My Thoughts on the GAO Report on Peak Oil

As I mentioned yesterday, the Government Accountability Office (GAO) has released a report addressing future energy supplies in the U.S.:

Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production (1.1 meg PDF warning)

The report is getting a good deal of mainstream media coverage. I believe that there is something of value in the report for everyone, and there are a number of lessons we need to take away from it. Let’s start with Results in Brief:

Most studies estimate that oil production will peak sometime between now and 2040, although many of these projections cover a wide range of time, including two studies for which the range extends into the next century.

That is obviously a very wide range. If you don’t believe that oil production will peak until the latter part of that range, then you may not be at all concerned about the issue. (More in a bit on why you should be anyway). After all, 2040 is over 30 years in the future, and technology could come up with a lot of neat tricks in that amount of time. After all, some believe we will have transcended biologyby then. Perhaps very cheap solar energy will satisfy the bulk of our power needs. Those who tend toward the optimistic viewpoint that science will solve the problem will probably take great comfort in a 2040 estimate.

On the other end of the scale are some of the hysterical reactions that I read yesterday. Some believe that not only is peak NOT 30+ years away, but they believe that it has already happened. After reading some reactions following the release of the report, I had to look outside to make sure there wasn’t rioting in the streets and missiles flying overhead. That was literally the tenor of some of the more hysterical reactions. (For the record, I believe there is a 90% chance of a production peak by 2015, and maybe a 10% chance that production has already peaked).

While I certainly don’t tend toward the apocalyptic viewpoint, I do consider this a very serious challenge and something that needs to be addressed immediately. If oil production peaks in the next few years, and is followed by a 4-8% annual production decline, things could get very bad indeed. The U.S. is simply not prepared to have its oil supply disrupted. As the report notes:

While the consequences of a peak would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be particularly vulnerable.

Now, here is why you should care about this situation, even if you tend toward the viewpoint that oil production won’t peak for 30 years:

Other important sources of uncertainty about future oil production are potentially unfavorable political and investment conditions in countries where oil is located. For example, more than 60 percent of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain oil exploration and production.

Most of the remaining oil happens to be in places like Iran – not on the friendliest terms with the U.S., Nigeria – where the promise of oil wealth has led to much violence (ala Blood Diamond), and Saudi Arabia – generally on "friendly" terms with the U.S., but in a historically unstable part of the world. This is where the oil dollars are flowing. If you think ExxonMobil is making big profits, you would probably be stunned at the amount of money Saudi Aramco is pulling in – with a significant portion resulting from U.S. demand. Some of that money ends up in the pockets of people like Osama bin Laden, who then uses it to fund attacks against the U.S.

So, is that situation desirable for the next 30 years (for those with a 2040 peak view)? I doubt too many people will say yes. Yet the same mitigation efforts for peak oil will also mitigate our dependence on foreign oil. Why don’t we address this? Politics. There is no free lunch. Mitigation will cost money. How many people would be willing to get off of foreign oil if the end result is gasoline prices of $7.00 a gallon? I guarantee you that there is a price point that would enable us to get off of foreign oil. But what percentage would accept such a solution? 5%?

The problem is that people are being promised pie-in-the-sky solutions. They want to get off of foreign oil, but they don’t want their gasoline prices to increase. So, to fulfill the unrealistic expectations we get “solutions” like corn ethanol. I have been warning about the implications of this for a long time. We saw a lot of unrealistic assumptions early on that have now led to a situation in which ethanol has done little to reduce our foreign oil demand, while driving up our food prices. Yet despite the current production of 5 billion gallons of ethanol a year, gasoline prices are once again in record territory. And I believe the worst is still in front of us. (Yes, I know the farmers are getting rich, and their land values are skyrocketing. Maybe we should hit them with a windfall profits tax?)

Biofuels certainly have a part to play if we are serious about getting off of foreign oil. But we have got to be realistic here. The U.S. uses too much energy, because energy has been cheap there for a long time. People are ready to riot because gasoline hits $3.00 a gallon, yet people in Europe have dealt with that situation – and quite well – for many years. But in the U.S., conservation is really being discussed as an afterthought. Cellulosic ethanol, algal biodiesel, and hydrogen cars are not going to save the day. Conservation is the only thing that can save the day, with various energy sources providing the energy we do need.

This is why, even if I knew oil production wasn’t going to peak for 30 years, I would still be concerned. We are very vulnerable. Supply and demand will remain tight. Look at Chris Skrebowski's latest Megaproject update. As Chris noted:

It is only possible to draw two conclusions from this latest megaprojects analysis. First, data on production, project performance and depletion rates is wholly unsatisfactory, particularly for the Opec producers. Second, the large volumes of new capacity being added between 2007 and 2012 may not translate into the sort of increased production flows the world economy needs to underpin economic growth.

Supply can't open up a gap on demand, so oil prices are going to remain high. As long as the U.S. maintains the status quo, riches will continue to flow into countries like Iran and Venezeula, imminent peak or not.

There is a section of the report devoted to various mitigation possibilities. That is a pretty realistic assessment in my opinion, and probably worth another post in the near term. The report concludes:

The consequences would be most dire if a peak occurred soon, without warning, and were followed by a sharp decline in oil production because alternative energy sources, particularly for transportation, are not yet available in large quantities. Such a peak would require sharp reductions in oil consumption, and the competition for increasingly scarce energy would drive up prices, possibly to unprecedented levels, causing severe economic damage. While these consequences would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be especially vulnerable among the industrialized nations of the world.

That is not an acceptable situation. Policy makers must wake up and find the courage to address the vulnerability.

GAO Addresses Peak Oil

This is probably not news to anyone at this point, but the Government Accountability Office (GAO) today released probably the most mainstream discussion of the implications of peak oil ever:

Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production (1.1 meg PDF warning)

I will address this a bit tomorrow, but I know some ethanol boosters aren't going to be happy with this claim from the first page:

For example, although corn ethanol production is technically feasible, it is more expensive to produce than gasoline and will require costly investments in infrastructure, such as pipelines and storage tanks, before it can become widely available as a primary fuel.

Lots of places are covering this story, including The Oil Drum, Energy Bulletin, and the Wall Street Journal's Energy Roundup. I will highlight some excerpts after I have a bit more time to digest it. Even if you don't accept a peak in oil production any time soon, the report emphasizes the danger of being so dependent upon Mideast oil. But I have also read reactions today that border on hysteria. I will sleep on it, and pick out what I think are the key issues tomorrow. Feel free to post your own excerpts or comments for now.

This Week in Petroleum 3-28-07

The supply situation is quickly coming to a head, and many questions will be answered in the coming weeks. Will OPEC increase oil production? Can they? Will there be any relief from rising gasoline prices? Will gasoline demand remain strong in the face of the recent price spike?

The trend at this time of the year – because some refineries are offline for maintenance – is that crude stocks are generally rising and gasoline is generally falling. (The trend for distillates is very dependent upon the weather). That has been the trend for several weeks, but this week crude oil inventories dipped slightly. This will happen as refineries start to come out of turnarounds, with the trend of falling crude inventories usually starting in mid-spring and continuing through the summer. Given that crude inventories are 12 million barrels below where they were at this time last year – and peak season is still in front of us – I expect that there will be a call for OPEC to open up the taps some before the end of summer.

Refinery utilization number crept up this week – from 86.3% to 87%. This may suggest that the majority of the turnarounds are complete, but if so that would be somewhat earlier than normal. It would not surprise me to see utilization dip again within the next couple of weeks before making a run to the upside of 90%.

Gasoline stocks fell for the 7th straight week, although by less than expected. This is because high wholesale prices in the U.S. always attract the attention of exporters, and a rash of gasoline imports did arrive this week. Gasoline imports rose above a million barrels per day for the first time since January. However, they will need to remain high else gasoline prices may continue to head higher. According to This Week in Petroleum:

To help gasoline supplies keep pace with demand increases that are likely over the next several weeks, total gasoline imports will need to remain above 1 million barrels per day most of the time.

While there are many statistics analysts can watch in monitoring gasoline market conditions, two statistics that they may want to add to their arsenal over the next several weeks are crude oil inputs to refineries and total gasoline imports. Combined with information on gasoline inventories and demand, they will provide a more enlightened picture of current market conditions and insight into which way gasoline prices might head. Until domestic gasoline production and imports both increase substantially, retail prices are not likely to experience a noticeable downturn.

Despite the higher prices, demand continues to run ahead of last year’s level:

Total products supplied over the last four-week period has averaged 21.1 million barrels per day, or 2.4 percent above the same period last year. Over the last four weeks, motor gasoline demand has averaged 9.2 million barrels per day, or
1.6 percent above the same period last year. Distillate fuel demand has averaged above 4.4 million barrels per day over the last four weeks, unchanged compared to the same period last year. Jet fuel demand is up 3.8 percent over the last four weeks compared to the same four-week period last year.

Stay tuned, as it promises to be a very interesting situation over the next few months.

The Logistics Problem of Cellulosic Ethanol

Update: This article got a mention in today's Wall Street Journal Energy Roundup.

--------------------------

In my essay Cellulosic Ethanol Reality Check, I identified several big challenges that must be addressed before cellulosic ethanol is commercially feasible. One of these is the logistics problem, and a recent story in the Omaha World-Herald emphasizes the point:

The future is not now for biomass ethanol industry

The article describes the logistics challenges for a single ethanol plant:

The logistics of collecting and storing a million tons of corn stubble each year for an ethanol refinery are mind-numbing.

