How Fast a Transition from Oil?

The Gulf Coast oil spill remains the top energy story this week, eclipsing a $10 drop in oil prices that should soon ripple through to gas pumps near you. With BP's latest effort to contain the spill having run afoul of a slush buildup composed of methane hydrate crystals, the deepwater well continues to leak at an undetermined rate. The longer the spill continues, the greater the chances for severe environmental consequences, and the likelier that it will become a perception-altering milestone event as some environmentalists have already suggested. However, even if the spill were to galvanize public opinion in a manner similar to the 1969 Santa Barbara oil spill, what options do we have that could realistically reduce our reliance on oil produced from offshore platforms?

Last week I focused on the energy contribution of the oil we produce offshore in US waters, particularly in the deep water of the Outer Continental Shelf (OCS) of the Gulf of Mexico. It constitutes 30% of domestic crude oil production, or about 10% of our total oil consumption, and contrary to the wildly-inaccurate assertion on a widely-read environmental blog last week, essentially none of it is exported. (Anyone who doesn't know the difference between crude oil and petroleum products has no business commenting on that aspect of energy policy.) Today I'd like to go into a little more detail on the alternatives to offshore drilling that I alluded to last Wednesday.

Gasoline, jet fuel and diesel accounted for 75% of the petroleum we consumed last year. Other than the heating oil included in the diesel tally, these are the fuels that power most transportation of people and goods. Many initiatives are under way to develop non-petroleum fuels for cars, trucks and even jet aircraft, though at this point they are all in relatively early stages of development or deployment. On paper, at least, electricity looks like the best option for replacing gasoline, by means of plug-in electric vehicles like the Chevrolet Volt and Nissan Leaf. Since less than 1% of US oil consumption is used to generate electricity, switching cars from gasoline to electric power represents a nearly total displacement of oil. It would also facilitate the direct use of renewable electricity sources to eliminate greenhouse gas emissions. This prospect has many people excited, and I've heard it mentioned frequently in reactions to the Gulf spill. Yet this is hardly a slam-dunk, for numerous reasons, topped by scale and the unproven consumer acceptance of mass-market EVs.

In one of their periodic special sections on energy, today's Wall St. Journal included an article on the development of EV recharging networks in the US. It cited a study by Pike Research forecasting 610,000 EVs by 2015. That would be a great start, though it would fall short of President Obama's goal to put a million plug-in vehicles on the road by then. Even assuming that the million-EV mark were reached that soon, and that they were driven as much as other cars and replaced vehicles averaging 25 mpg, the quantity of gasoline they would displace amounts to just 31,000 bbl/day--less than the quantity of oil the leaking Macondo field would have been producing in a couple of years, had Deepwater Horizon's exploration well been completed uneventfully. Substituting for all of the oil currently produced from offshore drilling--or for the decline in US oil production that would occur by 2020 if we stopped drilling offshore--would require up to 50 million EVs, making up roughly 40% of all the cars likely to be sold in the US this decade. I suppose that might barely be possible on a crash basis, with a World War II-style mobilization of the resources required to achieve it, but it doesn't look very likely to me. I would be impressed if the US had 10 million EVs by 2020, implying annual production of well over a million units within just a couple of years, though that would reduce our current oil demand by under 2%.

So if EVs can only take us a small part of the way to replacing our oil consumption in the near future, what about advanced biofuels? There are many promising avenues, including biofuels produced from agricultural or forestry waste or dedicated energy crops, biofuels from algae, and bio-hydrocarbons from plant sugars. All are in their infancy. The EPA recently had to reduce its mandate for advanced biofuels delivered in 2010 from 100 million gallons to just 6.5 million gallons--424 barrels per day--because no truly commercial-scale facilities will come on-stream this year. We might get a few billion gallons per year from these sources by 2020, if numerous technical and economic hurdles can be overcome, but that would displace at most a couple of hundred thousand bbl/day of oil.

Natural gas looks like another good alternative transportation fuel. T. Boone Pickens has put forward his plan to shift long-distance trucking onto compressed or liquefied gas. There's no shortage of gas available for this purpose, thanks to the much larger supplies made possible by shale gas drilling. It starts from a very low level, however, with current natural gas used in transportation equivalent to less than 1,500 bbl/day of diesel fuel. It also competes with other uses of gas, such as generating more electricity to reduce our consumption of coal. Or, looking at it another way, there might be plenty of gas to do both, but not at today's price.

