oil sands and shale;

Directional drilling to access non-vertical reserves.

Additionally, there is considerable scope to reduce and prioritize fossil fuel usage. This approach will be different by sector and by time. For example, the short-term viable alternatives for aviation are very limited and it is only recently that flights partially supported by bio-fuels have taken place. This contrasts to personal and mass land transportation where credible alternatives such as hybrid and all electric vehicles already exist. Here greater usage of alternative fuel vehicles should be encouraged by policy whilst longer-term solutions for aviation are researched and developed.

3. Credible Alternatives to Fossil Fuel

The previous section raised the opportunity to reduce and prioritize fossil fuel utilization. Given the increasing energy demand, this approach can only be pursued if credible alternatives to fossil fuel exist.

a. Bio-Fuels. Considerable emphasis has been placed on the development and implementation of bio-fuels. In this case the overall enterprise must be environmentally and economically acceptable. Specifically, issues such as increasing the price of food crops and increasing the utilization of other resources, such as water, need to be considered actively [3].

b. Renewable Energy. Emphasis has also been placed on the development of renewable energies. With the exception of hydro-electricity the impact of renewable energy to meet the global energy demand has been minimal [4]. There are many factors that underpin this situation:

Renewable energy systems and supply chains can lack maturity;

There is no “silver bullet” renewable energy solution;

Generally, renewable energy systems are large complex installations (e.g. large wind farms) that demand significant capital investment and complex planning and permitting.

To overcome these limitations innovation is crucially required at all stages in the renewable energy enterprise. One innovative approach could be the systematic application of energy storage and renewable energy at a smaller scale as a micro-grid. In the residential context this could be applicable at a township level. The micro-grid approach has the potential to deliver rapidly increased energy security and resilience as well as enabling a significant reduction in emissions.

One important consideration is where geographically renewable energy systems could be developed. Much emphasis has been placed on the future energy demands of emergent economies [1]. It is important to recognize that these economies are generally not hindered by legacy. This is illustrated by the growth in cellular phones. For example, from 1997 to 2007 in emerging nations the number of cellular phones increased 18 times faster [5] on average than landlines and a technological generation was by-passed. Of greater relevance to this paper is rapid growth in London, UK of electric vehicles as a consequence of the introduction of congestion charging (which electric vehicles are exempt from). The dominant supplier of electric vehicles in London is G-Wiz [6], an Indian manufacturer. Therefore, the location of renewable energy system development may result in technological surprise.

4. Amelioration of Environmental Damage

The previous section raised the opportunity for an innovative micro-grid approach to reduce emissions. This approach could have a significant contribution to meeting the future emissions targets. For example, in the UK approximately 80% of the carbon emissions arise from energy consumed in buildings and electricity generation [7].

As well as introducing renewable energy, reducing energy demands has the potential to reduce carbon emissions further. Approaches to reduce energy demands include:

Target setting on energy suppliers;

More stringent construction codes;

Energy labeling to highlight to consumers more efficient appliance;

Improved product standards, for example, minimizing power dissipation from appliances whilst they are in a “stand-by” mode;

Energy performance certification prior to renting or selling real estate;

Smart homes including smart meters and appliances to better inform users about energy consumption in order to highlight areas for energy reduction.

Building upon the latter point, it has been estimated that the domestic energy demand can be reduced by an additional 25% [8] by integrating appliances or products into the home so they can turn off automatically when not required. A key requirement is to realize effectively these crucial savings in a manner that is transparent to the occupants. This can be achieved by embedding intelligence and communications into appliances and is an example of an emergent systems engineering discipline – “cognition-centric systems engineering”.

In order to meet the required 2050 environmental targets it has been estimated that 1% of the global Gross Domestic Product (GDP) needs to be invested every year from now until 2050. Given the technological element of meeting these target a shortage of skilled and experience staff is probable. At a smaller scale, this limitation has already been identified in the USA as a consequence of Stimulus Package Funding with the Department of Energy [9]. To overcome this there will be an increasingly urgent need to increase the availability of training and re-training at the technician, undergraduate and post-graduate levels.

5. Discussion

This paper has made the case that the future energy conundrum is complex and highly interdependent and the continued availability of fossil fuels needs to be considered along with the introduction of credible alternatives whilst ameliorating environmental damage. Pursuit of part of this triad is likely to result in an incomplete or inappropriate solution set. Therefore, it is essential to solve the future energy conundrum holistically and systematically. Moreover, the scope of the future energy challenge dictates that:

Innovation will be required continuously through the energy enterprise. This is innovation in the broadest sense, not just technical, and will encompass areas such as systems to business process to supply chain.

Advances are likely to happen in emergent economies that are unconstrained by the fossil fuel legacy; technological surprise could become a reality.

Unless we act now there is a high probability that there will be a shortage of skilled and experienced staff, at all levels from technician to post-graduate. If this situation arises we will not have the number of skilled staff to realize our aspirations and needs.

Paul Winstanley, Stevens Institute of Technology, November 2009

[1] Report #:DOE/EIA-0484(2009)

[2] http://www.independent.co.uk/news/science/warning-oil-supplies-are-running-out-fast-1766585.html

[3] http://www.iwmi.cgiar.org/News_Room/pdf/Down_to_Earth__Rise_in_biofuel_demand_could_trigger_food_water_crisis.pdf

[4] http://www.renewableenergyworld.com/rea/news/article/2009/09/renewables-global-status-report-2009-update?cmpid=WNL-Friday-September11-2009

[5] ITU REFERENCE

[6] http://www.greencarsite.co.uk/GREENCARS/GoinGreen-GWIZ-EV.htm

[7] http://climatechange.cbi.org.uk/uploaded/Roadmap_SummaryDistance.pdf

[8] http://climatechange.cbi.org.uk/uploaded/CCT_010_Buildings_v2.pdf

[9] http://www.renewableenergyworld.com/rea/news/article/2009/04/if-we-want-more-renewable-energy-in-the-u-s-wont-we-need-more-engineers

We're Number One!

2009-11-03T17:29:00.007-10:00

The U.S., that is, in total fossil fuel resources. At least those were the findings of the Congressional Research Service in a report they just released:

U.S. Fossil Fuel Resources: Terminology, Reporting, and Summary

The primary reason is our huge coal reserves. While we are 12th in oil reserves (Table 5 of the report), our coal reserves are by far the largest in the world. All together, the fossil fuel reserves (oil, natural gas, and coal) of the U.S. are reported at just under one trillion barrels of oil equivalent (BOE). The global total is reported at 5.6 trillion BOE.

While I think you have to take data from some of the listed countries with a grain of salt - especially when talking about categories like "undiscovered technically recoverable" oil and natural gas - it does point to the importance that coal will play when oil reserves start to seriously deplete. I have said this before, but when gasoline is $5/gallon, most objections to coal as a fuel will disappear. At that point I think you will start to see coal-to-liquids (CTL) plants moving forward.

Also from the report, at first glance this chart may seem ridiculous:

But I am also reminded of my amazement at a U.S. oil statistic I once came across. In 1982, U.S. reserves were 27.9 billion barrels. In 2005, U.S. reserves were 21.8 billion barrels. But over the course of that 24-year period we produced 57 billion barrels of oil and pulled our reserves down by only 6 billion barrels. So the graph above seems far-fetched, but so does the evolution of our reserves over past quarter century.

Of course it goes without saying that government policies will heavily influence which resources are developed, and over what time period. My guess is that over the next few years we will favor policies that are intended to wean us off of fossil fuels. While I applaud good intentions - and in fact my new job is all about moving developing fossil fuel replacements - I expect we are going to see more than a few unintended consequences. The one I am most concerned about is heavily disincentivizing domestic production, but not having an adequate answer for the domestic production shortfall. In this case, while more alternative energy may be the target, more oil imports may be the unintended consequence.

Toward a Sustainability Bioenergy Platform

2009-10-31T12:08:00.004-10:00

The slides I presented on September 27th at the First Nations' Futures Program at Stanford University are available for viewing for anyone interested:

Toward a Sustainability Bioenergy Platform

To summarize, the purpose of the First Nations' Futures Program is "to establish a world class fellowship program focused on building First Nations' capacity through developing values based leadership and more integrated solutions for managing First Nation's assets / resources." These are the leaders and future leaders of First Nations' groups like the Māori of New Zealand, Native Hawaiians, and Native Americans. These are the people who are often tasked with managing group resources so they are still available for future generations. Thus, sustainable energy is high on their list of priorities.

My presentation starts with some of the traditional aspects we think of being related to sustainability, but then talks about a more systematic and objective method for measuring sustainability. I cover the fact that sustainable solutions are different in different locales. For example, Brazilian sugarcane ethanol has been deemed to be potentially sustainable by a Dutch group who attempted to measure sustainability based on six categories. But take that example and move it to a location that doesn't receive ample rainfall, or a location in which the terrain is prone to erosion, and what was sustainable in one case is not sustainable in another. On the topic of sustainability, one size definitely does not fit all. I also contrast the U.S. to Brazil to show why the two are not at all comparable.

Finally, I spend three slides to present for the first time in public a tentative org chart for my new organization, our platform, and our strategy. The org chart has been sanitized to remove some company names from the boxes, as some deals are not ready to be publicized. As indicated previously, I sit in the "Merica" box, but spend most of my time working on the Global Conversions leg of the platform.

Next up is the Pacific Rim Summit in a week. I will be on a panel with Guy Cellier - the President and founder of Forest Solutions - and Professor Scott Turn from the Hawaii Natural Energy Institute at the University of Hawaii. The topic will be sustainable bioenergy.

Interview With an Algae CEO

2009-10-29T12:18:00.007-10:00

So I am finally back home for the next 10 days, and slowly catching up. I had a good trip to Panama and then to Stanford. I had my luggage sniffed by dogs when I connected in El Salvador, and then when connecting in LAX Gwen Stefani and her husband walked by within 3 feet of me. I told my wife that I probably could have touched her, but then I might have been delayed by a trip to the L.A. County Jail. I also read Oil on the Brain on the long plane trips, and will soon post a review of that. I will also put up the slides I delivered at Stanford.

One of the things I did on the trip was take a tour of an algae farm. I spent some time with the CEO, and got to ask numerous questions. He had some very interesting comments, which I will capture below. Because he has to work in this industry, I am not going to identify him or his company. Below I will indicate his comments as CEO and mine as RR.

RR: Talk about some of the challenges of growing algae.

CEO: The list is exhaustive. It takes a lot of water. It takes a lot of electricity. Solar penetration is only about an inch into the water, so we really have to keep the ponds mixed well. One thing people never mention is the phosphorous requirement. Phosphorous is a limited resource, but a critical one for the algal growth. If you are trying to make oil, then you have to stress the algae and push it into a lipid production mode. But that causes growth rates to stall. If you engineer algae for higher oil production rates, they can't out-compete the native species in the ponds.

RR: I talk to John Benemann on a fairly regular basis, and he has said much the same. He likes algae for the potential, for the water treatment possibilities, and as something that should continue to get funding for lab research. But he is pretty harsh on the uber-optimists.

CEO: Yes, I know John as well. He has done some good work in the field. Have you seen his latest paper?

RR: (He shows me the paper, and I acknowledge that I do in fact have that one).

RR: I was looking at those open ponds and wondering if the evaporation rates wouldn't be problematic. That could create seriously high water usage, especially for those schemes that propose to use open ponds where the solar insolation is high (like in the Arizona desert).

CEO: Yes, those open ponds require a lot of fresh water. You should see our water bill.

RR: What about photobioreactors? Some people envision them as a solution to some of the problems (evaporation, contamination) of the open pond system.

CEO: They are ungodly expensive relative to how much algae they can produce.

RR: So how do you foresee the future of algal fuels?

CEO: There is no future. Look, some of these guys are out there committing fraud with their yield claims. Nobody is making fuel except for small amounts in the lab. I just don't see how anyone will ever make cost-competitive fuel from algae.

RR: How about fermentation approaches like Solazyme? I haven't written that off yet.

CEO: Yes, but they are using sugar, and sugar is food. They say they won't always use sugar, but who knows?

RR: I could see their model working in Brazil as sugarcane ethanol does. Instead of fermenting to ethanol, they could ferment to oil. I also recently had someone write to me and claim they were using a feedstock other than sugar.

CEO: Maybe cellulose?

RR: If it is cellulose, I am on the next plane to go see them. That would indeed be a tremendous breakthrough, presuming their conversions are reasonable. I presume you get a lot of phone calls from aspiring algae fuel producers wanting to do a deal?

CEO: Oh yeah. All the time. Someone with a business plan and no appreciation for the scientific challenges wants to form a company and go after investors. It used to happen every other day, but has tailed off some now.

RR: So you see the main barrier to commercialization of algal fuel as cost?

CEO: Yes, but it is important to note why the cost is high. I don't see much hope of dramatically cutting those costs. For algae that has other uses - like in the nutraceutical market - the economics are sometimes there because the product is much more valuable. I can make 4-5 times as much revenue per acre growing algae for the supplements market, and at a lower cost than it would take to make fuel.

RR: How about if you extracted oil as a byproduct of the nutraceutical market? I could see that working if you had a much higher value product carrying the costs. On the other hand, you probably aren't going to get a whole lot of oil.

CEO: Exactly. You could produce oil in that scenario, just not in bulk.

RR: OK, many thanks for your time.

CEO: My pleasure.

The Future of Energy

2009-10-28T16:40:00.004-10:00

I am back in Hawaii, and over the next couple of days I will climb out from under an avalanche of correspondence. I have a couple of essays to get out, including an interview that I conducted with the CEO from an algae company. What he said may surprise you.

Until then, the latest energy-related story from Money Morning. As I previously explained topical Money Morning content will be featured here from time to time. As always, normal caveats apply: I am not an investment advisor. I don't endorse any specific stocks mentioned in the following story; these stories are meant to spur discussion.

-----------------------------
A Money Morning Interview: The Future of Energy

Renowned Oil Expert Dr. Kent Moors Details Shortages of Oil, the Impact of Higher Prices, the Promise of New Technologies and the Opportunities For Investors Dr. Kent Moors is one of the world's foremost experts on oil, energy policy, finance, risk management and new technologies. Moors advises the leaders of six oil-producing countries, including the United States, as well as global corporations and banks operating in 25 countries.

Moors is the founder and director of the Energy Policy Research Group, which conducts analyses and makes recommendations on a range of energy-related issues. He is also the president of ASIDA Inc., a worldwide advisor on the oil-and-natural-gas markets.

In an interview with Money Morning Executive Editor William Patalon III this week, Dr. Moors detailed the top current energy challenges in the global economy, and also provided investors with a look at some of the looming new technologies, as well as a future in which China is a dominant global energy player.

Some of these issues are already at work. Although oil prices remain well below the all-time record of $147 a barrel set in July 2008, crude prices have been on the march of late. Just yesterday (Wednesday), in fact, supply concerns pushed oil futures up above $81 a barrel, their highest level in more than a year.

"If you think the run up to July 2008 was a wild ride, you haven't seen anything yet," Dr. Moors told Money Morning. "In the next five years, investors who focus on medium- to small-sized producers and oil-field-service companies having a well-developed specialty niche will outperform the overall energy sector."

Money Morning (Q): In an earlier discussion, you said that the successful energy investor of the future wouldn't be a person who just goes out and invests in ExxonMobil Corp. (NYSE: XOM). Can you explain?

Dr. Kent Moors: We are entering a period of rising prices. There is still some play left in the large verticals (vertically integrated oil companies, or VIOCs) such as ExxonMobil, but the primary profits will be made with smaller, leaner exploration-and-production (E&P) outfits, field-service companies and specialized producers (unconventional gas producers - shale gas, coal bed methane, tight gas, hydrates - heavy oil and biodiesel).

(MM): How will investors have to play this future? What types of companies should they be looking for, and where should they look?

Moors: The market rapidly approaching will be more volatile with valuation often more difficult to determine than in the past, even with prices increasing. How much of the increases result from actual product margins and how much results from oil becoming a financial asset rather than just a commodity is a major concern. It requires some careful homework. The types of categories mentioned above - smaller producers, new developments in field services and technology (especially those providing ways to decrease wellhead and operational costs, increase productivity, use associated gas, treat and utilize produced water, increase efficiency per barrel ... there is a long list here) as well as the specialized producers and providers of their technical needs are the main targets.

(MM): When we look at the U.S. economy, you said that investors would be stunned to discover how much of our oil is produced by small players. In that discussion, in fact, you even described the type of firm that could be the "savior" of the U.S. energy sector, and perhaps even the economy. Could you take a moment to describe that situation and explain what that means for the economy?