It would take 67,000 semitrailer loads to haul the baled stubble out of the field. That's 187 truckloads a day, or one every eight minutes. To complicate matters, the need for trucks, machinery and manpower would come during harvest, already the busiest time of the year on the farm. And that's where a massive federal initiative into cellulosic ethanol may find its biggest bottleneck - on the farm.

According to the article, a million tons would produce 80 million gallons of ethanol. This would be enough on a gross basis to displace 0.04% of our gasoline usage. So, if all the inputs were free, all we would need is 2,500 of these facilities, and we will have met all U.S. gasoline needs (but not diesel, fuel oil, or jet fuel). Ah, but we forgot about energy inputs. How many gallons of fossil fuels did it take to run all of those semi-trailer trucks to take the stubble to the plant? How much natural gas was required to distill off the ethanol? But we are told that these are "small problems." Easily resolved.

The article also highlighted the cellulosic pilot plants that are being built:

Many of the questions surrounding cellulosic ethanol could be answered in the next 10 years as six pilot plants are built with the help of $385 million in grants from the Energy Department.

The list was interesting, because I have heard several of these described as full-fledged ethanol plants:

Pilot projects
--------------------------------------------------------------------------------
These are the six pilot projects awarded $385 million in grants by the Department of Energy to construct biomass ethanol plants:

Emmetsburg, Iowa - ($80 million). Broin Companies of Sioux Falls, S.D. Using 842 tons per day of corn fiber, cobs and stalks.

Soperton, Ga. - ($76 million). Range Fuels of Broomfield, Colo. Using 1,200 tons a day of wood residues and wood-based energy crops.

Shelley, Idaho - ($80 million). Iogen Biorefinery Partners of Arlington, Va. Using 700 tons a day of wheat straw, barley straw, corn stover, switchgrass and rice straw.

Southern California - ($40 million). BlueFire Ethanol of Irvine, Calif. Using 700 tons per day of sorted green waste and wood waste from landfills.

Kansas (site undetermined) - ($76 million). Abengoa Bioenergy Biomass of Missouri. Using 700 tons a day of corn stover, wheat straw, milo stubble and switchgrass.

Hendry County, Fla. - ($33 million). ALICO Inc. Using 770 tons per day of yard, wood and vegetative wastes.

Again, according to the article 1 ton of biomass is going to produce 80 gallons of ethanol. The capital costs alone on some of these is in the $60,000 per daily barrel range. That puts capital costs at 2-3 times those of a conventional grain ethanol plant, and over 3 times those of an oil refinery. And I suspect that they are going to find that they have very high operating costs as well.

So, what are we going to find out in 10 years? I could tell you, but the ethanol proponents would tell me that I just lack vision.

More on Hot Gas Lawsuit

I really love my Site Meter at the bottom of the page. I check it most days, and it gives me a lot of good information about who is linking to the site and where they are coming from. Incidentally, you can access the same information I can see by clicking on it.

Anyway, a few days ago I wrote Hot Gas Lawsuit in Utah. It is about a class action lawsuit that claims that oil companies are making a killing from overcharging customers because gas expands in the summer. According to my Site Meter, I was getting some hits on this article, which I ultimately tracked back to here. The discussion was fine, until one of my beloved fringe elements weighed in:

Rapier works for an industry that lobbies against temperature sensing smart pumps in the United States, but lobbied FOR regulatory changes requiring these devices in Canada in the 1990's. I don't believe they got the regulation they wanted, but in any case the market did its job and about 95% of retail outlets now have these devices installed.

Why? Because they were losing money in Canada because of cold fuel; i.e. selling more energy per volumetric unit because of shrinkage due to cold temperatures.

Rapier's line on ground temperatures is a crock.

I have engaged this guy before. He reads a few websites, and thinks he is an expert. You see it all the time. Now, I have no idea about the claim on the situation in Canada, and I guarantee you that neither does he. He read it on a web site, and it became fact. But in this case, the troll actually provided the very evidence that showed that my "line on ground temperatures" was spot on. Here is what I wrote previously:

In fact, those tanks are probably pretty close to 60 degrees year round, which means the class action lawsuit is just a waste of the court’s time.

Now, recall the reasoning behind the lawsuit. From the original article:

When a gallon of gasoline is 60 degrees it exactly will fill a one gallon container. But that same gasoline at 90 degrees would spill over the sides of the container. It is that spillage that represents the energy drivers allegedly paid for, but didn't get, when they purchased a gallon of "hot gas."

But, my troll, following his charge that my line was a crock, provided the link that showed that it wasn't:

Technology, new rules a hot-fuel fix

The Star’s $2.3 billion estimated annual cost to consumers from hot fuel is based on fuel storage tank temperature data, the impact of varying temperatures on fuel volumes, and state-by-state consumption data.

The fuel temperature data was gathered by the National Institute of Standards and Technology from storage tanks at 1,000 gas stations and truck stops in 48 states and the District of Columbia during a period from 2002 to 2004.

The NIST data revealed that the average temperature of fuel across the country and year-round was 64.7 degrees Fahrenheit — almost 5 degrees higher than the government standard of 60 degrees.

As a liquid, gasoline expands and contracts depending on temperature. At the 60-degree standard, the 231-cubic-inch American gallon delivers a certain amount of energy to your engine. But that same amount of gas or diesel fuel expands at higher temperatures, to about 235 cubic inches at 90 degrees. Yet consumers still get only the 231 cubic inches at the pump.

As I said, pretty darn close to 60. Definitely not close to 90. So what does this really cost consumers? I suspect the Star made a math error in their calculation. Here is why. The average gasoline consumption from 2002 to 2004 was 8.9 million barrels per day. You can get all of that data here. That translates into an average over that time period of 136.5 billion gallons per year. The average spot price of gasoline, which can be retrieved from here, was only $0.93/gallon over that time period. Don't believe me? Look it up at the link. We forget that it wasn't want that long ago that gasoline was still quite cheap relative to today. Also remember that these are spot prices, which don't include taxes. This is an indicator of what refineries got for their gas during the 2002-2004 period that the Star investigated.

Now, note the change in going from 60 degrees to 90 degrees. The difference is 4 cubic inches, an increase of 1.7%. (My chemical engineering handbook says it is more like 1%, but we will give them the benefit here). But the average wasn't 90 degrees, was it? It was 64.7 degrees. Interpolating, the change for that is going to be 0.27% (based on their 1.7% for the full range). That's right, between 2002 and 2004, consumers were ripped off to the tune of 0.27%. That means that for every gallon of gas sold during this period, consumers were getting ripped off by less than 1/4th of a cent per gallon. So, each time you put 4 gallons of gas in, you lost almost a penny on average (and some fraction of a penny more to the government for taxes). And as I have pointed out, the energy difference from blend to blend can easily amount to more variation than this.

So, what was the total lost? Was it $2.3 billion per year as the Star claimed? Not even close. The actual number is about a tenth of what the Star claimed. I suspect their error was to assume the entire expansion to 90 degrees, instead of using the average annual number of 64.7%.

Frankly, I hate wasteful spending, but if they force the equipment to be installed, that's just one more thing that will drive up the price of gas (you don't think there's a free lunch, do you?). I am all for things that drive up the price of gas and spur conservation. Of course Jamie Court, president of the FTCR, claims he is waging war on this issue to keep consumers from getting ripped off. He has got to be one of the most naïve individuals I have ever seen. He seems to have in his mind that he is going to “sock it to” the oil companies and score one for consumers. And the lawyers are also out trying to make sure the consumers are protected. I just wonder if any of them actually believe that any of this is going to bring down the cost of gasoline?

Is Peak Oil a Belief, Theory, or Fact?

One of the comments by KingofKaty that followed my essay Peak Oil and the Lunatic Fringe brought up something that is worth addressing, because it comes up pretty frequently. The phrase of interest was "you believe in peak oil." I have heard peak called a belief , a theory, or just an observation. In fact, all three descriptions apply depending on the situation, but it is important to clarify what's what. And I want to make it clear that even though I "believe in peak oil", it is not in the same context as one would "believe in the tooth fairy."

Peak Oil as Observation

Peak oil is an observation, in that we have observed many regions of the world see their oil production rise, sometimes plateau, and then fall. Texas, for instance, saw oil production peak in 1972 at 3.45 million barrels per day. At that time, the average well produced 20.6 bbl per day. Today, oil production in Texas - despite very high prices - is about a million barrels per day. The average well today produces about 6 barrels per day, and proved reserves are about a third of what they were in 1972.

Likewise, the Lower 48 peaked in 1970, and production has fallen by more than 50% since then. We can go through the same exercise for many countries. So, this is peak oil as an observation. It is the fact the oil reserves are finite, and therefore eventually production will peak and start to decline. At some point, production for the entire world will peak and decline. In fact, world production did peak in 2005, and that leads to the "theory" and to the "belief" aspects of peak oil. This has been the topic of many of my recent debates: Is the 2005 peak, "The Peak"? That's where the believers come in.

Peak Oil as Belief

The "believers" of peak oil are generally people who believe that peak is now, and this is the beginning of the end of the world. For them, the debate is over - they can only see evidence in favor of "peak now." If you argue with them about this, they sometimes lash out irrationally. I guess it is somewhat understandable because some of these people were not entirely rational in the first place.

While I have never had any of these sorts of issues with Matt Savinar - who does post at The Oil Drum - a read through his site Life After the Oil Crash will give a flavor of the kinds of things the believers, many of them "Doomers", believe. From Matt's site:

The effects of even a small drop in production can be devastating. For instance, during the 1970s oil shocks, shortfalls in production as small as 5% caused the price of oil to nearly quadruple. The same thing happened in California a few years ago with natural gas: a production drop of less than 5% caused prices to skyrocket by 400%.

