Thursday, September 22, 2011

Breaking Oil's Monopoly on Transportation

I've been thinking about an op-ed in Tuesday's New York Times written by a former National Security Advisor and a former CIA chief. They propose breaking oil's monopoly on transportation fuels by introducing more fuel competition at the point of use. This isn't a new idea, nor is their preferred tactic of requiring all vehicles sold in the US to be flexible fuel vehicles (FFVs) capable of running on a variety of fuels. I looked at this in April, following another op-ed by Mr. Woolsey, and several times previously in conjunction with the Open Fuel Standards Act, a piece of unpassed--so far as I know--federal legislation designed to put such competition into effect. The idea is as interesting as it has always been, though several trends pose new challenges for its ultimate success.

The op-ed was apparently timed to mark the introduction of a new group called the United States Energy Security Council, the membership of which constitutes a who's who of national security and energy leaders. The Council's issue statement is worth a read and stands apart from some other similarly-well-intended efforts for its clear recognition that our energy security problem with oil has nearly nothing to do with electricity, and thus won't lend itself to leverage from renewable electricity sources until large numbers of electric vehicles are on the road. That could take decades, as I've noted elsewhere. However, I wish the group had spent more time pondering the source of oil's natural monopoly in transportation energy, because I think it might have given them pause concerning methanol, one of the competing fuels they're trying to promote.

The sources of that natural monopoly--the reasons oil continues to dominate the transportation energy market 93 years after the introduction of the Model T Ford--owe little to the market power of OPEC, and much to the energy density and convenience of storage, transportation and distribution of petroleum products. Making fuels like E85 ethanol and methanol as readily available as gasoline, and making cars as compatible with them as they are with unleaded gasoline, won't affect the miles per gallon and range advantage that gasoline enjoys. That advantage is especially evident relative to methanol, which packs just under half the BTUs per gallon in gasoline.

Even though the abundance of shale gas could conceivably alter the economics of fuel methanol enough to put it into serious competition with gasoline, it would face an even more serious marketing challenge than E85, with its smaller but still significant range and mpg penalties, and its miles-per-dollar penalty that could expand significantly when the ethanol blenders credit expires at the end of the year--or sooner. Without substantial engine modifications to take advantage of methanol's other properties--modifications that wouldn't be compatible with fuel flexibility, as I understand it--both mpg and range would reflect a similar ratio as energy content. And unless methanol (with all appropriate federal, state and local motor fuel taxes applied) could be delivered to your corner gas station at less than half the cost of gasoline, then not only would its range be inferior, but also the miles delivered per dollar spent. Consumers tend to notice such things after a while. And that is aside from my long-standing concerns about the mass-market use of methanol.

The group's focus on alcohol-based fuels also goes against another recent trend in the biofuels industry towards what are called drop-in fuels: fuels that despite their non-petroleum origins are 100% compatible with engines designed to run on petroleum products. Despite all the hype about cellulosic ethanol, it is looking increasingly likely that the main fuels we will get from non-food biomass could closely resemble today's gasoline, diesel and jet fuel. And drop-in fuels don't require vehicles to be modified as FFVs.

When viewed from a technical perspective, I don't find the Council's arguments for mandating FFVs especially persuasive. However, I think there's a more compelling argument to be made, relying on option value. If it costs $100 to modify a car to run on other fuels besides gasoline, then that investment would still have value even if in practice the car's owner never actually bought those fuels, as has been the case with the vast majority of the cars already capable of using E85. The option still has value because it provides an insurance policy against some future circumstance in which the only fuels available (or affordable) are non-petroleum ones, for whatever reason: an oil embargo, peak oil, pipeline failure, or some weather-related catastrophe, take your pick. That kind of competition for oil doesn't even require large sales of non-petroleum fuels before having an impact in the market. The key question is whether it's worth enough to us as a society to require the collective expenditure of roughly $1.2 billion a year (adapting all new cars) or up to $24 billion (retrofitting the entire light-duty vehicle fleet) to force it to happen, as opposed to leaving this as the consumer and manufacturer choice that it is today.

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