Moors: The United States remains one of the top five producers of crude and will shortly ramp up production of natural gas (once the current glut has moved through the system). Sixty percent of crude produced in the U.S. market is at stripper wells providing less than 10 barrels of crude a day, but more than 20 barrels of water, a major byproduct. As America enters an accelerating field maturity curve (and an intensifying decline in well debit - well production), the efficiency of production declines. Therein lies a significant area for innovation and leaner companies. And that spells greater profitability at lower entry prices. Some offshore and Alaskan National Wildlife Refuge (ANWR) production will be done at scale, but that is not where the future of U.S. production will be. It will be the result of greater profitability at existing depleting wells with the new technology rolled out (on the oil side) and unconventional gas production.

(MM): Let's take a look at the global markets, too. China's global shopping spree has been well chronicled. As China locks up suppliers and supplies of oil and natural gas, what are the chances there could end up being what's almost a two-tiered market, where China has access to oil and natural gas at lower prices levels, creating a shortage of non-captive supplies and leading to Western countries having to pay much higher prices?

Moors: Price rises for Westerners will occur anyway, and not just because of China (where a rising energy bubble resulting from the recent acquisitions is a concern). The competition for available energy sources will usually result in those regions prepared to pay more, increasing the overall aggregate price for most others. China, India, a resurgent East Asia, Japan and even regions such as West Africa will occupy important positions moving forward in this regard. Also, rising demand will center in places other than OECD countries. The new oil market emerging can hardly discount the developed countries, but the primary demand spikes are going to come from elsewhere.

(MM): After some significant turmoil in recent years, you said that Russia is finally opening up to foreign investment. Will that last, and what effect will that have on global energy prices?

Moors: To offset a more rapidly declining traditional production base (primarily Western Siberia), Russia must move north of the Arctic Circle, into Eastern Siberia and out on the continental shelf. These moves are technologically sensitive and very expensive. Moscow needs the outside investment and that will remain. However, projects must be carefully structured. Foreigners cannot own 50% of "strategic fields" under new laws or anything on the shelf. This means watch out for the smaller, focused operators and oilfield service companies. They will include companies currently trading on the Alternative Investment Market (AIM) in London: The AIM and London Stock Exchange (LSE) are the sources of the new external investment phase in Russia.

(MM): From a global perspective, which markets show promise? And which ones - either because of overly restrictive investment policies, or because of the risk of nationalization - are markets to be avoided?

Moors: Many markets show promise or telegraph restraint. Let's look at some of the more noticeably promising markets, organized by energy category:

Conventional Oil: Sub-Saharan Africa, Brazil, Kazakhstan, Russian Eastern Siberian and Far East smaller fields.

Conventional Natural Gas: Turkmenistan (if recent government overtures to outside investment remain genuine), Uzbekistan, Northwestern Australia (region of the Gorgon project) and New Guinea.

Unconventional Oil: Tatarstan (Russia) for bitumen and heavy oil, Alberta for oil sands (assuming an average and multi-year sustainable crude price of $72 [USD] a barrel or above).

Unconventional Gas: The United States for shale (especially Marcellus Shale) and coal bed methane (Powder River Basin, Wyoming, also basin into Montana - if that state reduces regulations), Poland, Turkey and Germany for shale, south central Russia and Ukraine for coal bed methane. If Baghdad and Erbil can finalize central Iraqi and regional Kurdish oil legislation - and if security is maintained - Iraq will become a major play in both oil and gas.

TO BE AVOIDED: Iran (sanctions and buyback contract frustrations), Mexico (collapsing infrastructure and nationalization), Venezuela (significant technical shortcomings, concerns over productivity assessments, and absence of Western operators).

(MM): If an investor were to divide the energy market into short/intermediate/and long-term segments, what will be the dominant energy plays (oil, natural gas, solar, coal-bed methane, for example) in each of those three time segments? What time periods would you tack onto the short-term, intermediate-term, and long-term segments? And which energy plays will be the real winners?

Moors: To make this easier to see, let's divide this into short-term, intermediate and long-term segments and look at the key players, issues and technologies in each category.

Short-Term (five years out): Here we'll see an increasing efficiency at existing oil wells; Marcellus Shale natural gas; an extension of large fields into known deeper production layers - for example, BP-led (NYSE ADR: BP) multinational plays such as the Azeri-Chyrag-Guneshli and Shah Deniz deposits offshore Azerbaijan. Other developments to watch are the huge Chevron-led (NYSE: CVX) Tengiz field in Western Kazakhstan, initiatives in the central Gulf of Mexico and all satellite fields operated by other companies.

Intermediate-Term (five to 15 years out): All U.S. and Canadian shale plays, Wyoming, Montana, New Mexico and Russian coal bed methane, selected wind power Western U.S. and Baltic Sea region (Denmark, Germany, Poland).

Long-Term (20 years or more): All alternative and renewable energy (by this point, crude oil will be too volatile with supply problems and natural gas from whatever source will be the main power source both for conventional applications and for new technologies - fuel cells will obtain most of their price-sensitive hydrogen from natural gas).

Moors: Here's the bottom line. Looking forward, successful energy investors will be those who: (1) weigh volatility as well as opportunities; (2) understand the rapidly changing supply/demand balance; (3) hedge within a focused time-frame; (4) watch the development of new technology to improve production, processing or transport; and (5) have a flexible approach to the market.

Catching Up

2009-10-27T03:50:00.003-10:00

Folks, I know it has been almost a week since I posted anything new, and it will still be a couple more days. I have had a productive trip to Central America, and am at Stanford this morning to give a talk on sustainability. It will be the first time I have presented my new company's plans in public (although that is a minor component of the presentation). I fly back to Hawaii on Wednesday, and then should start catching up on a backlog of correspondence.

The title of my presentation today is "Toward a Sustainable Bioenergy Platform." I am well aware that the word sustainable has lost almost all of its meaning. It is like "being green." I remember seeing an interview with a Hummer owner a couple of years ago who said he was "becoming green" by putting E85 in his Hummer. I see the same sort of logic being applied toward the concept of sustainability.

Anyway, below is the outline of the talk that I will deliver in two hours at the First Nations' Futures Program at Stanford. I will host these slides somewhere following the presentation.

Sustainability Basics
A Higher Standard
- Case Study: Sugarcane Ethanol
Caveats
Contenders
Has Brazil Paved the Path?
- Brazil versus U.S. consumption statistics
Building a Sustainable Platform
- Merica Overview
- Strategy
Political Risk Factors
Solutions

Don't Weep for the Trees

2009-10-21T10:02:00.007-10:00

While I have no intention of changing the general theme of this blog, I will spend some essays in the future providing more details behind my new job in Hawaii. I did this on occasion with my previous job at Accsys, but the focus of the blog remained on energy, sustainability, and the environment.

As explained in the previous essay, my new role involves development of an integrated bioenergy platform. We believe this to be a different way of looking at the problem of turning biomass into energy, and then ultimately supplying that energy to customers. We are not tying ourselves to a specific technology platform; we are using different platforms as suited for specific local needs. We are also as concerned about the sustainability of the biomass as we are the sustainability of the processes we will utilize.

Since moving to Hawaii, I have been asked to give talks at the local high school here about energy and sustainability. During one recent talk I was explaining some of the things we are thinking about as a company, specifically for alternative energy in Hawaii. One of the students said "I heard you were going to cut down all the trees." At that moment, I realized that her view of forestry was much the same as my own view of forestry growing up in Weyerhaeuser country in Oklahoma. I viewed foresters as people who cut down trees, and I associated them with clear cutting.

My views have changed a lot since then, because I have met a lot of foresters and have a better understanding of what they do. Foresters are people who manage forests. With a managed forest, sometimes that means you harvest the trees like you would harvest any other crop. But managing a forest entails replacing what you cut down (thinning is an important exception).

That makes sense when you think about why people went into forestry in the first place: They love trees (and not in the same way that a polar bear loves humans) and they love the outdoors. They are very conscious of the important role trees play in the environment, and as such they are generally very good stewards of the trees and land they manage.

As indicated in my recent interview with Katie Fehrenbacher, sustainable forestry is a critical component of our platform. We have a forestry company called Forest Solutions, and our ultimate goal is to manage all of the forest assets that we will use in our platform.

So why do we like woody biomass? Why not switchgrass? Sugarcane? Crop residues? Various sources of biomass have their strengths and weaknesses. Very high on the list for a sustainable model is to take care of the soil. One of the questions I sometimes pose is "What would the soil condition be after 500 years in a particular service?" If the answer is not approximately as good or better than the present, then it doesn't meet the sort of criteria that I am looking for (of course taking into consideration that the soil doesn't have to be utilized for the same purpose for the entire duration).

There are many potential pitfalls when considering biomass. Some sources are heavy users of nutrients, and as such the fertilization requirements can be high - especially when they are on short rotation. This can imply high fossil fuel inputs and a high risk for soil depletion. Some crops are heavy users of water. Sugarcane ethanol has been judged to be potentially sustainable for Brazil, but it may be a different story in areas that require irrigation.

Trees are different. During the first 10 years or so of their lives, trees can accumulate biomass at the rate of 7-10 bone dry tons per acre per year. You may see some switchgrass yields that are claimed to be that high, but those were almost certainly with fertilizer and plenty of water. But even if the yields were the same, the difference is that you have many harvests of the switchgrass over 10 years to get the same yield as one harvest of trees. Each harvest comes at the cost of energy and labor inputs.

But there is an even more compelling reason to utilize trees. Unlike most of the short-rotation crops that are frequently discussed as feedstock for fuel production, trees can actually improve the quality and health of the soil.

While this is not news to our foresters, it was something that I had not given much thought to until recently. I was taking a tour of a new energy lab being built here on the Big Island, and someone pointed out a plot of land behind the lab and said "We tested the fertility of that soil, and it is much higher than that of the surrounding soil." I asked why, and was told that there used to be a stand of trees there.

What happens is that trees can bring up nutrients from the subsoil and concentrate them in the leaves and bark. This ends up falling back to the soil and adding to the organic material in the soil. Depending on the specific trees you use, managed forests can provide fuel while improving soil quality. You could also envision rotating trees with other crops to rebuild fertility.

A good example of the potential of trees can be found on the Hamakua Coast of Hawaii. For years the coast was planted in sugarcane. While the area gets plenty of water, it is also very hilly. The sugarcane operations led to a large amount of soil erosion. People who were around during that time said that the normally blue water would be brown for long stretches as soil ran off into the ocean.

The sugarcane industry was ultimately abandoned there, and the area is now planted in trees. The erosion has stopped, and the soil has started to recover. The ocean is once again blue there, and I was told today that a reef that had been damaged by soil runoff is healthy again.

So do not weep for the trees we will use. The right trees are ideal sources of biomass if they are properly managed. Besides providing fuel, they are going to perform an important function - recycling nutrients from the subsoil to the topsoil. The trees that are cut will be replanted. The forests we use will be from managed plantations, and not from rain forest or old growth forests.

That is a general overview of the first leg of the platform. There are a number of assets under management, as well as various acquisitions in progress. At some point I will provide details of these holdings and how we plan to use them.

Lifting the Veil

2009-10-19T21:17:00.001-10:00

Over the next six weeks, I will start to talk publicly about what we are putting together in Hawaii. There isn't a specific strategic reason for doing so at this time, nor is it for the purpose of soliciting investors. The deal is that I have three speaking engagements between now and mid-November, and I believe it will be necessary to spell out the details and answer questions over our activities.

There have been very specific reasons for keeping a low profile. One is that we believe some of our technology pursuits are completely novel. We would rather not call attention to this until we have things nailed down a bit better. Another reason is that there will be specific competition for certain other technologies and biomass resources. Speaking publicly about those details could hamper our efforts.

But I can talk in broader terms about what we are doing, and I will do so at these speaking engagements. Further, in the next few days I will post some bits on my blog that will fill in some of the details.

My schedule between now and mid-November looks like this. This week, I have to go to Panama for a meeting. On the way back, I fly to San Francisco and will speak at the First Nations' Futures Institute at Stanford University:

First Nations' Futures Program

I will be on a panel session on October 27th with Stanford Professor Margot Gerritsen on the topics of energy and sustainability.

On November 11th, I will be on a panel at the Pacific Rim Summit on Industrial Biotechnology and Bioenergy in Honolulu. The topic is Specialty Crops, Renewable Feedstocks, & Sustainability.

On November 16th, I will be on the opening plenary session at a conference in Orlando on alternative energy and globalization:

The Economics of Alternative Energy Sources and Globalization: The Road Ahead

I have received some requests since coming to Hawaii about what we are working on, and I did the first interview on that over the weekend. It is still purposely vague on some technology specifics, but the other details will be laid out as needed:

Our Holistic Approach

I say this again and again, and sometimes I can feel my co-workers wince when I say it: The primary goals here are all long-term, and as such we aren't planning to make fast money. On the other hand, we are trying to put something together that has staying power, and that can make a real net contribution.

Additional details to follow in the next post.

A High School Senior Asks About Peak Oil

2009-10-17T21:01:00.000-10:00

I tend to get a lot of e-mails, and I try to make a point to answer them all. Sometimes, the e-mail is a question that I can quickly answer. Sometimes it is a request for comments on a specific technology. But sometimes I get one that someone put a considerable amount of time in, and it warrants a very detailed and thoughtful response. I just received one like that that I felt was worth sharing with readers. I asked the writer for permission to publish it, and she agreed in the hopes that it can help others struggling with these questions, and hopefully spawn some fruitful discussion.

This letter was written by a high school senior, and it is the sort of letter that makes me hopeful for the future. The letter resonated strongly with me, because I have been through some of the same thought processes as I worked my way through the implications of peak oil. I will insert my comments in the text as [RR: Comment].

--------------------------
Dear Mr. Rapier:

Thank you for posting your email address at TOD! I apologize in advance for the length of this letter, but I just can’t seem to express my thoughts succinctly on this topic. I know you are a busy man, but I would greatly appreciate it if you could read and respond to my message and help put my mind at ease.

I am writing to you to ask you some questions about peak oil. I am in my last year of high school and discovered peak oil by accident a few months ago. Like many people, I found Savinar’s site first, and of course my first reaction was one of terror. I stopped reading about the subject immediately to preserve my sanity. However, I knew I had to be honest with myself and keep investigating. Thankfully I found you and Stuart Staniford and all the others who believe that while some trouble may be coming, doom is not.

[RR: There are a couple of things bound to frighten many people new to peak oil. One is is you find Matt Savinar's site and read through it before you have read through anything else. Another is if - like me - the first book you read on Peak Oil is Jim Kunstler's The Long Emergency. I read it and thought "Can things really get that bad?" My wife read it and concluded "There is no hope." What I told her is that this is one view of how things might play out. Nobody knows the future, and I see my job as working to change the future so it doesn't play out according to worst case scenarios. Incidentally, I have since met Jim Kunstler, and he doesn't come across like a doomer in person. He is very charming and witty, and is generally a fun guy to be around. But his writings have scared a lot of people.

On the other hand, if your introduction to peak oil is Peak Oil Debunked (which I often recommend to people who have become depressed over peak oil), you may come away with the impression that the post-peak world will be smooth sailing all the way. I don't believe that (and I don't think JD at Peak Oil Debunked does either). What I believe is that peak oil will present some upheavals and personal hardship for many people. Even if we have lots of coal and natural gas, the transition will be costly. I think what you are seeing in the economy right now is a taste of what a post-peak world will initially look like: Spiking energy prices that put a burden on people and keep us flirting with recession for many years.]

However, I still have some concerns. Though I do not want to believe in doom, the doomers’ arguments tend to keep resurfacing in my mind and bothering me. On my good days I think, “We can pull through. It won’t be fun, but we can do it.” But on my bad days I think, “What if we can’t?”

[RR: Over the years, I have gone through the same thought process. My undergraduate training is as a scientist, and one thing you learn as a scientist is to continually challenge your conclusions. In other words, conclusions are tentative. You have to be willing to ask yourself what kind of data it would take to cause you to change your position. If you find yourself fitting the data to the conclusion, or rationalizing away evidence that doesn't seem to fit the conclusion, you have slipped from serious inquiry into dogma. In my view, many doomers are guilty of the latter.]

In other words, I sound like you in your article “My Worst Fears”: doom is my worst fear, but not my expectation. Scenarios, like oil production, fall on a bell curve, with heaven on earth at one end and hell on earth at the other, and in a world in which many factors play into any given situation, it seems simplistic to me to just say, “Well, it’s absolutely gonna be the worst-case and we’re all gonna die.” In real life, the worst-case scenario almost never plays out and reality lands somewhere in the middle. However, that worst-case scenario has a habit of captivating the mind, especially when you’re like me and have no real ability to prepare for it. So I thought I’d write to someone who knows a lot more than me to get my questions answered. (I’m also including, at the bottom, a few of the reasons why I think the doomers are most likely wrong.)

Who exactly are the doomers? Obviously, Kunstler, Heinberg, and Savinar are doomers. However, I had questions mainly about TOD in general and Simmons and Hagens specifically. Simmons, in most places, is called a doomer. However, I have heard him quoted as saying that humanity will “muddle through” peak oil. Does this mean that he is just a super-negative non-doomer? Or is he a doomer trying to tone down his position for the public?

