Late yesterday I saw a headline reporting that Chevron was being assessed more than $10 billion for a spill from its drilling activities offshore Brazil last month. The story was later revised to clarify that the amount in question was associated with a civil lawsuit being filed by a Brazilian prosecutor, rather than an actual fine by the government petroleum or environmental agencies. Either way, the sum involved goes beyond surprising. Given the quantity of oil that actually leaked from an appraisal well at Chevron's Frade platform, it is grossly disproportionate to any objective gauge of the scale of the spill and the effectiveness of the response, which stopped the leak within a few days and reduced the surface oil slick to around one barrel within a couple of weeks, without any oil reaching shore. For a nation that aspires to sit at the top table globally, including a permanent seat on the UN Security Council, the reaction to this event raises questions about due process and rule of law. It could also backfire badly, in light of the substantial foreign investment Brazil is seeking in order to develop the enormous "pre-salt" oil deposits off its coastline.
My purpose in writing about this incident isn't to defend Chevron. I don't have enough of the details of what happened, and my well-known conflict of interest as a former employee and Chevron shareholder would undermine my credibility on that front in any case. From my perspective the noteworthy aspects of this spill are its magnitude and the Brazilian government's hasty and exaggerated reaction to it. In terms of its energy implications, it almost doesn't matter what company was involved, except that it's highly unlikely that a similar spill by Petrobras, the partially-privatized national oil company of Brazil, would have elicited the same response.
Start with the magnitude of the leak. No oil spill is a good spill, but the estimated 2,600 barrels that leaked into open waters about 120 miles offshore was at least two orders of magnitude (100 times) smaller than the kind of worst-case tanker spill that oil companies routinely plan and train to be able to handle. Suggestions by the Brazilian government that a global oil company and its drilling contractor, Transocean, weren't prepared to handle a spill of less than 3,000 barrels--more than one year after the Deepwater Horizon accident--belong in the realm of politics, rather than serious analysis.
In fact, any comparisons to the disaster that killed eleven men and leaked 4.9 million barrels of oil into the Gulf of Mexico over 89 days, fouling beaches and harming birds and marine life in four states must pale. The total cost to BP and its partners in the Macondo well isn't yet known, but between the $20 billion escrow fund for Gulf Coast cleanup and claims, along with the federal fines they face, the bill could come to $40 billion, or 4 times what a Brazilian prosecutor is apparently seeking for a spill roughly 2000 times smaller, that never threatened Brazil's coastline. The Frade leak is also modest in comparison to spills from tankers and other ocean-going vessels. Comparable or larger spills averaged more than 3 per year in the last decade, according to the International Tanker Owners Pollution Federation.
Another interesting feature of the spill is that it didn't result from an uncontrolled well blowout, as BP's did, but from subsea oil seeps that developed during the process of drilling into the complex geology of Brazil's technically challenging pre-salt oil deposits. Although these particular seeps were apparently directly related to the well Chevron was drilling, similar seeps are a common feature of many oil-rich offshore regions. NASA has estimated that the Gulf of Mexico experiences similar, naturally occurring seeps on the order of 500,000 barrels per year.
So if the Frade spill was relatively small and contained in short order, why should anyone other than Chevron's management and shareholders care if Brazil slaps them with large fines or a multi-billion-dollar lawsuit, in an apparent attempt to make an example of them and enforce what amounts to a zero-tolerance policy toward oil spills from its offshore projects? I'd argue that we all have something at stake here, indirectly. Brazil's pre-salt reserves offshore represent some of the largest recent oil discoveries and are expected to contribute 2 million barrels per day or more to global oil supplies by 2020. With output in Latin America's two other largest producers, Venezuela and Mexico, falling due to mismanagement of their otherwise ample resources, Brazil's output could be a key factor in oil prices in this decade and beyond.
Brazil is poised to become a major oil exporter, but Petrobras can't take on the scale and risk of this opportunity on their own, without foreign partners. It's not that they lack the technology; Petrobras is a leader in deepwater development. However, if they have to go it alone because the government's response to this event scares off its potential partners, they will be forced to reduce the size of their program, and oil prices will end up higher than they would have otherwise. While I'm entirely sympathetic to the sentiment behind a "zero-tolerance" attitude towards oil spills, whether from oil platforms, tankers or pipelines, I'm afraid it belongs in the same category as a zero-tolerance toward plane crashes: a standard to aspire to, but not one on which national development policies with global consequences can realistically be based.
Showing posts with label Brazil. Show all posts
Showing posts with label Brazil. Show all posts
Thursday, December 15, 2011
Wednesday, July 27, 2011
The Anthropocene and Other Topics
For the first four years of this blog I published nearly every weekday, and as time went on occasionally struggled to find suitable topics. Lately, I've been running across more good blog topics than I could conceivably cover. I think more is at work in that than my having scaled back the blog's frequency; energy has become an integral part of so many crucial conversations in the meantime. So instead of my customary single topic, today's post includes three essentially unrelated ones, all of which I thought merited sharing with my readers.
The first item concerns compact fluorescent lighting, those "CFL" bulbs people seem to either love or hate, and upon which many base unrealistic expectations of energy and emissions reductions. According to the tracking of NEMA, the Association of Electrical and Medical Imaging Manufacturers, US demand for CFL bulbs has declined for four straight quarters, while demand for the incandescent bulbs that are being phased out by law has revived to 79% of the market. This shift begs for deeper analysis. Is it the result of consumers stocking up on 100 Watt incandescents before they disappear from store shelves next January 1 and become a new kind of black market commodity, or is it more along the lines of what happened to tire sales after steel belted radials were introduced? Like the latter, CFLs last a lot longer than the traditional product they're replacing, and at some point one would expect sales to plateau at a much lower level than incandescents previously held. Or is it the case, as in my household, that CFLs are simply not viewed as a satisfactory replacement in all the fixtures where they could be placed, because of a combination of lighting quality, cost effectiveness, and concern about potential mercury contamination?
Now let's turn to plastics. Two stories, both involving Dow Chemical, caught my eye. In the first, Dow is investing in a facility to make polyethylene, a very common plastic, from ethanol in Brazil. As the article in Technology Review notes, Brazil is one of the few places that would make sense. The process of producing ethanol from sugar cane is so energy-efficient and cost-competitive that ethanol can sensibly be substituted for the petroleum products from which it might otherwise be produced there. In the other story, Dow recently announced a process for extracting most of the available energy from non-recycled plastic waste. Taken together, these two items challenge our traditional view of the relationship between oil and plastics: not only does oil no longer have a lock on the feedstock market, but it could face competition from waste plastics in end-use energy applications, or possibly even as a potential source of synthetic oil, as I noted a couple of years ago.
Finally, I'd be remiss if I didn't recommend an article from the May 28, 2011 issue of The Economist, which had been in my reading pile for weeks. It suggests that we are living in a new epoch of the earth called the Anthropocene, signifying humanity's having become the equivalent of a force of nature in our effect on the earth and its systems. I'm intrigued by this not just because it dovetails with my view that essentially everything we do on a civilization-wide scale, including energy production and consumption, agriculture, transportation and public works, has consequences for the entire planet, but also because of its implications for what sustainability is likely to mean going forward. If the cited scientists are correct, we influence the earth's systems as much as the climate does, with climate change only one example of our impact.
The corollary to that is that an earth restored to the conditions that prevailed in the Holocene epoch from which we emerged--before we started messing with the nitrogen cycle, the carbon cycle, and other key processes--could not support the population expected by mid-century. There's just no going back to our bucolic roots, but neither is that a justification for the large-scale destruction of the environment needed to sustain humanity. The other interesting twist to this is that it's possible we will need the energy from the large-scale harnessing of solar power to conduct the intentional geoengineering that might be necessary to get the global climate back on an even keel. It's the sort of thing that gives environmentalists nightmares but makes believers in an approaching Technological Singularity nod sagely.
The first item concerns compact fluorescent lighting, those "CFL" bulbs people seem to either love or hate, and upon which many base unrealistic expectations of energy and emissions reductions. According to the tracking of NEMA, the Association of Electrical and Medical Imaging Manufacturers, US demand for CFL bulbs has declined for four straight quarters, while demand for the incandescent bulbs that are being phased out by law has revived to 79% of the market. This shift begs for deeper analysis. Is it the result of consumers stocking up on 100 Watt incandescents before they disappear from store shelves next January 1 and become a new kind of black market commodity, or is it more along the lines of what happened to tire sales after steel belted radials were introduced? Like the latter, CFLs last a lot longer than the traditional product they're replacing, and at some point one would expect sales to plateau at a much lower level than incandescents previously held. Or is it the case, as in my household, that CFLs are simply not viewed as a satisfactory replacement in all the fixtures where they could be placed, because of a combination of lighting quality, cost effectiveness, and concern about potential mercury contamination?
Now let's turn to plastics. Two stories, both involving Dow Chemical, caught my eye. In the first, Dow is investing in a facility to make polyethylene, a very common plastic, from ethanol in Brazil. As the article in Technology Review notes, Brazil is one of the few places that would make sense. The process of producing ethanol from sugar cane is so energy-efficient and cost-competitive that ethanol can sensibly be substituted for the petroleum products from which it might otherwise be produced there. In the other story, Dow recently announced a process for extracting most of the available energy from non-recycled plastic waste. Taken together, these two items challenge our traditional view of the relationship between oil and plastics: not only does oil no longer have a lock on the feedstock market, but it could face competition from waste plastics in end-use energy applications, or possibly even as a potential source of synthetic oil, as I noted a couple of years ago.
Finally, I'd be remiss if I didn't recommend an article from the May 28, 2011 issue of The Economist, which had been in my reading pile for weeks. It suggests that we are living in a new epoch of the earth called the Anthropocene, signifying humanity's having become the equivalent of a force of nature in our effect on the earth and its systems. I'm intrigued by this not just because it dovetails with my view that essentially everything we do on a civilization-wide scale, including energy production and consumption, agriculture, transportation and public works, has consequences for the entire planet, but also because of its implications for what sustainability is likely to mean going forward. If the cited scientists are correct, we influence the earth's systems as much as the climate does, with climate change only one example of our impact.
The corollary to that is that an earth restored to the conditions that prevailed in the Holocene epoch from which we emerged--before we started messing with the nitrogen cycle, the carbon cycle, and other key processes--could not support the population expected by mid-century. There's just no going back to our bucolic roots, but neither is that a justification for the large-scale destruction of the environment needed to sustain humanity. The other interesting twist to this is that it's possible we will need the energy from the large-scale harnessing of solar power to conduct the intentional geoengineering that might be necessary to get the global climate back on an even keel. It's the sort of thing that gives environmentalists nightmares but makes believers in an approaching Technological Singularity nod sagely.
Thursday, June 09, 2011
Do OPEC Meetings Matter?
Yesterday's meeting of OPEC in Vienna attracted extra attention because of disagreements between Saudi Arabia and Iran that extend well beyond the oil fields. The resulting impasse over increasing production to stem high oil prices and support a weakening global economy produced a much-quoted assessment from the Saudi Oil minister, Ali Naimi, who described it as "one of the worst meetings we ever had in OPEC." Yet while the events in the Middle East were at the forefront for most commentators, the outcome of the meeting seems understandable purely in the context of OPEC's own history and the current fundamentals of the market. I'm not sure why so many people appeared to expect OPEC to boost output in anticipation of demand that might not materialize.