It's not just transportation and agriculture that are entirely dependent on abundant, cheap oil. Modern medicine, water distribution, and national defense are each entirely powered by oil and petroleum derived chemicals.

In addition to transportation, food, water, and modern medicine, mass quantities of oil are required for all plastics, all computers and all high-tech devices.

If you read through Matt's site, it can be pretty scary. It is doom and gloom, mass starvation, and is what most people probably think of when they hear "Peak Oil." But what Matt describes as an end-of-the-world scenario where billions of people die off is a belief. And I am sure that some of the believers are the same ones who were locked up in their basements with 6 months worth of food as 1999 rolled over to Y2K. And while I think the peaking of oil production will be unprecedented, I am not of the belief that it will spell doom for most of humanity. A major shift in our lifestyles? Yes. The end of several billion people? No.

The problem for many who are very concerned about oil depletion is as odograph said following my earlier essay: The "extreme doomer fringe" owns peak oil. That is why my friend Nate Hagens has suggested that we stop using the term and start talking about resource depletion. Peak oil has come to be associated with fringe elements, and just as soon as some people hear you mention the term that is the image they conjure up.

Peak Oil as Theory

However, there are very serious scholars who believe that Saudi Arabian (and world) oil production is at or past peak. For an example of this, see Stuart Staniford's comprehensive essay Water in the Gas Tank, where he tries to read the tea leaves of what's going on in Saudi, and concludes that they are actually in decline. (Read the comments following the post where you will see a decent sampling of believers - "we can easily start backcasting the models using 2004-2005 as a known peak"; what you have is people who are readily willing to accept that Saudi has peaked - even though Stuart admits that his work is not conclusive).

I disagree with Stuart's assessment, and made my case in an essay also posted to The Oil Drum. I believe that the Saudi declines are voluntary, and that they will raise production later this year. But Stuart, a Ph.D. physicist, is no dummy. He has made a compelling case; I just think there are some aspects he is overlooking. But these are the debates that I would throw into the "theory" category. They are attempts at explaining what is actually going on in the world of oil production. And of course the theoretical aspect attracts lots of kudos from the believers - as long as you say what they want to hear.

As an aside, on the topic of scholarly attempts at reading the tea leaves, there was a recent Ph.D. thesis by a student at Uppsala in Sweden - Fredrik Robelius - that you can find archived here (3.7 meg PDF warning). Besides a very well-researched treatise on oil production, his conclusion was that world oil production will peak some time between 2008 and 2018.

What I Believe

Peak oil for me is an observation, not a belief. It has been observed in country after country. I believe that when peak happens on a worldwide basis, there will be a lot of hardship. The U.S. is especially vulnerable because the country is highly dependent upon cheap oil. I believe that Fredrik Robelius is probably correct; that world oil production will peak in the time frame he mentioned. The wild card in all of this is Saudi Arabia. If they are telling the truth about their reserves, then peak won't happen for quite some time. They are the key, which is why so much time and effort is spent in trying to figure out the situation there. And while I am not willing to accept the Saudi party line on their reserves, if you go back to 1982 when their books were still open and subtract off the production since then, you get more remaining reserves than you should if the imminent peakers were correct. And that is assuming they haven't discovered a drop since then. I covered this in an essay here.

I also believe that even if the world doesn't peak for a few more years, supply and demand will remain very tight. I think we are in a permanent era of higher oil prices. If you look at expected demand growth, and compare that to the expected production that is forecast to come online, I think my Peak Lite scenario will play out over the next few years. Any new capacity is going to be consumed by fast-growing demand.

But I think when oil production does peak, we will muddle through and humankind will persevere. It will be a big adjustment. But if the U.S. can learn to live with the kind of per capita energy consumption the rest of the world uses, then oil supplies will last quite some time. It is not that difficult to make do with less. My own fossil fuel usage is probably 1/4th that of the average American. But I am quite comfortable. I am just very conscious of my energy consumption, and I don’t waste energy. If we all learn to be more careful with our energy consumption – and I think higher prices are going to force that on us anyway – then the doomers will all be wrong about the consequences of peak oil.

But I have also come to the conclusion that the fringe elements own the rights to "Peak Oil." I am going to transition to using the terms oil depletion or resource depletion in the future.

Windfall Profits: A Lesson from the U.K.

Regardless of your position on windfall profits taxes on oil companies, one thing has been demonstrated again and again. Governments consistently fail to accurately anticipate the consequences. As oil prices have increased, governments have seen tax revenues from oil and gas grow significantly. But they apparently believe they know how to deal with a goose that lays golden eggs: Take some food away from that corpulent goose, but expect it to keep laying golden eggs.

The purpose for imposing windfall profits taxes is generally two-fold. First, a government can tell the citizens that despite their inability to control oil and gas prices, they are doing something by "punishing" the oil companies that benefit from these rising prices. Second, they genuinely see it as a rich source of revenue that they can squeeze without consequence. They think the only real people who will be affected are those who are directly involved with oil and gas companies.

History has shown again and again that this viewpoint is inaccurate. That hasn’t stopped recent attempts in California, with Proposition 87, and current attempts in Wisconsin to again try dipping into this “consequence-free” pot of money. While I favor the direct approach – tax oil and gas on the consumption side – recent attempts have focused on taxing it on the production side, while writing into the legislation provisions to prevent costs from trickling down to consumers. I have previously noted the stunning naivety of this approach, and that these attempts are destined for failure.

It turns out that we now have another example to add to the list in which politicians inaccurately gauged the consequences. The story more or less starts right after Hurricane Katrina. U.K. Chancellor and soon-to-be Prime Minister Gordon Brown detailed what he believed needed to be done to bring down gas prices:

Brown calls for oil price effort

Chancellor Gordon Brown has called for a "concerted effort" by oil-producing countries to bring down prices - but is not offering to cut taxes on petrol.

Ahead of expected fuel duty protests, Mr Brown told the TUC Opec countries to produce more oil and refine more.

Mr Brown called for more worldwide investment in refineries and alternative energies.

So, he told OPEC to produce more oil. I bet they got right on that. The last statement is the most interesting, in light of the move that Brown made just a few months later:

Brown doubles North Sea oil tax

Chancellor Gordon Brown has announced a rise in the tax levied on North Sea oil producers in the wake of record crude prices. Under the measure, the government's supplementary charge on energy companies will rise to 20% from 10%.

Mr Brown also said there would be no further rises in the North Sea oil tax during this parliament.

Meanwhile, the extra revenue raised would be used to "help consumers most affected by the significant increases in global oil and energy prices" such as pensioner households, the government said.

"Governments levy taxes and we will do what we have to," said a BP spokesman. "But any extra tax that we pay is money that is no longer available for investment in North Sea oil and gas fields."

So, Brown called for more investment, and then doubled the surcharge (bringing the total corporate tax rate for oil companies to 50%). I guess he thought he would sit back and watch the revenues come rolling in, and then use those revenues to help consumers affected by higher energy prices. But not only do you discourage investment with these sorts of moves, rising oil prices also increase the costs of everything associated with the oil business. I could have told him that while his strategy might work in the very short term, it would certainly be akin to cutting a research budget: Short term gain, with often longer term consequences.

Brown's reality checks have started to arrive. In a prescient article written in February 2007, Shadow Chancellor George Osborne got to the crux of the matter:

Gordon Brown is squandering North Sea oil assets

By squeezing the maximum amount of tax revenue from Britain's oil and gas assets, Gordon Brown is putting further offshore investment at risk, George Osborne has warned.

Accusing the Treasury of failing to understand that the UK Continental Shelf is a mature resource competing for investment in a fiercely competitive global market, he went on: "They don't recognise that investment in the North Sea cannot be taken for granted when there are potentially more profitable opportunities in West Africa, Mexico or Brazil.

In short, Gordon Brown risks denying future generations the benefits our generation has enjoyed from the North Sea. He's more interested in cash today than investment tomorrow. The result is that Britain's North Sea inheritance is in danger of being squandered."

Last week, the treasury announced that things weren't working out as forecast:

North Sea Revenues Drying Up

Source: Daily Mail; London (UK)

Publication date: 2007-03-22

BRIAN O'CONNOR

The Treasury is nursing a Pounds 5bn shortfall in North Sea oil and gas revenues after a sharp rise in tax rates failed to bring in the targeted result. North Sea revenues for 2006/7 were only Pounds 8bn, against a projected Pounds 13bn. Though North Sea production is declining, the fall cannot be explained by this alone. The UK Offshore Operators Association (UKOOA) says the Treasury did not foresee that a rise in crude oil prices would be followed by a sharp rise in costs as the industry scrambled for drilling rigs, skilled workers and specialist equipment.

Surprise! Thus is the short-sightedness of our political leaders.

Brown has admitted that things didn't work out as planned, but blamed "factors outside the government's control":

'Brown playing games on oil'

Falling North Sea oil revenues will force the government to borrow more than expected, it emerged today, drawing accusations of "panic" from opposition politicians.

Gordon Brown argued in an interview that borrowing remained on a downward trend but added: "What has changed our forecast is what happened to North Sea revenues."

Mr Brown said North Sea oil revenues would be £5.5bn lower than expected for 2007/08 but argued that the reduction was due to factors outside the government's control. "That's no fault of the government. It's lower production from the North Sea. We have to take that into account," Mr Brown told the BBC's Today programme.

No fault of the government? Again, read George Osbourne's words above. Investment in the North Sea is affected by the tax rates. You have taken money away that could have gone into new investments and diverted it. So, even though North Sea production is in decline, these policies will accelerate that decline by discouraging new investments.