[RR: I am going to be quite critical of Simmons here. Fans of his shouldn't consider this Simmons-bashing; I just think this needs to be said. I definitely consider Simmons a doomer. I also consider him to be alarmist much of the time. I understand very clearly his desire to have people take this issue seriously, but lately he has latched onto some pretty skimpy evidence and run with it. (I thought it extremely ironic that he recently accused others of running off on a tangent based on skimpy data). The problem is that he takes a little bit of information - which he sometimes doesn't understand very well - and then draws sweeping conclusions. Many - even some of his allies - acknowledge the contribution of Twilight in the Desert, but they question whether he isn't doing more harm than good at this point.

An example of that - which I have discussed before - was his talk at last year's ASPO conference. He claimed in his presentation that we don't have a good idea of our gasoline inventories, and were just beginning a gasoline crisis that could bring the entire country to a halt. He spun quite a frightening tale, and I could see the shock on some people's faces. Such shock tactics may work to get people's attention, but if you cry wolf a few times they backfire.

Contrary to Matt's argument, the evidence was just the opposite. Even as he was speaking, refineries were coming back online from hurricane outages and inventories were recovering. I was asked about Matt's comments on a later panel session, and I said I thought gasoline inventories were beginning to recover and that they would be higher in a month. They were. Further, I noted that I was previously in the group that submitted weekly gasoline inventories from our refinery to the Department of Energy, and that we actually have a pretty clear idea of what gasoline inventories looked like from week to week.

Another example is his argument about the $100 trillion corrosion issue in the oil industry. The gist is that he argues that the oil industry is full of rusting infrastructure, and he questions whether we have the money or even the iron resources to fix the problem. Further, he questions aloud how it is that he - Matt Simmons, investment banker - has 'discovered' this problem that the oil industry has missed. I won't go into all of the reasons that Matt is way off the mark on this, as that would be an essay in itself. A corrosion engineer at The Oil Drum has weighed in on this issue, and explains that corrosion is well-understood, and not actually something that Simmons just discovered. Oil companies are full of corrosion engineers who work to replace corroded equipment as needed. There was actually a lot of behind the scenes discussion on how hard to rebut Matt on this, as many felt like this warranted a sharp rebuttal. In the end - because he is considered to be a friend of TOD - he was treated much more gently in public than he was in private.

I did not attend this year's ASPO conference, but I did get an e-mail from someone who saw his presentation. This from a friend and long time acquaintance of Matt: "Matt Simmons was NOT worth seeing. he seemed a bit crazy - not much new."]

Obviously you and Staniford are not doomers. I have also seen Kjell Aleklett and Robert Hirsch distance themselves from the doomers. You mentioned that Nate Hagens was not a doomer, and that he wanted to use the term “resource depletion” rather than “peak oil” because peak oil was virtually copyrighted by doomers. However, when I read some of Nate Hagens’ articles at TOD, they sounded remarkably doomerish! I thought, since you know the man, you could tell me what his position was (since, as a student, I have no time to sit on my computer all day and read nothing but peak oil articles).

[RR: Nate is a friend of mine, and I feel like I know him fairly well. His big interest is in human psychology as it relates to peak oil - and I have suggested to him that he distance himself from the phrase "peak oil" because of some of the connotations it has taken on. Nate doesn't expect people to collectively do the right thing, and as such he is more doomerish than I am. Funny story about Nate is that his original moniker at TOD was "The Last Sasquatch." I liked a lot of his writing, and talked him into posting under his real name. I told him that he would be taken more seriously that way. He ultimately did start posting under his real name, and gained a lot of credibility as he continued to write. Nate talks about that decision here. But on a scale of 1 to 10, with 1 being extreme doomer, I would consider Nate to be about a 3 or 4. I consider myself to be about a 6 or 7 - fairly optimistic, but also realistic that it won't be a piece of cake. Five years ago I was a 5.

By the way, I got to spend some time with Bob Hirsch at last year's ASPO. I can definitely relate to his thinking. He considers the problem very serious, but something we can painfully work our way through if we get busy. That pretty much reflects my own thoughts.]

TOD in general seems to be a semi-doomer site. It sounds as though it used to be balanced, but shifted at some point. Consequently I only read a few contributors, and rarely touch the comments, which usually degenerate into debate about very fine points that I don’t understand or turn into “when you’re starving to death you’ll see that I’m right.” Which of the main contributors over there are doomers? Because sometimes it’s hard to tell. (By the way, I define “doom” to basically mean “die-off and/or Industrial Revolution reversal scenario.”)

[RR: I don't want to name names, but very few of the 'staff' there are doomers. But two of the most frequent contributors are, and that may make TOD staff seem more doomerish than we really are on average. The readership, I think, does tend toward the doomerish end of the scale, but you have people all over the spectrum. And I can tell you through my own experiences that some doomers feel personally affronted if you challenge some of their views, and are vocal about it. This was also Stuart's experience right before he stopped posting. He posted some articles forecasting that the future might not be complete doom and gloom, and he got some venom thrown his way. That is why I post there infrequently.]

Source of Aleklett/Hirsch/Simmons statements (dated May 2005, from attendee at Uppsala peak oil conference): [Simmons, Aleklett, and Hirsch] think Peak Oil is a very grave issue, but they also think the doomers are wrong. On a specific question they said Richard Heinberg was very much too pessimistic. They meant Heinberg was too pessimistic on technology and society. They didn’t believe that the end of the world was near, but that we would, and I quote, “muddle through.” They said we might have a few rough decades but that world will not end. For example, Aleklett was asked if he believed airborne mass tourism would continue in the future. He answered that sailing boats are very nice.

Is there any mathematical possibility of world decline rates approaching 8-12%? Doomers seem to throw these numbers around as though they are gospel truth. However, I have never seen a doomer actually lay out the math behind their enormous decline rates. I have only ever seen people in comments confuse field decline rates with world decline rates. Also, I have never heard any leading peak oil expert (except Simmons) predict anything worse than maybe a 6% decline rate. In fact, JD worked out Aleklett’s latest release and found that he was predicting a .5% annual world decline rate!

[RR: As you mention, individual fields can decline at those rates, but as prices rise different technologies can come into play that allow more oil to be extracted and so observed decline rates may be less than what would be observed in a constant oil price environment. But this may also accelerate the decline when it really begins in earnest. I was at the annual Energy Information Administration conference last April and in one of the presentations a slide was presented that showed that decline rates are climbing. See Slide 6 here.]

There is also a more specific question I want to ask you on this same topic. Freddy Hutter (at the Trendlines website) posts innumerable graphs and checks peak predictions and such. While I disagree with his “superabundant” scenario, his site is useful for getting the lastest predictions from leading people. He stated this (on the right side of the page under "worst-case scenario"):

Using the lowest recognized estimate of All Liquids (2021-Gb by EWG/LBST 2008), and assuming 2008 (85.4-mbd) as Peak Year, this projection depicts the Avg Decline Rate of 4.6% required mathematically to exhaust this conservative URR. The significance is that half of this year’s volume will still be available in 2035, and flow won’t dip below 10-mbd until 2055. Finally, All Liquids exhausts in 2083. A post-peak production decline rate higher than 4.6% “strands URR”…and that phrase is an oxymoron. Ignore all pundits that suggest a post-peak average extraction decline rate of over 4.6% in their musings. And please read their alarmist TEOTWAWKI forecasts with these hard numbers in mind.

Is this anywhere close to true? What is “stranding” URR and why is it an oxymoron? Since I agree with Staniford’s assessment that the decline rate is largely what determines the severity of the scenario, I would much rather side with Hutter and the “cornucopians” (a word I hate due to its pejorative application to anyone who is not a doomer), but I need to know if this is really true or not before I do that.

[RR: I think what he means is this. URR is the amount of oil that is ultimately recoverable with current technology. Assume for a moment that URR is estimated to be 100 units. Assume what has been produced is 50 units, and 10 units are being produced in the current year. Now assume for the purpose of illustration that the presumed decline rate is 50%. So then your cumulative recovery based on that decline rate might be something like 50 at the beginning of Year 1, 60 in Year 2, 65 in Year 3, 67.5 in Year 4... We already said that URR was 100, but it doesn't look like we can get there with that presumed decline rate. So what has happened is too high of a decline rate was presumed which results in a cumulative production rate that will ultimately fall short of present URR estimates. Hence, the oxymoron.]

What is Hubbert Linearization and what is it good for? Some people seem to hold up HL as though it can work miracles, and some people seem to throw it in the trash heap. However, I have noticed that it seems to be used two different ways: to either predict a region’s peak, or predict the post-peak decline rate. You have come out against its use to predict a peak, but Staniford’s article on a slow world decline rate was based entirely on the second usage of HL. Since JD linked to this article as one of the main arguments in favor of a slow decline, I’d like to know if HL can be properly used this way, or if it useless here too.

[RR: And I can tell you that Stuart definitely agrees with me on the issue of using it to predict peak. He has stated this publicly and we have corresponded about it a great deal privately. What has happened here is something I often see. Someone has a theory. They think their logic is impeccable. They start using the theory to make predictions. But they never bothered to validate that theory by plugging in known data to see if it gives the right answer. In the case of HL, I did that and showed that it gave wrong answers more often than not. Hence, using HL to predict a peak is akin to astrology as far as I am concerned.

I have seen this before with relatively inexperienced engineers. They build a model, and start to use it without validating it. But models must be validated. That's the only way you can have some confidence in the model predictions. (Then there are those who hear the word "model" and they immediately discount the results. That is also the wrong approach).

Because that article by Stuart was written very early on - and Stuart did modify his views on HL as time went by - I can't really say whether HL gives reasonable and consistent answers on decline rates. I can't say I have done those checks.]

Vis-à-vis Staniford’s article, how will world economic troubles affect peak scenarios? I am of the opinion that it is very possible that a major depression is looming sometime in the next decade, what with the credit contraction and stock market losses. Obviously a depression would kill oil demand, which might soften peak initially. However, it would also kill funding for alternative energy projects and other mitigation efforts. While I am still not convinced this necessarily spells doom, it could make the transition much more painful. I wonder if the initial depression (economically-induced and having nothing to do with energy or oil) would kill the demand and funding, and we would then stumble our way through recession after recession as peak “ripples through” until suitable alternative technology is developed. Does this sound even remotely accurate? Because the “worst fears” part of me is deathly afraid that a depression now, at the “critical moment,” could trigger the doom scenario. Staniford did not seem to think this, and neither did any of the commenters (early on, at least; I didn’t read the whole thread).

[RR: I think it all ties together. A sharp peak will cause an initial supply shortfall that will result in spiking prices which can cause recession/depression - as well as a drop in funding for renewables. This will cause demand to fall, which will cause prices to fall. Demand then picks back up, and we repeat the cycle. Due to reduced funding for alternatives in troubled economic times, the longer term mitigation options are endangered. This is how I foresee peak oil. It will cause economic troubles, which will feed back into demand. The ultimate impact is that oil will last longer than had the peak not resulted in economic difficulties. This was my premise in The Long Recession.]

Reasons I think the doomers are wrong/suspicions about doomers (in no particular order):

1) The track record/statistics of doom. People have always made doomsday predictions. Since civilization still exists, they obviously did not come true. First it was a global ice age earlier this century, then it was nuclear holocaust, then it was Y2K, etc. Now it is peak oil, or by extension resource depletion. While I understand the gravity of the concerns behind this latest doomsday “fad,” I am just not convinced that doom will play out, due to both their track record and to the mere probability of the event. The bigger and more severe the event, the probability necessarily goes down (like the probability of a major Gulf Coast hurricane vs. the probability of a meteor hitting the earth tomorrow). And doomsday is of necessity a very large and very severe event, pushing the chances down into the realm of the highly improbable. However, I do understand that statistics must be weighed against reality.

2) The lack of presented mathematical evidence for huge world decline rates.

3) The strange distribution of professions amongst the major voices of peak oil. Most of the more optimistic voices in the community seem to have been connected to energy at some point. They are either geologists or in some oil- or energy-related profession. However, the major doomers seem to be either journalists or lawyers, neither of which are energy-related jobs. I question the expertise of these people, especially when their predictions seem to flop so often and so spectacularly. They strike me, overall, as the sort of “annual prophets” who make negative predictions like clockwork, and whose followers seem to get yearly amnesia when their hero’s predictions are totally off the mark.

[RR: Geologists are pretty well-represented in the doomer camp. Think of people like Ken Deffeyes and Collin Campbell. And of course many doomers gain strength in their convictions from Hubbert himself, who was also a geologist.]

4) The “dark side” of peak oil. You don’t have to dig too far into any issue related to resource depletion before you find these people. The people who post things like “only the fit in our society should be allowed to have children” and “we should euthanize the handicapped” and “it’s cruel to be altruistic because it props up the weak,” etc. Obviously these people are all doomers, though not all doomers fall into this category.

[RR: While I view those people as a tiny minority, it has always bothered me that so many doomers can casually talk about billions of people worldwide dieing off as a result of peak oil. My mind can't even comprehend such a horror, yet people toss that around as casually as if they were debating whether to have a second helping of lunch.]

5) Large amounts of other fossil fuels to "ease us into" the transition. There have now been huge natural gas discoveries under Texas and Louisiana, and if they turn out to be anywhere near as big as they say, it is, as one of your commenters put it, "nearly unalloyed good news." Coal is even more abundant. From the EIA Coal Reserves page:

As of January 1, 2008, the DRB (Demonstrated Reserve Base) was estimated to contain 489 billion short tons [of coal]. In the United States, coal resources are larger than remaining natural gas and oil resources ... Worldwide, compared to all other fossil fuels, coal is most abundant and widely distributed across the continents. Estimates of the world's total recoverable reserves of coal in 2004 were about 998 billion short tons. The resulting ratio of coal reserves to production is approximately 164 years, meaning that at current rates of production (and no change in reserves), coal reserves could in theory last more than one and one-half centuries.

From Wikipedia's coal article (not sure if this information is reliable - it's Wikipedia):

At the end of 2006 the recoverable coal reserves amounted 800 or 900 gigatons. The United States Energy Information Administration gives world reserves as 930 billion short tons. At the current extraction rate, this would last 132 years. However, the rate of coal consumption is annually increasing at 2-3% per year and, setting the growth rate to 2.5% yields an exponential depletion time of 56 years (in 2065). At the current global energy consumption of 15.7 terawatts, there is enough coal to provide the entire planet with all of its energy for 37 years (assuming 0% growth in demand and ignoring transportation's need for liquid fuels).

Of course, I do recognize that burning that much coal would result in a very bad spike in pollution (I am not yet convinced of the science behind global warming). However, it seems like more than enough to help us "limp along." (One question about the coal, though: on my first and only visit to the Energy Bulletin website, I saw Richard Heinberg saying that a new study said that we only have 15 years of coal. I wonder if this is true - it is Richard Heinberg, after all. Have you heard of this?)

[RR: I had not heard Heinberg say this, but if he did I think he is wrong. I think one thing that is really going to help us transition away from oil is that we do seem to have substantial natural gas reserves. Natural gas is far more fungible as a transportation fuel than are things like coal, biomass, wind, or solar power, so it should buy us time. Hopefully we don't squander that time. Of course if our coal reserves are as significant as is often claimed, CTL is a longer-term option for producing liquid fuels, albeit at a higher price point than we are accustomed to.]

6) All major doomers seem to be Americans. Now I am an American, so this is not American-bashing. However, it does make me wonder if, by living in this country, these doomers have a slightly lopsided view of the world (as regards usage and perceived "needs"), since no doomers seem to be coming out of "emerging" countries like China or India or even out of Europe. Notice also how almost all peak oil discussions seem to degenerate, often unknowingly, into "Americo-centric" scenarios ("the U.S. economy will implode," "the U.S. dollar needs oil," etc.).

[RR: I had never made this observation, but that does seem to be generally correct (although I do know of doomers who are European or Australian). Maybe this is because we Americans use so much oil, and our way of life is more dependent on oil than is much of the rest of the world. I have always felt like this makes us more vulnerable to oil shortages and oil price shocks. So perhaps it is just that we see the implications of peak oil as being more serious, because for us they may very well be more serious.]

Sorry again for the length of this message. I hope you can help me sort through my confusion. By the way, I love R-squared Energy Blog. It is a voice of moderation in a corner of the interent gone mostly mad, and it is nice to hear that not everyone is a doomer.

[RR: Thank you for your e-mail. As I said, it gives me hope for the future that you are so thoughtfully weighing these issues. Good luck on your quest for the truth. Just keep in mind that ultimately none of us know how the future is going to play out. Personally, I consider a number of possible scenarios, and I plan accordingly. Some of those scenarios including asking questions like "What if Matt Savinar is right?" Ultimately, I think you have to plan for some of the scenarios you think are low probability in the same way that you buy homeowner's insurance for a house that you don't believe will ever burn down. You do have to draw a line somewhere, though.]

A Massive Decline in Carbon Emissions?

