Wednesday, April 27, 2011

Are Oil and Gas Renewable?

A long-time reader of this blog sent me a link to a New York Times article highlighting the diverse scientific pursuits of Jesse Ausubel of Rockefeller University, among which is the exploration of the "deep carbon cycle". Although much is known about the behavior of carbon in the first seven miles or so of the earth's crust into which we routinely mine and drill for resources, relatively little is known about the flows of carbon-based compounds in the other 99.6% of earth's total volume. Increasing our knowledge in this area could have momentous implications for our long-term energy supplies, while expanding our understanding of the processes affecting climate change. It's also just plain fascinating.

Mr. Ausubel was already well-known in energy circles for his assessment of the progressive decarbonization of our energy consumption since the start of the industrial revolution and continuing into the future. Some colleagues at Texaco introduced me to his work on that subject in the mid-1990s. However, until I read the Times article I was unaware of his involvement with the Deep Carbon Observatory, an international project of the Carnegie Institution to investigate the organic and inorganic carbon cycles deep in the earth. Although this involves such esoteric questions as the disposition of the carbon content of the "planetesimals" that accreted to form the earth billions of years ago, it also has much more practical aspects, such as the origins of oil and gas. That includes both the fuels we consume and the methane and other hydrocarbons released into the environment without human intervention.

Most experts in the oil and gas industry accept the traditional Western view of these substances as fossil fuels, the remains of ancient forests and dinosaurs that have been processed into their present form by exposure to high pressures and temperatures over the course of millions of years. Although most hydrocarbons weren't formed in the reservoirs where they are found today, it's generally assumed that they were generated from organic material in sedimentary rock elsewhere and migrated until they reached the various geological structures that trapped and stored them for subsequent discovery and exploitation. The shale gas that has been the subject of so much activity and debate in the last few years is a special case, for which the source and trap are one in the same: organic-rich rock with such low porosity that the gas can't escape without assistance.

However, there's another, more controversial theory of the origins of at least some oil and gas, suggesting that they were formed by chemical or biological activity much deeper in the earth, and then migrated long distances before being trapped. If correct, that would mean that not only aren't these fuels truly fossils--and thus essentially static and finite--but that they might actually be continuously regenerated by natural processes in much shorter time spans. A number of academics appear to hold this view, and it was a common theory of petroleum origin among Soviet scientists. Much of this is explored in a lengthy white paper on the Deep Carbon Observatory site, including the shortcomings of current analytical techniques in determining definitively whether a given sample of methane originated from organic material in sedimentary rock or from some other source.

Finding gas or oil in deposits much deeper than those we already know about, or in places that aren't consistent with our present understanding of petroleum geology, would represent an even bigger potential energy revolution than the one begun by the recent development of the means of unlocking shale gas resources. It would also shift our perspective on the nature and required speed of the energy transition on which we've embarked. If oil and gas weren't finite--at least in human terms--it might alter the urgency of deploying some of the alternative energy technologies now in our repertoire. At the same time, it would have enormous implications for climate change, by greatly increasing the ultimate quantity of carbon we could eventually emit to the atmosphere.

From my reading of the material on the Deep Carbon Observatory site, it would be extraordinarily premature either to celebrate or panic--depending on one's perspective--over this prospect. The possibility of extracting useful quantities of hydrocarbons from unknown reservoirs in the deep earth remains speculative and might never come to pass. As a presenter from Shell put it in a slide deck from a conference on the subject, "Shell is not interested in drilling exploration wells into Earth's mantle in search of petroleum fluids." But despite understandable skepticism about the underlying theory of deep carbon and the failure of previous efforts to prove it, I don't see how it can be disproved without a much more detailed picture of the earth's interior than we are likely to possess for a long time.

The likelier near-term outcomes of the work of the DCO's multi-disciplinary researchers from industry, government and academia are both more benign and far less polarizing than the cornucopia of hydrocarbons it might someday uncover. Better techniques and instruments for analyzing the carbon and hydrogen isotopes in methane and other hydrocarbons could have wider application in many fields, including pharmaceuticals, while a better understanding of the physics and chemistry of the deep carbon cycle could lead to lower-cost and more widely acceptable means of sequestering the CO2 emissions from our use of "fossil fuels", regardless of their origin. I look forward to hearing about the progress of these efforts.

Monday, April 25, 2011

Gas Taxes and Price Divergence

Rising gasoline prices got my attention pretty forcefully this weekend when I filled up our rental car in South San Francisco, at the end of a short holiday trip to California. I expected to pay a bit more than usual near the SFO airport, but $4.439 per gallon for unleaded regular was a jolt, because prices in Northern Virginia, where I live, have been hovering at or under the $4 mark. This served as a reminder that while I have tended to focus in my writing on the average US gasoline price, local and regional variations can be significant, and their effect can amplify the economic impact of high oil prices in markets like California, where the unemployment rate is still in double digits. Most of these differences in gas prices can be attributed to taxes, which some would like to see increased further, to promote energy security.