As I said, I support higher gas taxes. That is not my issue at all. My issue is that these politicians have an incredibly naive view and believe they can increase these taxes with no fallout on anyone but the oil companies. Time and time again they see this as a quick fix to budgetary issues, while pandering to a constituency outraged at higher energy prices. It's just that it never works out they way they thought it would. But I'm sure that won't stop them from trying again.

Peak Oil and the Lunatic Fringe

I have been posting at The Oil Drum as a contributor for about a year now. Yesterday, I announced that I would be taking a break for a while. (I will continue to post at least one new essay a week here). As I am getting quite a few e-mails about this, I wanted to document what has precipitated this for those who may not know the history.

The Oil Drum receives a great many visitors each day (currently over 12,000 a day). While the vast majority are interested in intelligent discourse on energy issues, there is a very vocal lunatic fringe who accept Peak Oil RIGHT NOW with a religious fervor. They lash out at any viewpoints that challenge this notion. To be clear, not all who believe Peak Oil is now fall into the lunatic fringe category. In fact, most don't. There are many very serious posters who argue that peak is now, and they use data and logic to argue their point. However, the lunatic fringe will tend to associate themselves with posters espousing these views, and legitimate challenges of the data are sometimes met with bitter ad hominem attacks. Add to that the fringe who think that because I work for an oil company, they are entitled to pile on with ad hominem attacks, and I have found myself increasingly on the receiving end of some very nasty comments and e-mails.

I have recently written two articles examining a technique that is claimed to be able to predict a peak in a country's oil production. I reproduced the first one (Predicting the Past) here on my blog, but the second one had far too many graphics. Here are the links to both essays, as well as to an essay I wrote in which I made my argument that Saudi Arabian oil production has not yet peaked:

Does the Hubbert Linearization Ever Work?

Predicting the Past: The Hubbert Linearization

A Debate on the Substance and Timing of the Peak of Oil Production and Consumption, Part II

My conclusions, supported by a number of other modelers, is that the Hubbert Linearization (HL) technique does not in fact work well enough for one to call a peak in oil production with any sort of precision. The error range can span decades, as I documented in those posts. In fact, it is a very good example of an ad hoc model. And while I certainly believe that we should be preparing right now for Peak Oil (this is a position that my opponents consistently misrepresent), I also want to understand more about when Peak Oil will occur. If we "cry wolf" this year, and oil production rises next year because we didn't do a good enough job forecasting, I believe this will diminish our ability to influence policy-makers that we must take action.

In response to my latest essay, in which I compared some of the arguments in favor of the HL as "faith-based", many posters bitterly lashed out. As I documented at TOD, here is a sampling of the comments (without corrections for spelling errors) I received in response to my essay. Again, this is a minority, but a very vocal one:

“basically garbage”, “dangerous”, “keep being unreasonable or start thinking”, “not that interesting”, “not even close to being the right way to critique HL”, “assumption you childischly refuse to mention”, “sad, silly, egotistical”, “pissing contest”, “disingenuous”, “arrogance, pigheadedness and perhaps even childishness”, “waste of time”, “absurd”, “clumsy and actually self-defeating”, “gross”, “way off base”, “contrived examples”, “get off your high horse”, “re-inventing the wheel”, “junk”, “deceitful”, “unrealistic scenarios”, “let me hand you a clue”, “over the top”, “not very useful”, “cheating”, “vindictive, and spiteful”, “constructed cases where it does not work”, “diatribe”, “obnoxious attempt”, “a guy with an aganda and a axe to grind”, and “quite revealing in an unflatering way”

It was after reading some of those comments (and the posters attempted justifications of them) that I finally decided to take a break. However, in response to my note about taking a break, one poster provided a shining example of - in addition to the sort of insulting comments above - the kind of misrepresentation I have to deal with on a daily basis. It is absolutely comical, except for all of the slander.

But I think you have to see this for yourself, if you are unfamiliar with the sort of lunatic fringe I am talking about. Following my note, a poster decided to waste everyone's time with this gem:

http://www.theoildrum.com/node/2398#comment-172203

I read through it, and I couldn’t make anything of that gibberish. I had to study it, and go back to the comments following my essay to even figure out what he was talking about. Here were some of the things this poster attributed to me (along with a very long personal attack):

“because you did post these words yesterday didn't you Robert. paraphrased: I can make 2+2=5 if I want to also.

I am sure you can Robert, for a while, so if you make such a statement why should we believe that you haven't found a way to fudge the numbers and data in your post yesterday.”

Of course I had written no such thing, but it got worse:

“With your time off Robert why don't you examine Mary's paper. I am sure she would love for you to tell her why she is incorrectly interpreting the statistical data. You have nothing to do now since your not posting here. I might even send Mary your post that said she was intentionally manipulating the data to fit the outcome. Pretty strong words Robert, and in the scientific community that is a real no no. Are you saying Mary is a charlatan with the credentials she has to back up her abilities. You must be pretty smart to take her on. Whoops, wait, you just made a statement, but didn't back it up. You will not do it though will you Robert. As Mary asks, why why why, is this showing up in the data.”

I couldn’t make heads or tails of what this person was saying. So, I went back to the comments following my essay, and I found that he had posted a link to some mystical gibberish in which a scientist had claimed to have found a relationship between the alignment of the stars and NASA missions. So this person was accusing me of saying things about this scientist, when I had never even acknowledged his post. Furthermore, he demanded that I show that she is incorrectly interpreting statistical data. Now, to cut to the chase, I clicked on the link to see what it is this person was yammering on about. You know what was displayed at the top of the page in which the scientist had laid out this mystical “relationship”?

http://www.angelfire.com/ca3/citystars/

“AUTHOR'S NOTE THERE ARE ERRORS IN THIS STATISTICS PAPER THAT I HAVE NOT HAD THE CHANCE TO CORRECT. They do undermine the conclusions of this paper. In order to determine how seriously my math errors affect the results, it would be necessary to redo the paper. Since I do not currently have time for that, I am posting this addendum.

On March 24, 2003, I entered into a debate regarding the merits of this statistics paper I wrote in 1999. It is at this time in 2003 that I reviewed my paper again, only much more thoroughly for the purposes of debating with my paper's detractors -- and I then decided that the errors I made in the paper definitely do undermine at least some of its conclusions.”

Anyway, sorry for the long story but I thought it provided an exclamation point on my decision to take a break. This person had just provided a clear example of why I end up wasting a good portion of my time. I am being slandered, and this person is attributing to me things that I did not say, while demanding that I address a paper that the author has already acknowledged to be in error. And while I am completely sympathetic to the need for anonymity in many cases, this clearly drives some people to behave in these sorts of inappropriate ways. Therefore, to lower my stress level a bit, I have decided to remove the bulls eye from my chest. As I mentioned in the opening, I will continue to post at least 1 essay a week here.

What Planet Are They From?

I have come across a couple of articles in the past few days that really left me shaking my head. One praises Hugo Chavez as a hero, and the other blasts oil companies for their multi-million dollar gifts to higher education. These people definitely see the world through a very different set of lenses than I do.

Hugo Chavez: Hero of the People

There are extremists on both ends of the political spectrum. For every Ann Coulter on the Right, there is a Wayne Madsen on the Left: Both are just as out of touch as they can possibly be. I have found that I can’t communicate with either sort of extremist, because they are generally entrenched in their views and impervious to any reasoning that challenges them. First up we have Madsen praising Hugo Chavez:

Better Than Bush's Let-Them-Eat-Cake

Source: The Augusta Chronicle
Publication date: 2007-03-19

By Wayne Madsen

WASHINGTON - Venezuela's President Hugo Chavez and American President Bush could not be further opposites. While Bush, an oil family scion, incoherently blathers on about the problems of highly priced gasoline and heating oil, his oil industry friends rack up obscene profits.

Meanwhile, Chavez, the champion of his country's poor, delivers on his promises by providing deeply discounted home-heating oil, through Venezuela's state-owned Citgo, to low-income Americans.

It should be clear to all thinking Americans that Chavez delivers and Bush does not.

Take that, Chavez critics. You aren’t “thinking Americans.”

THE BUSH-CHENEY oil cartel finds it reprehensible that poor people receive a 40 percent discount on their heating oil. For them, it is outrageous that such a program might eat into the grotesque profits of their oil industry pals.

What is monstrous is that Bush and Dick Cheney would sit idly by as America's poor and elderly freeze to death in their homes because they cannot pay for luxuriously-priced home-heating oil.

Yes, “luxuriously-priced home-heating oil.” The current spot price is $1.67 a gallon, much lower than the apparently even more “luxuriously-priced” items like milk and bottled water. This is the problem with extremism. In his rabid state, Madsen takes complete leave of his senses and makes these preposterous claims.

Words can’t describe the level of cluelessness exhibited here. First, why can Chavez even provide deeply discounted heating oil? Because his country invited oil companies in to do business, they invested billions of dollars developing Venezuela’s oil fields, and now Chavez is saying “I’ll take that.” What Chavez hasn’t figured out yet – or maybe he is starting to as oil production continues to decline in his country – is that regardless of whether your oil industry is being run by private companies, or by the government, it takes major capital expenditures to keep it going.

So, can Chavez under-invest in the industry while diverting money to his pet causes? He can for a while, but you can see the results. Despite having enormous oil reserves, he and his cronies are running Venezuela’s oil industry right into the ground. His generosity to the poor has only been possible because he had a goose that laid golden eggs because they constantly reinvested money back into the business. Once he kills the goose, where is he going to get the money to continue his programs? I guess he could invite the oil companies back in and try to repeat the cycle, but I think they will be a bit more cautious next time around.