I have followed OPEC meetings for nearly 30 years, though not always as closely as when I was trading oil and its products, the prices of which stood to rise or fall depending on what was decided in Vienna. My interest in this meeting went up significantly when I received a call inviting me to participate in a panel discussion about it on the Voice of Russia radio network yesterday afternoon. An hour or two of research revealed a global oil market that is currently well-supplied, with inventories in most developed countries running at fairly typical levels and inventories in the US actually on the high side of normal for this time of the year. That's pretty much the argument that OPEC's price hawks took into yesterday's session.
However, the Saudis and others arguing for higher quotas were looking ahead to the effects of summer demand, especially in rapidly growing Asia, and the buildup of inventories for the fall and winter heating fuel season. They--along with the IEA--anticipated demand growing faster than supply, particularly when the impact of the curtailments from Libya and Yemen are factored in. Such events are important because of the quality difference between the oil that's been shut in in those countries and the spare capacity elsewhere that's available to make up for it.
OPEC's main problem is that the outlook for the global economy has weakened in the last few weeks, and not just because oil has risen to above $115 per barrel, compared to its average of $80 or so last year. The stakes for them look even higher when you factor in a history that includes boosting production in the late 1990s to meet roaring demand in Asia-Pacific, only to see the Asian Economic Crisis slam demand growth in the region into reverse, sending crude prices tumbling from the $20s to single digits by the end of 1998. The doves within OPEC were focused on keeping prices below the level at which large chunks of demand were destroyed in 2008, while the hawks seemed willing to risk that outcome to avert a future price collapse and preserve the revenue they need to fund their national agendas.
The potential consequences for individual OPEC members are substantial. Consider Algeria, which exports about 1.8 million barrels per day. The difference between the current price and what they realized last year equates to more than $20 billion annually. That might sound small in the context of the current debate over trillion-dollar US deficits, but it's nearly 15% of Algeria's GDP. It's no wonder that smaller producers and others with limited capacity to increase output--and thus revenue--would drag their feet on agreeing to raise quotas for countries with spare capacity.
If it sounds like I'm rationalizing cartel behavior that would be illegal in the US, that's not my intent. It's clear to me that oil prices are significantly higher than they would be, because OPEC has chosen to produce around 2 million barrels per day less than it did in 2008. In part they've had to do that to accommodate higher non-OPEC production--think Brazil and Russia--along with rising biofuel production, without weakening prices. The consequences for US consumers are equally clear: Gasoline prices are still more than $1 per gallon higher than a year ago, and even ignoring the impact on diesel or jet fuel that translates into an additional drain of $100-150 billion per year that can't be spent on other goods and services that would contribute more to the recovery.
OPEC meetings do matter, because as long as OPEC possesses both spare production capacity and the discipline to withhold it from the market, it retains the power to control oil prices. If we want to understand the decision process of this group of countries that is always struggling to reconcile its own often-competing, but still broadly aligned self-interests, our assessment should focus on their issues more than ours, however much we are affected by the outcome. Yesterday we saw the price hawks stymie the efforts of those producers who are worried that if they squeeze consumers too hard, demand will fall back to the lows of 2009, costing them hundreds of billions of dollars per year in revenue. But if demand continues to grow, that was surely not the last word, and this debate must be revisited within a few months.
I have followed OPEC meetings for nearly 30 years, though not always as closely as when I was trading oil and its products, the prices of which stood to rise or fall depending on what was decided in Vienna. My interest in this meeting went up significantly when I received a call inviting me to participate in a panel discussion about it on the Voice of Russia radio network yesterday afternoon. An hour or two of research revealed a global oil market that is currently well-supplied, with inventories in most developed countries running at fairly typical levels and inventories in the US actually on the high side of normal for this time of the year. That's pretty much the argument that OPEC's price hawks took into yesterday's session.
However, the Saudis and others arguing for higher quotas were looking ahead to the effects of summer demand, especially in rapidly growing Asia, and the buildup of inventories for the fall and winter heating fuel season. They--along with the IEA--anticipated demand growing faster than supply, particularly when the impact of the curtailments from Libya and Yemen are factored in. Such events are important because of the quality difference between the oil that's been shut in in those countries and the spare capacity elsewhere that's available to make up for it.
OPEC's main problem is that the outlook for the global economy has weakened in the last few weeks, and not just because oil has risen to above $115 per barrel, compared to its average of $80 or so last year. The stakes for them look even higher when you factor in a history that includes boosting production in the late 1990s to meet roaring demand in Asia-Pacific, only to see the Asian Economic Crisis slam demand growth in the region into reverse, sending crude prices tumbling from the $20s to single digits by the end of 1998. The doves within OPEC were focused on keeping prices below the level at which large chunks of demand were destroyed in 2008, while the hawks seemed willing to risk that outcome to avert a future price collapse and preserve the revenue they need to fund their national agendas.
The potential consequences for individual OPEC members are substantial. Consider Algeria, which exports about 1.8 million barrels per day. The difference between the current price and what they realized last year equates to more than $20 billion annually. That might sound small in the context of the current debate over trillion-dollar US deficits, but it's nearly 15% of Algeria's GDP. It's no wonder that smaller producers and others with limited capacity to increase output--and thus revenue--would drag their feet on agreeing to raise quotas for countries with spare capacity.
If it sounds like I'm rationalizing cartel behavior that would be illegal in the US, that's not my intent. It's clear to me that oil prices are significantly higher than they would be, because OPEC has chosen to produce around 2 million barrels per day less than it did in 2008. In part they've had to do that to accommodate higher non-OPEC production--think Brazil and Russia--along with rising biofuel production, without weakening prices. The consequences for US consumers are equally clear: Gasoline prices are still more than $1 per gallon higher than a year ago, and even ignoring the impact on diesel or jet fuel that translates into an additional drain of $100-150 billion per year that can't be spent on other goods and services that would contribute more to the recovery.
OPEC meetings do matter, because as long as OPEC possesses both spare production capacity and the discipline to withhold it from the market, it retains the power to control oil prices. If we want to understand the decision process of this group of countries that is always struggling to reconcile its own often-competing, but still broadly aligned self-interests, our assessment should focus on their issues more than ours, however much we are affected by the outcome. Yesterday we saw the price hawks stymie the efforts of those producers who are worried that if they squeeze consumers too hard, demand will fall back to the lows of 2009, costing them hundreds of billions of dollars per year in revenue. But if demand continues to grow, that was surely not the last word, and this debate must be revisited within a few months.
Tuesday, March 08, 2011
Arguing With the Numbers
Over the weekend I read a remark in one of the Wall St. Journal's political columns that resonated with an implicit theme of this blog since its inception in early 2004. In her discussion of the budget crises facing various states and the debates concerning how to resolve them, Peggy Noonan highlighted the benefits of focusing on the numbers involved. "It doesn't matter if you're a liberal or a conservative, it's all about the numbers, and numbers are sobering things." Our national debate on energy would be much more productive if that same rationale were applied to it. That's happening more than it used to, perhaps because blogs are making some of the numbers more accessible, but an example in Monday's Journal reminded me just how far we still have to go in this regard.
In a supplement providing highlights from the Journal's annual "ECO-nomics" session in Santa Barbara, I saw a reference to a discussion of Brazil's sugarcane ethanol model and the merits of trying to apply something like that here, either on a domestic basis or by importing more cane ethanol. Brazil is widely credited for its vision of fueling its cars from domestic renewable sources, largely in response to the oil shocks of the 1970s. As hard as those were on the developed world, they were even more disruptive for developing economies. Today, Brazil consumes more ethanol than gasoline, because so many cars in Brazil run on either pure ethanol or a blend with a much higher proportion of alcohol than the standard US 10% blend. Who could fail to find this attractive, conceptually?
When we look at the actual numbers involved, however, we see Brazil's cane ethanol and its flexible fuel vehicle fleet in a somewhat different light, in terms of providing a model for the US. Start with the number of cars in the country, comprising around 26 million in a nation of 194 million, or 2/3rds the population of the US. By contrast, the US has more cars and light trucks than there are Brazilians. Next compare Brazil's total ethanol output to US gasoline consumption. With Brazil's annual ethanol yield approaching 7 billion gallons, and factoring in ethanol's lower energy content, the US would need roughly 27 Brazils worth of cane ethanol to fuel our car fleet, after subtracting the 13 billion gallons of corn ethanol we produce domestically, and ignoring logistical and fleet modification issues.
So without trivializing the important question of whether to continue to impose a tariff on Brazilian ethanol imported into the US, or taking anything away from the tremendous biomass conversion inherent in sugar cane grown in the tropics and processed in efficient facilities that make use of essentially every part of the cane plant to produce ethanol, sugar and a modest surplus of electric power, it's hard to see that we could encourage Brazil to ramp up its output enough to displace all the gasoline attributable to imported oil, or gear up US cropland in Florida and Louisiana to produce the equivalent. That conclusion couldn't be gleaned from purely conceptual arguments without the numbers.
This isn't intended as a slam on the Journal's conference or other high-concept confabs--I have attended many, myself, and found them very stimulating--or on Brazil's sugar/ethanol industry. It just seems that if our fiscal problems have finally reached the level of concern at which serious conversations must be grounded in the numbers, then energy deserves no less. And while I recognize that many of the numbers involved are daunting, there are many resources available to make them more accessible. That includes the recently revamped public website of the Energy Information Agency of the US Department of Energy. Although the update to EIA.gov has unfortunately blown up numerous embedded links in my past postings, the result seems to be more user-friendly.
Tomorrow I'll be participating in a webinar examining the energy implications of the unfolding revolutions in North Africa and the Middle East at The Energy Collective. Click here for more information and to register.
In a supplement providing highlights from the Journal's annual "ECO-nomics" session in Santa Barbara, I saw a reference to a discussion of Brazil's sugarcane ethanol model and the merits of trying to apply something like that here, either on a domestic basis or by importing more cane ethanol. Brazil is widely credited for its vision of fueling its cars from domestic renewable sources, largely in response to the oil shocks of the 1970s. As hard as those were on the developed world, they were even more disruptive for developing economies. Today, Brazil consumes more ethanol than gasoline, because so many cars in Brazil run on either pure ethanol or a blend with a much higher proportion of alcohol than the standard US 10% blend. Who could fail to find this attractive, conceptually?
When we look at the actual numbers involved, however, we see Brazil's cane ethanol and its flexible fuel vehicle fleet in a somewhat different light, in terms of providing a model for the US. Start with the number of cars in the country, comprising around 26 million in a nation of 194 million, or 2/3rds the population of the US. By contrast, the US has more cars and light trucks than there are Brazilians. Next compare Brazil's total ethanol output to US gasoline consumption. With Brazil's annual ethanol yield approaching 7 billion gallons, and factoring in ethanol's lower energy content, the US would need roughly 27 Brazils worth of cane ethanol to fuel our car fleet, after subtracting the 13 billion gallons of corn ethanol we produce domestically, and ignoring logistical and fleet modification issues.