As in so many other aspects of life, California provides a laboratory for testing the effect of higher gasoline taxes, for which I've been seeing a growing number of calls, lately. As of January 2011, the Golden State's gas tax was 18 ¢/gal. higher than the national average and 28 ¢/gal. higher than I pay in Virginia. However, that's not the whole story, because California effectively taxes gasoline twice: once by means of the state and local taxes collected at the pump and again via regulations that make it difficult for refiners to blend gasoline to the state's strict fuel specifications, and even harder for local refiners to expand output. The combination of these explicit and implicit taxes cost Californians on average an extra 29 ¢/gal., compared to the national average gas price over the last five years. That works out to about an additional $140 a year per car based on typical usage and fuel economy. That's not enough to provide a big incentive to buy hybrid or electric vehicles, but it surely puts a dent in the purchasing power of low-to-middle income residents.

Nor have alternative fuels been of much assistance in reducing this premium. If anything, the economics of ethanol have contributed to higher gas prices in California. That's because the state's few ethanol plants are capable of producing only about 16% of the roughly 1.5 billion gallons of ethanol blended into California's gasoline annually, based on 10% of sales. The rest must be shipped in by rail, mainly from the Midwest, with significant freight costs.

The key question in terms of supporting a higher national gasoline tax is whether California's higher existing gas tax has actually reduced fuel consumption, compared to the rest of the country. Based on Energy Information Agency statistics, 2010 gasoline sales in the state were 7% lower than in the peak year of 2006. That's more than twice the 3.3% reduction the entire US experienced in the same interval. Of course there are many other factors at work in that comparison besides gas taxes, including the large difference in unemployment cited above, the disproportionate exposure of California consumers to falling home prices, as well as variations in population growth and other demographic factors. Teasing apart all those influences is beyond the scope of this blog. But even if we attributed half of the additional reduction to fuel taxes, I question whether the result is large enough to justify the resulting drag on the economy, if conservation were the only goal.

Based on this simple analysis, California's higher gasoline taxes appear to have at least contributed to reducing gasoline consumption, although they also increase the financial burden on the state's consumers, especially at times of high gas prices such as we are currently experiencing. That was noticeable even from a single fill-up of my relatively thrifty rental car. What they don't seem to have done, despite raising billions of dollars for state and local government, is to have had a discernable impact on the state's financial health or the condition of its roads, compared to other states with lower gas taxes.

Monday, April 18, 2011

Seeing Our Footprint

I know I've commented before on the number of PR lists that I'm on as a blogger. Every day brings emails touting some new process or product, a must-go conference, or a new book on energy or the environment to review. Even the subset of these that truly interests me and that I have every intention of writing about mostly gets swept aside by more urgent topics or the needs of my consulting clients. That nearly happened to a clever little book I received from National Geographic called "Human Footprint." I ran across it on my desk again today and decided it deserved a quick mention before I pass it to my daughter, who has been demanding it for weeks.

The book--more of a booklet at just 32 pages--is part of the National Geographic Kids line. It seems to be related to a "Find Your Footprint" contest and other materials on NatGeo's website. I had hoped to find at least some of the book's photography online, because its approach is extremely visual. It displays the accumulation of a lifetime's worth of consumption decisions such as the more than 13,000 pints of milk the average American will drink--and the Louisiana-sized grazing footprint of the cows that supply it--a huge collection of rubber ducks symbolizing the 28,433 showers we'll take, and my favorite, the 43,371 cans of soda we'll drink. On pages 28-29 they display all this stuff in front of a typical home, including the dozen cars the average American will own. And to tie this topic to the normal theme of this blog, those cars are estimated to drive an average of 627,000 miles. At the current average fleet fuel economy, that represents more than 25,000 gallons of gasoline, or 600 barrels, yielding on the order of 250 tons of CO2. And of course every product arrayed in front of that house represents an additional energy expenditure, as well as a recycling challenge for the resulting waste of all kinds.

The explicit message is to get kids to think about the consequences of all these choices, and then make smarter choices with reduced impact. The author provides some suggestions in that regard. But I wonder if the bigger effect will be on the parents who read it with their children. When I showed my daughter the pile of 3,796 disposable diapers on page 7, she just laughed. They clearly meant a lot more to me than to her. Now, you might argue that adults ought to be able to visualize their impact on the planet without gimmicks like assembling decades' worth of consumption in one place and photographing the result. Perhaps, but I suspect most of us are so distracted by busy lives that we rarely mentally integrate a week's worth of the contents of our trash and recycling cans over the thousands of such trips to the curb we make in a lifetime, let alone picturing the resources that went into making all these goods, from mines, oil & gas wells, power plants, factories and farms all over the world.

It's daunting, and no matter how one might view this from a social, ethical or political perspective, it seems pretty clear that the inescapable consequence of population growth, and especially of the dramatic improvement in incomes and wealth that is happening in large parts of the developing world, is that our individual footprints of both energy and material goods will be under increasing pressure in the years ahead. That's at the core of the drive to become more energy efficient, in order to avoid the worst scenarios of resource competition that otherwise lie ahead of us.

Friday, April 15, 2011

Industrial Scale Ethanol

After my recent posting on resurgent food vs. fuel competition from expanding corn ethanol production, one of my contacts called to ask if I was familiar with an industrial process developed by Celanese Corporation for producing ethanol from a variety of feedstocks, including natural gas, coal, and potentially cellulosic biomass. My initial reaction to him was based on my knowledge that such processes have been around for decades, and that until the policy-inspired growth of the corn ethanol industry, much of the ethanol for industrial use was produced in that fashion. However, I was unaware of plans to deploy this technology on a truly massive scale, in the form of a pair of 400,000 ton-per-year coal-to-ethanol plants in China. I consider this a really interesting development on several levels.