2009-10-16T11:16:00.007-10:00

A couple of years ago, I wrote an essay that ultimately turned out to be very controversial:

Why We Will Never Address Global Warming

That same essay published at The Oil Drum received 560 comments, and was until recently the most-commented upon post in The Oil Drum's history. Global Warming/Climate Change is a topic that people get very emotional about, and the idea that I claimed that we would never address it didn't sit well with a lot of people.

Now I know that I have some global warming skeptics here. And I have said many times that I am fine with that, but I don't want to engage in that debate for multiple reasons. And in the hopes that I can focusing this essay, let me say what I really mean: We won't stop rising atmospheric carbon dioxide concentrations. If you want to argue that increasing carbon dioxide is not resulting in climate change, fine. But I think we can all agree that carbon dioxide concentrations are steadily increasing in the atmosphere. In fact, one of the key monitoring stations is here in Hawaii at Mauna Loa, which I can see clearly from my house.

The reason I don't believe we will stop accumulating carbon emissions is that this is a global issue, and people around the world are going to generally gravitate to the cheapest source of fuel they can find. So, many of the world's countries can sign a well-intentioned protocol in Kyoto, but then China plans 562 new coal-fired power plants. Carbon emissions continue unabated, despite Kyoto.

This week I saw a new article by Lester Brown - author of the "Plan B" series, the most recently published version of which is Plan B 4.0: Mobilizing to Save Civilization. In his article, Brown observed that the U.S. has had major reductions in carbon emissions:

U.S. headed for massive decline in carbon emissions

For years now, many members of Congress have insisted that cutting carbon emissions was difficult, if not impossible. It is not. During the two years since 2007, carbon emissions have dropped 9 percent. While part of this drop is from the recession, part of it is also from efficiency gains and from replacing coal with natural gas, wind, solar, and geothermal energy.

The U.S. has ended a century of rising carbon emissions and has now entered a new energy era, one of declining emissions. Peak carbon is now history. What had appeared to be hopelessly difficult is happening at amazing speed.

For a country where oil and coal use have been growing for more than a century, the fall since 2007 is startling. In 2008, oil use dropped 5 percent, coal 1 percent, and carbon emissions by 3 percent. Estimates for 2009, based on U.S. Department of Energy (DOE) data for the first nine months, show oil use down by another 5 percent. Coal is set to fall by 10 percent. Carbon emissions from burning all fossil fuels dropped 9 percent over the two years.

All of that may very well be correct. But China and India continued to build new coal plants. Demand for oil around the world remained high. And the result so far is that the monitoring station on Mauna Loa shows absolutely no sign that global carbon emissions have been impacted by this sharp drop in U.S. emissions. In fact, the most recent measurements show the highest atmospheric concentrations that the observatory has ever measured:

This is one of the reasons I have never focused my time on carbon emissions. I just can't see that anything the U.S. does or that I can advocate is going to really impact global emissions. Sure, we may reduce our carbon emissions in the U.S. But there is a long line of countries waiting to use that fossil energy that we don't use. So I think the best we could hope for is to slow the accumulation rate. But I think the atmospheric concentration will continue to rise until fossil fuels start to run out. That's the only thing I think will permanently rein in carbon emissions.

Let me be clear that this has nothing to do with what I would like to see happen. The reason the essay was so controversial at The Oil Drum was because some people perceived my attitude as "I don't care about climate change." That's not it. This is just the way I see things playing out.

I have instead chosen to focus my efforts on changing the forms of energy we use. There is of course some synergy with those who are working to reduce carbon emissions. We both would like to see expanded use of alternative energy. For me, this is about energy security. Increasing the locally produced energy should help insulate against future energy shocks. This would also reduce localized carbon emissions.

But I don't expect this to impact the global carbon emissions picture. If that was my goal, I think I would be very frustrated by that Mauna Loa graph. I see no reason to believe that picture will change in the next few years. But I am optimistic that we can continue to develop some alternative energy options that enhance energy security for specific locations that have limited fossil fuel resources. I think those countries with ample fossil fuel resources will continue to burn them, though, which is why I think the focus on carbon emissions is ultimately futile.

Ethanol and Petroleum Imports

2009-10-14T18:08:00.002-10:00

This is the concluding post in a series looking at the impact of increased ethanol production on petroleum imports. Previous posts concluded that there has been little measurable impact on our petroleum imports as a result of increased ethanol production. In this post, I provide a spreadsheet to all the data and graphics used, and delve a bit deeper into the issue.

Previous posts in the series were:

Does Ethanol Reduce Petroleum Imports?

Ethanol, Imports, and the MTBE Effect

The spreadsheet that was used to tabulate all of this information is archived here:

Oil Imports Versus Ethanol Production

(For some reason the graphs don't show up in the Google Documents link. However the data and calculations are all there).

Audacious Claims

One of the most frequently cited reasons for our U.S. ethanol policy is that it will reduce our dependence on foreign oil. Some of the more audacious claims actually suggest that one barrel of ethanol will displace more than one barrel of foreign oil. Here is a sampling of some of the claims. From the Renewable Fuels Association's (RFA) "Energy Facts":

FACT: The production and use of 9 billion gallons of ethanol in 2008 displaced the need for 321.4 million barrels of oil. It also saved American consumers and taxpayers $32 billion, an average of more than $87 million a day. This is the equivalent of eliminating oil imports from Venezuela for 10 months, or looked at another way, it would mean that the U.S. would not have to import ANY oil for 33 days.

The RFA's page on industry statistics shows that ethanol production in 2006 was 9 billion gallons, which is 214 million barrels. Once refined, a barrel of oil will turn into products with an average BTU value of 126,000 BTUs/gal, versus 76,000 BTUs/gal for ethanol; therefore 214 million barrels of ethanol contain the BTU equivalent of 129 million barrels of oil. (Source: ORNL). The claim then is that ethanol with an energy equivalent of 129 million barrels of oil (BOE) displaced more than twice that much oil - 321 million barrels!

The RFA's source on that was the consulting firm LECG, where director John M. Urbanchuk consults for the Renewable Fuels Association and the National Corn Growers Association. Thus, Urbanchuk is expected to spin a positive ethanol story, but one would hope he could do so without completely sacrificing his credibility. He has also been quoted:

The production of nearly five billion gallons of ethanol means that the U.S. needed to import 206 million fewer barrels of oil in 2006, valued at $11.2 billion. This is money that stayed in the American economy.

Source: Contribution of the Ethanol Industry to the Economy of the United States in 2006 (PDF download)

Even grander claims have been made by the U.S. Government. From DOE Assistant Secretary Alexander Karsner's keynote address to the RFA's National Ethanol Conference (link now dead) in Tucson, Arizona:

Last year, we contributed something on the order of a displacing 500 million barrels of oil, oil that we didn't have to import from regimes that are hostile to our interest or might leverage energy economics over our future.

Here's the same claim (that link has also been taken offline) by Paul Dickerson, Chief Operating Officer at the DOE's Office of Energy Efficiency and Renewable Energy:

Over 6 billion gallons of ethanol were produced in the United States last year, and we have an additional 5 billion gallons of refining capacity under construction.

That effort means 500 million fewer barrels of oil that we have to import from the Middle East.

That's from the U.S. Department of Energy. Those are pretty bold claims. How on earth are people coming up with these numbers? More importantly, can we go to the data and actually see this impact?

Probing the Data

The import situation is complicated by several factors, the biggest of which is the rapid run-up in petroleum prices over the past few years. The increase in prices caused overall demand to fall, which can be seen in Figure 1 below:

Figure 1. Net Imports Versus Total Demand

It is important to note that "demand" includes all crude oil, natural gas liquids (ethane, propane, butane, etc.), ethanol, fuel gas (offgas from the refinery used as fuel or feedstock), and asphalt. (See the full list of products covered here). This is important to understand, because if ethanol displaces petroleum, it has no impact on overall demand - since it is already included. What you would see in that case is merely a shift between ethanol and gasoline, for instance, with total demand remaining constant (actually it would have to go up a little due to ethanol's lower BTU content).

The conclusion one draws is also influenced by the time period over which one looks. In the first post in this series, I looked at imports, demand, and ethanol production over the time period 2002 through 2007. The reason for choosing that particular time period was that this was when ethanol was ramping up sharply.

I left off 2008 because of the very sharp drop in demand due to the recession. However, as one reader pointed out, since ethanol is included in the demand number, it doesn't really matter whether demand went up, down, or stayed constant. If ethanol is displacing imports, we should see that effect even if demand drops sharply. For example, if demand fell by 1 million barrels a day, then all else being equal I would expect imports to fall by 1 million barrels a day. Now add in expanding ethanol production, and I expect imports to fall by more than 1 million barrels a day.

What I observed was that between 2002 and the end of 2007, our petroleum imports do not appear to have been impacted at all by the increase in ethanol production. But that time period is complicated by a couple of things. First, the largest increase in ethanol production took place in 2008. Thus, the largest impact would be expected to show up in 2008 - a year I left off because of the recession effect.

Second, the phase-0ut of methyl-tertiary-butyl-ether (MTBE) took place during this time. I went into detail on how this would have impacted the issue in the second post in this series. The bottom line was that even when MTBE was taken into account, it still did not appear that ethanol production had a measurable impact on petroleum imports.

However, the MTBE phase-out was completed in the first half of 2006. So for the rest of this post, I want to focus on 2007 and 2008. (And as I write this, I don't know what the answer is; I will work it out as I put the rest of this post together).

During 2007 and 2008, total demand fell by 434 million barrels. Domestic production fell by 74 million barrels. (You can see all of the data in this spreadsheet; there are comments indicated where different data originated). So then all else being equal, I would expect imports to fall by 434 million barrels, but then they also need to make up for the 74 million barrel domestic production deficit. That modifies the expected import change to (-434 million + 74 million) = - 360 million barrels.

Over that two-year time period, net imports actually fell by 466 million barrels. This is the first time period I have looked at over which the import change was less than the demand change, which is what I would expect to see if ethanol was displacing imports. The change certainly isn't the often exaggerated 200 million or 500 million barrels, but over the course of 2007 and 2008 imports did fall by 106 million more barrels (53 million barrels per year) than would be expected on the basis of demand and domestic production changes. Over the longer time frame of 2002 through 2008, the cumulative increase in imports (+207 million barrels) is very close to what would be expected based on changes in demand and domestic production (-225 million barrels), still implying no measurable impact from ethanol.

How much ethanol was produced over that period of time? Per the RFA's ethanol statistics, a total of 15.5 billion gallons of ethanol was produced in 2007 and 2008, which amounts to 369 million barrels. On an energy equivalent basis, this is equal to about 215 million barrels of finished petroleum products. Yet the measured fall in imports was less than half that value.

One of the problems here is that we may be looking for a needle in a haystack. By that, I mean that the contribution of ethanol is so small relative to that of overall demand, that any actual displaced imports would be lost in the noise. Figure 2 illustrates:

Figure 2. Ethanol Production Versus Total Demand

For this graphic, I have put ethanol production on the same scale as total demand to show the relative contribution. The production for ethanol in 2008 amounted to 0.59 million barrels per day of a total demand of 19.5 million barrels per day. For people who claim that the oil companies are threatened by the ethanol companies, that graphic puts things in perspective.

One could argue that the ethanol impact should show up most strongly in a comparison with gasoline demand. Figure 3 shows that effect:

Figure 3. Ethanol Production Versus Gasoline Demand

In fact, gasoline demand* did dip in 2008 by 300,000 bpd. Ethanol may have been part of the reason, but the increase in ethanol production was quite a bit less than the fall in gasoline demand. Corrected for energy content, the ethanol increase was less than half the drop in gasoline demand (which can be mostly explained by higher prices and recession, as shown below).

One thing Figures 2 and 3 show is the dip in demand in 2008, which followed a flattening of demand for a few years prior. Recall that since ethanol is included in the demand number, ethanol can't be a cause of the drop in demand. Figure 4 shows part of the culprit:

Figure 4. Average World Crude Price Versus Total Demand

As crude prices began to climb in 2004, crude demand flattened. As the price skyrocketed in 2008, we were also entering a recession. The combination caused a sharp drop in demand. One interesting thing to consider is that since ethanol is mandated in increasing volumes each year, it is not impacted by the drop in demand. While total demand fell by 1.2 million bpd in 2008 relative to 2009, "demand" for ethanol actually increased by nearly 200,000 bpd - because the mandated increase has no allowance for overall drops in demand.

Conclusions

What to conclude from this exercise? The easiest conclusion is that the claims of petroleum import displacement have been at a minimum grossly exaggerated. It may even be that ethanol hasn't backed any petroleum imports out, or that the impact is so small as to be unnoticeable.

All of these conclusions, however, point toward a common theme: Even our biggest source of alternative fuel is taking very little bite out of our petroleum consumption. Much more effective has been high prices and recession. In fact, I believe it unlikely that any combination of biofuels will ever replace even 50% (net) of our present petroleum consumption. That points toward the need for conservation as a critical component of any major effort to wean off of fossil fuels. Perhaps some combination of conservation, electrification, mass transit, and biofuels can make a significant impact on our fossil fuel consumption. But the graphics above should demonstrate that it isn't a trivial matter to significantly impact our petroleum consumption.

*Total gasoline demand contains the ethanol contribution. Therefore, Figure 3 shows gasoline after subtracting out the ethanol volumes.

Special thanks to the Energy Information Administration for answering some of my questions about the data.

Book Review – Power of the People

2009-10-11T08:24:00.005-10:00

I will finish up my long-promised concluding post in the recent series on ethanol and oil imports. I have been traveling for ten days, and inadvertently left all of my graphics for that post on another computer. I am back home now, and will try to tidy it up and post it in the next few days.

On the long plane ride back to Hawaii, I read Power of the People: America's New Electricity Choices. I picked this book up at the 2009 Solar Tour – Pikes Peak Region, which I visited on my trip to Colorado. My new job has me getting more involved in the electricity sector, and I thought this would be a book that would help push me up the learning curve. A short description of the book:

America is as addicted to electricity as it is to oil. Our electricity usage increases every year, yet we still use the same transmission grid that was constructed in the middle of the last century. The grid is stretched to the limit, creating the potential of future black-outs like the one that brought the Northeast to its knees in 2003. Meanwhile, some of our most abundant and affordable generating fuels have become major culprits in global warming.

Power of the People explores in a nontechnical, conversational way some of the clean, green, 21st-century technologies that are available and how and why we should plug them into our national grid. This important essay explores our failure as a country to adopt these "no regrets" technologies and policies as swiftly as the rest of the world, and why it matters for the future of every American.

The author, Carol Sue Tombari, works for the National Renewable Energy Lab (NREL). Despite trying, I can't find out what her exact position or qualifications are. Here biography says:

Carol Sue Tombari has specialized in energy and environmental policy and programs for more than 25 years. She directed the State of Texas's energy efficiency and renewable energy programs, served as natural resources advisor to the lieutenant governor, and helped found the National Association of State Energy Officials.

In addition, she was appointed to federal advisory posts by two Federal Secretaries of Energy, chairing a Congressional advisory committee on the subject of renewable energy joint ventures and serving on the U.S. Department of Energy's (USDOE) State Energy Advisory Board. Tombari is employed at the USDOE's National Renewable Energy Laboratory, where she works on local and rural economic development. Ultimately, it is her love for the next generation that continues to drive her work to protect the future of our planet and the lives of those yet to come.

While I found myself learning more about the sector, many things she said left me puzzled. For instance, she claimed that the U.S. uses more energy per GDP than anyone else in the world. This is exactly the opposite of Jeff Rubin’s claim in Why Your World Is About to Get a Whole Lot Smaller. Rubin claimed that countries like China use a lot more energy per GDP, which was the basis of his argument that carbon tariffs could work in favor of countries like the U.S., who are more energy efficient at producing GDP. In fact, if you look at the EIA data on energy usage per dollar of GDP, you can see that the U.S. is on the low end of the scale. According to the EIA data, China, compared to the U.S., uses about four times the amount of energy per dollar of GDP. (Thanks to reader Clee for that reference).

The book is pretty anti-nuclear, and makes the claim that renewables are “considerably more affordable” than nuclear power. She seems to rely on Amory Lovins and Tom Friedman for these sorts of claims. The book is pretty realistic about coal, however, concluding that we will be relying on coal for a good many years. She did claim, though, that there have been no major technological innovations in coal-fired central station power plants since the 1950’s. I don’t consider that accurate, as Integrated Gasification Combined Cycle (IGCC) seems like a dramatic improvement in the efficiency of the usage of coal for power production. Several of these IGCC plants will be coming online in the U.S. over the next decade, and a number have already been built in China. (You can see some of the plants that have been completed or are in progress around the world here).

There were some things I found annoying about the book. For instance, it had no graphs. However, on a number of occasions the author said “picture a graph in which the Y axis represents one variable, and the X axis another variable.” Why not just show a graph? Or if for some reason you are limited to no graphics, find another way to make the point.