Big Oil’s Reprehensible Philanthropy

Next, the FTCR is in the news again. I could probably do a regular column on them. As far as I can tell, their mission statement seems to be “Slam oil companies and issue a press release every time we do.” I honestly can’t see that they serve any function besides self-promotion. They put out one misinformed press release after another, but now they have come up with perhaps the most disturbing Big Oil story ever:

ConocoPhillips Tries To Buy Into "Big Oil U" In Greenwash Campaign

SANTA MONICA, Calif., March 20 /PRNewswire-USNewswire/ -- ConocoPhillips, with a $6 million gift to the University of Oklahoma's School of Geology and Geophysics, is the latest oil giant seeking to buy respectability by capitalizing on the name of a well-known university, the Foundation for Taxpayer and Consumer Rights (FTCR) said today.

Why that’s disgusting! An oil company with Oklahoma roots giving money to an Oklahoma institution of higher learning! Despicable. Of course if the FTCR wasn’t quite so clueless, they might recognize that oil companies have a long history of giving to higher education, and in fact most oil companies have a dedicated budget for philanthropic causes. But I don’t expect the FTCR to know that, nor to mention it if they did, since it doesn’t support their mission statement. It seems that this is all new news to the FTCR, and they felt compelled to spin it as bad news by claiming that Big Oil is suddenly trying to buy respectability.

"Big Oil, an industry that has made billions at the expense of the environment, is trying to clean up its deservedly dirty image by associating with well-known universities," said John M. Simpson, consumer advocate with FTCR. "Independent academic activities are too important to let them be sold to Big Oil companies that want to greenwash their image."

Just to show the rank hypocrisy within the FTCR, remember that these are the guys calling for sub-$2.00 gasoline. Let’s see, guys. Will cheap gas make environmental problems better or worse? If they had their way and got what they wanted, we would consume much more gasoline than we currently consume. Would that be good or bad, fellows? Take your time.

If you don’t like oil companies and think they are polluting the environment, then what do you think you are doing when you drive a car or fly on an airplane? Are they doing the polluting, or are you? Don’t be a hypocrite. Make a stand against pollution by giving up your petroleum-based fuels, plastics, paints, medicines, fertilizers, clothing, etc.

"For a paltry $6 million, Conoco gets naming rights to the school and an industry friendly professor to spout their warped view of the world in an academic environment. We call on the regents to reject this deal," said Simpson.

So, these companies have a “deservedly dirty image” and a “warped view of the world”, they have “made billions at the expense of the environment” and are now “seeking to buy respectability” with their “paltry $6 million.” Gosh, at least these guys aren’t biased in their viewpoints. I wonder how many of them drive cars and fly on airlines?

Stanford University's Global Climate and Energy Program receives $100 million from ExxonMobil. The oil giant has recently launched an advertising campaign touting its involvement with the university. Movie producer Steve Bing, a Stanford alumnus, was so appalled by the campaign that he canceled a $2 million pledge to the school.

So Stanford netted $98 million dollars after Bing pouted and went home. I think Stanford can live with that deal.

Meanwhile, UC Berkeley is negotiating a $500 million deal with BP to create the Energy Biosciences Institute on campus.

No way! I also heard that when they aren’t destroying the world by funding higher education, they spend their time torturing puppies.

"Big Oil has an image problem," said Simpson. "We simply cannot allow them to fix it by turning our respected colleges and universities into 'Big Oil U'."

Now isn’t this what you really meant? “Big Oil has an image problem. We simply cannot allow them to fix it because our mission is to perpetuate it.”

Perhaps if the FTCR had done their homework, they might have come across this article:

Okla. Univ. Receives $6M Gift From ConocoPhillips

Source:Journal Record - Oklahoma City
Publication date: 2007-03-16

Frank Phillips of Bartlesville and E.W. Marland of Ponca City - two Oklahoma oil industry pioneers - were among the first private donors to the University of Oklahoma.

Phillips and his brother started Phillips Petroleum and Marland founded Marland Oil, which merged with Continental Oil Co. - Conoco - in 1929. Phillips Petroleum and Conoco merged in 2002.

On Thursday, the company now known as ConocoPhillips and based in Houston continued the tradition of providing financial support to OU with a $6 million contribution allocated to the School of Geology and Geophysics.

Total gifts and pledges to OU from ConocoPhillips now total $33 million, said David L. Boren, OU president.

The FTCR press release closes with this whopper:

The nonpartisan, nonprofit Foundation for Taxpayer and Consumer Rights (FTCR) is a leading consumer watchdog group.

Non-partisan? Non-partisan?!! I wonder what definition of non-partisan they are using? When every article that they write about oil companies is riddled with adjectives like “deservedly dirty image” and a “warped view of the world”, they show how much credibility they have by claiming that they are “non-partisan.”

And if that story wasn’t bad enough, this one will really make the FTCR’s blood boil:

ConocoPhillips Contributes $1 Million To Memorial Hermann Life Flight

HOUSTON, Mar. 20, 2007 – ConocoPhillips announced today its contribution of $1 million to Memorial Hermann Life Flight to help with the purchase of six new helicopters that will provide enhanced emergency care to the community.

"Since its inception in 1976, Memorial Hermann's Life Flight has brought hope to thousands of patients who have required emergency medical care and transportation," said Phil Frederickson, executive vice president, ConocoPhillips. "By replacing the existing four helicopters and adding two new helicopters, Life Flight will be able to reach many more people who have life-threatening medical conditions."

They should set up a hotline for consumers to call in and turn in oil companies every time they commit philanthropy. If they like, I can get them a hundred more stories like these. They can issue a scathing press release in response to each story.

Hot Gas Lawsuit in Utah

I wrote this up a couple of weeks ago, but never got around to posting it. I guess business is slow for the folks who sue people for a living:

Suit Seeks to Deflate Excess 'Hot Gas' Profit

Source: Salt Lake Tribune

Mar. 7--When the temperature of gasoline rises, the volume of the fuel expands.

And that means Utah drivers who fill up during the summer may get fewer miles out of a tank of gas than during the colder months, when the temperature of the fuel they pumped into their automobiles and pickups was lower.

The prospect that motorists may not always be getting all the energy from each gallon of gasoline that they paid for has ignited a growing controversy across the country.

"This is a serious problem, especially with truckers" whose livelihoods are tied to the cost of fuel, said C. Val Morley, an attorney in American Fork who filed the proposed class action lawsuit. "Similar lawsuits have been filed in other areas of the country."

About 100 years ago, federal regulators determined that a gallon of gasoline would be 231 cubic inches of fuel measured when it was 60 degrees. And it is that 231 cubic inch per gallon standard that is used on gasoline pumps in Utah and across the country.

While it is true that fuel expands when the temperature rises, the impact on the volume of liquids is very low. I expect the attorneys in the class action lawsuit to learn the hard way, but here is what they will find out.

First, according to my chemical engineering handbook, the change in volume of gasoline in going from 60 to 90 degrees would be about 1%. So, if this sort of temperature rise actually happened, you would be getting about 1% less gas for the same money. BUT, gasoline tanks are buried underground. How often do you think those gas tanks reach 90 degrees? Probably never. In fact, those tanks are probably pretty close to 60 degrees year round, which means the class action lawsuit is just a waste of the court’s time.

I would also point out that this cuts both ways. The volume of gas shrinks at colder temperatures. So, if you fill up when it is less than 60 degrees, you are getting more gas for the same money. So, even if the tanks were above ground, unless the average annual temperature is above 60 degrees, there would be no net loss on the amount of gasoline you got for your money (unless you are just filling up in the summer). Furthermore, due to the many different components that go into gasoline, individual blends undoubtedly differ by more than 1% in their BTU content anyway (and this also varies with the seasons).

This is a good example of one of those nuisance lawsuits that makes everything more expensive for all of us. These are drummed up by lawyers who must find someone to sue in order to stay in business. The following is the true motive behind the lawsuit:

The Utah lawsuit contends that hot gasoline is costing American motorists a couple of billion dollars a year and drivers in this state millions annually. And it contends that money represents excess profits for the big oil companies.

And they want a piece. The truth is merely an inconvenience. All they need to do is find an ignorant jury and they have it made. I wonder if the O.J. Simpson jury is busy.

Water Usage in an Oil Refinery

There has been much controversy regarding the amount of water used to produce a gallon of ethanol. Considering just the usage in the ethanol plant (ignoring any irrigation requirements for the corn), this amounts to about 4 gallons of water per gallon of ethanol produced:

New Research Paper Finds Water Availability Critical to Growth of Ethanol Industry

Generally, an ethanol plant will use 10 gallons of water per minute for each 1 million gallons of ethanol produced. A typical 50 million gallon plant, would need 500 gallons per minute of water.

There are no publicly available records on water use by ethanol plants in the United States, the authors found, with the exception of the Minnesota Department of Natural Resources.

Minnesota plants use a range of 3.5 to 6 gallons of water per gallon of ethanol. Average water use has declined from 5.8:1 in 1998 to 4.2:1 in 2005.

Authors of the paper said 4 gallons of water per gallon of ethanol is a good estimate with the current technology.

I have frequently been asked how this compares to the water usage for an oil refinery, and each time I do some back of the envelope calculations and come up with about 0.5 gallons of water per gallon of crude oil processed. But the question comes up often enough that it is worth documenting.