That leaves what looks like the best option for reducing our oil consumption, other than simply deciding to drive less, as some folks have apparently already done. Because the US car fleet is so large and is driven so far, increasing its fuel efficiency by just 3 miles per gallon could save nearly a million bbls/day of gasoline. That's more than the entire contribution of corn ethanol, our most significant alternative transportation fuel. In fact, the latest demand forecasts of the Energy Information Agency are already based on that kind of improvement, reflecting new regulations requiring new-car fuel economy to increase to 35 mpg before 2020. Still, only a small fraction of our fleet of 240 million cars turns over every year, so it will take a long time before average fleet fuel economy even begins to approach these levels.

Whether your preferred alternative to offshore drilling requires replacing millions of vehicles with hybrids, EVs, natural gas-powered vehicles, or highly-efficient small conventional cars like the new Ford Fiesta, or depends on a vast new infrastructure of alternative fuel production and distribution, none of these solutions can work overnight. In the meantime, every barrel of oil we consume but don't produce here must be imported, some of it from countries that don't like us very much--as we're frequently reminded--and all of it with serious implications for our national financial and trade balances. (And don't forget the inevitable oil spills from all those extra tankers.) If we don't want OPEC to be the biggest beneficiary of a new environmental mindset after the Gulf Coast spill, then we face some very tough choices, including whether we'd prefer to open up major new areas for onshore drilling, instead of some of the offshore prospects that were slated to be leased in the next few years, or to continue drilling offshore under updated procedures and with strengthened environmental protections, at the same time we pursue all of our options for reducing our overall reliance on oil.

Technology and Critical Thinking

The other day I read a story in my local paper concerning a new technology for converting waste plastic into synthetic oil. The prototype "Envion Oil Generator" had been temporarily deployed at a solid-waste facility in Montgomery County, MD, and its owners were touting its benefits to the Washington Post. As I read the article, I found myself considering it on two levels: whether the reported details made sense, and whether the reporter was encouraging his readers to approach new inventions such as this with sufficient skepticism. We're living through a nearly unprecedented explosion in energy-related technology, and it's vital that the public not swallow every claim they encounter, because a large fraction of these technologies will ultimately prove to be either impractical or uneconomical, while some of them are in fact impossible, because they depend on the violation of basic physical laws. We might not all have the background for making detailed judgments about this, but I can suggest a few questions to ask in these situations, even if you don't have a science or engineering degree.

The first question is whether the description of the basic process seems logical. For example, in the case of the "Oil Generator" is it reasonable to expect that plastic could be turned back into something like crude oil by means of essentially just heating it up? After all, plastic is mostly derived from crude oil and natural gas in the first place, so perhaps heating it would cause it to decompose back into its constituents. If you Google on "plastic recycling", you'll see that this normally entails separating it strictly by type--those little numbers in the triangle that usually appears somewhere on an item--and then melting it. But that doesn't give you "oil"; it gets you back to the raw plastic, which can be used to make clothing, carpets, or some other recycled product. However, if you heat them further under the right conditions, the polymer chains of the plastic break down in a process called "thermal depolymerization." The result of that is a liquid that might resemble crude oil. OK, so far.

The next aspect you might look at is the whether any obvious physical laws are broken. Do the claims for the device hint at something impossible, such as getting more energy or mass out than are put into it? For example, the article indicates that this device can turn 10,000 tons of plastic per year into up to 60,000 barrels of oil. Is that plausible? A little Googling should turn up the fact that a typical crude oil has a specific gravity of around 0.85. That means that a gallon of it would weigh just over 7 lb., and a 42-gallon barrel would come in just under 300 lb., or 0.15 short tons. So the claim here is that 10,000 tons of plastic could turn into as much as 9,000 tons of usable oil. Personally, I'd say that sounds pretty optimistic, and I'd guess that a yield under 5 barrels per ton was likelier, particularly if the gas produced as a byproduct from the process is supposed to generate most of the energy for this conversion. At a minimum, though, this gizmo doesn't appear to bend any physical laws.

If you know a bit of organic chemistry, you could delve a little further into this, looking up the chemical structure of such common plastics as Polyethylene Terephthalate (PET or Type 1), Polystyrene (Type 5), and Polyvinyl Chloride (PVC or Type 3). De-polymerizing a random mix of those is either going to yield a stew of specialized petrochemical molecules, or if you break them down further you might get back to more basic chemicals full of double bonds and benzene rings. Neither result has much in common with the typical constituents of good-quality crude oil that refineries turn into gasoline, diesel or jet fuel, so it raises a key question about the value of the product this technology produces.