There were some calculations that just didn’t make sense to me. For instance, she once calculated the required size of a PV system to run a household in Phoenix “if PV cells were 100% efficient.” Why not just do the actual calculation with typical PV efficiencies? She also commented that NREL had done a calculation in which they concluded that "100 square miles that constitute the Nevada Test Site" covered in PV arrays could meet the needs of the entire U.S. (without addressing storage). I did a similar calculation in which I tentatively came up with an area of about 100 miles by 100 miles. So I wonder if she didn’t mean that the NREL calculation concluded that a 100 mile square (10,000 square miles) would suffice.

She also spent a good deal of time talking about how a terrorist could bring down the transportation system or the electrical grid. I don’t think those are the kinds of ideas we want to plant in people’s heads.

One thing that isn’t clear to me is just how utilities benefit from efficiency improvements of their customers. She spent some time discussing various utility programs to improve the efficiency of the end user so they don’t have to construct new power plants. But utilities make their money selling electricity, don’t they? If customers improve efficiency, they just means they are selling less electricity to that customer. But there is apparently something to this model that I don't fully understand, because I know that utilities are always pushing for – and even subsidizing – these sorts of programs. In Hawaii, the utility will pay for part of a solar hot water installation. So how do they benefit? Perhaps the utilities are compensated by various governments for pushing these efficiency programs. Otherwise, it seems that as consumers become more efficient, the utilities would have to charge more money for the electricity.

One other thing that was discussed – but that has always puzzled me – is the economic multiplier theory. She gave one example about how the benefits of a local Midwestern project ended up contributing three times the income generation to the local economy. Now I can see how a multiplier should work in theory. Pay a guy $100 in salary, and then he pays his taxes and turns around and spends that $100 in the local economy. That merchant then pays his taxes and spends some of it in the local economy, such that the initial $100 supports more than $100 in taxes and spending. In practice, it seems like if it really worked that way, we would subsidize everything. Why would we want to get any autos from Japan? Subsidize U.S. consumers for 50% of the cost of a domestic car, and then let the local multiplier give back 3-4 times that amount to the local community. But in reality, I don’t quite think it works out that way.

In summary, while it seems like I found a lot to nit-pick in the book, I did find a lot of useful information in there. Even the things I found puzzling caused me to think and to do additional research, which was helpful. The author spends a lot of time laying out the present situation with respect to electricity, and talking about the changes that need to happen. The author is peak oil aware, citing Matt Simmons and Tom Whipple (among others) with respect to a projected future energy crunch. I think the anti-nuclear stance was misguided, and I think she overestimates the ability of renewables to fill in for growing demand and the phase-out of older coal-fired power plants. In my view, it is hard to imagine how we are going to get by without building more nukes in the next few decades.

What Would Ron Wyden Do?

2009-10-09T15:07:00.008-10:00

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.

What Happened to a Buck a Gallon?

2009-10-08T11:28:00.007-10:00

Coskata will produce ethanol for under US $1.00 a gallon anywhere in the world, from almost any input material. - Coskata Vision Statement

A bit more than a year ago, I read a number of claims from ethanol start-up Coskata stating that they would be able to produce ethanol from cellulose for less than $1.00 a gallon. One thing that is very important to me as an engineer is that you deliver what you say you will deliver - or more. If you deliver less, you lose credibility. If it becomes a habit, you lose all credibility.

I am not a fan of hype, and I don't like my tax dollars funding hype. So when I think someone is overly guilty, I will often report on it. I did:

Coskata: Dead Man Walking

A couple of comments I made in that essay:

The fact that they don't even have an operating pilot plant should tell even the most optimistic supporter that they have little basis for their claims of producing ethanol for less than $1/gal.

My prediction? I predict that Coskata's suggestions that they will produce ethanol for less than $1/gal will look ridiculous in hindsight.

There were two reasons that I took exception to their claim of "under $1/gal." First, they had no pilot facility upon which to base that claim. Making such a claim on the basis of lab tests is pretty reckless, as you are staking credibility on the line with little to back it up.

Second, the claim was incredibly misleading because there was no capital recovery in the number. If you don't understand what that means, consider this. Let's say I claim to be able to make gasoline for a nickel a gallon. But to do that, I have to build a plant that costs a trillion dollars. Do you really think then that I can make ethanol for a nickel a gallon? If I specified that my operating expenses amounted to a nickel a gallon, then that may be a true statement - which would then lead to questions about capital costs. In the case of Coskata, these capital costs are not trivial, and thus "$1/gal" immediately goes way up because capital isn't free.

Well, that was a bit over a year ago, and two things have happened. First, they now reportedly have an operating pilot plant:

Coskata leaks word that demo plant is up and running

Ethanol developer’s CEO tells the Cleantech Group at the Boston Forum that its pilot facility, capable of producing 50,000 gallons a year, has been operating for nine weeks.

Warrenville, Ill.-based ethanol developer Coskata has been planning to announce the opening of its demonstration plant in October. But CEO William Roe leaked the news a little early.

Let me congratulate them on that accomplishment, and sincerely wish them the best. They will gain important operating knowledge from this plant - and I believe they will learn that their earlier cost claims weren't credible.

The second thing happened at this week's gasification conference. Coskata's gasification provider - AlterNRG - made a presentation. Apparently they did not get the memo from Coskata, because they had on their slide that "Coskata expects overall operating costs to be less than $1.25/gallon." That may not seem like much, but that's a potential upward creep of 25%, and their pilot plant is barely warm. Further, they specified that this was just for operating costs; something Coskata's early claims did not specify.

Another thing that AlterNRG said specific to their gasifier is that it really needs tipping fees for the economics to work. I expect long term, there will be more competition for biomass, and tipping fees will start to decline. So a company that is dependent on tipping fees is making a pretty risky bet in my opinion. In my first ever essay on Coskata almost two years ago - Coskata Hype - I wrote about the potential need for tipping fees:

My guess is that unless they found someone to pay a steep tipping fee to get them to take biomass, there is nowhere in the world that they will be able to make ethanol via gasification for under $1/gal.

Coskata would not be the only company back-pedaling on their cost claims. Last year Mascoma claimed "The cost of fuel from the process is similar to Coskata's at about $1-1.50 a gallon." (Like Coskata, Mascoma is a Vinod Khosla-backed venture).

Now they have changed their tune:

"Governments need to help with the financing for the first plants, once you have those the private sector will start to come in," said Jim Flatt from research and development at U.S. biofuels firm Mascoma, speaking at a conference in Amsterdam.

"Oil needs to trade at a sustainable level of $100 or above to make this competitive," said Flatt.

Both of these companies have quietly increased their projected costs (although Coskata still has the <$1/gal claim on their website). Bear in mind that neither company has anything that would be considered much of a demonstration plant. Coskata's recently completely pilot plant has a nameplate capacity of 3 barrels a day. So reality about cellulosic ethanol appears to be setting in for everyone. Everyone except for General Wesley Clark, who just went on record with this whopper: U.S. seen unlikely to meet ethanol fuel-content goal

Retired U.S. General Wesley Clark, co-chairman of the Growth Energy group, said the 100 million gallon level could be reached in time if the cap on the permitted level of ethanol in regular gasoline is increased to 15 percent from 10 percent.

"There is cellulosic capacity standing by ... but the later than policy decision is (taken), the less likely we are to meet that 2010 mandate of 100 million gallons," he told reporters during a trip to Ottawa.

The auto industry says gasoline containing 15 percent ethanol could damage engines and fuel lines in some older cars, and has urged regulators not to approve the higher blend.

"There are a lot of people who see it our way -- namely, that this is good for the environment, it's good for jobs, it's good for national security. It doesn't hurt automobiles," said Clark.

That's right, just lift the 10% cap, and the cellulosic ethanol will start to flow. Plus, it will be under a buck a gallon, it will create jobs, and it will bring us one step closer to energy independence.

I don't meant to downplay the issue of the 10% cap, but there is room to put a lot more ethanol out there in the form of E85 even with the 10% cap - if it could be made in a cost-competitive manner. But that won't open up the cellulosic taps. We actually had a pair of those until about 1920, at which time they were shut down because they weren't economical.

Exposing a Two-Bit Scammer

2009-10-06T21:13:00.003-10:00

My regular readers can ignore this, as it has nothing to do with energy or the environment. This post is about a small-time scammer who tried to rip me off - and who has ripped others off. The scammer uses harassment and intimidation techniques, which probably works when he is taking lunch money from children. By posting this, I hope to save some people from the annoyance that comes from dealing with him. Had I done a bit more research, I could have avoided it.

As I will document here, others have reported on his fraud. By writing this, people who are trying to figure out if he is running a scam should run across this in their Google search results - and they will know what to expect. This all started on 10-26-09, but I am back-dating this post so it doesn't show up on the first page (but still high enough that the Google spiders will find it).

Here is the story. I like to play computer games with my kids. One of the games we play is called Diablo II, and to play together online we need two licensed copies of the game on two computers. I especially like to play with them when I am traveling, as we can play together even as I am sitting in a hotel room in a remote location. Since I already have the software, all I needed was another key. (Actually two keys, as there is also an expansion pack).

People do sell game keys, and so I did a Google search for Diablo II Game Keys. Up popped a Google ad for this site: http://www.diablo-keys.com/. Go there, and here is a snapshot of part of their ad:

Note the language of the ad. "The keys are fresh from the box - unmuted, unbanned and only in use by you." The bottom portion of the ad reads "If you have any problem with any of the keys, we will replace them free of charge, forever. All orders are shipped INSTANYLY [sic] upon purchase."

There were other comparable ads, but this was the best price, so I bought two keys. I almost bought multiple sets - and would have later on - except for what happened after I bought the keys. Right after I got them, I tried them out and found out that they had already been registered. In other words, they were not "fresh from the box", and were in fact worthless since I could not use them for playing the game. I gave the merchant the benefit of the doubt, and simply reported that the keys didn't work:

For both of the keys below, I received this message when I tried to authenticate and add them to my Battlenet Account:

The authentication key you entered has already been claimed.

Each authentication key can only be redeemed once. Please refer to your games section of the home page to review the keys attached to this Battle.net account. If you're sure you have not previously claimed this key, please double-check the spelling and enter it now.

The response I got was pretty lame, and immediately aroused my suspicions:

We are glad to hear from you. We fully investigate and reply to each e-mail submitted to us. Whatever your concern is, expect the best customer support ever!

Your request will be answered within 24 hours. We will be glad to fix any problem you, valued customer, could get. To ensure the best customer service, please do not submit multiple e-mails unless you have new information to submit, or if we haven't replied for 24 hours (this usually means our response has been blocked by your junk filter).

As again, thank you for your great customership and for your trust in Diablo-Keys, top Diablo 2 reseller :) !

At that point, I started wondering whether this person was trying to scam me. So I did some Google searches on Diablo Keys scam and some other related keywords. I found that I wasn't the first to have a problem with this guy. Here is someone documenting that his keys didn't work. And here is the amazing response from "Diablo-Keys, top Diablo 2 reseller:"

Now that's what I call customer service! So the response from support@diablo-keys.com, the same address responding to me, was to insult the customer who complained about getting ripped off. I also noted that he had used PayPal, but when I bought my keys PayPal wasn't the payment option. He was using a service called AlertPay.com. In hindsight I think what that probably means is that PayPal dropped him after people complained about being ripped off. I also ran across multiple other accounts of people being ripped off by this clown.

I knew then that I was going to have trouble, so in response to the delaying tactic I got when I reported the invalid keys, I wrote:

Guys, I have a blog with a whole lot of viewers. Please don't try to get funny with these keys. After my keys didn't work, I looked into it, and I see that others have reported the same problem:

http://img.techpowerup.org/090811/Untitled160.jpg

http://img.techpowerup.org/090812/yeah.jpg

So I either need to get my money back, or two keys that work. Failure to do either one will result in me publicizing this and reporting fraudulent advertising to Google Ads.

That's when it took a turn toward the comical. Based on the response, I knew that this scammer was simply trying to wear me down and hope I just wrote it off like a lot of other people have done:

We understand this problem might be frustrating.We are proud to offer one of the best customer service on the market, at no additional cost. Your satisfaction is our priority. We will do everything we can to fully satisfy you.

Per our 100% working guarantee, all products are guaranteed to be 100% working. We would be more than happy to give you all the required technical support at no charge. Our experts are ready to assist you. If you require any instructions, we can send full guide, written in simple words.

That one was signed "Carl." Once more I asked for either a refund or keys that worked - or I would take action:

I don't need technical support, I just need keys that haven't already been authenticated. The ones you sent me have already been claimed. So please send another pair or refund the money. Otherwise I will just contact the credit card company, dispute the charge, contact Google Ads, and then write a story about this on my blog (and then it will be one of the first things that pops up when someone Googles "Diablo keys.")

Note that I have made multiple requests for replacement keys, and all I was getting was stalling tactics. So I nearly fell out of my chair laughing when I got the following typo-riddled response (these attorneys apparently don't know how to use spell-check). This was supposedly from a Joseph Karlson (joseph.karlson@karlsonandkarlson.com) who claims to have a law firm at www.KarlsonandKarlson.com (located in Toronto).

from Joseph Karlson
to Robert Rapier
date Tue, Oct 27, 2009 at 6:20 PM
subject CEASE AND DESIST- Diablo-Keys.com

WITHOUT PREJUDICES

Dear sir:

My name is Joseph Karlson and I represent Diablo-Keys.com

This notice is to inform you my client, Diablo-Keys.com, intends to press charges against your person for harassment, defamation, verbal abuse and fraud.

On October 28th, 2009, despite various answers that your cd-keys would be replaced, you have chosen to keep harassing, threatening and insulting my client's customer support agent. As you are surely aware, such a behavior is not only unethical, but illegal.

For this reason, I now seek reparation on behalf of my customer. We are legally required to inform you that we plan to press charges on October 30th, 2009, unless you complete the following points:

* A complete apology letter for your rude behavior and abuse towards my client's employees.
* A statement of retraction of everything submitted, posted or writen against my customer.
* A $5,000 compensation for the time and efforts deployed in this case.

If you fail to fulfill the following points by October 30th, 2009, charges will be pressed against you directly in state courts. You will then have to defend yourself directly in court.

Diablo-Keys.com intends to fully pursue you for any damage, interest, claim and compensation caused by this situation. You have fourty-eight (48) hours to complete the above points. By law, you are now considered to have been served the required preliminary notice.

For any further information do not hesitate to communicate with me.

Sincerly yours,
Joseph Karlson
joseph.karlson@karlsonandkarlson.com
www.KarlsonandKarlson.com

So, not satisfied with simply ripping people off, now he is trying scare tactics that might work on a 12-year-old kid. But the typo-ridden rant above (just like the typo-filled website of this "attorney") simply made me laugh. How funny is it to claim that there were "various answers that your cd-keys would be replaced" when a simple replacement set could have been sent instead of empty promises to replace the keys?

So after I stopped laughing, I responded to his lame extortion attempt. I also decided that instead of making a "statement of retraction of everything submitted", I would do the opposite and publish all correspondence:

You are either the stupidest lawyer on the planet, or a fraud like your client to think you can "serve" someone over the Internet and across national borders. Or your client isn't really your client and is falsifying this response (copying the real Karlson and Karlson in case that is the case). No matter, you picked the wrong person to defraud, and the end game is all the same.

Let me tell you what is going to happen. Your client is committing Internet fraud. He is fraudulently advertising keys to a game. He is guaranteeing that they work, and money back if not satisfied. He is selling keys that have already been sold and used, and therefore do not work.

So here is the deal. I tried to buy these keys for my son's birthday. I received a lame response from your client informing me that my satisfaction is his highest priority. I informed him that I merely wanted keys that work, and then I received the same message from him again, and now this from you. So here is what is going to happen.

Your client has 12 hours to either refund my money or provide keys that work. Failure to do so will result in the following:

1. I will file a claim with the credit card company, explaining the nature of the fraud. As I have observed already, others have documented this fraud from your client.

2. I will file a report with Google, with whom your client is advertising. This will stop your client from advertising with them, as they will not tolerate fraud.

3. I will file a report with AlertPay, which your client is using to receive money.

4. I will document this on my blog, which has very high traffic. Rest assured that when people Google "D2 Keys", on the first page of the Google results they will see "Diablo-Keys.com is a Scam." Google my name if you think I am exaggerating.

5. I will file a report with the Internet Crime Complaint Center (http://www.ic3.gov/default.aspx)

Now, the ball is in your court. You don't have to respond with any further lame threats. Your client has never offered to replace the keys; he just keeps saying that my satisfaction is his highest priority. So if you are truly stupid enough to harass me over this, assure that you will be counter-sued for wasting my time - and I think you know you will lose.

12 hours to replace the keys. Any other response will result in Actions 1-5 above, no further response from me, and publication of all correspondence related to this (which will put a damper in your client's scam). To be honest, I will probably do all of that anyway, but if I get keys that work I might be in a generous mood and forget this ever happened.