So without trivializing the important question of whether to continue to impose a tariff on Brazilian ethanol imported into the US, or taking anything away from the tremendous biomass conversion inherent in sugar cane grown in the tropics and processed in efficient facilities that make use of essentially every part of the cane plant to produce ethanol, sugar and a modest surplus of electric power, it's hard to see that we could encourage Brazil to ramp up its output enough to displace all the gasoline attributable to imported oil, or gear up US cropland in Florida and Louisiana to produce the equivalent. That conclusion couldn't be gleaned from purely conceptual arguments without the numbers.
This isn't intended as a slam on the Journal's conference or other high-concept confabs--I have attended many, myself, and found them very stimulating--or on Brazil's sugar/ethanol industry. It just seems that if our fiscal problems have finally reached the level of concern at which serious conversations must be grounded in the numbers, then energy deserves no less. And while I recognize that many of the numbers involved are daunting, there are many resources available to make them more accessible. That includes the recently revamped public website of the Energy Information Agency of the US Department of Energy. Although the update to EIA.gov has unfortunately blown up numerous embedded links in my past postings, the result seems to be more user-friendly.
Tomorrow I'll be participating in a webinar examining the energy implications of the unfolding revolutions in North Africa and the Middle East at The Energy Collective. Click here for more information and to register.
Monday, December 06, 2010
Turning Biomass into Power or Fuel
This morning I ran across a news item indicating that Dow Chemical was installing a biomass cogeneration unit at its facility in Aratu, Brazil to provide process steam with minimal greenhouse gas emissions. It's a good example of another way to convert biomass into energy that hasn't attracted nearly as much interest as advanced biofuels have. That's somewhat surprising, since biomass power shares most of the logistical limitations but few of the technical challenges that have made the production of biofuel from non-food biomass so difficult. Perhaps the relative neglect of biomass power results more from motivation than outcomes.
I'm sure I paid more attention to this story because of Dow's choice of eucalyptus as the biomass source. I grew up under the spreading limbs of a giant eucalyptus tree in California--limbs that periodically fell off in storms, including a 9-ton monster that practically cut our house in half. In the years before that tree was finally cut down I raked up enormous quantities of the eucalyptus leaves and nuts that bombarded our yard. It would be fair to say that I developed a strong distaste for the species, at least for the ornamental and wind-break purposes for which many Californians had chosen this Australian import. However, many of these same features, including its fast growth and dense, oily wood, seem to be good attributes for biomass supply.
As noted in a recent Wall St. Journal article, the Achilles heel of biomass power is logistics. The lower the energy density of the biomass, relative to the fossil fuels it is intended to replace, the closer the source must be to the facility where it will be used, before transportation erodes any cost benefits, even after considering emissions reductions. Wood chips provide about 2/3 as much energy per pound as bituminous coal, but they can take up more than six times as much volume, unless they are first dried and turned into pellets. As is the case for cellulosic biofuels, these supply-chain considerations limit the scale of biomass power application and impose an additional constraint of sustainability: It doesn't pay to build a biomass power plant (or a cellulosic biofuel plant) unless you can be sure of a long-term supply of the raw material. The Journal article included examples of projects that paid a high price for miscalculations in this regard. One strategy for mitigating this limitation is co-firing, which relies on biomass for only a portion of a power plant's fuel needs.
The lower energy density of biomass also makes it essential to extract as much energy as possible from each pound or cubic foot. One of the reasons for the high efficiency of the Brazilian ethanol industry is that many of its mills turn the bagasse, the waste left over after extracting the juice from sugar cane, into process heat and power and need little or no fossil energy. Burning biomass in a high-efficiency combined heat and power application, as the Dow project appears to do--based on the scant information I could find--provides another way to get the most bang for the biomass buck.
That brings us back to motivation. One of the main justifications for the pursuit of cellulosic biofuels is that we have relatively few practical, cost-effective alternative fuels that could replace more than a small fraction of our petroleum use. On the other hand, we have many ways to generate electricity, including more than a few that emit little or no greenhouse gas, one of the main benefits of biomass power--though this point is not without controversy. However, I can't help wondering whether in the long run the best way to turn non-food biomass into energy for vehicles is to turn it into electricity first, rather than working so hard to break down plant structures that have evolved over millions of years to resist easy conversion into chemical energy. Resolving that dilemma depends on a lot more than engineering considerations, however, since we still don't know much about how consumer preferences will play into it. In the meantime, projects like Dow's provide another option for reducing emissions from facilities that must meet increasingly stringent sustainability criteria.
I'm sure I paid more attention to this story because of Dow's choice of eucalyptus as the biomass source. I grew up under the spreading limbs of a giant eucalyptus tree in California--limbs that periodically fell off in storms, including a 9-ton monster that practically cut our house in half. In the years before that tree was finally cut down I raked up enormous quantities of the eucalyptus leaves and nuts that bombarded our yard. It would be fair to say that I developed a strong distaste for the species, at least for the ornamental and wind-break purposes for which many Californians had chosen this Australian import. However, many of these same features, including its fast growth and dense, oily wood, seem to be good attributes for biomass supply.
As noted in a recent Wall St. Journal article, the Achilles heel of biomass power is logistics. The lower the energy density of the biomass, relative to the fossil fuels it is intended to replace, the closer the source must be to the facility where it will be used, before transportation erodes any cost benefits, even after considering emissions reductions. Wood chips provide about 2/3 as much energy per pound as bituminous coal, but they can take up more than six times as much volume, unless they are first dried and turned into pellets. As is the case for cellulosic biofuels, these supply-chain considerations limit the scale of biomass power application and impose an additional constraint of sustainability: It doesn't pay to build a biomass power plant (or a cellulosic biofuel plant) unless you can be sure of a long-term supply of the raw material. The Journal article included examples of projects that paid a high price for miscalculations in this regard. One strategy for mitigating this limitation is co-firing, which relies on biomass for only a portion of a power plant's fuel needs.
The lower energy density of biomass also makes it essential to extract as much energy as possible from each pound or cubic foot. One of the reasons for the high efficiency of the Brazilian ethanol industry is that many of its mills turn the bagasse, the waste left over after extracting the juice from sugar cane, into process heat and power and need little or no fossil energy. Burning biomass in a high-efficiency combined heat and power application, as the Dow project appears to do--based on the scant information I could find--provides another way to get the most bang for the biomass buck.
That brings us back to motivation. One of the main justifications for the pursuit of cellulosic biofuels is that we have relatively few practical, cost-effective alternative fuels that could replace more than a small fraction of our petroleum use. On the other hand, we have many ways to generate electricity, including more than a few that emit little or no greenhouse gas, one of the main benefits of biomass power--though this point is not without controversy. However, I can't help wondering whether in the long run the best way to turn non-food biomass into energy for vehicles is to turn it into electricity first, rather than working so hard to break down plant structures that have evolved over millions of years to resist easy conversion into chemical energy. Resolving that dilemma depends on a lot more than engineering considerations, however, since we still don't know much about how consumer preferences will play into it. In the meantime, projects like Dow's provide another option for reducing emissions from facilities that must meet increasingly stringent sustainability criteria.
Thursday, July 15, 2010
Moratorium Follies
This week Secretary of Interior Salazar reissued the administration's deepwater drilling moratorium, with a few new twists and a notional six month limit. This happened in spite of loud protests from the states most affected by the spill, some of their representatives in Washington, and even some skepticism from the heads of the President's own drilling commission. The old ban is still in court, and the new one probably will be soon, but this is really all moot, because whether the Salazar moratorium is technically in force or not, the legal battle over it has created a moratorium limbo that few companies would be willing to test, given the costs involved. One irony of all this is that in addition to the obvious indirect winners in OPEC, there's at least one direct winner in this hemisphere: Brazil, which will be quite happy to export to us their deepwater oil that we're inadvertently helping them to develop quicker and cheaper.
When I read the Interior Department press release on the new moratorium, which was presumably crafted to satisfy the federal judge's objections to the original deepwater drilling ban, several points stand out, aside from the redefinition of the ban to cover not water depth, but the kind of rigs that are required to drill in deep water. In the Secretary's statement that he "remains open to modifying the new deepwater drilling suspensions based on new information", he appears to offer greater flexibility and the prospect of case-by-case exemptions or an early termination. Yet when you read the first item on the list of reforms for which the moratorium is intended to buy time, dealing with "companies demonstrating that they have the ability to respond effectively to a potential spill in the Gulf," the implication seems clear. If an unprecedented response to the Macondo spill using the state-of-the-art technology and techniques has been inadequate to meet the government's implied standard--as seems self-evident--then this is a classic Catch 22. If drilling can only resume when the industry can prove it could contain a blowout like this and any oil spilled within a few days, then we could be waiting a very long time, while technology catches up to that new, higher bar.
When you parse through this document and examine the evidence that's been made available so far concerning the causes of the Deepwater Horizon disaster and spill, it's hard to avoid the conclusion that the main driver behind the moratorium is not technological, or even necessarily environmental, given the extremely low risks of a similar event occurring from a properly managed rig equipped with a properly-maintained blowout preventer. It seems due at least to "an abundance of caution"--that lovely phrase we have heard several times this week--if not ultimately from hard-nosed political considerations. If I were a President whose party was facing a tough mid-term election, I'd be tempted to eliminate any possible risk of another blowout between now and November 2, too.
The problem with that approach is that the administration won't pay the short-term price for that abundance of caution. That burden falls on the economy of the region, which has already been affected by the spill, on the domestic drilling industry--a vital national asset, not just a bunch of corporations--and its employees, and eventually on the entire US, as our domestic energy supply will again begin to dwindle. According to a new study, the economic impact of the moratorium already extends well beyond the region, because offshore oil workers, who typically work two weeks on and two weeks off, live all over the country, apparently in more than two-thirds of Congressional districts. Yet while unemployed oil workers might at least be covered by the $100 million fund that BP set aside for that purpose at the administration's request, the local businesses that employ many of them need help with more than just meeting payroll, if they are to survive until the end of the moratorium, whenever that might be. That's not BP's responsibility; it's the direct responsibility of the government that has taken a calculated decision to impose a blanket moratorium on the entire industry, rather than on individual bad actors.
Meanwhile, aside from OPEC, an indirect beneficiary of the moratorium that understands very well that when you stop drilling your existing production begins to fall away, there is at least one direct beneficiary that is about to take advantage of the opportunity the ban has created. Brazil has discovered enormous offshore oil reserves in the deep waters of the Santos Basin and elsewhere along its lengthy coastline. As I've noted before, it's the exploitation of these resources, rather than its effective but comparatively-small cane ethanol program, that has made Brazil energy independent and is turning it into one of the most important new oil exporters in the world, including to the US. Until recently, the companies exploring for oil off the coast of Brazil faced the same problems that Gulf Coast drillers did, of high rig rental costs and a long queue for hiring them. Our response to Deepwater Horizon is mitigating both issues. So while it might be promoting safer drilling in the Gulf, one of the unintended consequences of the suspension of drilling here is that it will simultaneously create a greater need for the US to import oil, while ensuring that countries like Brazil will have more of it to sell us, sooner than otherwise and at a bigger profit.