According to an article in the February 18, 2007 Billings Gazette:

Here are the top users of the Billings Public Utilities Department

TOP WATER USERS (GALLONS PER YEAR)

1. Billings Heights Water District, 848 million.

2. ConocoPhillips Refinery, 456 million.

3. PPL Montana, 53.4 million.

4. Casa Village Mobile Home Court*, 49.6 million.

5. St. Vincent Healthcare**, 39.6 million.

The ConocoPhillips refinery in Billings processes 62,000 bbls of crude oil, or 2.6 million gallons per day. The reliability of most refineries is in the 90-95% range, so if we assumed 92.5% on-stream time, the refinery processes 2.6 million * 365 * 0.925, or 879 million gallons of crude oil per year. The water usage then amounts to 456 million/879 million, or 0.52 gallons of water per gallon of crude oil processed.

Ethanol in the News

There were several ethanol stories in the news today. It was a mixed bag. From BusinessWeek:

Ethanol's Growing List of Enemies

Paul Hitch has spent his entire life raising cattle and hogs on a stretch of the Oklahoma panhandle he says is "flat as a billiard table." But he worries that they'll face mounting pressures in the industry, particularly because of the soaring price for corn, which the business depends on to feed the livestock. In the past year, corn prices have doubled as demand from ethanol producers has surged.

"This ethanol binge is insane," says Hitch, who's president-elect of the National Cattlemen's Beef Assn. (NCBA). "This talk about energy independence and wrapping yourself in the flag and singing God Bless America -- all that's going to come at a severe cost to another part of the economy."

"The government thinks it can pick a winner, but they should allow consumers to pick their own," says Demian Moore, senior analyst for the nonprofit Taxpayers for Common Sense. "Corn ethanol has failed to prove itself as a reliable alternative that can exist without huge subsidies."

Seems cattlemen in general are not too happy about the ethanol situation. The prosperity of the corn farmer is coming at their expense:

Energy Interdependence

A frightening number was released by the labor department on March 15. February prices for “crude foodstuffs and feedstuffs” were 22.73% higher than a year ago. Wholesale consumer food prices were 6.8% above last year, too. Even more frightening, the February number was 29.25% higher than it was in May, its lowest point of 2006. It has all the potential of being worse and longer lasting than the consistent double digit increases we saw from mid-2003 to mid-2004.

Most of the increase we saw in February is the price we’re paying for trying to buy energy independence with our corn crop. It’s a double whammy, a perfect storm of a too-quick demand on American agricultural resources to pay for decades of unbridled energy consumption and a need by elected officials to prove they’re doing something to end our dependence on tenuous Middle Eastern sources of oil.

This was an interesting read:

Paying the Price for Biofuels

You can hardly open up a major newspaper without encountering the latest hype about biofuels: they're going to save oil, reduce pollution and prevent climate change.

Bill Gates, Sun Microsystems' Vinod Khosla, and other major venture capitalists are investing millions in new biofuel production, whether in the form of ethanol (mainly derived from corn in the U.S. today), or biodiesel (mainly from soybeans and canola seed).

Several well-respected analysts have raised serious concerns about the rapid diversion of food crops toward the production of fuel for automobiles.

WorldWatch Institute founder Lester Brown, long concerned about the sustainability of world food supplies, warns that "Cars, not people, will claim most of the increase in grain production this year." The grain required to make enough ethanol to fill an SUV tank is enough to feed a person for a whole year.

One study, originating from the University of Minnesota, is moderately hopeful in the first two areas, but offers a strong caution about land use.

This paper, published in the July 25, 2006 edition of the Proceedings of the National Academy of Sciences, concluded that ethanol production and use offers a modest net energy gain of 25 percent over oil, resulting in 12 percent less greenhouse gases than an equivalent amount of gasoline. The numbers for biodiesel are more promising, with a 93 percent net energy gain and a 41 percent reduction in greenhouse gases.

I don't even know where to begin on this one:

Science shows ethanol good for America

Suddenly in America, a multitude of so-called experts have become vocal in their attacks on renewable fuels - fuels that just might break the stranglehold that oil-producing countries have on us.

Using a weighted balance of 1, ethanol has an energy balance of 1.3 to 1.8 while gasoline has an energy balance of .8. The same rules were applied to both sources by comparing transportation, refinery costs and handling.

With the wise use and advancement of ethanol production, a 90 percent reduction in the use of gasoline is possible.

Therefore, the cost of extracting a gallon of ethanol is significantly lower than extracting a gallon of gasoline from crude oil.

Somebody needs to dispel the myth that there won't be enough land to produce this source of alternate fuel.

And finally, Vinod Khosla makes an ethanol investment that I think will actually be viable long-term:

Ethanol Company Starts Brazil Operations

Brazilian Renewable Energy Company Ltd.'s founding shareholders include venture capitalist Vinod Khosla, American supermarket magnate Ron Burkle, America Online founder Steve Case, former World Bank President James Wolfensohn and film producer Steven Bing, the company said in a statement.

The United States is the world's largest ethanol producer; Brazil is No. 2, but is the biggest exporter and has ample land available to boost production.

Brazilian ethanol is made from sugar, which is significantly cheaper than production of the fuel from corn, the raw material in the United States.

Refining 101: Summer Gasoline

Just what is summer gasoline? Twice a year, in the fall and in the spring, you hear about the seasonal gasoline transition. However, most people probably don’t understand what this actually means. AAA recently provided a Top 10 list explaining the recent rise in gasoline prices, and summer gasoline checked in at #7:

7. The summer blend switchover. This transition from winter-blend to summer-blend fuel, a concoction that causes less smog, occurs every spring. It causes a dip in gasoline supplies as refineries in the U.S. shut down temporarily to retool their production facilities.

That's only partially correct, and is probably the extent of most people's understanding of this transition. But given that I am very keen that people should understand the energy industry, it is worth a review, and a layman's explanation. I explained the details behind this transition in Here Comes Winter Gasoline. But let’s review some concepts.

There are two key (although not the only) specifications that refiners must meet for gasoline. The gasoline needs to have the proper octane, and it needs to have the proper Reid vapor pressure (RVP). While the octane of a particular grade is constant throughout the year, the RVP spec changes with the seasons.

The RVP is based on a test that measures vapor pressure of the gasoline blend at 100 degrees F. Normal atmospheric pressure varies, but is usually around 14.7 lbs per square inch (psi). Atmospheric pressure is caused by the weight of the air over our heads. If a liquid has a vapor pressure of greater than normal atmospheric pressure, that liquid boils. For example, when you heat a pan of water, the vapor pressure increases until it reaches atmospheric pressure. At that point, the water begins to boil.

In the summer, when temperatures can exceed 100 degrees F in many locations, it is important that the RVP of gasoline is well below 14.7. Otherwise, it can pressure up your gas tanks and gas cans, and it can boil in open containers. Gas that is vaporized ends up in the atmosphere, and contributes to air pollution. Therefore, the EPA has declared that summer gasoline blends may not exceed 7.8 psi in some locations, and 9.0 psi in others. The particulars vary, but key considerations are the altitude and motor vehicle density of a specific location. The EIA summarizes the key points:

As gasoline evaporates, volatile organic compounds (VOC’s) enter the atmosphere and contribute to ozone formation. Gasoline’s propensity to evaporate is measured by Reid vapor pressure (RVP). In order to control VOC emissions, the Federal Clean Air Act Amendments of 1990 require that all gasoline be limited to an RVP maximum of 9.0 psi during the summer high ozone season, which the Environmental Protection Agency (EPA) established as running from June 1 to September 15. The Act also authorized the EPA to set more stringent standards for nonattainment areas. As a result, EPA limits areas designated as “high volatility non-attainment” to a maximum RVP of 7.8 psi during the high ozone season. Some States elected to require even more stringent restrictions to achieve local clean air goals, and require 7.2- and 7.0-psi gasolines.

Butane, which has an RVP of 52 psi, can be blended into gasoline in higher proportions in the winter because the vapor pressure allowance is higher. There are 2 advantages in doing this. First, butane is a cheaper blending component than most of the other ingredients. That makes fall and winter gasoline cheaper to produce. But butane is also abundant, so that means that gasoline supplies increase in the winter because more butane is thrown into the mix. Not only that, but this all takes place after summer driving season, when demand typically falls off. These factors normally combine each year to reduce gasoline prices in the fall (even in non-election years). The RVP is stepped back down to summer levels starting in the spring, and this usually causes prices to increase.

There are some misconceptions that I often seen repeated about this seasonal transition. One is that it is the reason that spring and fall maintenance are done. That is not the case. Most, if not all refineries can carry out this transition without shutting down or interrupting production. The reason that maintenance is done in the spring and fall is that it provides a combination of moderate weather (the inside of a vessel can be unbearable in the summer) and off-peak demand. Vessels must be inspected, new equipment must be installed, catalyst change-outs occur, etc. This is similar to tuning up your car to keep it in proper running condition. But the seasonal maintenance is unrelated to the gasoline transition. In fact, for reasons I won't get into here, seasonal maintenance often complicates the transition.

Another misconception that some have is that they can save money by buying cheap gas in the winter and storing it for the summer. Remember that winter gasoline will pressure up as the weather heats up, and the contained butane will start to vaporize out of the mix. You will end up with less gasoline than you paid for, and you will be contributing to the air pollution problem that summer gasoline was designed to avoid. If, on the other hand, you were to buy summer gasoline and try to store it until winter, you might find yourself having problems getting the fuel to ignite, due to the lower vapor pressure. This would be like putting a little bit of diesel in your gasoline – not very good for your car. So buy and use gasoline in the correct season.