Following that, I did go ahead and file reports with the Internet crime division (he may only be scamming $5 at a time, but I hate low-life scammers), I filed a dispute with AlertPay, and I filed a complaint with Google Ads. No response the next morning from the scammer, so I sent my final communication:

You have had 8 hours. Four more hours and I also have a word with the FBI's Internet crime division. I think they would be interested in the $5,000 extortion attempt below.

About to get on a plane. When I get off, if I don't have 2 working keys, or a refund, don't say you weren't warned. And I don't bluff.

This will be the last communication from me.

One more comical response from the "attorney", who doesn't seem to understand the difference between civil and criminal law. (I think it obvious that this wasn't written by an actual lawyer; if it was then it truly is the stupidest lawyer I have ever encountered):

from Joseph Karlson
to Robert Rapier
date Wed, Oct 28, 2009 at 4:19 AM
subject Re: CEASE AND DESIST- Diablo-Keys.com

WITHOUT PREJUDICES

Dear sir:

Thank you for your response. Any additional evidence is appreciated and only adds to our evidence.

By harassing, threatening and blackmailing my client, Diablo-Keys.com, you have committed fraud under federal law. Although we intend to prosecute you under state laws, this crime is a felony in most of the United States and punishable by up to three years in jail and/or $100,000. As you are without a doubt aware, verbal violence is not tolerated, and Diablo-Keys.com will not make an exception.

As your e-mail was very clear, we will begin legal procedures against Mr. Robert Rapier in the state of Hawaii. Karlson and Karlson is authorized to practice civil law in the United States.

I have recommended my customer to refund your order both to help procedures and to prove good faith in the case of Diablo-Keys.com, Inc Vs. Robert Rapier. For now, you have nothing to do. As required by US Law, every legal document will be served to you. For now, you have nothing to do, except maybe finding a suitable attorney.

Diablo-Keys.com had no choice but to prosecute you to protect its brand, image and quality service. While it is sad this matter couldn't be settled off court, you have given us very little choice.

For any further information do not hesitate to communicate with me.

Sincerly yours,
Joseph Karlson
joseph.karlson@karlsonandkarlson.com
www.KarlsonandKarlson.com

LOL! Yes, Diablo-Keys is going to "prosecute me." Oh no, I have to get an attorney. I might go to jail for three years! What a douche. I should be so lucky as to meet them in court. The only harassment and verbal abuse was coming from Diablo-Keys themselves.

Then the scammer himself responded twice more:

from Lawrence Irwin "joyandmercy@gmail.com"
to Robert Rapier
date Wed, Oct 28, 2009 at 4:09 AM
subject Re: CEASE AND DESIST- Diablo-Keys.com

Thank you for the additional evidence. I know you mentionned this was the last communication, but please keep writing to us: every e-mail is more and more evidence and our lawyer LOVES it.

Our lawyer has been very strict: we are unable to make comment this situation. We will see each other in court.

Sincerly yours,
Diablo-Keys.com

So Lawrence Irwin (which is probably just a name this loser is hiding behind) at joyandmercy@gmail.com, is "unable to make comment" on the "very strict" advice of his make-believe attorney. But stupid people rarely know when to shut up. So two minutes later, he sends this:

Yes, continuing the theme of illiteracy, "such it hard" is his answer. He must have gotten help with the spelling from his "attorney."

So if you happened upon this because you were trying to determine whether http://www.diablo-keys.com/ is a scam, now you know. Here is how the scam goes:

1. He sells you invalid keys that have no value (but this means he is selling something that does not belong to him as someone else has already purchased the keys). You pay $5 because he claims they are new.
2. You report that the keys are invalid, and he promises to investigate.
3. He sits tight and hopes you forget all about it.
4. If you are persistent, he has his make-believe attorney write a threatening letter.
5. If you continue to be persistent, he refunds your money, lashes out like a two-year-old, and has his make-believe attorney send another letter.

It is just brilliant enough to have been crafted by a couple of 7th grade dropouts.

If you are coming here because you have gotten a pair of bad keys and are trying to get resolution, my recommendation is to file a fraud complaint and dispute the charge. If the guy had any actual working keys, he would have sent them instead of ultimately refunding my money. After all, I made multiple requests for a replacement before finally disputing the charge (at which time my money was refunded).

The guy could have had an actual business, but instead tries to scam people, and then scare them if they complain. If you are looking for a legitimate site for Diablo keys, after this experience I went to http://www.mmo1st.com/ and got a pair of working keys for $7. No problem at all from them, unlike the scammer/con artist/fraud at Diablo-Keys.com who will charge you $5 and then proceed to harass and threaten you - and just generally waste your time.

Energy Potpourri

2009-10-05T14:06:00.003-10:00

I am at the 2009 Gasification Technologies Conference this week, with a pretty full schedule. But there are three stories that I wanted to quickly hit. One is a follow-up on the previous cellulosic ethanol post, one is about Paul Sankey’s new report on peak demand, and the last is on a technology that ExxonMobil has reported on here at the conference that I felt was quite interesting. There will probably be no more new posts from me until the weekend. I only got away with this one because I decided to write instead of network (which I hate to do anyway) during free periods today.

When Technologies Are Mandated

I don’t care too much for mandates. I think they are so much worse than subsidies, because with a mandate you are really saying that it doesn’t matter how much it costs, you don’t want to know how much it costs – just do it.

If the government thought it was a good idea to blend bio-butanol into the gas supply, they could offer a $0.50/gallon subsidy to do so. If that doesn’t result in butanol entering the fuel supply, then that’s a pretty good indication that butanol is at more than a $0.50/gal disadvantage to gasoline. But imagine instead that it is mandated. The costs could go very high in that case, but gasoline blenders would still have to pay up. We may find out that the cost to fuel suppliers was $8.00/gal. Had it been a subsidy instead – and it needed to go to $4 or $5/gal to make it economical – it would have never passed because the costs would be more transparent.

Thus, I was not too enthusiastic about the cellulosic ethanol mandates we got as part of the 2007 RFS. In 2010, for instance, it is mandated that 100 million gallons of advanced biofuels will be blended into the fuel supply. Cellulosic ethanol has been the technology that has been favored, but I have warned about costs that are going to be very high. Instead of a mandate, suppose we put a $1/gal subsidy in for cellulosic ethanol. Then instead of relying on people promising that they can make cellulosic ethanol for $1/gal if they can just get grants, mandates, and loan guarantees – you put the burden on the producer. Here is a $1/gal subsidy for you. Build the plant, make your $1/gal ethanol, and collect the subsidy.

Not surprisingly we are now getting news that despite throwing a lot of money at it, the 2010 levels of cellulosic ethanol are going to fall far short of the mandate – as I have been saying all along. They are going to need more money to meet future mandates – highlighting the problems I have with mandates. From the NYT:

Biofuels Producers Warn They Are Going to Fall Far Short of Federal Mandates

"The current economic climate almost makes the RFS a moot point for the time being," said Matt Carr, policy director for the Biotechnology Industry Organization.

His organization estimated last month that 2010 volumes will, optimistically, reach 12 million gallons, far short of the 100-million-gallon mandate that year.

Range Fuels had gotten an initial $76 million from the DOE, then an $80 loan guarantee from the USDA. They also got $100 million in private equity. (I predict some folks are going to lose some money - including taxpayers). But that still wasn’t enough, so they went back to the DOE for more money. This time, the DOE said no:

The Department of Energy's loan guarantee program, producers say, has been particularly flawed. No advanced biofuel makers, aside from a partnership between BP PLC and Verenium Corp., have so far won approvals.

"We received a 'Sorry, Charlie' letter," said Bill Schafer, a senior vice president of Range Fuels Inc., which is now building a cellulosic facility in Soperton, Ga., slated for completion early next year.

He said that under the program, biofuels companies must compete directly against solar, wind and even compressed natural gas -- all energy technologies that, unlike advanced biofuels, have already been built at commercial scale.

So there you have it. The DOE seems to be losing some of the earlier enthusiasm for cellulosic ethanol. Range Fuels is here at the conference, by the way. I should probably say hi.

Again, this highlights the risk of mandates. Costs can spiral out of control. The ultimate cost can’t be easily predicted. Instead of assuming that technology can be mandated if enough money is thrown at it, we would all have been better off had there merely been subsidies offered. In that case, if this is truly not economically viable, the taxpayer may not have to foot the bill for millions of dollars for failed or stalled plants.

Printing Money

One of the reasons I invest in oil companies is that I think oil prices will continue to spike higher in the future. Because of the recession, we currently find ourselves with excess production capacity. But it looks to me like that excess production capacity will be eroded in the future, which will once again put pressure on prices. Oil companies will again reap very big profits by supplying a dwindling resource. (Whether governments will aggressively move to confiscate these profits is another question entirely).

There is another view that the oil companies will die out as oil depletes, and therefore oil stocks are very risky investments in the longer term. I don’t subscribe to this view because I believe the oil companies will possess enough cash to enter into any future energy business that looks lucrative. If we are supplying 90% of the cars with liquid fuels derived from coal in 20 years, I suspect it will be the oil companies producing it. In fact, most major oil companies – ExxonMobil, Shell, BP, ConocoPhillips – have active programs in this area. It is a naïve view to think that the oil industry as a whole will fail to anticipate the changing markets. That’s why I always think it is humorous that people feel the ethanol industry is a threat. If the oil industry thought it was a threat, there is nothing keeping them from getting involved.

Paul Sankey of Deutsche Bank just put forth both views in a new report. As I have mentioned previously, I think Sankey is an analyst who really understands the industry. And I agree with his first comments. I just don’t think he is right about the second point.

Don't Fill Up on ConocoPhillips

That one is a somewhat misleading title because he is recommending ConocoPhillips (which I do own):

DESPITE NUMEROUS SIGNS that the global economy is still struggling, just about everyone following energy predicts at least one more spike in oil prices in coming years.

It's just that scenario that prompted Deutsche Bank analyst Paul Sankey to publish today a 61-page opus to clients in which he upgraded shares of ConocoPhillips (COP) to "Buy" from "Hold" and raised his price target to $55 from $40.

Sankey's thesis -- and he's not alone -- is that Conoco will benefit in such a scenario by being able to sit back and milk profits from its existing reserves of oil with minimal new investment, thus leading to generous cash flows.

In brief, Sankey sees global demand surging again with economic rejuvenation, leading to a spike in oil of $175 per barrel in 2016, after which developments in global fuel efficiency, specifically electric cars, will cause demand for crude to fall off precipitously, until oil comes back into equilibrium with supply at $100 per barrel in 2030.

Sankey spells out why he is long-term bearish on the oil companies:

Peak Oil: The End Of the Oil Age is Near, Deutsche Bank Says

Deutsche Bank expects the electric car to become a truly “disruptive technology” which takes off around the world, sending demand for gasoline into an “inexorable and accelerating decline.”

In 2020, the bank expects electric and hybrid vehicles to account for 25% of new car sales—in both the U.S. and China. “We expect [electric propulsion] will reverse the dynamics of world oil demand, and spell the end of the oil age,” the bank writes.

But won’t cheaper oil in the future just lead to a revival in oil demand? That’s what’s happened in every other cycle. Au contraire, says the bank: Just as the explosion of digital cameras made the cost of film irrelevant, the growth of electric cars will make the price of oil (and gasoline) all but irrelevant for transportation.

He could be right, but I am betting against it. But I may find that in 20 years ConocoPhillips' core business is something entirely different than it is today.

ExxonMobil’s MTG Technology

One of the more interesting presentations for me at the gasification conference has been ExxonMobil’s work on a different kind of coal-to-liquids (CTL) technology. Conventional CTL would involve gasification of the coal to syngas, followed by a Fischer Tropsch reaction that converts the gas into liquid fuels such as diesel. Exxon has a different process, in which they gasify the coal, but then they turn it into methanol. As I have said before, methanol can be made quite efficiently, and I think it’s a shame that it wasn’t allowed to compete with ethanol on an equal footing. But the technology doesn’t stop at methanol. The methanol is dehydrated to di-methyl-ether (DME, also a nice fuel). The DME is then passed over a catalyst and converted to gasoline in yields of around 90%. The technology is called methanol-to-gasoline (MTG).

The process has been around for a while, but hasn’t gotten much attention. In the 80's and 90’s, they ran a 14,500 bbl/day plant in New Zealand. As far as synthetic fuel facilities go, that’s a big plant with an impressive track record of operation. The on-stream reliability of the plant was over 95% during its operation. (Following the oil price collapse in the 90's, the plant stopped upgrading the methanol, and just made methanol the end product).

The advantage of the process is that capital costs are reportedly lower than FT, and the product is gasoline – in high demand in the U.S. The disadvantage is that the process produces relatively little diesel and jet fuel. The military and various airlines are highly interested in FT because of its ability to supply these important fuels.

Exxon reports that a new plant, based on 2nd generation technology with better heat integration and process efficiency, has been built in Shanxi, China. At 2,500 bbl/day, the facility is smaller than the earlier New Zealand facility, but Exxon has licensed MTG technology to a pair of companies in the U.S. DKRW announced in 2007 that they would utilize MTG in a 15,000 bbl/day facility in Medicine Bow, WY. Synthesis Energy Systems announced in September 2008 that they would license MTG for their global CTL projects.

While Exxon seems to be more focused on coal to gasoline, there is no reason this process couldn’t be used to turn natural gas or biomass into gasoline (GTL and BTL). This technology could be complementary to FT technology, providing gasoline while FT supplies the liquid fuels needed for airlines, marine applications, long-haul trucking, and the military.

During the Q&A, though, one guy asked "If this is so great, why aren't you building these plants yourselves?" The answer was that they weren't experts, and only wanted to license.

Cellulosic Ethanol Falling Short

2009-10-02T11:07:00.000-10:00

The reason I spend time debunking wild claims is that I think they damage the entire bioenergy sector in the long run. People who issue press releases claiming they can produce fuel for $1/gallon - and by the way we can do it next year if you give us the money - may attract some funding, but in the long run if they can't deliver, investors will shy away from the entire sector.

One of the things I have spent time debunking is the notion that we are going to rapidly scale up and produce massive quantities of cellulosic ethanol. I believe - for fundamental reasons of chemistry and physics - that it isn't going to happen. I have said that I think the people who are getting money to build cellulosic ethanol plants will start coming up with a litany of excuses for the cash they burned through, and their failure to deliver. A year ago, I wrote:

The next few years will see a record amount of back-pedaling from most of the companies trying to establish a foothold in this space - and overpromising on their technology to do so. There will be the normal litany of excuses - such as 'the oil companies are suppressing the technology' - but in the end the chemistry, physics, and most importantly the capital costs and logistical challenges will catch up with them. Yes, excuses will be made, but those who know a little about the technology will know what really happened. It's going to be TDP all over again.

Today a new article in Nature says that cellulosic ethanol schedules are slipping and prospects are dimming - partially because investors have gotten burned by rosy biofuel promises (which is exactly my fear). The article is:

Cellulosic ethanol hits roadblocks

The article is behind a pay wall, but I have access. So I can provide some excerpts:

In February 2007, the US Department of Energy selected BlueFire and five other companies to negotiate for up to US$385 million in funding for commercial-scale plants. And later that year, Congress issued a federal mandate to produce 61 billion litres of cellulosic biofuels annually for transportation by 2022.

As I have said on repeated occasions, I don't believe the advanced biofuel mandates will be met, and I think you will start to see targets slipping next year (the first year the advanced mandate really phases in). I predicted quite explicitly a year ago that we wouldn't come close to meeting the targets. The Nature article agrees:

According to ThinkEquity, an investment bank based in San Francisco, California, the United States will have the capacity to produce less than 13 million litres of cellulosic ethanol this year, and it will almost certainly fail to meet the US Environmental Protection Agency's (EPA) projection of 381 million litres of cellulosic biofuels in 2010. Two of the six companies selected by the Department of Energy to negotiate for commercial plant funding have dropped out of the programme, and several plants belonging to other companies have been delayed.

They also casually note more delays in Vinod Khosla's Range Fuels project:

Range Fuels, based in Broomfield, Colorado, originally planned to complete the final phase of construction on a Georgia commercial plant in 2011 but has delayed that until late 2012, says chief executive David Aldous.

The reason I have criticized Vinod Khosla is that I believe he is out there making promises that he can't deliver upon. But he is Vinod Khosla, so people (private equity and taxpayers) give him money to invest, potentially diverting it from ventures that make less noise, but have more real potential to deliver. And a lot has been invested into his Range Fuels venture. However, it is no surprise to me at all that the schedule has been slipping since the project was first announced.

I first covered the Range Fuels ground-breaking as one of my Top Energy Stories of 2007 (See #6). A year later, I covered the first announced delay in my Top Energy Stories of 2008 (again #6). The initial announcements from Range were that the "first 20 MM gy phase is expected to be fully complete in 2008". Then that was delayed until 2009. Next it was "scheduled to be completed by the first quarter of 2010, with the production of ethanol and methanol at a run rate of less than 10 million gallons per year to follow in the second quarter of 2010." So now we see delays pushing into 2012. As some readers noted, this is the "final phase" they are talking about, but they need to start producing from the first phase before they have to worry about any final phases.