I expect to post over the course of the summer on ideas for what it would take to get our government and the rest of the country comfortable with resuming drilling, although some indications suggest that most of our fellow citizens are already there. This is complicated by an opportunistic PR campaign from environmental groups suggesting that this is the moment to get the US off oil entirely, rather than figuring out how to drill more safely. However desirable that might sound, for many reasons, at this point it's about as feasible as suggesting to a hospital patient that this is the moment for him to try living without blood. For good and ill, oil is still the lifeblood of our economy. We should absolutely work on reducing our dependence on it, but we're going to burn many billions of barrels of oil getting there, and that will require continued drilling in the US--unless we're happier than I think to go back to our former pattern of importing more and more of it from other countries. Stay tuned.
When I read the Interior Department press release on the new moratorium, which was presumably crafted to satisfy the federal judge's objections to the original deepwater drilling ban, several points stand out, aside from the redefinition of the ban to cover not water depth, but the kind of rigs that are required to drill in deep water. In the Secretary's statement that he "remains open to modifying the new deepwater drilling suspensions based on new information", he appears to offer greater flexibility and the prospect of case-by-case exemptions or an early termination. Yet when you read the first item on the list of reforms for which the moratorium is intended to buy time, dealing with "companies demonstrating that they have the ability to respond effectively to a potential spill in the Gulf," the implication seems clear. If an unprecedented response to the Macondo spill using the state-of-the-art technology and techniques has been inadequate to meet the government's implied standard--as seems self-evident--then this is a classic Catch 22. If drilling can only resume when the industry can prove it could contain a blowout like this and any oil spilled within a few days, then we could be waiting a very long time, while technology catches up to that new, higher bar.
When you parse through this document and examine the evidence that's been made available so far concerning the causes of the Deepwater Horizon disaster and spill, it's hard to avoid the conclusion that the main driver behind the moratorium is not technological, or even necessarily environmental, given the extremely low risks of a similar event occurring from a properly managed rig equipped with a properly-maintained blowout preventer. It seems due at least to "an abundance of caution"--that lovely phrase we have heard several times this week--if not ultimately from hard-nosed political considerations. If I were a President whose party was facing a tough mid-term election, I'd be tempted to eliminate any possible risk of another blowout between now and November 2, too.
The problem with that approach is that the administration won't pay the short-term price for that abundance of caution. That burden falls on the economy of the region, which has already been affected by the spill, on the domestic drilling industry--a vital national asset, not just a bunch of corporations--and its employees, and eventually on the entire US, as our domestic energy supply will again begin to dwindle. According to a new study, the economic impact of the moratorium already extends well beyond the region, because offshore oil workers, who typically work two weeks on and two weeks off, live all over the country, apparently in more than two-thirds of Congressional districts. Yet while unemployed oil workers might at least be covered by the $100 million fund that BP set aside for that purpose at the administration's request, the local businesses that employ many of them need help with more than just meeting payroll, if they are to survive until the end of the moratorium, whenever that might be. That's not BP's responsibility; it's the direct responsibility of the government that has taken a calculated decision to impose a blanket moratorium on the entire industry, rather than on individual bad actors.
Meanwhile, aside from OPEC, an indirect beneficiary of the moratorium that understands very well that when you stop drilling your existing production begins to fall away, there is at least one direct beneficiary that is about to take advantage of the opportunity the ban has created. Brazil has discovered enormous offshore oil reserves in the deep waters of the Santos Basin and elsewhere along its lengthy coastline. As I've noted before, it's the exploitation of these resources, rather than its effective but comparatively-small cane ethanol program, that has made Brazil energy independent and is turning it into one of the most important new oil exporters in the world, including to the US. Until recently, the companies exploring for oil off the coast of Brazil faced the same problems that Gulf Coast drillers did, of high rig rental costs and a long queue for hiring them. Our response to Deepwater Horizon is mitigating both issues. So while it might be promoting safer drilling in the Gulf, one of the unintended consequences of the suspension of drilling here is that it will simultaneously create a greater need for the US to import oil, while ensuring that countries like Brazil will have more of it to sell us, sooner than otherwise and at a bigger profit.
I expect to post over the course of the summer on ideas for what it would take to get our government and the rest of the country comfortable with resuming drilling, although some indications suggest that most of our fellow citizens are already there. This is complicated by an opportunistic PR campaign from environmental groups suggesting that this is the moment to get the US off oil entirely, rather than figuring out how to drill more safely. However desirable that might sound, for many reasons, at this point it's about as feasible as suggesting to a hospital patient that this is the moment for him to try living without blood. For good and ill, oil is still the lifeblood of our economy. We should absolutely work on reducing our dependence on it, but we're going to burn many billions of barrels of oil getting there, and that will require continued drilling in the US--unless we're happier than I think to go back to our former pattern of importing more and more of it from other countries. Stay tuned.
Friday, January 22, 2010
Energy Lessons from Brazil
I was surprised by a headline I saw this morning: "Brazilians Call for Cut to 20% Ethanol Import Tax." At first I thought this referred to the US duty and tariff on ethanol imports, the repeal of which Brazil's President Lula has suggested to his US counterpart on more than one occasion. Instead, it seems that Brazil has had an ethanol import tariff of its own all along--who knew?--and today's call from Brazilian sugar trade association Unica stems from the recent weather-related shortfall in cane production that reduced ethanol inventories in Brazil and led to the government's temporary cut in the required ethanol content of gasoline from 25% to 20%. This situation illustrates a couple of energy lessons that don't quite square with the usual, overly-simplistic interpretation of Brazil's success at displacing oil with biofuel.
Brazil deserves recognition for its consistent approach to supporting the expansion of ethanol production from its normally-abundant sugar cane crop. The country has benefited from its government's deliberate efforts to promote the use of domestically-produced ethanol in a car fleet that increasingly consists of "flexible fuel vehicles" capable of running on widely-varying proportions of ethanol and gasoline. With an ethanol surplus and climate and geography well-suited to producing more--and much more efficiently than from corn and the other principal ethanol crops in northern latitudes--it's no surprise that Brazilians now consume more ethanol than petroleum gasoline. Yet as we see in today's news, Brazil's extraordinary reliance on biofuel creates a different kind of energy-security vulnerability, one related to crop yields rather than geopolitics. While Brazil's dual-fuel capability gives it ample flexibility to prevent a 5% drop in ethanol production for a few months from causing a crisis, just imagine the economic consequences of a comparable drop in oil production from the Middle East. Anyone advocating a complete switch to biofuels ought to ponder the potential unintended consequences carefully.
Another lesson hiding behind these ethanol statistics is that contrary to popular opinion, Brazil hasn't become energy independent because of its ethanol policies, though these have certainly helped. Rather, it is chiefly the surging output of Brazil's oil fields, which nearly doubled to 2.6 million barrels per day in the last 10 years and is not done growing, that has made Brazil self-sufficient in fuels. To put that in perspective, Brazil's oil platforms produce the energy-equivalent of 72 billion gallons of ethanol per year, or ten times its cane ethanol output. Although this was only possible because of the discovery of world-class resources off the country's coast, their development depended on consistent policies providing attractive access for the international firms that partnered with the state oil company, Petrobras, in exploring them. I wish more people in Washington, DC paid attention to the crucial contribution of offshore drilling to Brazil's appealing energy story.
As for the import tariff, I confess amusement at the inconsistency inherent in Brazilian politicians and business leaders criticizing a US tariff that exists mainly to prevent a US ethanol blending subsidy from leaking abroad, when they have their own tariff protection in place. I'd be happy to see both of these tariffs reduced or dropped entirely, but only if we finally ended our three decades of generous taxpayer support for ethanol blending. It's bad enough to subsidize domestic ethanol production from corn, but subsidizing Brazilian sugar companies to produce ethanol in their country would be a travesty, yet that's exactly what we'd do if we eliminated the tariffs without eliminating the Volumetric Excise Tax Credit, too.
Brazil deserves recognition for its consistent approach to supporting the expansion of ethanol production from its normally-abundant sugar cane crop. The country has benefited from its government's deliberate efforts to promote the use of domestically-produced ethanol in a car fleet that increasingly consists of "flexible fuel vehicles" capable of running on widely-varying proportions of ethanol and gasoline. With an ethanol surplus and climate and geography well-suited to producing more--and much more efficiently than from corn and the other principal ethanol crops in northern latitudes--it's no surprise that Brazilians now consume more ethanol than petroleum gasoline. Yet as we see in today's news, Brazil's extraordinary reliance on biofuel creates a different kind of energy-security vulnerability, one related to crop yields rather than geopolitics. While Brazil's dual-fuel capability gives it ample flexibility to prevent a 5% drop in ethanol production for a few months from causing a crisis, just imagine the economic consequences of a comparable drop in oil production from the Middle East. Anyone advocating a complete switch to biofuels ought to ponder the potential unintended consequences carefully.
Another lesson hiding behind these ethanol statistics is that contrary to popular opinion, Brazil hasn't become energy independent because of its ethanol policies, though these have certainly helped. Rather, it is chiefly the surging output of Brazil's oil fields, which nearly doubled to 2.6 million barrels per day in the last 10 years and is not done growing, that has made Brazil self-sufficient in fuels. To put that in perspective, Brazil's oil platforms produce the energy-equivalent of 72 billion gallons of ethanol per year, or ten times its cane ethanol output. Although this was only possible because of the discovery of world-class resources off the country's coast, their development depended on consistent policies providing attractive access for the international firms that partnered with the state oil company, Petrobras, in exploring them. I wish more people in Washington, DC paid attention to the crucial contribution of offshore drilling to Brazil's appealing energy story.
As for the import tariff, I confess amusement at the inconsistency inherent in Brazilian politicians and business leaders criticizing a US tariff that exists mainly to prevent a US ethanol blending subsidy from leaking abroad, when they have their own tariff protection in place. I'd be happy to see both of these tariffs reduced or dropped entirely, but only if we finally ended our three decades of generous taxpayer support for ethanol blending. It's bad enough to subsidize domestic ethanol production from corn, but subsidizing Brazilian sugar companies to produce ethanol in their country would be a travesty, yet that's exactly what we'd do if we eliminated the tariffs without eliminating the Volumetric Excise Tax Credit, too.
Wednesday, November 04, 2009
"Carbon Debt"
A new term has entered our lexicon without much fanfare, but that is about to change. When the Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) meets next month in Copenhagen, we will hear a lot more about "carbon debt" and the obligation that developing countries believe the developed world owes them for having used the atmosphere as a sink for CO2 and other gases since the Industrial Revolution. From my perspective, this approach looks counterproductive and risks scuttling the principal process for coordinating the actions of independent nations in addressing the most global of problems. The issues of international and inter-generational environmental equity raised by the accumulation of greenhouse gases (GHGs) are serious and complex, but framing them in this way will make it much harder to find acceptable middle ground, unless the delegations show restraint and common sense about how far to reach back into history to assess blame for a warming earth.
It was always going to be tricky reconciling the competing interests of the developed and developing worlds sufficiently to craft a new global climate agreement to replace the expiring Kyoto Protocol. In addition to large differences in per-capita wealth and income, many of the main players fall into one of two key categories: countries with large historical and current emissions of GHGs that are now moderating or even decreasing, and countries with relatively much smaller historical emissions but large and/or rapidly-growing current emissions. The nature of the cumulative climate impact of these GHGs makes that distinction a crucial one and the source of much rancorous debate. I've been thinking about the resulting issues of equity for some time, but I am extremely concerned by the turn that I see the negotiating process that started in Bali two years ago having taken.