The attraction of producing ethanol for industrial or fuel use from indigenous non-food raw materials in China seems obvious. It enhances the country's food and energy security by avoiding imports of both. As I delved into the technology involved, I realized it starts with gasification, a process that my former employer, Texaco Inc., licensed to numerous facilities in China, going back to the 1980s. So China has deep experience with gasification as an effective and reliable way to turn feedstocks as diverse as waste oil, petroleum coke, low-value coal, and even natural gas into syngas, or synthesis gas, a mixture of carbon monoxide and hydrogen from which all sorts of useful organic chemicals can be produced. One of those is acetic acid (the acid in vinegar.) It turns out that Celanese's new ethanol process is an offshoot of the company's well-established "acetyl platform" for making acetic acid in plants like this one in Singapore.

It's noteworthy that the first ethanol plants Celanese is building are so large. 400,000 metric tons per year equates to 134 million gallons per year, larger than all but a couple of the corn-based ethanol plants in the US. I've also seen hints that these facilities could be expanded to 1 million tons/yr, which would put their output in the same league as the gasoline yield of the smallest oil refineries. That would be truly industrial scale fuel production that conventional or advanced biofuels can't yet match and may never do, because of their much more complex supply chain considerations. That also explains why Celanese could consider building a 40,000 ton ethanol plant in Texas based on natural gas. The supply chain isn't an issue when it's just an existing pipeline. In any case, large scale and low feedstock cost should result in ethanol output that's more than competitive with ethanol from biomass. US biofuel producers eyeing export markets ought to be concerned about the potential competition from Celanese, even if the federal Renewable Fuels Standard (RFS) guarantees them a market here.

My other instant reaction when I heard about this process focused on the potential environmental consequences of producing ethanol from coal. However, as I thought about it more carefully, it occurred to me that processing coal into ethanol using the extremely clean gasification process, which allows for sulfur and other contaminants to be easily and safely collected and disposed of, is probably a lot more benign than burning the same coal to produce electricity, particularly in power plants without state-of-the-art pollution equipment. Assessing the greenhouse gas impact of coal-to-ethanol requires a thorough lifecycle analysis that I have not yet found.

At the same time, it's clear that the environmental comparison to biofuels like corn-based ethanol isn't nearly as bad as suggested by an erroneous comment in a Business Week article on the subject last November, which stated that corn ethanol production "doesn't use a fossil fuel as a raw material." In fact, analysis by the Argonne National Laboratory of the US Department of Energy found that 78% of the energy in a typical gallon of corn ethanol comes from fossil fuels, including coal, diesel fuel, and natural gas. That's why the emissions from corn ethanol aren't much lower than from gasoline, after factoring in the natural-gas derived fertilizer used in growing the corn, the diesel fuel required for cultivation, harvesting and transportation, and the coal and natural gas used to generate electricity and process heat for the fermentation and distillations steps. Ethanol from coal might emit incrementally more greenhouse gases than food-crop based ethanol, but not orders of magnitude more. And I'd bet that a gas-to-ethanol plant would match or beat the emissions from a standard corn-based biorefinery, based on avoiding the need to separate the alcohol product from water. Distillation requires lots of energy.

It's getting harder to draw meaningful distinctions between conventional fuels and alternatives when we can make ethanol efficiently from fossil fuels and produce "drop-in" fuels--synthetic gasoline, diesel or jet fuel--from biomass like sugar cane or algae. I haven't seen how the detailed economics and energy balance of the Celanese ethanol process compare to traditional and advanced processes for producing ethanol from biomass, but I think we're going to be hearing a lot more about this option in the future. I was surprised to see that it even garnered a mention in the White House press release for the President's visit to China earlier this year.

Wednesday, April 13, 2011

Still Not Worse Than Coal

At the end of last year I examined assertions by a professor from Cornell University, based on his unpublished paper, that leakage from natural gas production and transportation systems in the US resulted in lifecycle emissions for gas that were actually worse than those from coal. From what I saw at the time, I couldn't agree with his conclusions. Now Professor Howarth's paper is apparently about to be published, with a specific focus on shale gas. It has already been leaked via the New York Times and The Hill news site. After seeing the data and calculations supporting its claims, I am still not persuaded, though I would be quick to concede that the subject deserves a more thorough assessment by a body actually equipped to gather the necessary data and process it rigorously.

I don't make a habit of reviewing scientific papers, but this one begs for a critique, for two reasons. First, it's appearing in the middle of a crucial national debate on the potential risks of the techniques involved in unlocking the potentially game-changing shale gas resources that have been found in the US and elsewhere around the world. What better way to make those risks--which I believe to be entirely manageable--seem not worth taking than by portraying shale gas as having more adverse environmental consequences than the chief fuel its supporters see it displacing: coal. So at a minimum the paper demands careful scrutiny because of its potential significance to the debate surrounding the largest energy opportunity the US has uncovered in decades.