The article also discusses Iogen, and the fact that they "suspended operations on an Idaho plant to focus its resources on a possible plant in Saskatchewan." Iogen has been producing for long enough at their pilot plant that they should have a good idea of what the economics really look like. That's why I don't expect them to build a plant, but instead to keep announcing that they are studying the issue.

The article also noted that researchers at Sandia National Laboratories had predicted that "cellulosic ethanol could compete with petrol in 2030 only if oil was $90 a barrel or higher." Left unsaid is that this hinges upon technical improvements.

I find the entire issue very frustrating, because I have felt for years that our energy policy is being pushed by people with influence, but not necessarily people who are knowledgeable about energy. So what happens is that we waste years chasing dead ends and losing precious time as oil depletion marches on - and we spend our tax dollars because someone made a lot of empty promises.

These delays should also serve as a message to those who think the market will fix the problem of oil depletion by driving prices higher and making alternatives more affordable. The problem is that it takes years to bring these projects online, so you have to have a long-range plan for pursuing the right strategies. If oil prices are back to $150 next year, we will either pay up or do without. The energy business isn't like a widget maker that can easily set up shop and compete for market share. It takes years and lots of money.

Note: I originally put this up in a hurry, and in reading it later I felt it came across as unnecessarily abrasive. In my haste I had also chopped off a quote that made it appear out of context. That was not my intention, but after viewing some of the comments I reread the story and I saw that this was the case. So I have corrected it.

Ethanol, Imports, and the MTBE Effect

2009-09-29T18:01:00.007-10:00

I am traveling later this week, and will be on the road for nine days (Colorado, New York, Massachusetts). I was trying to wrap up the loose ends from my previous post with a much more comprehensive look at the ethanol/import issue before I travel. However, there are a couple of questions I had for the EIA before I finish up. As soon as I hear back from them, I will post a number of graphs and I will put my spreadsheet up so everyone can pick through it. But if I don't hear back within a couple of days, it may be a while before I can put up the final installment.

But so far, it still looks like my initial observation was correct: Ethanol has not reduced our oil imports. Our oil imports have fallen over the past couple of years, but here is why:

Net Crude Imports Versus Total Demand. Source: EIA

I will clean that graph up in the final posting. It should be obvious, but the import scale is on the left. Bear in mind that the ethanol production numbers do show up in the demand numbers. Thus, whether petroleum demand was impacted by ethanol displacement is irrelevant in that demand number, since whatever is no longer counted as petroleum is counted as ethanol.

If you notice, "Imports" track "Demand" very closely, except demand fell faster in 2008 than did imports. If ethanol was actually impacting imports, what I would expect to see is the import line negatively trending away from the demand line. For instance, since ethanol began to really ramp up in 2002, we are producing an incremental 7 billion gallons per year with an energy content of over 250,000 bbl/day of finished petroleum products. The change in demand through 2002 was down slightly. Yet imports actually rose slightly. If ethanol was impacting imports this is where I would expect to see it; with imports falling faster than demand fell (or rising more slowly than demand rises as ethanol makes a contribution).

The MTBE Effect

One reader asked a great question - just the kind of question I like to get following these essays. The blending of the oxygenate methyl tertiary butyl ether (MTBE) was phased out in 2006. In order to meet the oxygenate requirements for specific areas of the country, ethanol replaced MTBE in the gasoline blending pool. So is it possible that the reason petroleum imports didn't fall as ethanol ramped up was that ethanol was being used to replace MTBE? If MTBE was being made with domestic products that are not captured in the liquid demand summary, then it would be theoretically possible for ethanol to replace MTBE with no impact on imports. That sent me on a mission into the EIA archives digging through historical MTBE data.

The MTBE picture is complicated, and thus I expect there to be many opinions on how to handle it. Until 2008, the EIA published a monthly supply/demand picture on MTBE. The report is called Monthly Oxygenate Report, and the historical data are still all there. Figure 29 of this USGS report confirms that MTBE production had plateaued in the years 1999-2002 at just over 3 billion gallons per year. During 2002, production dropped sharply as it started to be phased out. If you look at this year end 2003 report, they show historical production separated into merchant plants and captive plants. (See Table D-4). The EIA defines a merchant plant as one that isomerizes normal butane to isobutane, dehydrogenates isobutane to isobutylene, and then reacts the isobutylene with methanol to produce MTBE. The definition of a captive plant is one that takes isobutylene, produced as a byproduct of refinery operations, and reacts it with methanol to produce MTBE.

The previous definitions are important for understanding how the MTBE phase-out should have impacted the import picture. Because butane is captured both in the import numbers and in the petroleum demand numbers, any ethanol that displaced MTBE should have backed out butane imports - thus lowering total imports. But, MTBE is partially produced from methanol, which is generally produced from domestic natural gas. Natural gas is not captured in the petroleum imports number, nor is it captured in the demand number. Thus, ethanol that backed out MTBE would not have impacted the natural gas piece that went into MTBE. So what we have then is that some of the ethanol ramp-up would have been diverted into MTBE replacement without being expected to have impacted demand.

How much? The portion that came from the natural gas. The MTBE reaction as stated above requires isobutylene and methanol. One molecule of MTBE has one molecule of embedded methane (via methanol). Let's make the best case assumption that all MTBE production was replaced by ethanol. In 2002, ethanol production was really ramping up and MTBE was falling off the plateau. So let's take the last year of strong production, 2001, and assume that must be replaced by ethanol. In 2001, MTBE production averaged 212,000 bbl/day for the year (per the previous historical report). The EIA did a comprehensive study of the MTBE replacement issue in 2006, and they concluded that from the oxygenate perspective, it takes 9 barrels of ethanol to replace 10 barrels of MTBE.

So to replace 212,000 bbl/day of MTBE was going to require 191,000 bbl/day of ethanol, which is 2.9 billion gallons per year. 191,000 bbl/day of ethanol production has the energy content of about 115,000 bbl/day of oil. In the absence of the MTBE issue, this is how much petroleum product imports I would expect to be backed out as ethanol displaced MTBE. But we need to prorate it by the isobutylene content, which is 64% of the mass of MTBEs. Thus, I would still expect the ethanol that backs out MTBE to displace imports equal to 64% of the 115,000 barrels, which would be 74,000 bbls.

There are two other factors that complicate matters even more. Since ethanol has a lower energy content, when ethanol displaces MTBE other components need to be added to compensate for the loss of energy. That may result in addition imports to keep the BTU content of the gasoline pool constant. Further, because the vapor pressure of ethanol is higher, certain components like butane and pentane must be backed out of the gasoline and replaced with other components that may need to imported. However, the latter shouldn't have much impact on imports, because butane and pentane are already captured in both the import number and in the product supplied number.

Bottom line? We should still expect to see imports backing out even as MTBE is replaced by ethanol. Further, the MTBE phase-out was completed in the first half of 2006, so there is no longer any complication from that. And 2007 and 2008 also show no compelling case that ethanol is backing out imports.

Conclusion

It still appears to me that ethanol has had no impact on oil imports. However, it is not yet clear to me why this would be the case, so I am digging to better understand. It may be that we are just trying to see a change that amounts to noise in the overall demand picture. In that case, the ethanol contribution is really put into perspective and readers may understand why I am focused on other solutions; solutions that I think can ultimately make a bigger impact.

It may be that something is still missing from the picture, which is one of the reasons I have contacted the EIA for some additional clarifications. I think the conclusion in any case is that ethanol backs out approximately zero imports, plus or minus some very small number.

So those like the RFA who make claims like this - FACT: The production and use of 9 billion gallons of ethanol in 2008 displaced the need for 321.4 million barrels of oil - are simply promoting misinformation.

Does Ethanol Reduce Petroleum Imports?

2009-09-26T16:15:00.013-10:00

One of the main arguments in favor of ethanol production in the U.S. is that it supports the goals of energy independence by getting us off of foreign oil. After all, we could just tell the entire Mideast to take a hike while we grow our own fuel. In fact, there have been some truly grandiose claims made around this theme. Of course if we are making more ethanol, we are importing less oil as a result. Right? Maybe not. Has anyone actually taken a good look?

A couple of years ago, I looked at total gasoline consumption in an essay called The Mythical Ethanol Threat. My conclusion from that was that despite the rapid ramp up of ethanol, there was no apparent drop in gasoline demand. In fact, gasoline demand (which was corrected for ethanol content by backing that out) actually grew at a steady pace even as ethanol was ramping up sharply. But a couple of years have passed, and some comments following my last essay got me curious: Has U.S. ethanol production actually impacted petroleum imports?

From 2002 through 2007, ethanol production in the U.S. more than tripled: From 2.1 billion gallons per year to 6.5 billion gallons per year. (Source - RFA: Historic U.S. Fuel Ethanol Production). Yet total net petroleum imports (oil, gasoline, diesel, etc.) increased over that time period by 2.1 million barrels per day - from 10.2 million bpd in 2002 to 12.3 million bpd in 2007. (Source - EIA: Weekly U.S. Total Crude Oil and Petroleum Products Net Imports). So what does this mean?

I wasn't going to jump to a hasty conclusion, so I started to dig. I started with several hypotheses. Perhaps U.S. oil production had fallen by 2.1 million barrels per day over that period of time, and the increase in imports were merely to compensate for that. So I checked. No, domestic production did fall over that period of time, but only by 682,000 barrels per day. Domestic production fell from 5.746 million bpd in 2002 to 5.064 million bpd in 2007 (Source - EIA: U.S. Field Production of Crude Oil). But one could allocate that much of the 2.1 million barrel per day import increase to the lower U.S. production.

Had demand growth accounted for the additional 1.4 million barrel per day increase in imports? Yes, in fact petroleum demand did grow (partially rebounding from the 9/11 attacks that reduced demand) from 19.8 million barrels per day in 2002 to 20.7 million barrels per day in 2007. (Source - EIA: U.S. Product Supplied of Crude Oil and Petroleum Products.) So of the remaining 1.4 million barrels per day of the increase in imports, 900,000 could be explained away as being due to an increase in demand. That still leaves a real increase in petroleum imports of 500,000 barrels per day - despite a tripling of ethanol production.

So how to explain this discrepancy? How can petroleum imports rise above and beyond the total increase in demand plus the drop in domestic production? There are two possibilities that I can think of. If the product in storage increased from 2002 to 2007, that can explain part of it. And we did in fact put a lot of oil in the Strategic Petroleum Reserve during those years (but not enough to account for 500,000 barrels per day).

Another portion can be allocated to declining energy returns as oil becomes heavier, and as we switch to lower energy return options like ethanol. For instance, as the quality of crude oil worsens - higher sulfur and lower gravity - it takes more energy inputs to refine it. Likewise as sulfur standards for clean products tighten; energy inputs increase and the net energy falls. This can result in some cannibalization of the oil. In a case with light, sweet crude you may end up with 9 BTUs of net products for 10 BTUs of petroleum inputs. As the crude gets heavier, the net BTUs may drop to 7 because of the need for higher energy inputs for processing. This can explain more of the discrepancy.*

The same is true of ethanol. It does take some liquid petroleum to grow corn and process ethanol, and as ethanol ramps up some of the petroleum imports will now be required in the ethanol industry. This is similar to the case of light, sweet crude gradually becoming heavier, more sour crude. You may have to increase the imports just to net out the same amount of fuel.

But one thing is pretty clear. Our petroleum imports have not fallen as ethanol has ramped up. So it is really hard to make a strong case based on the data that increased ethanol production is reducing our dependence on foreign oil. One reason for this is something I have talked about before, and that is scale. In 2007, our oil demand was 20.7 million barrels per day. When the lower energy content of ethanol is factored in, the 6.5 billion gallons of ethanol produced in 2007 is only worth 0.26 million barrels per day - just over 1% of our total petroleum consumption.** Factor in that some petroleum (and other fossil fuels as well) was used in the manufacture of the ethanol, and the net contribution falls even further.

Factor in all of the fossil fuel inputs that can also be used as fuels (diesel, natural gas, gasoline) and the total net contribution of ethanol toward our petroleum consumption ends up at under 0.5% (and that includes the energy credit from by-products). This relatively low contribution is another likely reason that there is no obvious impact on our imports from ethanol: The contribution may be simply too small to measure.

Conclusions

In closing, this more than anything explains why I often come out against our ethanol policy. It is being presented as a bigger solution than I think it can ever be - and yet we are throwing a lot of taxpayer money at it. That doesn't mean that I am against ethanol. If you read a post like this, you might come to that conclusion. But I think ethanol is a fine fuel, and if we had a more efficient way to produce large amounts of it, I would happily support that. I strongly support attempts to get the fossil fuel inputs out of ethanol production. In fact, in my current job I keep a very close watch on ethanol developments - ready to jump in if I see one that I think has major long-term potential.

I also believe - as stated in my essay on Biofuel Niches - that corn ethanol may work out well in specific situations. For instance, it may never provide more than around 1% of net U.S. petroleum needs, but it may be able to supply a fair fraction of the needs in the Midwest. But then I also think that a local solution for Iowa - if it must be subsidized - should be subsidized by the taxpayers of Iowa. If the fuel is produced and consumed in Iowa, and the jobs are created in Iowa, then Iowa should support it. Try to scale it across the U.S., and again I think the net contribution will be lost in the noise - and money from taxpayers outside the Midwest won't be well-utilized. In the latter case you essentially have a transfer of wealth from taxpayers across the nation into the Midwest.

I actually wanted to be wrong about my initial suspicions as I worked through this, because I don't like the idea that there has been no measurable impact on imports from our massive ethanol ramp-up. But maybe a reader can spot a mistake that will change the overall conclusion.

Methodology

In this exercise, I used data available from the Energy Information Administration website. I used annual averages to dampen out any noise. I looked at net petroleum imports, which includes those destined for the Strategic Petroleum Reserve (SPR). The reason for using net imports is that this subtracts out the imports that simply went into increased exports. For example, our exports of fuel oil have increased over the past few years, so the imports that ended up being fuel oil exports are excluded.

I only considered data from 2002 through 2007 for two reasons. First, the ethanol ramp-up was pretty steep over those years. An impact should be noticeable as ethanol production tripled. Second, the end of 2007 approximately defines the beginning of the current recession. Imports definitely fell during 2008, but overall consumption fell even more. So inclusion of 2008 would make it more difficult to separate out cause and effect, especially considering the speed at which demand fell. But it will be interesting as we come out of the recession - and as ethanol continues to scale up - whether we eventually see a sustained drop in net petroleum imports.

Notes

* While it can explain some of the phenomenon, it can't explain a whole lot, because most of the energy used to remove the sulfur from oil is derived from natural gas. Some may be cannibalized from fuel gas produced as the oil is refined, and in that case it would show up as an incremental increase in the barrel inputs into a refinery to produce the same amount of net products. That could translate into higher imports in order to keep production steady.

** A barrel of oil contains around 5.8 million BTUs of energy. It takes approximately 500,000 BTUs to process that barrel into finished products, for a net energy content of finished products of 5.3 million BTUs, or 126,000 BTUs per gallon. Ethanol contains 76,000 BTUs per gallon, so one gallon of ethanol is worth 76,000/126,000 = 0.6 gallons of oil.

CNG in Your Beer

2009-09-25T09:13:00.005-10:00

Thanks to a reader for this story:

Cheap Natural Gas Drives Truck Alternatives

NEW YORK (Dow Jones) - If you order a beer in New York, the odds are growing that it was delivered by a truck running on natural gas.

Beer distributors are among a growing vanguard of private trucking fleets encouraged by cheap natural gas and new government funding to adopt compressed natural gas, known as CNG, as a cleaner alternative to diesel.

As I have argued before, I think it makes a lot of sense for fleet vehicles to migrate to compressed natural gas (CNG). Natural gas is historically a lot cheaper fuel than liquid fuels such as diesel or gasoline. A quick check of prices today shows natural gas for October delivery at $3.78 per million BTUs (MMBTU). By contrast, gasoline is currently trading at $1.62/gallon (spot market, no taxes included) which works out to be $14 per MMBTU. Ethanol is trading on the CBOT at $1.66/gal for October delivery, which works out to be $21.84 per MMBTU. (In 2006, Popular Mechanics put together a graphic comparing different fuel options. See The Great Alt-Fuel Rally).

But more importantly than where prices are today is where prices are going. Natural gas will have a lot of resistance trying to sustainbly break through the $7-$8/MMBTU range because shale gas starts to become economical in that range - and we have a lot of shale gas resources. So if you are planning for the future, the odds are with you over the next few years if you are betting on moderate natural gas prices. Oil prices, on the other hand, are far more uncertain in my opinion.