The UNFCC doesn't make it easy to follow what's going on. Of all things it took a visit to a climate change skeptic's website to track down a reasonably current version of the negotiating draft that is being prepared for consideration in Copenhagen. That enabled me to locate the document on the UN site once I had its file name. Having scanned through it for references to carbon debt, I can see why they might have wanted to make it hard to find, since the principles embodied there are bound to strike most Americans as at least counter-intuitive. For starters, the notion of carbon debt is introduced early in the draft as a "guiding principle of the Convention", and described as, "historical responsibilities in greenhouse gas emissions and the related historical ecological debt generated by the cumulative greenhouse gas emissions since 1750 and the most recent scientific information." That word "debt" crops up many times in the document, with repeated references to the "emissions debt", "historical climate debt" and "adaptation debt" that developed countries "owe" to developing ones.
Lest you think that this is merely intended as an abstraction governing philosophical discussions of equity, the document makes it abundantly clear that this is about money and who shall pay whom. One of several examples in the text puts this in admirably concrete terms:
"Developed country Parties shall provide financial resources and transfer technology to developing country Parties to make full and effective repayment of climate debt, including adaptation debt, taking responsibility for their historical cumulative emissions and current high per capita emissions."
Unfortunately, as I noted in a lengthy posting on this topic a year-and-a-half ago, matters aren't nearly as clear-cut as this wording suggests. While the consequences of many decades' worth of emissions of CO2 and other long-lived GHGs certainly appear to be putting an unfair burden on developing countries, it would be equally unfair to the citizens of developed countries to tax them for emissions that occurred before the scientific consensus on global warming emerged in the last couple of decades. Arrhenius may have worked out that CO2 could warm the planet a century ago, but the relative importance of that effect amidst the many complex factors influencing the climate was anything but obvious then, and it is still not fully understood. It makes no more sense to burden modern Europeans and Americans for the emissions of our parents, grandparents, and great-to-the-nth grandparents going back 10 generations than it does to tax modern Chinese, Indians and Brazilians for the entire edifice of Western technology that has enabled their present and future development.
We are all in this together, and the only emissions we have control over are those that occur from here on out. Having said that, it's clear that without some recognition that developing countries didn't create this problem--no matter how much they might be contributing to it now--there will be no deal in Copenhagen. The only viable middle ground I see, if not from the standpoint of the inter-governmental delegations, then for the citizenry they represent, would be to recognize the disparities in historical emissions but impose an effective statute of limitations on them. No emissions prior to the establishment of the Framework Convention on Climate Change at the Second Earth Summit at Rio de Janeiro in 1992 should be counted for purposes of allocating emission targets or financial assistance. While such a compromise would greatly diminish the imputed carbon debt of the developed world and allocate a bigger portion of it to large developing countries like China and Indonesia--particularly when changes in forestry and land-use are factored in--it would hardly let the rich world off the hook. The countries of the OECD have collectively emitted on the order of 200 billion tons of CO2-equivalent GHGs since then--roughly half the world's total emissions in that interval.
It would be tragic if the Copenhagen climate conference could only arrive at a new global agreement on emissions by relying on a principle that American voters would ultimately find as unacceptable as the allocation of national emission-reduction targets in the Kyoto Protocol. It is challenging enough for our elected representatives to attempt to match federal tax revenues to our existing obligations, foreign and domestic. I can't imagine any President or Congress wanting to explain to the electorate--particularly with so many of them already exercised over growing deficits and the current tax burden--why they must pay higher taxes to send carbon-debt payments to some of the same countries that are competing for our jobs and industries, on the basis that previous generations of Americans put more CO2 into the atmosphere than past generations of Chinese, Indians and Brazilians. That sounds like political suicide to me.
It was always going to be tricky reconciling the competing interests of the developed and developing worlds sufficiently to craft a new global climate agreement to replace the expiring Kyoto Protocol. In addition to large differences in per-capita wealth and income, many of the main players fall into one of two key categories: countries with large historical and current emissions of GHGs that are now moderating or even decreasing, and countries with relatively much smaller historical emissions but large and/or rapidly-growing current emissions. The nature of the cumulative climate impact of these GHGs makes that distinction a crucial one and the source of much rancorous debate. I've been thinking about the resulting issues of equity for some time, but I am extremely concerned by the turn that I see the negotiating process that started in Bali two years ago having taken.
The UNFCC doesn't make it easy to follow what's going on. Of all things it took a visit to a climate change skeptic's website to track down a reasonably current version of the negotiating draft that is being prepared for consideration in Copenhagen. That enabled me to locate the document on the UN site once I had its file name. Having scanned through it for references to carbon debt, I can see why they might have wanted to make it hard to find, since the principles embodied there are bound to strike most Americans as at least counter-intuitive. For starters, the notion of carbon debt is introduced early in the draft as a "guiding principle of the Convention", and described as, "historical responsibilities in greenhouse gas emissions and the related historical ecological debt generated by the cumulative greenhouse gas emissions since 1750 and the most recent scientific information." That word "debt" crops up many times in the document, with repeated references to the "emissions debt", "historical climate debt" and "adaptation debt" that developed countries "owe" to developing ones.
Lest you think that this is merely intended as an abstraction governing philosophical discussions of equity, the document makes it abundantly clear that this is about money and who shall pay whom. One of several examples in the text puts this in admirably concrete terms:
"Developed country Parties shall provide financial resources and transfer technology to developing country Parties to make full and effective repayment of climate debt, including adaptation debt, taking responsibility for their historical cumulative emissions and current high per capita emissions."
Unfortunately, as I noted in a lengthy posting on this topic a year-and-a-half ago, matters aren't nearly as clear-cut as this wording suggests. While the consequences of many decades' worth of emissions of CO2 and other long-lived GHGs certainly appear to be putting an unfair burden on developing countries, it would be equally unfair to the citizens of developed countries to tax them for emissions that occurred before the scientific consensus on global warming emerged in the last couple of decades. Arrhenius may have worked out that CO2 could warm the planet a century ago, but the relative importance of that effect amidst the many complex factors influencing the climate was anything but obvious then, and it is still not fully understood. It makes no more sense to burden modern Europeans and Americans for the emissions of our parents, grandparents, and great-to-the-nth grandparents going back 10 generations than it does to tax modern Chinese, Indians and Brazilians for the entire edifice of Western technology that has enabled their present and future development.
We are all in this together, and the only emissions we have control over are those that occur from here on out. Having said that, it's clear that without some recognition that developing countries didn't create this problem--no matter how much they might be contributing to it now--there will be no deal in Copenhagen. The only viable middle ground I see, if not from the standpoint of the inter-governmental delegations, then for the citizenry they represent, would be to recognize the disparities in historical emissions but impose an effective statute of limitations on them. No emissions prior to the establishment of the Framework Convention on Climate Change at the Second Earth Summit at Rio de Janeiro in 1992 should be counted for purposes of allocating emission targets or financial assistance. While such a compromise would greatly diminish the imputed carbon debt of the developed world and allocate a bigger portion of it to large developing countries like China and Indonesia--particularly when changes in forestry and land-use are factored in--it would hardly let the rich world off the hook. The countries of the OECD have collectively emitted on the order of 200 billion tons of CO2-equivalent GHGs since then--roughly half the world's total emissions in that interval.
It would be tragic if the Copenhagen climate conference could only arrive at a new global agreement on emissions by relying on a principle that American voters would ultimately find as unacceptable as the allocation of national emission-reduction targets in the Kyoto Protocol. It is challenging enough for our elected representatives to attempt to match federal tax revenues to our existing obligations, foreign and domestic. I can't imagine any President or Congress wanting to explain to the electorate--particularly with so many of them already exercised over growing deficits and the current tax burden--why they must pay higher taxes to send carbon-debt payments to some of the same countries that are competing for our jobs and industries, on the basis that previous generations of Americans put more CO2 into the atmosphere than past generations of Chinese, Indians and Brazilians. That sounds like political suicide to me.
Wednesday, July 02, 2008
The Ethanol Tariff and Subsidy Reform
Brazilian ethanol producers have long sought a level playing field on which to compete with their US counterparts, and this week they are launching a campaign to publicize their message that ethanol derived from sugar cane could be imported from Brazil at a lower cost than ethanol can be produced from corn in the US, if only the import tariff were reduced or eliminated. Legislation to reduce the tariff has been introduced in both the House and Senate. But while the modest step of cutting the tariff to match the domestic ethanol subsidy makes sense, eliminating it entirely would require substantial changes in the mechanism by which the federal government supports the use of domestic ethanol, to prevent taxpayer dollars directly subsidizing Brazilian cane growers and distillers. It is hard to imagine legislators wanting to open such a can of worms this year.
With the exception of imports under the Caribbean Basin Initiative, all ethanol imported into the US is subject to an import tariff and "secondary duty" worth about $0.60 per gallon. Although its original purpose may have been to protect domestic producers from foreign competition, it serves an important practical function, because of the way the US subsidizes domestic ethanol. Along with direct support to corn farmers and loan guarantees and other benefits for ethanol distillers, the government provides a credit of $0.51/gal. to companies that blend ethanol into gasoline, as a reduction to the fuel tax they would otherwise owe--though no longer at the expense of funding for road maintenance. The Farm Bill recently enacted over President Bush's veto reduced this "blenders' credit" to $0.45/gal, starting next year, but it will still amount to over $3 billion per year, based on 2007 volumes, which are slated to double by 2012.
Due to surging US ethanol production in 2007, imports from Brazil fell last year, compared to 2006. However, in the wake of the flooding that has devastated crops and paralyzed rail and barge transport in a large section of the Midwest, more imports might be necessary in order to meet the mandated volume of 9 billion gallons of ethanol for this year, under the Renewable Fuel Standard provisions of the Energy Independence and Security Act of 2007. If the tariff were repealed without changing the way the blenders' credit is paid, and if Brazilian imports merely matched their 2006 level, taxpayers could end up subsidizing Brazilian ethanol producers to the tune of $220 million this year.
I see two possible ways to avoid this outcome, while still taking advantage of lower-cost, higher-efficiency Brazilian ethanol: First, the law governing the ethanol credit could be modified to restrict its application to volumes produced in the US. Even if that passed muster under World Trade Organization rules, it would require the creation of a two-tier ethanol subsidy system and the means of monitoring it. In the process, it would increase the incentives for ethanol smuggling. That might sound like a relic of Prohibition, but given their established involvement in evading gasoline taxes, organized crime might find it a lucrative new line of business.
The other, more drastic alternative would be to shift the point of subsidy payment from the blender to the ethanol producer. This would impose its own regulatory and accounting burden and create other opportunities for abuse. However, it would also raise a more awkward question for ethanol producers. The original choice to subsidize blenders was hardly accidental; it was designed to encourage greater use of a domestic fuel during the previous energy crisis, and it has certainly achieved that goal. But with refiners and other blenders of gasoline now required by law to blend specified quantities of ethanol into gasoline, and with wholesale ethanol now generally selling for less at the distillery gate than wholesale gasoline, the justification for providing blenders with additional financial incentives to use this fuel has been greatly diminished.