The Politics of Ethanol Blending

I should also mention a bit about ethanol blending. The blending of ethanol into the gasoline pool has been controversial because (among other things) it increases the vapor pressure of gasoline blends. This has resulted in the need for a 1 psi waiver for ethanol-containing fuels. From the previously linked EIA report:

As a part of the Clean Air Act Amendments, conventional gasoline containing 10 percent ethanol was allowed to exceed the Federal RVP maximums by 1 psi.

This of course means that ethanol will exacerbate smog at certain times of the year, and has resulted in a campaign by Senator Diane Feinstein to limit ethanol blending in California:

California contends its refineries can make clean-burning gasoline without oxygenates such as ethanol or MTBE. In fact, California’s Sen. Diane Feinstein contends ethanol’s volatility may be the cause for increasing smog levels in Southern California since the waiver was denied and more ethanol was added to the state’s gasoline supply.

Recently, Feinstein asked the EPA and the California Air Resources Board to investigate the impact of ethanol-blended gasoline on California’s air quality.

She said air quality in the South Coast Air Quality Management Zone has gotten worse this year compared to last and "the switch to ethanol-blended gasoline is considered one of the main culprits in increased ozone."

"Since ethanol’s volatility increases smog, particularly in the summer, I believe we need to look carefully at its impact on air quality," said the senator.

However, it looks like she is losing this battle for political reasons:

In the face-off between California and Corn Belt states over ethanol, California lost again this month. Federal officials concede that the corn-based fuel additive can increase smog and soot pollution from vehicles. But in a ruling shocking in its disregard for public health, the U.S. Environmental Protection Agency refused for a second time to scrap the rule requiring California to blend ethanol in its gasoline.

The EPA conceded that California air quality officials are right about ethanol's polluting effect in summer. Nonetheless, in its tortured ruling, the federal agency said California had not "clearly demonstrated" that the ethanol requirement would delay or interfere with the state's ability to meet federal clean air standards. Incredibly, the ruling said that even if California had demonstrated that the ethanol rule prevented the state from meeting clean air standards, the EPA "would deny the waiver." Why? "This reduction in the use of ethanol would undermine the potential benefits vis a vis energy security and support for rural and agricultural economy that Congress expected" from its ethanol rule.

The EPA ruling's effect is to increase payouts to one special interest, Midwest corn producers. For that California endures higher gasoline prices and dirtier air.

California cannot afford to let this assault on public health, fairness and common sense stand. U.S. Sen. Dianne Feinstein, D-Calif., has persuaded the Senate Energy Committee to add a clause to a pending energy bill that would exempt California from the ethanol rule during summer months. All the state's elected officials should join her in that fight.

All energy issues seem to be completely entangled with politics, and the sad fact is that the politics often trump the science. Ethanol blending is a perfect example where we are willing to exempt certain pollution issues "for the greater good."

Conclusion

Hopefully that was an easy-to-understand explanation of the seasonal gasoline transition in the U.S. The purpose of the transition is to curb pollution, but as the last section demonstrates the politics often interfere with the original intent. Now the next time you hear "season gasoline transition", you will know exactly what they are talking about and what the expected impact on supply and price will be.

Energy Heating Up Inflation

I am not quite sure why this was a surprise:

Producer prices unexpectedly jump 1.3%

There were two major culprits identified: Energy and food. However, the food component was also related to energy:

Food prices rose 1.9%, as prices for unprocessed foods rose 11.2%. Fresh fruit prices rose 15.7% and fresh vegetable prices rose 8.3%. Pasta prices rose 4.3%, the most in 11 years. Food prices have been rising rapidly, in part in response to the diversion of corn into the ethanol market as a substitute for gasoline.

Food prices have now risen more than 1% for three months in a row and are running at an annualized rate of 18.1% in that time. Other than a spike in 2004 caused by a drought, that's the fastest three-month gain since 1984.

Yet I keep hearing from people how this food versus fuel issue is just a myth. I have a feeling that we are going to end up seeing a backlash over this as demand for corn continues to pick up.

China is dealing with the same issue, but they are taking action. From an article last week in China Daily:

China will this year invest more in biomass ethanol projects over maize-based ones because of a lack of grain.

"The current maize-ethanol production capacity has far surpassed what the corn output can provide as an important grain resource," Du Ying, vice-minister of National Development and Reform Commission, said.

"We are researching all kinds of biomass energy options, and others include sorghum ethanol and coal diesel oil projects," Yang Xiongnian, deputy director of science and technology, education and rural environment department of the ministry told China Daily.

"But establishing new maize ethanol projects should be temporarily stopped."

OPEC Holds Steady

I have been trying to get inside the mind of OPEC lately and predict what they would do at this week’s meeting. Worldwide crude inventories have been falling, so the market appears to be undersupplied heading into high-demand season. So, if I was in charge of my country’s oil, do I open the taps a bit and risk bringing the price down, or do I hold steady and hope that I can react fast enough if prices start to spiral out of control? Or, do I make additional cuts in an attempt to stabilize prices at a higher price band?

After mulling this over, I think I would take the middle-ground. The current prices have not stemmed demand. The money continues to roll in. The world has come to accept that oil at this price is the new reality. So, I would let things coast along with assurances that OPEC will react as needed. And that is what they did. Here are some excerpts on the meeting from various AP sources.

The representative from the UAE spelled out the strategy:

"We seek prices that are stable, sustainable and acceptable to producers and consumers alike," Mohammed al-Hamli, the United Arab Emirates' oil minister and OPEC president told the meeting in his opening address.

I am sure that acceptable in this context means “as high as possible”, but you wouldn’t just come right out and say it. He also expressed concerns over what they seek to avoid:

But despite apparent general OPEC satisfaction with present price levels, al-Hamli expressed concern about the weak U.S. dollar, nothing that was "having a significant effect on the purchasing power of oil-producing developing countries in many parts of the world."

Any prolonged economic downturn would curb the world's appetite for oil, and drive down prices.

Of course they want to make as much money as they can without killing the goose laying the golden eggs.

It sounds like the members are quite satisfied with current price levels:

"I will strongly argue against this," said Nigerian Oil Minister Edmund Daukoru, when asked if the 12-nation organization would contemplate raising output.

Kuwait's oil minister, Sheik Ali Al Jarrah Al Sabah, also said his country supported keeping output levels where they are, and Shokri M. Ghanem, head of the National Oil Corp. of Libya, also suggested OPEC would opt for the status quo.

But there are indications that supply and demand are on a collision course:

The 10 OPEC members bound by quotas agreed to total cuts of 1.7 million barrels a day in October and February. And while analysts say that the reductions have not been fully implemented, they have kept prices at levels OPEC feels comfortable with.

But with the traditionally high-demand North American summer driving season approaching, there is little likelihood of a near-term prolonged slide in prices - and of resulting production cutbacks any time soon. Instead, OPEC might be looking at pressure to increase production at its next meeting, possibly in June.

Total OPEC output last month averaged 30.2 million barrels - 400,000 barrels less than OPEC should produce to meet world demand, said the IEA, the energy watchdog of the world's major industrialized countries. And - barring the unexpected - consumption is set to increase with the approach of the high-demand North American summer driving season.

Personally, I think they will need to open the taps a bit before June. If they don’t, or if they can’t (referring to recent reports of declines in Saudi Arabia), then barring recession prices will be headed back into record territory.

When Will Saudi Arabian Oil Production Peak?

The eventual decline of oil production in Saudi Arabia will likely have a profound impact on all of our lives. This event will result in energy shortages around the world, and depleting oil supplies will be bid up to higher and higher levels. Poor countries will no longer be able to compete, and they will be the first casualties of oil depletion. The richer countries will bid against each other for the remaining supplies, and if the depletion rate is high enough we will be in for some very tough times. The Saudis say they have plenty of oil. However, there are a lot of skeptics.

So, I am very interested in understanding what's going on inside Saudi Arabia. One thing is certain: Over the past year their oil production has declined. I think up until now the reasons they have given for reducing oil production - which they say is entirely voluntary - have been consistent with what the market was calling for. So, I believe that their decline over the past year has been voluntary.

Other researchers disagree. Books have been written calling into question the claims of Saudi reserves. Matt Simmon's book Twilight in the Desert was devoted to this subject. Many people have come up with models for attempting to predict the demise of Saudi oil production. This essay, also posted to The Oil Drum, takes a close look at one popular model that is often used as evidence pointing to an imminent peak for Saudi, as well as world oil production.

In Part I, I take a look at the model by feeding it historical Texas oil production data and observing the predictions. In Part II, I will feed it historical Saudi oil production data and observe the results.

Part I - Texas Myths

Like Cindy Crawford, I have done quite a bit of modeling in my career. However, mine has been in front of a computer. There are various types of models. They can be empirical, such that you curve fit data without having a clear explanation of the underlying mechanisms. Or they can be theoretical, in which the system is modeled according to the governing scientific principles and mathematical equations.

However, one thing is critical to keep in mind. If you are going to use the model for forecasting, the model must be tested. Testing the model is called “validation”, or sometimes “back-casting.” This involves feeding the model real data, and observing how well the predictions match up with the observations. If the predictions match up on a consistent basis, and any large variations are explainable, you have the makings of a predictive model. If you have not validated your model, or if you have attempted to validate it and found that the predictions were inconsistent, the model should be used with caution (if at all). In this essay I have done some back-casts on the Hubbert Linearization (HL) model and attempted to use it to make predictions using historical data.