In addition, practically every paragraph includes an assumption, simplification or choice by the authors that tends to increase the calculated environmental impact of natural gas. Whether that's the result of bias or merely a series of judgment calls, it undermines confidence in the final conclusions at the same time it amplifies them. I'll focus on the most significant of these decisions and forgo the questioning of many individually less-important, though still cumulatively consequential details for others better equipped to tackle them.

Probably the most significant choice the authors made was to emphasize the global warming impact of methane (the main component of natural gas) over a 20-year period, in preference to than the more commonly used 100-year interval. Then they bypassed the established Global Warming Potential (GWP) factors from the UN IPCCC's Fourth Assessment Report to use much higher factors for methane from a 2009 paper published in Science. I'll leave the angels-on-a-pin debate over this to the climate scientists, but I don't believe you need a Ph.D. in atmospheric physics to understand that if the outcomes of climate change will truly be determined in the next 20 years, we are already cooked. The world can't get global emissions down by enough, fast enough, to solve the problem on that time scale, at least not without a global economic shock that would return hundreds of millions of people to poverty. So when I recalculated the paper's estimate on shale gas emissions, I did so using the consensus 100-year GWP for methane of 25--less than 1/4 of the one on which the paper's scariest results rely.

The other major choice the authors made was to ignore the downstream conversion of gas and coal into electricity. As lifecycle analysis, this earns a failing grade. It's like comparing the overall emissions of a Nissan Leaf and Ford Explorer by focusing only on what happens upstream of the battery charger and the fuel tank. The authors dismiss this by saying that "this does not greatly affect our overall conclusion". That's wrong, not least because it's precisely the comparison of how gas and coal actually compete with each other that matters most here.

On the basis of these two points alone, the paper's conclusions crumble, even with the inclusion of supposed methane leakage rates from shale gas production that would have any engineer worth his or her salt scrambling to redesign the equipment so as to capture so much valuable "lost and unaccounted for" output. So how do shale gas and coal compare, on a full lifecycle basis from well and mine to the power plant bus bar, if 3.6-7.9% of gas actually leaked out during well completion, processing, transportation, storage and distribution, as Dr. Howarth's paper suggests?

Let's start at the power plant and work backwards. A current combined-cycle gas turbine unit requires around 6,700 BTUs of gas to generate a kilowatt-hour (kWh) of electricity. At the rate of 117 lb. of CO2 emissions per million BTUs of gas burned, that yields power plant emissions of 0.78 lb/kWh. But that's on the basis of the gas that reaches the turbine's combustor. We have to gross up that result to account for the emissions that occurred upstream of the plant. At Howarth's estimated leakage midpoint of 5.75%, and using the standard 100-year GWP for methane compared to CO2 on a molar, rather than mass basis, that leakage would add an extra 55% of CO2-equivalent emissions from the well to the combustor, bringing the effective emissions from that combined-cycle plant up to 1.2 lb/kWh. For comparison, the most efficient coal-fired power plant I know of (without carbon capture and sequestration) emits about 1.75 lb/kWh. Only if we included inefficient, simple-cycle gas "peaker" units that don't normally compete with coal would the upstream emissions that Dr. Howarth posits result in lifecycle emissions from gas-fired power worse than the typical coal-fired generation emissions of around 2 lb/kWh. In other words, the gas-fired generation that actually competes with existing coal plants still appears to emit nearly 40% less GHGs than its coal competition, even assuming the shale gas leaks that Dr. Howarth and his contributors reported.

Although my analysis admittedly falls into the back-of-the-envelope category, I'm not sure that the Howarth, et al paper is many notches above that level, given its reliance on non-peer-reviewed sources and its references to irrelevancies like Soviet-era gas systems. All in all, it seems a shaky edifice on which to mount such provocative conclusions. Perhaps all the authors wanted to do was to highlight some areas for the gas industry to investigate further, in order to ensure that methane emissions are kept to a minimum as shale and other unconventional gas deposits are developed. Unfortunately, it seems all too likely that its headline findings will be touted by those who are determined to stop the shale gas revolution in its tracks, or at least delay it for long enough that its utility in addressing our pressing energy problems will be lost. I wonder what Mr. Pickens thinks about all this, given that legislation promoting his plan to convert portions of the US truck fleet to natural gas, which depends on abundant shale gas supplies, has finally attracted bi-partisan support, including from the White House.

Tuesday, April 12, 2011

What's the Alternative to Oil Sands?

I can recall when technologies like oil sands and coal gasification were commonly referred to as alternative energy, with the same high-tech aura now attached to solar power and advanced biofuels. Much has changed since then, not least our perspective on climate change and the greenhouse gases that contribute to it. It's no longer possible to consider Canada's oil sands production and the means of transporting it without a serious examination of the environmental consequences, both at the source and along its journey to market. However, while I understand that perspective, the reaction to the proposed Keystone XL pipeline seems disconnected from the reality that crucial supplies of Middle Eastern oil suddenly look much riskier than they did. We should certainly weigh the costs and benefits of oil sands carefully, but the missing element from this conversation is the question of what the alternative would be if we ruled out more oil sands imports.