The caveat of course is that the conversion can be quite expensive (the reasons for that were explained in a previous essay). The article explains that lawmakers are tackling that issue as well:

Paying for CNG conversions is still a problem. Federal funds are available to cover up to $32,000, or roughly two-thirds, of the additional costs associated with purchasing a CNG truck as opposed to a diesel one.

A company that gets the full $32,000 in federal funds should be able to make back its investment in less than three years, according to Natural Gas Vehicles for America.

Lawmakers in Congress are trying to shorten the time it takes to recoup costs on a CNG vehicle. Senate Majority Leader Harry Reid, D-Nev., is among legislators backing a bill, dubbed the NAT GAS Act, that would cover 80% of the incremental cost of a natural gas vehicle and give a $100,000 property tax credit to any company that builds a CNG fueling station. The bill has yet to come up for a vote.

The price differential between CNG and diesel/gasoline/ethanol-powered vehicles is quite large (around $10K for an individual vehicle), which is why natural gas may not make sense for individuals unless they drive a great number of miles. But that's what fleets do, so it may make more sense to convert fleets over (and the localized nature of fleets also improves the economics of putting in CNG refueling stations). It all boils down to how many miles a year you drive and your expectation for the price differential between natural gas and gasoline/diesel/ethanol over the time you will drive the vehicle.

Finally, in the spirit of my previous post, fleet conversions are one more way to reduce our dependence on imported petroleum.

Gas Taxes and Long Range Energy Planning

2009-09-24T11:45:00.004-10:00

I consider the level of dependence of the U.S. on imported petroleum to be a very large financial risk endangering the country's future. There are certainly other import-related risks as well, but here I want to talk about the financial risk.

I consider it similar to having a mortgage upon which you pay interest each month - but in which the interest rate can fluctuate wildly. If you typically pay 7% interest on your mortgage, but your rates quickly climb to 12%, a lot of people would find themselves in a deep financial hole. Come to think of it, a lot of people did when they found themselves in a similar situation. They gambled on the future and lost.

With respect to oil prices, we are also gambling on the future. We import a bit over 9 million barrels per day of crude oil (we also import gasoline, diesel, etc.) Each $10/bbl increase in the price of oil means that consumers pay $33 billion more each year for oil. We are now paying $100 billion more each year for oil than we were just a few short years ago, and that money comes out of all of our pockets. This acts as a tax upon the U.S. economy, albeit one that doesn't primarily benefit U.S. citizens.

The drain on the U.S. economy is one thing, but the risk is quite another. Why do we tolerate that sort of price risk? In my opinion, it is because tolerating the status quo is viewed by politicians as the cheapest, most politically safe option. And even if they are concerned about the risks, when economists say that oil might be going back down to $30, politicians are paralyzed from taking action. The uncertainty is a killer.

A story I read this morning highlights that uncertainty, and points to some of the consequences:

Low Gas Prices Threaten Green Car Revolution

The single biggest factor determining the success or failure of high-tech fuel-efficient cars is not battery technology, legislation, tax incentives, new model introductions, or infrastructure. It’s gas prices. The price at the pumps is the elephant in the room when it comes to green cars.

I would imagine that there is general agreement on that. When gas prices raced ahead, the Toyota Prius began to outsell the Ford Explorer. When gas prices fell back to $2/gal, SUV sales surged and Prius sales plunged.

The fundamental problem is that many people don't make long-range plans with energy prices in mind. When gasoline goes to $2/gal, some expect it to stay there and so that SUV purchase doesn't look bad - until gasoline is back to $4/gal. And the inability to plan is compounded by analysts who give mixed messages on which way oil prices are going:

Japanese broker Ryoma Furumi said oil prices will stay rangebound at $70-$75 a barrel; analysts at Mirae Asset Securities said prices are likely to consolidate between $65 and $75; and Jim Ritterbusch, president of Ritterbusch & Associates, said crude could be pushed toward the $75 mark.

Verleger, the energy consulting firm, predicts a drop in oil this year—all the way down into the $30s. The firm bases this prediction on crude stockpiles in the US being 14 percent higher than a year ago, and gasoline supplies up by 2.2 percent. Also, OPEC is currently pumping 600,000 barrels a day more than the world needs.

Meanwhile, Christophe de Margerie, chief executive of French oil giant Total, this week said he sees a risk of oil rebounding to $100 a barrel unless there’s greater investment in exploration. He warned of a possible oil shortage between now and 2015 if immediate action is not taken to invest in exploration. "The reserves of oil are there but if you don't invest they don't come on the market," de Margeries said.

Would we plan differently if we knew that oil prices were going to be $100/bbl? Of course we would. We have already seen consumers respond as oil prices went over $100/bbl. But while consumers were responding, a lot of damage was done to the U.S. economy. The airline industry and the auto industry took a beating, as did many personal budgets that suddenly had to cope with much higher weekly fuel outlays.

Enough gambling on oil prices! Let's raise the price of petroleum via taxes so that people can make energy plans that incentivize them to become more fuel efficient. As I have argued before, you can direct that back at people in the form of a tax credit. The idea would be to trade energy taxes for income taxes.

The benefit would be that we would start moving toward a higher level of fuel efficiency without having to legislate CAFE mandates that end up being gamed. With increased fuel prices, people will demand more efficient vehicles. Automakers will know which cars they need to build. Renewable energy - particularly those varieties that aren't heavily reliant on fossil fuels - would also see a boost. Not only would they be competing against higher priced fossil fuels, but project developers could have more assurance that oil prices aren't going to fall to $30 and destroy their project economics.

The benefits would be substantial. Most importantly, our consumption would fall. I consider it very important to stretch our remaining fossil fuel endowment as far as we can, and we can do a better job of that if we manage it. We need to buy time, because renewables are not ready to fill the supply gap that will result if we burn through our remaining oil too quickly.

I don't think there is any question our oil imports would fall as people started to change their transportation arrangements. Following the high prices of mid-2008, total petroleum imports over the following 12 months fell by 700,000 barrels/day over the previous 12 months (although it is hard to say how much of that was recession-induced).

I have long complained that government energy policies that vacillate every time a different political party comes into power have long been an impediment for companies trying to do long-range project planning, both for fossil fuel and renewable energy projects. Volatile prices have much the same impact. I have had my disagreements with Vinod Khosla in the past, but his call to put a floor underneath oil prices has merit (see Point 14 here).

Having a price floor would would allow companies - especially energy companies and auto makers - to do a better job of long range planning. I don't fault automakers for getting caught with an oversupply of SUVs as oil prices skyrocketed. They were just making cars that people in a low-oil-price scenario had long demanded. With the certainty of higher prices, the auto companies needn't gamble that SUV sales are going to come back strong. They would know that they need to shift to the more efficient vehicles that consumers will demand.

I have no problem with taking calculated risks, but I do not gamble. Living on the Gulf Coast of Texas without hurricane insurance is gambling, because the hurricane probability is too high. I don't see that as much different than the risk we place on the economy by not taking more proactive steps to insulate the economy against price spikes. But we didn't learn that lesson in 1973, nor in the 1974-75 recession that followed. I don't expect we are much wiser today.

Book Review: Crude World

2009-09-21T21:01:00.004-10:00

Introduction

It succors and drowns human life. And for the last eight years, oil — and the people and places that make it — was my obsession. - Peter Maass

Today a new book by Peter Maass was released. The book is called Crude World: The Violent Twilight of Oil. Peter Maass is a name you may know from a 2005 article that he wrote for the New York Times called The Breaking Point. The story was a comprehensive look at where he thought oil production/prices were headed - and what the implications might be. Maass focused on Saudi Arabia in the article, and spent a lot of time covering Matt Simmons' viewpoints. It was after reading this story that New York Times columnist John Tierney offered to bet Simmons on the future direction of oil prices. Thus arose the Simmons-Tierney bet.

I thought Maass' 2005 article was well-researched, and it was a captivating read. So when Mr. Maass e-mailed and asked if I would like a copy of his new book, I thought it would probably be a book I would enjoy. I still have a stack of books that have been sent to me to review, but I jumped this one to the front of the queue. I hadn't really intended to, as I am working on two other books right now*, and would normally finish those before starting another. But once I picked this book up and started thumbing through it, I couldn't put it down.

The subtitle of the book is The Violent Twilight of Oil. The book talks about the twilight of oil, but as the chapter titles imply the focus is less on the twilight and more on the seedy side of the business. The book notes that there are some countries like Norway, Canada, United Arab Emirates, Kuwait and Brunei to which oil appears to have generally benefited the population as a whole. But then there are also many cases in which the discovery of oil seems to have brought many problems to the population. (The book suggests that countries with established democracies and strong self identities are less likely to suffer following the discovery of oil).

The Chapters

The chapters read like the Seven Deadly Sins: "Plunder", "Rot", "Fear", "Greed", and "Desire" are a few of the 'sins' covered in various chapters. Within each chapter, Maass then takes a look at an example that embodies that particular "sin." That sort of style reminded me of a really good book I read a few years ago written by Matt Ridley. It was called Genome: The Autobiography of a Species in 23 Chapters. Each chapter of that book tells the tale of one gene from each chromosome. In Crude World, Peter Maass tells the story of oil one dysfunctional example at a time.

The book picked up where the New York Times story left off. In fact, Chapter 1 - Scarcity - was mostly about Saudi Arabia and incorporates much of that 2005 story. And if you liked his New York Times story, you will probably enjoy the book as the same style is evident. But I use the word "enjoy" loosely, as it is a sober read. You will find yourself shaking your head at some of the things that have been carried out as a result of the world's desire for oil.

In Chapter 2 - Plunder - the book covers the case of Equatorial Guinea. The oil wealth was plundered, with the help of international oil companies, banks that looked the other way as government officials brought suitcases of money in for deposit, and governments eager for access to the resource. While he was investigating the oil story in Equatorial Guinea, Maass was accused of being a spy and kicked out of the country.

Chapter 3 - Rot - was all about Nigeria. I won't tell you how that one turns out, but I am amazed at the (dangerous) lengths Maass went to for the story. Rot describes his journey deep into the Niger Delta in a leaky canoe, courtesy of one of the local warlords. It is well known in the oil industry that Nigeria is a dangerous place to operate. Oil companies generally pay very big premiums to get workers to agree to an assignment in Nigeria. Oil workers are kidnapped in Nigeria regularly (but rarely harmed) and held for ransom from the oil companies operating there. Warlords are constantly doing battle there, and Maass described his visit to one village that had been attacked. Shell also featured prominently in this chapter.

Chapter 4 - Contamination - tells the story of Ecuador, with special focus on the Chevron lawsuit. Maass notes the irony that California - one of the most environmentally conscious states - receives the largest portion of Ecuador's exports.

The rest of the book's ten chapters covers a litany of oil-induced miseries. Iraq, Russia, and Venezuela are all profiled. Former ExxonMobil CEO Lee Raymond is presented as the face of "Greed" (albeit it in the "Fear" chapter). There is an interesting explanation in "Greed" on why companies function as they do. Maass discusses a court case between Henry Ford and the Dodge brothers, in which the court ruled that a company's mission "is organized and carried on primarily for the profit of its shareholders." Thus, Maass argues that if Mr. Raymond had decided to run ExxonMobil in a more altruistic manner, the board would have removed him for not operating in the best interests of the shareholders.

The complaint that some will have about the book is that it isn't balanced. There are a number of villains portrayed, but the oil companies really stand out. It seems that those who are telling the tales of misdeeds are generally trusted in the book, but those who are interviewed for balance are treated with suspicion. For instance, in the chapter on Nigeria, the author interviewed the director of Shell's operations in Nigeria. The interview appears to proceed like a cross-examination. A Nigerian warlord's words, on the other hand, seem to be taken mostly at face value.

But this is not intended to be a balanced book. It is a book designed to highlight the downside of our oil dependence. We can all think about ways in which oil has made our life better, but in the Western world we are generally spared from the nasty side of the business. In this book, Maass brings that message home loud and clear.

Conclusion

Crude World was released today, September 22, 2009. The general theme of the book is that the world's dependence on oil has come at a very high price. This is not a book on peak oil, climate change, or renewable energy. It is not a technical book on the oil industry (for that see Morgan Downey's Oil 101). The book covers the misery - the wars, the corruption, and the ruined lives - brought about primarily by greed from the lure of black gold. The book highlights the irony that oil could be used to improve the lives of a country's citizens, but in far too many cases a country's citizens end up being worse off after oil is discovered. The book was a fascinating read, and I couldn't put it down once I started it. Now I can get back to my regularly scheduled reading.

Footnote

* The other books I am working on right now are Axis by Robert Charles Wilson and Outsourcing Energy Management by Steven Fawkes. The former is a science fiction book that I picked up because I really enjoyed Wilson's previous book Spin. The latter has been a difficult read; I have been working on the book for six months. I met the author earlier in the year when he visited the Titan Wood plant in the Netherlands. We had quite a lot in common, and he sent me a copy of his book. But it is really a textbook, and so I have been reading it in small doses.

About That $72 Billion Subsidy

2009-09-20T19:06:00.005-10:00

I am going to be pretty busy for the next few days, and probably won't be able to put anything new up until at least mid-week. Until then, over the past few days there have been a lot of headlines about a recently released study from the Environmental Law Institute. The study concluded that over the past seven years, fossil fuels have benefited from some $72 billion in subsidies. Their headline was innocent enough:

U.S. Tax Breaks Subsidize Foreign Oil Production

(Washington, DC) — The largest U.S subsidies to fossil fuels are attributed to tax breaks that aid foreign oil production, according to research to be released on Friday by the Environmental Law Institute in partnership with the Woodrow Wilson International Center for Scholars. The study, which reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008, reveals that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases.

The research demonstrates that the federal government provided substantially larger subsidies to fossil fuels than to renewables. Fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled only $29 billion. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol, the climate effects of which are hotly disputed. Of the fossil fuel subsidies, $70.2 billion went to traditional sources—such as coal and oil—and $2.3 billion went to carbon capture and storage, which is designed to reduce greenhouse gas emissions from coal-fired power plants. Thus, energy subsidies highly favored energy sources that emit high levels of greenhouse gases over sources that would decrease our climate footprint.

Let me be perfectly clear here. I am very opposed to policies that subsidize our usage of fossil fuels. But I am also opposed to painting with very broad brushes. In the case of the oil subsidies, three things stand out. First, the taxes the oil companies paid over that time period are about an order of magnitude higher than those so-called subsidies. Second, many of these so-called subsidies would merely be called tax deductions in any other industry. Finally, many of the so-called subsidies didn't even go to Big Oil.

One of my diligent readers took the time to actually read the study, and broke it down:

I was a little puzzled by this ELI study. First of all, the itemized subsidies only added up to $68 bn, not $72. Maybe they were just listing the largest items - I didn't read the fine print. I thought it would be useful to see just what was being subsidized rather than blurting out "BIG OIL Subsidy!!" I found it useful to consider 10 categories of fossil fuel subsidies.

1) 22%, or $15 billion of the $68 billion listed, was allocated to the Foreign Tax Credit you referenced. Not $72 billion.

2) 23% went to subsidize production in high cost environments, areas that may have otherwise been commercially marginal (although that of course depends on price). This seems like a legitimate use of subsidy to me, if without it most of these projects would have not been undertaken. [RR: As I have argued before, it makes sense to subsidize things that are deemed important, but otherwise uneconomic].

3) 11% went to various accounting conventions, particularly treatment of intangible costs.

4) 10% went to assumed loss stemming from lower than expected offshore lease government take. This seems very arbitrary to me. As I understand it, the ELI is assuming some globally fair government take, and calculates that the feds could get more. Maybe. But there's no free lunch. A higher take might mean lower bids or less development.

5) 9% went to a low income housing energy assistance program. This is money paid to states to insure low income families get access to fuels. Hardly a Big Oil subsidy.

6) Another 9% went to government storage programs, the SPR and two other minor programs. This is a government initiative, not a handout to the oil industry.

7) 8% went to an accounting rule benefiting independent producers, not Big Oil.

8) 5% went to the coal industry.

9) 1% went to incentives for clean fuels.

10) 1% went to a variety of small miscellaneous programs.

So, of these

- Numbers 1 and 3 may have room for revenue take ($22 bn);

- Number 4 possibly but would have the side effect of lower US production (how could it not?) $7 bn;

- Number 2 would clearly have a negative impact on US production ($16 bn);

- Number 7 would hurt smaller companies but may be minor source of revenue ($5 bn)

- The rest are not really benefiting the oil industry very much.

I view this as $22 bn in possibly vulnerable oil industry subsidies, another $23 bn in at least partly defensible subsidies, and $27 billion (getting back to $72 bn) in subsidies that don't benefit the large mutlinationals much at all.

Again, let me make it clear that I oppose true fossil fuel subsidies. In fact, I support "antisubsidies" - higher taxes - for fossil fuels in order to incentivize conservation and promote renewables (and again, I think it can be done in a revenue-neutral manner). But I do think the discussion should be intellectually honest, and we shouldn't lump money destined for research into carbon sequestration into all-encompassing "oil subsidies."