Considering all these factors, ending the tariff and duty applied to imports of ethanol from Brazil and elsewhere would hardly be the simple matter suggested by the supporters of this idea. It would force a choice between extending ethanol subsidies to foreign producers--imagine that coming up in a presidential debate--and confronting the larger question of continuing ethanol subsidies at a time when our ethanol use is widely perceived to contribute to higher food prices. Unless the logistical problems caused by the Midwest flooding result in a severe enough shortage of domestic ethanol to drive up gasoline prices, I would be surprised if this idea got any traction this year.
With the exception of imports under the Caribbean Basin Initiative, all ethanol imported into the US is subject to an import tariff and "secondary duty" worth about $0.60 per gallon. Although its original purpose may have been to protect domestic producers from foreign competition, it serves an important practical function, because of the way the US subsidizes domestic ethanol. Along with direct support to corn farmers and loan guarantees and other benefits for ethanol distillers, the government provides a credit of $0.51/gal. to companies that blend ethanol into gasoline, as a reduction to the fuel tax they would otherwise owe--though no longer at the expense of funding for road maintenance. The Farm Bill recently enacted over President Bush's veto reduced this "blenders' credit" to $0.45/gal, starting next year, but it will still amount to over $3 billion per year, based on 2007 volumes, which are slated to double by 2012.
Due to surging US ethanol production in 2007, imports from Brazil fell last year, compared to 2006. However, in the wake of the flooding that has devastated crops and paralyzed rail and barge transport in a large section of the Midwest, more imports might be necessary in order to meet the mandated volume of 9 billion gallons of ethanol for this year, under the Renewable Fuel Standard provisions of the Energy Independence and Security Act of 2007. If the tariff were repealed without changing the way the blenders' credit is paid, and if Brazilian imports merely matched their 2006 level, taxpayers could end up subsidizing Brazilian ethanol producers to the tune of $220 million this year.
I see two possible ways to avoid this outcome, while still taking advantage of lower-cost, higher-efficiency Brazilian ethanol: First, the law governing the ethanol credit could be modified to restrict its application to volumes produced in the US. Even if that passed muster under World Trade Organization rules, it would require the creation of a two-tier ethanol subsidy system and the means of monitoring it. In the process, it would increase the incentives for ethanol smuggling. That might sound like a relic of Prohibition, but given their established involvement in evading gasoline taxes, organized crime might find it a lucrative new line of business.
The other, more drastic alternative would be to shift the point of subsidy payment from the blender to the ethanol producer. This would impose its own regulatory and accounting burden and create other opportunities for abuse. However, it would also raise a more awkward question for ethanol producers. The original choice to subsidize blenders was hardly accidental; it was designed to encourage greater use of a domestic fuel during the previous energy crisis, and it has certainly achieved that goal. But with refiners and other blenders of gasoline now required by law to blend specified quantities of ethanol into gasoline, and with wholesale ethanol now generally selling for less at the distillery gate than wholesale gasoline, the justification for providing blenders with additional financial incentives to use this fuel has been greatly diminished.
Considering all these factors, ending the tariff and duty applied to imports of ethanol from Brazil and elsewhere would hardly be the simple matter suggested by the supporters of this idea. It would force a choice between extending ethanol subsidies to foreign producers--imagine that coming up in a presidential debate--and confronting the larger question of continuing ethanol subsidies at a time when our ethanol use is widely perceived to contribute to higher food prices. Unless the logistical problems caused by the Midwest flooding result in a severe enough shortage of domestic ethanol to drive up gasoline prices, I would be surprised if this idea got any traction this year.
Friday, April 25, 2008
Vertical Integration
Vertical integration is a time-honored strategy in the oil and gas industry, though for the last couple of decades it has operated in more of a virtual, rather than physical mode. Oil producers sell mainly into the open market, and the refineries of integrated companies buy as much or more from third-party suppliers as from their own affiliates, and then ship their products in fungible pipelines, with brand identity deriving from the additives with which the fuel is dosed at the distribution terminal, rather than any notion of continuous custody of molecules from well to pump. Various factors have prevented alternative fuels such as ethanol from attaining this highly-evolved state, and that makes the acquisition of Exxon Mobil's Esso marketing network in Brazil by Cosan Ltd., a large Brazilian ethanol producer, all the more interesting. Call it convergence or an example of parallel evolution; this is a notable signpost of the growth of biofuels and the diversification of the global liquid fuel system.
There are many reasons why a producer might want to integrate into the distribution and marketing of its products, and they vary with the conditions of the market in which it operates. The relatively recent integration of the leading US refiner Valero into branded marketing probably had more to do with gaining access to a less cyclical and non-correlated source of profit margins than with any concern that it would be unable to sell its output into the market. From the account of the Cosan/Esso Brasileira transaction in this morning's Wall St. Journal, however, the impetus for this deal seems to be one that would have been well understood by the founders of today's major oil companies, who operated in a similar period of rapid market growth, product oversupply, and cut-throat competition in this country.
Despite frequent and sometimes breathless comparisons to the success of ethanol in Brazil, the US produces more ethanol from corn than Brazil does from cane: 6.5 billion gallons last year, compared to around 5 billion. But the critical difference is that, while ethanol in Brazil enjoys a much higher share of the domestic motor fuels market, there is also a surplus, leading to substantial exports to the US and other countries. Producing ethanol from sugar cane in the tropics is so efficient that Brazilian ethanol can, without any government subsidy, overcome the $0.54/gal US ethanol import tariff--a necessary element of our domestic ethanol subsidy structure. That means that ethanol producers in Brazil must compete aggressively to supply the domestic retail fuel market controlled by Petrobras, Ipiranga, Shell, Chevron's Texaco brand, and Esso.
Buying Esso's marketing and distribution network should provide Cosan with a dedicated outlet for its entire 330 million gallon per year ethanol output. However, the world has changed since the days when energy companies regarded their marketing arms as a mechanism for locking in upstream profits--a means of "disposal". Cosan is effectively buying an option that it will choose how to exercise every day, pushing its product into its own stations or buying from other producers and continuing to export to other markets. Whether local marketing margins are low or high, it will be able to optimize around its new value chain and enhance the profitability of its core sugar cane business.
Some will wonder whether this deal foreshadows a future move by a US ethanol producer to build or buy its own retail network, to push E85 into this market. It's possible, but while corn and cane are similar in each having other uses besides fuel production, cane ethanol's much larger energy surplus makes it a valuable energy source, like crude oil, rather than just an energy extender. Corn ethanol is a margin business that hinges on the "crush spread" between a lively commodity market for corn and the mandated, subsidized use of ethanol by gasoline blenders. Efficiency and scale are its key drivers, and that's reflected in the merger of VeraSun and US Biofuels. For now, at least, horizontal integration and consolidation, rather than vertical integration, looks like the trend to watch here.
Note: I have a financial interest in one of the companies mentioned today, Chevron, and none of my comments should be construed as investment advice.
There are many reasons why a producer might want to integrate into the distribution and marketing of its products, and they vary with the conditions of the market in which it operates. The relatively recent integration of the leading US refiner Valero into branded marketing probably had more to do with gaining access to a less cyclical and non-correlated source of profit margins than with any concern that it would be unable to sell its output into the market. From the account of the Cosan/Esso Brasileira transaction in this morning's Wall St. Journal, however, the impetus for this deal seems to be one that would have been well understood by the founders of today's major oil companies, who operated in a similar period of rapid market growth, product oversupply, and cut-throat competition in this country.
Despite frequent and sometimes breathless comparisons to the success of ethanol in Brazil, the US produces more ethanol from corn than Brazil does from cane: 6.5 billion gallons last year, compared to around 5 billion. But the critical difference is that, while ethanol in Brazil enjoys a much higher share of the domestic motor fuels market, there is also a surplus, leading to substantial exports to the US and other countries. Producing ethanol from sugar cane in the tropics is so efficient that Brazilian ethanol can, without any government subsidy, overcome the $0.54/gal US ethanol import tariff--a necessary element of our domestic ethanol subsidy structure. That means that ethanol producers in Brazil must compete aggressively to supply the domestic retail fuel market controlled by Petrobras, Ipiranga, Shell, Chevron's Texaco brand, and Esso.
Buying Esso's marketing and distribution network should provide Cosan with a dedicated outlet for its entire 330 million gallon per year ethanol output. However, the world has changed since the days when energy companies regarded their marketing arms as a mechanism for locking in upstream profits--a means of "disposal". Cosan is effectively buying an option that it will choose how to exercise every day, pushing its product into its own stations or buying from other producers and continuing to export to other markets. Whether local marketing margins are low or high, it will be able to optimize around its new value chain and enhance the profitability of its core sugar cane business.
Some will wonder whether this deal foreshadows a future move by a US ethanol producer to build or buy its own retail network, to push E85 into this market. It's possible, but while corn and cane are similar in each having other uses besides fuel production, cane ethanol's much larger energy surplus makes it a valuable energy source, like crude oil, rather than just an energy extender. Corn ethanol is a margin business that hinges on the "crush spread" between a lively commodity market for corn and the mandated, subsidized use of ethanol by gasoline blenders. Efficiency and scale are its key drivers, and that's reflected in the merger of VeraSun and US Biofuels. For now, at least, horizontal integration and consolidation, rather than vertical integration, looks like the trend to watch here.
Note: I have a financial interest in one of the companies mentioned today, Chevron, and none of my comments should be construed as investment advice.
Friday, November 09, 2007
An Elephant in Perspective
Enthusiasm about Brazil's new giant oilfield, Tupi, has sharply boosted the stock price of Petrobras, which owns 65% of the offshore block in which the field is located. If the estimates of its total reserves prove accurate, in the range of 5-8 billion barrels of oil equivalent, then it would be one of the largest finds in recent years. While this one discovery might not change our perspective on the long-term capability of global oil supplies to keep up with demand, or our proximity to a peak in global production, it has all sorts of interesting implications. As such, it probably deserves even wider coverage than it is getting.
Using the skewed math of the industry's critics, Tupi's reserves amount to only a three-month supply of oil for a world that consumes 85 million barrels per day. A drop in the bucket, right? But of course the world's supply of oil is made up of the output of thousands of oilfields, most much smaller than Tupi and only a relative handful larger. And it's those few, large fields, which can sustain a high output for decades, that are the bedrock upon which our entire oil edifice rests. Tupi's prospective reserves would put it in that top league and, together with possible extensions and adjacent fields, make Brazil a much bigger factor in oil markets. It also raises questions about how many more such "elephants" are waiting to be discovered, as technology extends our reach into ever deeper waters offshore.
As things stand now, Brazil is a modest net importer of oil, on the order of 200,000 barrels per day (bpd,) but with a steadily rising production profile. Even without Tupi, it has another million bpd of new production coming onstream in the next several years. That should vault it past Venezuela's stagnating output and make Brazil the largest oil producer in South America and a key oil exporter. Add Tupi into the mix, and Brazil begins to look like the next Norway, or at least another Mexico: an important new factor in non-OPEC supply.
Guessing at Tupi's ultimate production is beyond my technical skills. Alaska's Prudhoe Bay and associated smaller fields, which contained about twice as much oil, peaked at 2 million bpd and produced over one million for 19 straight years. Well into decline, it still accounts for more than 10% of US oil production. Viewed in that light, one oil field--it it's big enough--can affect the fortunes of an entire country. Together with Brazil's potential to become a much bigger exporter of ethanol from sugar cane, the country's net contribution to global liquid fuels markets over the next decade or two might be on a par with that of Canada's oil sands, with a corresponding influence on world oil prices.