This train of thought began with a sobering analysis of the energy implications of the unrest in the Middle East by Amy Myers Jaffe of the Baker Institute at Rice University in Houston. The challenge she highlights is much subtler than the risk of exports from countries like Libya being disrupted for a few months or even a few years. Existing spare capacity in other producing countries can cope with some of that, although a portion of that capacity is in other countries that could be just another domino or two down the road, while the rest is in Saudi Arabia, which might not be immune, either. Yet if the worst case is the disruption of exports, we have a substantial Strategic Petroleum Reserve to fall back on. Prices might rise significantly, but the prospect of no fuel at your local gas station at any price remains remote for now.

However, as Ms. Jaffe demonstrates, much of the incremental oil production capacity on which forecasters have been relying to meet additional oil demand over the next two decades, and to backstop declining production in non-OPEC countries, must come from the same region that is now in turmoil. And as the charts in her presentation show, revolutions--democratic or otherwise--rarely result in higher oil output. If new governments or chastened existing governments don't invest in developing that extra capacity, then Peak Oil won't just be a theoretical construct in geology; it will be a very real outcome in geopolitics, and one that strategic inventories like the SPR would be unable to mitigate.

We have had a tendency to view Canada as the Saudi Arabia of the north. Considering that we now receive more oil from there than from all the countries of the Persian Gulf combined, and that our NAFTA partner's proved reserves of 178 billion barrels are second only to those of the Kingdom, that's not unreasonable. As recently as 2002, though, Canada's oil reserves were under 6 billion barrels, before the oil sands could be booked as reserves in large quantities. Without its oil sands, Canada would be just another mature oil province with declining conventional output. The question of how rapidly to develop those resources, and whether to export their output outside North America to any significant degree, is currently a hot topic in Canadian politics. The pipeline to transport this oil to Kitimat, British Columbia for export to Asia seems to be subject to a similar debate to the one we're having in this country concerning the Keystone XL line from Alberta to the Gulf Coast. But what if these projects didn't go forward? A world without oil sands might have a little less in the way of greenhouse gas emissions, but it would also have much higher oil prices, and those prices would be more volatile.

So what are the alternatives to these "dirty tar sands", as environmentalists now invariably refer to them? Well, if you're been reading my blog for a while, you know that wind and solar power don't enter into this discussion, because very little electricity is used for transportation and very little oil is used for generating electricity, outside of the developing world and now post-Tohoku Quake Japan. If we don't have access to oil sands imports, then the only other near-to-medium term options for reducing our oil imports from less stable suppliers involve more domestic oil production, more efficient vehicles, and more biofuels production.

Unfortunately the latest Department of Energy forecast incorporating all of those options still leaves us importing nearly 9 million barrels per day of oil in 2025. Without a significant portion of it coming from Canadian oil sands, we will still be forced to rely on imports from places like Venezuela and the Middle East, some of which aren't much more environmentally sound than the oil sands production. And that assumes that all the domestic production in these plans actually materializes. Turning up our noses at both offshore drilling and oil sands is pretty much mutually exclusive. (Or for that matter, shale gas and oil sands, even though these are different forms of energy.)

As for biofuels, we've already got just about as much corn ethanol as we can handle for many reasons, and the more advanced variety has not been especially cooperative in turning up on schedule. Replacing the oil sands capacity that the proposed Keystone XL pipeline could deliver would require more than 23 billion additional gallons per year of ethanol, or 180% of last year's US ethanol output. That figure exceeds the entire 2022 cellulosic and advanced biofuel target under the federal Renewable Fuels Standard. Biofuels are an important part of our energy mix, but the time when they could make oil sands crude unnecessary is still a long way off.

Americans are conflicted. We complain about $4 gasoline, and we're uneasy about another military intervention in the oil patch of the Middle East and North Africa, but then we throw obstacle after obstacle in the path of one of the few options that can provide us with a larger supply of reliable fuel from North America. No matter how sympathetic I am with communities that don't want the new pipeline to pass through or near them, or with concerns about the 17% increase in lifecycle greenhouse gas emissions that oil sands represent, compared to conventional oil, closing our border to additional imports of oil sands crude can only undermine US energy security, at the worst possible time.

Friday, April 08, 2011

Congress Defers to EPA on Climate Policy

The confrontation over climate policy that was teed up by the results of last November's mid-term election culminated with the House of Representatives voting overwhelmingly yesterday to strip the Environmental Protection Agency of its power to regulate greenhouse gases under the Clean Air Act. However, the more crucial votes took place on Wednesday, when the Senate defeated a string of amendments that would have similarly blocked EPA's powers to regulate CO2 and other greenhouse gases (GHGs), whether entirely, only for specific sectors, or for a period of two years. This is a worrying outcome, because it means that the Congress has effectively yielded responsibility for managing these emissions to an approach that nearly everyone, including this administration's EPA Administrator, previously saw as much less desirable, for good reasons. It will impose another layer of intrusive regulations on US industry and businesses, even though it's not clear that it will achieve much in terms of reducing US greenhouse gas emissions, let alone reducing the pace of global warming.