That brings us to the economics. The article quotes the company as claiming that the process costs only $10 per barrel of oil produced. It's not clear whether that $10 is just the operating cost or is meant to include the capital cost of the device, which apparently totals $6-7 million. Using the "PMT" function in Excel it took about 1 minute to determine that at an 8% cost of capital--about the best a small business could hope for in the current environment--the amortized hardware cost would be at least $611,000 per year over a 20-year life. Spread that over 60,000 bbls and you're already over $10/bbl, before you've paid for the first employee or the first kWh of purchased electricity. And since a device like this is unlikely to operate around the clock every day of the year, and the realistic yield is probably lower than 6 bbls/ton, it's not hard to come up with an effective fixed cost per barrel of around $20, over and above whatever variable costs are involved.

And then we come to the environmental impact of all this, and that hinges on assessing realistic alternatives. If the plastic would otherwise be buried in a landfill, this looks like a win-win, as long as the process complies with all local pollution regulations for stationary sources. However, if the device is chewing up plastic that could otherwise be recycled, the latter seems by far the better route, in terms of energy consumption and displacement of oil byproducts that would otherwise be used to make virgin plastic. It's also clear that a significant fraction of the input plastic is converted to CO2 and emitted to the atmosphere. Whether its emissions are higher or lower than those associated with burying the waste and producing new plastic isn't obvious.

Ultimately, all we can really conclude about the Oil Generator is that if it operates as advertised--a big if for any new technology--and if there is indeed a viable market for its output at some discount to crude oil, then this might leave a reasonable profit margin for the owners. That would also depend on how much rent the operators must pay, if any, for the land it sits on, how much plastic they could really run through it, and whether they would have to pay for that plastic or might even get paid to dispose of it. This is not meant as an endorsement of the company's claims, but then that wasn't the point of this exercise, which was more about taking my readers through the application of some basic critical thinking. Although the Post reporter didn't undertake all this analysis, he at least included a suitably skeptical viewpoint, instead of giving in to the breathless enthusiasm that seems so prevalent these days in reporting on any new technology with an environmental angle.

Replacing Today's Oil

If money were no object, and we had unlimited access to engineering and construction capabilities and materials, I'm confident we could produce enough synthetic oil from unconventional resources and coal-to-liquids processes to displace the 10 million barrels per day of petroleum that the US currently imports. Wood Mackenzie, a British consultancy, recently released a report indicating that global unconventional oil resources--oil that is either too heavy and viscous to produce normally, or that is bound up in oil shale or oil sands--stand at 3.6 trillion barrels, roughly three times current estimates of proved conventional oil reserves. But as the Financial Times article above describes, producing this bounty will be no simple matter. Even if the technology were fully proved, as it is in case of oil sands and Venezuela's Orinoco heavy oil deposits, there are other significant barriers to reaching this energy future.

Aside from the direct environmental impacts of these conversion processes, which are inherently higher than for conventional oil and gas, and are beginning to receive serious scrutiny, there are fundamental problems of attracting the capital and other resources required to build such complex facilities on the required scale, and doing so rapidly enough to fill the expected gap between conventional oil supply and aggregate worldwide petroleum product demand. Some of this investment is already underway. The output of major new oil sands facilities in Canada has become part of the base-case assumption for global supply over the next decade, and it is already starting to have an effect on petroleum pipeline infrastructure in the Midwest, where much of it will go. But as I've discussed in previous postings on this topic, the oil sands projects also illustrate many of the practical constraints inherent in the large-scale production of synthetic fuels, in terms of their use of land, water and natural gas supplies, skilled labor and even housing. While the US could certainly supply more of these factors than Canada's smaller economy and population are able to, environmental and local permitting seem likely to create bigger hurdles here than up north. Interestingly, biofuels share some of the same potential limitations, as they scale up to compete as the incremental supply into the world's transportation fuels market.

As long as global demand for liquid fuels continues to grow, these challenges will compound. At the same time that geometric growth steadily increases demand, it drives cumulative consumption to levels that will approach even the enormous endowments of coal and unconventional oil within a few generations, while liberating a comparable tonnage of carbon into the atmosphere, which is on track to reach double its pre-industrial CO2 concentration sometime between mid-century and 2100. For these reasons, fuel efficiency remains a critical component of any energy security plan, whether it is based on biofuels, synthetic fuels, petroleum, or a combination of the three. But efficiency, too, will take many years to bear fruit.

Without resorting to central planning and "industrial policy", we will be asking the market to allocate $20 trillion in energy investments over the next couple decades, within a geopolitical context that looks at least as complex as anything we saw in the 20th century. Unless we want to make the problems we face today even worse, the result of all that investment can't just look like a bigger version of the status quo.