Using the skewed math of the industry's critics, Tupi's reserves amount to only a three-month supply of oil for a world that consumes 85 million barrels per day. A drop in the bucket, right? But of course the world's supply of oil is made up of the output of thousands of oilfields, most much smaller than Tupi and only a relative handful larger. And it's those few, large fields, which can sustain a high output for decades, that are the bedrock upon which our entire oil edifice rests. Tupi's prospective reserves would put it in that top league and, together with possible extensions and adjacent fields, make Brazil a much bigger factor in oil markets. It also raises questions about how many more such "elephants" are waiting to be discovered, as technology extends our reach into ever deeper waters offshore.
As things stand now, Brazil is a modest net importer of oil, on the order of 200,000 barrels per day (bpd,) but with a steadily rising production profile. Even without Tupi, it has another million bpd of new production coming onstream in the next several years. That should vault it past Venezuela's stagnating output and make Brazil the largest oil producer in South America and a key oil exporter. Add Tupi into the mix, and Brazil begins to look like the next Norway, or at least another Mexico: an important new factor in non-OPEC supply.
Guessing at Tupi's ultimate production is beyond my technical skills. Alaska's Prudhoe Bay and associated smaller fields, which contained about twice as much oil, peaked at 2 million bpd and produced over one million for 19 straight years. Well into decline, it still accounts for more than 10% of US oil production. Viewed in that light, one oil field--it it's big enough--can affect the fortunes of an entire country. Together with Brazil's potential to become a much bigger exporter of ethanol from sugar cane, the country's net contribution to global liquid fuels markets over the next decade or two might be on a par with that of Canada's oil sands, with a corresponding influence on world oil prices.
Monday, September 10, 2007
Ethanol Diversification
The lead story of today's Wall Street Journal concerns the efforts of international commodity firms, including US companies such as ADM, Cargill and Bunge, to break into the Brazilian sugar cane ethanol market. On one level, this reflects the growing globalization of the ethanol business, as more countries look for alternatives to petroleum products. Deeper strategic issues are at work, as well, involving the need for these companies to reduce their dependence on high-cost supplies of corn ethanol, in anticipation of new competition from cellulosic ethanol within a few years. Brazil's potential as a low-cost supplier of ethanol has been recognized for along time; what's new is the apparent international bidding war to participate in this bounty.
Last week I ran across an academic paper arguing that the energy balance of ethanol was irrelevant. Aside from the errors in the author's conclusions about oil displacement, his suggestion of framing the balance in economic, rather than energy terms has merit. He argued that the market values different forms of energy differently. While that is certainly correct, it underlines the challenges facing a fuel requiring energy inputs that nearly equal its ultimate delivered energy content; corn ethanol can never be as cheap as ethanol from sources requiring fewer costly inputs. That's the essence of the appeal of ethanol derived from sugar cane grown in the tropics, instead of corn from the northern temperate zone. It's also the promise represented by cellulosic ethanol, which will be produced from agricultural waste and non-food crops requiring minimal fertilizer.
So if the bulk of your company's energy portfolio is tied up in something that, in spite of federal and state subsidies and a mandatory renewable fuel standard, looks like the high-cost supply in the long term, what do you do? You seek to diversify, of course. It's a little early to buy into cellulosic ethanol, because there are so many competing technologies and no industrial -scale facilities, yet. But cane ethanol is here, now, and it's been industrial-scale in Brazil for decades. The biggest risk is paying too much for the assets.
At the same time, US corn growers ought to be watching these moves closely. They should regard cane ethanol as a tough competitor, even if they succeed at preserving both the domestic ethanol blenders' credit and the tariff on imported ethanol. While pending Congressional energy legislation may expand their future market significantly, rising corn prices and the advent of cellulosic ethanol are putting the big ethanol firms under a lot of pressure to diversify and reduce costs, at the same time that the competition between food and fuel uses of corn is becoming more apparent. A future drop in oil prices would compound these problems.
The Journal does a good job on most of these issues, but their effort to put Brazilian ethanol in perspective is off by a wide margin. They compare its 9.5 billion gallon per year (BGY) potential output to crude oil from the Alaskan North Slope (ANS.) That doesn't even work using current ANS production, on the back end of its long, steady decline. 9.5 BGY equates to about 435,000 barrels per day (bdp) of oil, after adjusting for ethanol's lower volumetric energy content. That's nothing to sneeze at, but if the Journal's readers construed it as comparing favorably to the North Slope in its prime, they'd be sadly mistaken. ANS production peaked at over 2 million barrels per day in 1988 and yielded more than 1 million bpd for 26 consecutive years, starting in 1978. It still delivers roughly 800,000 bpd, or about 15% of total US crude oil production.
Even if Brazilian ethanol isn't quite another North Slope or North Sea, energy-wise, it will be an important part of a global energy market in which renewable fuels from many sources play an increasingly important role. And as the market for ethanol and other biofuels globalizes, the domestic market will shift, too. The ethanol commodity firms appear to see that, and the corn-belt states and their farmers should, too. The ethanol business is about to change, and not all the changes will be positive for corn.
Last week I ran across an academic paper arguing that the energy balance of ethanol was irrelevant. Aside from the errors in the author's conclusions about oil displacement, his suggestion of framing the balance in economic, rather than energy terms has merit. He argued that the market values different forms of energy differently. While that is certainly correct, it underlines the challenges facing a fuel requiring energy inputs that nearly equal its ultimate delivered energy content; corn ethanol can never be as cheap as ethanol from sources requiring fewer costly inputs. That's the essence of the appeal of ethanol derived from sugar cane grown in the tropics, instead of corn from the northern temperate zone. It's also the promise represented by cellulosic ethanol, which will be produced from agricultural waste and non-food crops requiring minimal fertilizer.
So if the bulk of your company's energy portfolio is tied up in something that, in spite of federal and state subsidies and a mandatory renewable fuel standard, looks like the high-cost supply in the long term, what do you do? You seek to diversify, of course. It's a little early to buy into cellulosic ethanol, because there are so many competing technologies and no industrial -scale facilities, yet. But cane ethanol is here, now, and it's been industrial-scale in Brazil for decades. The biggest risk is paying too much for the assets.
At the same time, US corn growers ought to be watching these moves closely. They should regard cane ethanol as a tough competitor, even if they succeed at preserving both the domestic ethanol blenders' credit and the tariff on imported ethanol. While pending Congressional energy legislation may expand their future market significantly, rising corn prices and the advent of cellulosic ethanol are putting the big ethanol firms under a lot of pressure to diversify and reduce costs, at the same time that the competition between food and fuel uses of corn is becoming more apparent. A future drop in oil prices would compound these problems.
The Journal does a good job on most of these issues, but their effort to put Brazilian ethanol in perspective is off by a wide margin. They compare its 9.5 billion gallon per year (BGY) potential output to crude oil from the Alaskan North Slope (ANS.) That doesn't even work using current ANS production, on the back end of its long, steady decline. 9.5 BGY equates to about 435,000 barrels per day (bdp) of oil, after adjusting for ethanol's lower volumetric energy content. That's nothing to sneeze at, but if the Journal's readers construed it as comparing favorably to the North Slope in its prime, they'd be sadly mistaken. ANS production peaked at over 2 million barrels per day in 1988 and yielded more than 1 million bpd for 26 consecutive years, starting in 1978. It still delivers roughly 800,000 bpd, or about 15% of total US crude oil production.
Even if Brazilian ethanol isn't quite another North Slope or North Sea, energy-wise, it will be an important part of a global energy market in which renewable fuels from many sources play an increasingly important role. And as the market for ethanol and other biofuels globalizes, the domestic market will shift, too. The ethanol commodity firms appear to see that, and the corn-belt states and their farmers should, too. The ethanol business is about to change, and not all the changes will be positive for corn.
Tuesday, July 31, 2007
Our Energy Omelet
Today's Washington Post cast some serious doubts on the environmental sustainability of producing ethanol from Brazilian sugar cane, demonstrating yet again that when it comes to energy, the temporary resemblance of any option to a silver bullet usually only reflects our poor understanding of its consequences. The cost in this case is the potential deforestation of the Cerrado, Brazil's non-rainforest plateau. While Brazilian cane ethanol clearly has a role to play in the world's future energy balance, this prospect should remind us that meeting the world's daily energy demand entails breaking eggs on a vast scale. Despite the growing sophistication of the public and our leaders on energy matters, the discussion is still not being framed in terms of the hard trade-offs involved.
Since ethanol has become the cornerstone of US energy policy, let's look at the size of the problem relative to the ethanol volumes we hear bandied about in the news and on the floor of Congress. The US currently produces about 6 billion gallons of ethanol, mostly from corn. The administration and Senate want to expand this volume six-fold. It's not clear that we can do that without a large contribution from cellulosic ethanol technology that is not yet commercial, but let's assume it could all come from corn. At a yield of about 2.7 gallons per bushel, this would consume 13 billion bushels annually, roughly equal to at least one estimate for the entire 2007 corn crop, planted on 90 million acres, or about 20% of total US cropland. So if it were all planted in corn for ethanol, our current agricultural land would yield something less than 200 billion gallons per year. That's a big number, but put it in perspective. The US uses 100 quadrillion BTUs per year of energy. That equates to 1.25 trillion gallons of ethanol on volume alone. Replacing the actual net BTUs from fossil fuels would require roughly 3.5 trillion gallons of ethanol, based on its current energy yield of 1.3:1 (energy return on energy invested.)
Of course, this is an absurd comparison, because we're not going to grow corn to make ethanol to feed power plants, home furnaces, or factories. The point here is to emphasize just how large the implied equivalent agricultural footprint of our energy consumption is. If we want an appreciable fraction of those needs to be met with biofuels, even if the actual crops involved are not corn, but Brazilian cane or US switchgrass--both of which are much more efficient net energy producers than corn--it's still a big footprint. And make no mistake, as long as oil prices remain high and federal incentives are in place, the market will deliver it, even if it has to overcome an import tariff to do it.
For all of our new-found environmental concern relating to climate change, I have yet to hear any politician debate how the total environmental impact of greatly increased biofuels output--including all land, water, and air impacts--compares to the environmental footprint of getting the same quantity of energy from natural gas drilling in protected areas, from large offshore wind farms, or new nuclear power plants, among our other choices. None of those options are silver bullets, either, but they could all be part of the mix, along with biofuels. Unless we talk about it in these terms, how can we be sure that the mix of broken eggs we're implicitly choosing is really the one we want? We ought to discuss this now, rather than after the Cerrado has all been planted in cane to power our cars.
Since ethanol has become the cornerstone of US energy policy, let's look at the size of the problem relative to the ethanol volumes we hear bandied about in the news and on the floor of Congress. The US currently produces about 6 billion gallons of ethanol, mostly from corn. The administration and Senate want to expand this volume six-fold. It's not clear that we can do that without a large contribution from cellulosic ethanol technology that is not yet commercial, but let's assume it could all come from corn. At a yield of about 2.7 gallons per bushel, this would consume 13 billion bushels annually, roughly equal to at least one estimate for the entire 2007 corn crop, planted on 90 million acres, or about 20% of total US cropland. So if it were all planted in corn for ethanol, our current agricultural land would yield something less than 200 billion gallons per year. That's a big number, but put it in perspective. The US uses 100 quadrillion BTUs per year of energy. That equates to 1.25 trillion gallons of ethanol on volume alone. Replacing the actual net BTUs from fossil fuels would require roughly 3.5 trillion gallons of ethanol, based on its current energy yield of 1.3:1 (energy return on energy invested.)