It's worth recalling how we got to this point. A long succession of cap and trade bills, several with bi-partisan sponsorship, ultimately failed to attract enough support to become law. The most recent such legislation, the egregious Waxman-Markey bill, may have looked more like a pork-barrel bonanza than a serious attempt to get our emissions under control, but even it was based on the principle of putting a price on emissions, and harnessing the power of the market and innovation to reduce emissions at a lower cost than through classic tailpipe and smokestack regulations. The former strategy takes advantage of the fact that greenhouse gases behave very differently than the substances associated with smog and other lung-irritating air pollution. Unfortunately, the way that EPA is approaching GHGs ignores that opportunity.

With essentially no adverse local effects, it makes sense to deal with GHGs as flexibly as possible. I can think of several adjectives to describe the path on which the EPA has embarked, but flexible isn't one of them. I suspect that many of the states whose Clean Air Act implementation plans were entirely satisfactory for their originally intended purposes but now find themselves out of compliance would agree. It's ironic that during the debate over Waxman-Markey, EPA regulation was held up as the dreaded alternative to enacting a climate bill, yet now we see a majority of the Senate treating it as something worth defending.

The net result of this week's votes is a House bill that will likely be dead on arrival in the Senate, where the leadership has demonstrated sufficient support for the EPA greenhouse gas regulations that went into effect at the beginning of this year to sustain a Presidential veto of any similar measure that might squeak past the Senate later. At the same time, 17 Democratic Senators voted for some degree of constraint on EPA's powers regarding GHGs. Even if many of those individual votes were focused on blue-state or swing-state electorates going into next year's election, that at least suggests that a bi-partisan majority of Congress does not view EPA regulation as the best strategy for reducing emissions, particularly in a weak economy. And that majority could expand next year. For those of us who are concerned about climate change but also worried that EPA's command-and-control approach to emissions will cost the US economy far more than the modest emissions reductions this will yield are worth, that provides a ray of hope that the current EPA regulations aren't the last word on the subject.

Wednesday, April 06, 2011

Flex-Fuel Competition for OPEC?

An op-ed in this morning's Wall St. Journal by former CIA Director James Woolsey makes an interesting and seemingly pragmatic suggestion for improving America's energy security. Instead of pushing new energy sources or new fuels, he seeks to break OPEC's cartel power by ensuring that US motorists have more choice at the pump, facilitated by flexible fuel vehicles (FFVs) that can operate on a variety of energy sources. The analogy to the electricity grid, in which no single source of generation can hold the entire market hostage, is clear. The question is whether this is really as useful as it sounds, to the point of justifying legislation that would force carmakers to make fuel flexibility the default, rather than an option on new cars.

Competition can be a powerful force, and Mr. Woolsey is correct that gasoline and other petroleum-based transportation fuels have had little competition at the point of sale to consumers. Even with ethanol making up 10% of most of the gasoline in the US, 94% of the energy we use for transportation still comes from oil. The idea of "multiple choice energy", which was the name of one of the corporate energy scenarios that I helped develop at Texaco more than a decade ago, is alluring. It's not hard to envision consumers being able to choose among gasoline, diesel, ethanol, other biofuels, natural gas (compressed or liquefied), electricity, hydrogen, and even exotic hydrogen-storing compounds such as ammonia borane, which recently appeared on my radar screen. As it has been for decades, however, the central problem is creating a market for these alternatives. That requires both cars and infrastructure.

Mr. Woolsey and his co-author are focused on the car side of the equation, suggesting that a $100 fix could enable most cars to run "a variety of liquid fuels in addition to gasoline." To make this happen, they espouse the Open Fuel Standard Act, a piece of legislation that has been floating around since at least late 2008 and that would mandate this hardware for all new cars. Then they extend this argument into natural gas vehicles and plug-in hybrid cars, both options costing a great deal more than $100 per car. While plug-in hybrids certainly provide very effective energy competition for oil, their cost and complexity ensure that their market penetration will be a long, slow process, pushing any real competitive benefits perhaps a couple of decades into the future. Nor do the natural gas cars I'm aware of--also much more expensive than simple FFVs--provide such a point-of-sale fuel arbitrage capability, because once converted to run on CNG or LNG, there's no going back to gasoline. (This feat isn't technically impossible, just impractical.) So for the near-to-medium term the main competition available would be from fuels like E85 and methanol.

I've written extensively about E85, a blend of 85% ethanol and 15% gasoline. The gist of it is that E85 has failed to take off so far, not because there aren't enough FFVs that can run on it--there are already millions on the road--but because its availability is limited and, more importantly, because its current pricing represents a poor value proposition for consumers. A gallon of E85 contains 27% fewer BTUs of energy than a gallon of gasoline with its typical 10% ethanol content. In cars not specially tuned to make the most of E85's high octane, that translates directly into a corresponding fuel economy penalty. So for E85 to be attractive to consumers, it should sell for at least 25% less than unleaded regular gasoline. As reflected on an industry website tracking E85 prices, that's only the case in a few locations, with the national discount currently averaging 16%. So on a miles per dollar basis, E85 is currently about 15% more expensive than gasoline. That doesn't sound like something that is likely to cause OPEC ministers to lose sleep.