Of course, this is an absurd comparison, because we're not going to grow corn to make ethanol to feed power plants, home furnaces, or factories. The point here is to emphasize just how large the implied equivalent agricultural footprint of our energy consumption is. If we want an appreciable fraction of those needs to be met with biofuels, even if the actual crops involved are not corn, but Brazilian cane or US switchgrass--both of which are much more efficient net energy producers than corn--it's still a big footprint. And make no mistake, as long as oil prices remain high and federal incentives are in place, the market will deliver it, even if it has to overcome an import tariff to do it.
For all of our new-found environmental concern relating to climate change, I have yet to hear any politician debate how the total environmental impact of greatly increased biofuels output--including all land, water, and air impacts--compares to the environmental footprint of getting the same quantity of energy from natural gas drilling in protected areas, from large offshore wind farms, or new nuclear power plants, among our other choices. None of those options are silver bullets, either, but they could all be part of the mix, along with biofuels. Unless we talk about it in these terms, how can we be sure that the mix of broken eggs we're implicitly choosing is really the one we want? We ought to discuss this now, rather than after the Cerrado has all been planted in cane to power our cars.
Friday, March 09, 2007
Trade Missions
In the last week two powerful executives have taken important trips to meet with officials in nations that could supply the US with additional energy. These missions couldn't be more different in their public profile, but together they tell us a lot about the likely sources of our energy security over the next decade. President Bush is in Brazil, meeting with President Lula da Silva on the topic of ethanol production, and the CEO of ExxonMobil, Rex Tillerson, just returned from a visit to Libya, where he discussed that country's under-developed oil reserves with Muammar Qaddafi. Some might contrast these trips as the dawn of a new world of energy and a last hurrah of the old one, but I'd prefer to view them both as important aspects of the real world of energy in which we will live for the next couple of decades.
Despite problems of logistics and energy return, ethanol demand is growing, because of its environmental and energy security benefits. However, barring a prompt cost breakthrough on cellulosic ethanol technology, the US will be unable to meet the President's aggressive alternative fuel targets without help from imports. Brazil, which can produce large quantities of additional ethanol at lower costs than the US, represents the leading edge of the global trade that will be necessary to satisfy future biofuels demand in the US and other developed countries. Doing so won't be easy, because the US goal of 35 billion gallons per year by 2017 represent more than 3 times the worldwide production of fuel ethanol in 2006. That means that global ethanol output would have to sustain growth of 12% per year for 10 years, just to satisfy the US.
Creating a framework for high volumes of ethanol trade looks equally challenging, in part because of the distortions created by the US ethanol subsidy and the accompanying--and much misunderstood--tariff on imported ethanol. Today's Wall Street Journal described the lengths that producers and traders will go to, to avoid the 54 cent tariff, effectively capturing a 51 cent subsidy intended for American farmers, rather than their Latin American counterparts.
So where does Mr. Tillerson's visit fit in? Well, even at 35 billion gallons, ethanol would still only equate to a bit more than 2% of global oil production by 2017, or less than 10% of projected US oil consumption. The security of the remainder will have to be ensured in the same way that it has been for the last two-plus decades: by creating as diverse and reliable a base of suppliers as possible. Venezuela was a bulwark of that diversification throughout the 1980s and '90s, but it is now moving sharply into the "unreliable" category, with international companies of all stripes facing high political risk there. Libya can't replace Venezuela for us, even if Col. Qaddafi has turned over a new leaf, but boosting its output by a million barrels per day or more would shore up supplies to southern Europe, thus freeing up production from West Africa for Atlantic Basin customers. And for now Libya looks like a better bet than Iraq, where tens of billions of barrels of untapped oil are certain to remain in the ground until the civil war ends.
As important as President Bush's ethanol mission to Brazil is, applying the influence and leverage of the US government to opening up access to the oil reserves held by the national oil companies is even more urgent. In our understandable enthusiasm for alternative energy, we can't lose sight of the total energy mix, which will be dominated by fossil fuels for some time, yet. Balancing these complementary sources is a key element of national energy policy.
Despite problems of logistics and energy return, ethanol demand is growing, because of its environmental and energy security benefits. However, barring a prompt cost breakthrough on cellulosic ethanol technology, the US will be unable to meet the President's aggressive alternative fuel targets without help from imports. Brazil, which can produce large quantities of additional ethanol at lower costs than the US, represents the leading edge of the global trade that will be necessary to satisfy future biofuels demand in the US and other developed countries. Doing so won't be easy, because the US goal of 35 billion gallons per year by 2017 represent more than 3 times the worldwide production of fuel ethanol in 2006. That means that global ethanol output would have to sustain growth of 12% per year for 10 years, just to satisfy the US.
Creating a framework for high volumes of ethanol trade looks equally challenging, in part because of the distortions created by the US ethanol subsidy and the accompanying--and much misunderstood--tariff on imported ethanol. Today's Wall Street Journal described the lengths that producers and traders will go to, to avoid the 54 cent tariff, effectively capturing a 51 cent subsidy intended for American farmers, rather than their Latin American counterparts.
So where does Mr. Tillerson's visit fit in? Well, even at 35 billion gallons, ethanol would still only equate to a bit more than 2% of global oil production by 2017, or less than 10% of projected US oil consumption. The security of the remainder will have to be ensured in the same way that it has been for the last two-plus decades: by creating as diverse and reliable a base of suppliers as possible. Venezuela was a bulwark of that diversification throughout the 1980s and '90s, but it is now moving sharply into the "unreliable" category, with international companies of all stripes facing high political risk there. Libya can't replace Venezuela for us, even if Col. Qaddafi has turned over a new leaf, but boosting its output by a million barrels per day or more would shore up supplies to southern Europe, thus freeing up production from West Africa for Atlantic Basin customers. And for now Libya looks like a better bet than Iraq, where tens of billions of barrels of untapped oil are certain to remain in the ground until the civil war ends.
As important as President Bush's ethanol mission to Brazil is, applying the influence and leverage of the US government to opening up access to the oil reserves held by the national oil companies is even more urgent. In our understandable enthusiasm for alternative energy, we can't lose sight of the total energy mix, which will be dominated by fossil fuels for some time, yet. Balancing these complementary sources is a key element of national energy policy.
Thursday, February 08, 2007
Ethanol Tariffs and Trade
Today's Washington Post reports that US and Brazilian officials are meeting this week in talks on a new biofuels energy partnership, with the aim of increasing biofuels use and trade between the US and Latin America. This seems a laudable goal, in light of our commitment to increase our ethanol use and given the greater efficiency of producing ethanol from cane in the tropics. Although you might guess that one of the key topics of conversation at this trade session would be the $0.54/gallon US tariff on imported ethanol, the article indicates this is not on the table. There's a good reason for that. The tariff is an integral part of the US ethanol incentive system, which is here to stay. Repealing the tariff would create a loophole that would effectively subsidize Brazilians to compete with American farmers. Imagine the headlines and sound-bites that would generate.
Our ethanol subsidy structure has evolved over the nearly 30 years since it was created. The current $0.51/gallon federal Volumetric Ethanol Excise Tax Credit (VEETC) was established by the American Jobs Creation Act of 2004 and reinforced by the Energy Policy Act of 2005. Under this system, the tax credit is issued to those who blend ethanol into gasoline at any fraction, including but not limited to the popular 10% (E-10) and 85% (E-85) blends. US ethanol producers benefit indirectly by charging a higher price for their product than they otherwise could, effectively receiving the 51 cents without having to file to get it. The current tariff prevents a blender from importing cheaper foreign ethanol, selling it at the domestic market price, and pocketing a subsidy that was intended to help US agriculture. The other way to look at this is that the net tariff on imported ethanol is really a modest 3 cents per gallon, after the blender collects the VEETC.
Our ethanol imports from Brazil have reached 1.7 billion gallons per year (110,000 barrels/day) in spite of the tariff, and that probably has as much to do with the cost of transporting domestic ethanol from the Midwest to coastal markets as with any inherent US ethanol shortage, which will rapidly disappear as new capacity comes online in the next year or two. It also reflects the lower cost of producing ethanol from sugar cane, which contrary to some assertions about its environmental impact, can apparently be grown in a sustainable fashion, with a higher energy return on energy invested (EROEI) than for corn ethanol, or even for fossil fuels.
I hope the Brazil/US ethanol discussions are fruitful. This is the kind of trade we should be promoting, and it adds at least in a small way to the diversification of our energy supply, which has been the most successful energy strategy we have pursued since the 1970s. More importantly, market pressure from expanding ethanol trade with Brazil, along with the prospect of having to compete with cellulosic ethanol later, should give US farmers and corn-ethanol producers ample incentives to become much more efficient, reducing their energy inputs and consuming a smaller fraction of a larger corn crop. That should help minimize ethanol's looming impact on food prices, while improving its contribution to reducing greenhouse gas emissions.
Our ethanol subsidy structure has evolved over the nearly 30 years since it was created. The current $0.51/gallon federal Volumetric Ethanol Excise Tax Credit (VEETC) was established by the American Jobs Creation Act of 2004 and reinforced by the Energy Policy Act of 2005. Under this system, the tax credit is issued to those who blend ethanol into gasoline at any fraction, including but not limited to the popular 10% (E-10) and 85% (E-85) blends. US ethanol producers benefit indirectly by charging a higher price for their product than they otherwise could, effectively receiving the 51 cents without having to file to get it. The current tariff prevents a blender from importing cheaper foreign ethanol, selling it at the domestic market price, and pocketing a subsidy that was intended to help US agriculture. The other way to look at this is that the net tariff on imported ethanol is really a modest 3 cents per gallon, after the blender collects the VEETC.
Our ethanol imports from Brazil have reached 1.7 billion gallons per year (110,000 barrels/day) in spite of the tariff, and that probably has as much to do with the cost of transporting domestic ethanol from the Midwest to coastal markets as with any inherent US ethanol shortage, which will rapidly disappear as new capacity comes online in the next year or two. It also reflects the lower cost of producing ethanol from sugar cane, which contrary to some assertions about its environmental impact, can apparently be grown in a sustainable fashion, with a higher energy return on energy invested (EROEI) than for corn ethanol, or even for fossil fuels.
I hope the Brazil/US ethanol discussions are fruitful. This is the kind of trade we should be promoting, and it adds at least in a small way to the diversification of our energy supply, which has been the most successful energy strategy we have pursued since the 1970s. More importantly, market pressure from expanding ethanol trade with Brazil, along with the prospect of having to compete with cellulosic ethanol later, should give US farmers and corn-ethanol producers ample incentives to become much more efficient, reducing their energy inputs and consuming a smaller fraction of a larger corn crop. That should help minimize ethanol's looming impact on food prices, while improving its contribution to reducing greenhouse gas emissions.
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