Why is E85 so expensive? It's not mainly due to its limited availability, although its smaller scale relative to gasoline distribution probably costs it a few extra cents per gallon. Fundamentally, it's because ethanol prices reflect high input costs, including corn. Even at the current futures price on the Chicago exchange this morning of $2.72/gal., which does not include transportation and blending costs that can easily add another dime or more, wholesale ethanol costs 85% as much as wholesale gasoline, equating to 87% on an E85 basis. It's hard to see how you could start there and end up with pricing on the forecourt that offers a big enough discount to compensate consumers for the fuel economy penalty and the more frequent refueling that results from it. And in fact, EPA analysis of refueling data for 2008 found that it "equates to an estimated 4% E85 refueling frequency for those FFVs that have reasonable access to the fuel." So without a fundamental change in the pricing relationship, it's not clear that either more FFVs or even more E85 pumps will result in consumers purchasing large volumes of E85.

Mr. Woolsey's arguments about fuel competition make intuitive sense, although it does not necessarily follow that legislation requiring carmakers to produce more FFVs would achieve the results he suggests, particularly when GM, Ford and Chrysler have already agreed that half the cars they produce will be flex-fuel capable by 2012. $100 per car isn't an astronomical sum for this kind of experiment, but is there really a compelling reason to make it compulsory, rather than a matter of consumer choice?

Monday, April 04, 2011

The Missing Food vs. Fuel Circuit Breaker

Corn futures have spiked to their highest price of the year, and, as the Wall St. Journal reported over the weekend, to their highest level since 2008, following news that US corn inventories had declined by 15%, compared to a year earlier. The Journal noted that prices were likely to continue rising until demand starts to moderate. Unfortunately, nearly all of that demand adjustment must come from consumers, exports, and livestock farmers. That's because corn used in ethanol production has grown to rival corn for livestock feed as the largest segment of domestic corn consumption, and it has been rendered essentially price-insensitive by government renewable fuel mandates.

It's a mark of the success of the nation's ethanol industry that it has grown large enough to be an important factor in two of the largest markets in the world: the US energy market and the US market for agricultural commodities. Yet despite supplying more than 13 billion gallons of fuel ethanol for blending into gasoline last year--the energy equivalent of 560,000 bbl/day of petroleum gasoline--ethanol hasn't eliminated oil or even gasoline imports, and its effect on pump prices is hard to detect, when gasoline prices are driven mainly by the price of crude oil, which is flirting with $120/bbl for UK Brent crude, the best current global oil-price indicator. However, ethanol's impact on corn prices, though subject to considerable controversy, is potentially much larger when the annual number of bushels converted into fuel must increase each year, even if the corn crop is lower than the previous year's.

That's driven by two factors. The less important of the two is that at the current price of oil, corn looks like a cheap source of oil-substitute. Even at $7.50/bushel, the corn inputs to ethanol work out to around $112/bbl., and after factoring in the $0.45/gal. tax credit that refiners and other fuel blenders receive for its use, that shrinks to $94/bbl. Compare that to wholesale gasoline at $132/bbl. In other words, even with competition for corn driving up ethanol prices, refiners have an incentive to use as much ethanol as they can, and they are, subject to the 10% blending limit for most of the fuel used by the public. Unfortunately for the ethanol industry, which has continued to expand capacity beyond the point at which they could satisfy 10% of US gasoline demand, that market is now effectively saturated, and price competition among ethanol suppliers has constrained their margins. Even ethanol producers such as Pacific Ethanol that emerged from bankruptcy after restructuring their sizable debts are making little or no profit from their ethanol operations.

The bigger factor driving ethanol demand--and thus corn demand-- is the Renewable Fuel Standard enacted as part of the Energy Independence and Security Act of 2007, a bill that was passed by a Democratic Congress and signed by a Republican President. If nothing else, this should serve as a reminder that however desirable bi-partisanship in energy policy is, its mere presence doesn't guarantee collective wisdom. What the RFS did was to layer on an escalating annual ethanol mandate on top of the existing system of tax credits for ethanol blenders and small ethanol producers. Unless ethanol producers could figure out how to get much more ethanol from the same amount of corn every year, which they have done to only a modest extent, this effectively created an escalating corn mandate for the fuel sector. So even if oil was still at $60 or $70/bbl ethanol demand, and by extension corn demand, would not decline with higher corn prices.

The current US ethanol policy has accumulated more distortions than you can shake a stick at, including the unnecessary layering of mandates and incentives, which also entrenches an unproductively high tariff on imported ethanol from places like Brazil that can produce ethanol with much lower inputs of energy than we can. But as competition for tight corn supplies intensifies due to a variety of factors, the absence of some sort of food-price-based circuit breaker in the relationship between corn and ethanol could turn out to be one of the most damaging distortions for US consumers and for people in other countries that depend on US corn exports. It's worth recalling that although ethanol had consumed just 14% of the previous year's corn crop when Congress passed the RFS, compared to the 40% expected this year, that expansion was an entirely predictable consequence of the legislation. For all the talk about the externalities of fossil fuel markets, this seems like an internality that merits a serious reexamination.

Friday, April 01, 2011

Obama on Energy: Getting the Balance Right

Another energy crisis, another presidential speech? It must seem that way to many of us who came of age in the first set of energy crises in the 1970s, and the President acknowledged that history in his talk on energy at Georgetown University on Wednesday. Yet although it contained little in the way of new ideas or initiatives, along with a target that was remarkable mainly for the relative ease with which it might be met, it at least presented a perspective that balances the continuing importance of our current energy sources with the potential of our new ones. No more talk of "yesterday's energy."

I was under the weather this week, so this is at least a day later than it should be, but if nothing else was clear from Wednesday's speech it's that our energy challenges have persisted for so long, while our preferred solutions have shifted with the mood of the moment, that a day or a week changes nothing. However, a sense of urgency matters, as gasoline prices rise to levels we haven't seen since 2008. A president can't be seen to be behind the curve on this issue. Except for a few quibbles I'll come back to, Mr. Obama got matters mostly right, reminding his audience that we will remain dependent on oil for a long time, and that increasing domestic oil production and relying on stable neighbors are both crucial strategies for managing our vulnerability to imports from less dependable sources. That puts him squarely in the mainstream of serious American energy thinking for the last four decades.

The President's goal of reducing oil imports by one-third from their level of 11 million barrels per day in 2008 seemed appropriate for several reasons. First, because the basis of that goal is the right one: net imports of crude oil and petroleum products. It would do little for our energy security to reduce crude imports by constraining US refineries and then importing more refined products from abroad. Nor should one ignore the growing US exports of refined products arising from mismatches between US fuel regulations and refinery configurations and yields. More importantly, this is one of the first energy security goals I've seen that we stand a fair chance of achieving. The DOE's preliminary forecast for 2011-35 shows a 17% reduction in oil imports by 2025 in the reference, or base case. Last year's forecast for the high oil price case showed an even steeper reduction, meeting Mr. Obama's goal as early as 2021. Reaching the President's target shouldn't require Herculean efforts, provided we stay focused on the things with the greatest potential to deliver in that timeframe: increased domestic production, efficiency, and possibly next-generation biofuels. That leaves out electric vehicles, which are a longer-term proposition, along with wind, solar and other renewable electricity sources, which only stand to displace oil via EVs. (Remember, a million EVs replace less than 0.2% of our oil consumption.)

The President was right to highlight the potential contribution from biofuels while calling for reform in biofuel subsidies, a task that is long overdue. He cited two examples of how biofuels could help to reduce our oil imports. One related to the military's goal of obtaining half its domestic jet fuel needs from alternatives to petroleum, while the other promoted four "next-generation biorefineries", referring to facilities that produce fuel from non-food biomass. Unfortunately, he didn't mention cost as one of the key trade-offs involved. It's laudable for the military to seek to reduce its vulnerability to oil-supply disruptions, and it can provide a crucial early-adopter base for new technologies. However, to the extent that bio-based jet fuel is more expensive than conventional fuel, then either Air Force operating budgets must include cuts in other areas, such as missions and training, or we will be buying fewer new-gen aircraft to pay for it. And while subsidies can help next-gen biofuels reach commercial scale--I don't consider 20 million gallons per year (1,300 bbl/day) as meeting that definition--they can't guarantee they will be commercial. That will require mastery of one or more of the numerous technology paths now being pursued, more than a few of which have already disappointed. Technological mastery doesn't appear on command.

That's an important consideration, because as desirable as it is to produce large quantities of biofuel without setting up ruinous competition between food and fuel, it seems equally important not to build another industry that will be unprofitable without sustained large government subsidies for decades to come. Helping new technologies through the development stage and across the "commercialization chasm" makes sense, but the level of support now offered for cellulosic biofuel, at $1.01/gal., looks unaffordable once output finally start to take off. As it is, corn-based ethanol will collect roughly $6.3 billion this year from a subsidy less than half that generous, for its displacement of just under 7% of our gasoline consumption on an energy-equivalent basis.

That brings us to the only item in Wednesday's talk that we haven't been hearing about for years: the application of the nation's newly-tapped shale gas bonanza to address the problem of our oil imports. Aside from the jokey references to the expertise of his Secretary of Energy, whose Nobel Prize in Physics was for "development of methods to cool and trap atoms with laser light"--not so relevant to natural gas extraction--this was the speech's money line. Shale gas is the only new technology we have that can deliver huge amounts of energy to compete directly with oil in transportation using off-the-shelf-technology: no breakthroughs required. This would have sounded even more impressive and serious if the punch line had focused on knocking down the barriers to making that happen, including infrastructure requirements and vehicle conversion costs, rather than calling for a bill regulating the production of shale gas.

And unfortunately, that was symptomatic of the things that kept the President's talk from being a landmark in our decades-long battle with energy security. It's one thing to state the problem clearly and lay out the options; it's another to bring it all together in a realistic plan for action. The administration's new "Blueprint for a Secure Energy Future" merely incorporates natural gas into a grab bag of many of the same initiatives it has been pushing since Inauguration Day 2009. Nor does it help when the President repeats his old talking point about the US consuming 25% of the world's oil (it was actually 22% last year) but having only 2% of its oil reserves. Someone needs to pull him aside and explain that current US proved reserves are no more of a limitation on future US oil production than wind power's contribution of just 2% of US power generation last year caps its future potential at that level. Reserves support today's production; resources determine tomorrow's, and the US has many billions of barrels of untapped resources, many of which remain off limits under the administration's policies.

So call it two-thirds of a great speech on energy. Unfortunately, what we desperately need is that missing third that concentrates it into something that the American people--and American industry--can rally behind.