The background of the technique is outside the scope of this essay, but Stuart Staniford has provided details here. The HL model is a hybrid model with empirical parts and theoretical parts. Jumping past the differential equations involved, a basic explanation of the modeling technique is as follows: If one plots the cumulative oil production of a region (Q), versus the yearly production (P) divided by the cumulative production (P/Q), a plot can be made to extrapolate and find the ultimate recoverable reserves (URR) for the region (Qt). You can see a number of HL examples in Stuart’s essays When Does Hubbert Linearization Work? and Extrapolating World Production.

Qt and Peak Production

I am unaware of a case in which a country has completely run out of recoverable oil and had Qt verified by the HL method. However, there are plenty of examples in which a region’s production profile follows the expected path determined by the HL. There are also many examples showing that a region’s production peaked at very close to 50% of Qt. Quoting from an article by oil geologist Jeffrey Brown and "Khebab":

With time, a HL data set starts to show a linear progression, and one can extrapolate the data down to where P is effectively zero, which gives one Qt, or ultimate recoverable reserves for the region. Based on the assumption that production tends to peak at about 50% of Qt, one can generate a predicted production profile for the region. The Lower 48 peaked at 48.5% of Qt.

Some areas have tended to peak at a higher % Qt than others. It is commonly claimed that Texas production, for example, peaked in 1972 at 57% of Qt (the reason for the qualifier will become apparent later in the essay). The fact that Texas peaked later than most regions is sometimes explained by the fact that prior to 1972 Texas was the swing producer, and production was regulated. This situation is similar to that of Saudi Arabia, so Texas is often used as an analog for predicting Saudi Arabia’s peak. So far, so good. But the astute reader may wonder “Can the value of Qt change significantly over time?” If the answer is “yes”, then the inevitable follow-up is “Then how can I be confident in using the HL to predict a peak?” I will attempt to answer these key questions by looking at the evolution of the HL for Texas over time.

Evolution of the Texas HL

I have retrieved historical Texas oil production records and modeled a series of HLs at various time periods. According to a 1956 Hubbert paper, (1) Texas had extracted approximately 4 billion barrels of oil prior to 1935. Beginning in 1935, we have annual production statistics that take us through the end of 2006. (2) Therefore, we can construct a series of HL curves. To avoid any bias on my part, I had Excel extrapolate the line and make the forecast once there was a relatively smooth trend. Let’s take a snapshot from 1960:


Figure 1. HL of Texas Oil Production Using Data Available in 1960.

As you can see, we have a nice trend. In fact, the latest 10 points are reminiscent of today’s HL of Saudi Arabia. The points have settled down and are staying pretty close to the line. So, what could we say in 1960? Qt as determined in 1960 from the intercept above is 42.5 billion barrels (Gbl). Texas crossed 50% of Qt in 1957, and by 1960 was at 56% of Qt – almost the same value as today. Surely peak was imminent. In fact, if you look at the data, Texas clearly peaked in 1956 at 1.079 MM bbl/day. By 1960, Texas was down to 892,000 bbl/day. It had undergone an annual decline of 5.5% for 4 years, and was well past 50% of Qt.

In 1960, we could have said “Texas oil production peaked in 1956, as predicted by the HL method.” But as we know, that’s not at all what happened. That would have been forecasting the peak 16 years too early. So let’s fast-forward to 1970:

Figure 2. HL of Texas Oil Production Using Data Available in 1970.

Well, that’s not very helpful. Our Texas HL in 1970 is much more muddled than in 1960. The 1956 record was broken in 1968 – twelve years after the 1960 analysis indicated a peak. We are starting to see some points rise above the line and extend Qt out further than was implied in 1960. The trend line that Excel drew is now forecasting 46.25 Gbl as our URR. That puts production in 1970 at 73% of Qt. The last 14 years had been spent well above 50% of Qt. But, the last 4 points – starting in 1967 – seem to indicate that Qt may end up being even further out than we thought. Now remember, it’s 1970. What exactly about this curve would indicate that we are 2 years from peaking?

Let’s jump forward now to 1980:


Figure 3. HL of Texas Oil Production Using Data Available in 1980.

Qt continues to grow. Excel is now forecasting Qt at 55.5 Gbl. The trend toward a higher URR is evident. The last few points imply that the forecast will grow to 57 Gbl. If so, our 1980 HL would put Texas’ 1972 peak at 63% of Qt. So, not only do we see Qt growing with time, we see that the % of Qt when the 1972 peak occurred is getting smaller. So, can we forecast the 1972 peak by 1980? No. We have already seen a case where the 1956 production record wasn’t broken for 12 years. The % Qt during that time was well over 50%. The % Qt in 1970 had climbed to 73%. Yet that still didn’t enable us to call peak. On what basis could we have done so in 1980? We have now gone through 24 years in which we could say “peak might be here.” To suggest that we could have made any other forecast at that time is wishful thinking.

So let’s skip to present day – end of 2006:

Figure 4. HL of Texas Oil Production Using Data Available in 2006.

Qt is now at 62 Gbl, but look at those last few points. They are once again pointing to a higher Qt. Some time in the 1980’s, as production continued to fall, we could have finally said “1972 was the peak.” But the % of Qt for the 1972 peak is still a moving target. Today, the 1972 peak clocks in at 58.3% of Qt – not far from the value in 1960. In 1980 it was 63% of Qt, and in 1970 it was 73% of Qt. Therefore, claims of “no examples of large producing regions showing sustained, steady increases in production past the 60% of Qt mark” are clearly wrong. Texas showed steady production increases past the 60% mark of Qt, because it reached that level in the early 1960’s. Texas even showed production increases past 70% Qt, as it reached 73% two years prior to the production peak.

Implications for Saudi

So, is Saudi like Texas in 1956, or is Saudi like Texas in 1972? Or is it like neither? The HL can’t tell us that. This essay should make clear that confidently predicting a Saudi peak on the basis of the Texas HL is nothing more than an exercise in faith-based forecasting. The only reason that the Texas HL looks as it does is because we have decades of data points following the Texas peak. But what is missed is that the HL has changed greatly from the time Texas actually peaked. So the Texas HL at its peak looked nothing like the Saudi HL of today.

It is invalid to use three decades of hindsight for refining the Texas forecast, because we clearly don't have the same option with Saudi Arabia. Yet some argue that the Saudi peak can be forecast with confidence using the knowledge obtained from the case of Texas – a region in which the uncertainty of the method spanned almost 3 decades.

So, the HL has shown that it is good at forecasting the past, but can be very unreliable for predicting the future. In Part II, we will examine the evolution of the Saudi HL over time.

Notes

For those who may be unfamiliar with my position, this argument in no way diminishes my belief that we need to take action right now concerning oil depletion. I am merely evaluating one of the tools that is used to forecast peak, and trying to determine whether that tool can give us any precision on forecasting a peak in Saudi Arabia. My conclusion is that it can’t, but we will look at the specific case of Saudi Arabia in Part II.

I believe that by summer (barring recession) we should know one way or another, because the market looks to be undersupplied at the moment. I think Saudi will be called upon to open the taps by summer. If they can't, look out.

References

1. Hubbert, M. King. Nuclear Energy and the Fossil Fuels. Paper presented at an American Petroleum Institute meeting in San Antonio, Texas. March 7-9, 1956 p. 10.

2. Oil Production and Well Counts in Texas 1935-2005, Railroad Commission of Texas, Accessed March 2007

Conflicts of Interest

Critics often charge me with a conflict of interest for my position on grain ethanol. They suggest that I have something to gain by opposing grain ethanol. Often, a charge of bias will be the extent of my opponent’s argument, which is of course an ad hominem fallacy. While it is certainly fair to suggest that I might have a bias, at the end of the day it is the arguments that must be addressed. This is true whether I am employed by Greenpeace, or on the staff of Dick Cheney.

Furthermore, as I have pointed out, ethanol producers use a lot of natural gas, and my company sells a lot of natural gas to them. Given our market share of the natural gas business, if ethanol producers displace some gasoline by making ethanol from natural gas, there will likely be a net benefit to my company. That may change in the future if ethanol producers start turning to coal in larger numbers, but the current situation is such that increases in grain ethanol production have the potential to actually benefit my personal finances (although the trickle-down effect either way would be exceedingly small).

But consider the following hypothetical situation. Let’s say that I am a lawmaker, and I have an investment in a small oil and gas producer. Furthermore, let’s say that I sponsor and promote a bill that will increase the business prospects of small oil and gas producers in my state. Is this a conflict of interest? Is it a lapse of ethics? It would seem so to me. Now replace “oil and gas producer” with “grain ethanol producer”, and the hypothetical situation is real.

Ethanol Bill Poses Conflicts

The two lead sponsors of a bill in the Wisconsin Legislature promoting the use of ethanol and the purchase of cars that run on an 85% blend of the corn-based fuel have financial ties to the ethanol and automotive industries, records show.

State Rep. Eugene Hahn (R-Cambria) bought $20,000 in shares of United Wisconsin Grain Producers LLC under his wife's name when the company was starting up in 2003. The Friesland-based company produces 40 million gallons of ethanol a year, and the plant is under construction to double its capacity.

"This ought to set off flashing red lights. It ought to set off warning bells for citizens," said Mike McCabe, executive director for Wisconsin Democracy Campaign, a non-partisan organization advocating government accountability. "This is the kind of thing that has been too tolerated and has degraded our ethical climate in Wisconsin politics.

"Whenever a legislator has a personal financial stake in an industry that stands to gain from particular legislation, it raises legitimate questions about their motivation about advancing that legislation, and the public needs to be aware of that."

Jay Heck, executive director of the Wisconsin chapter of Common Cause – a national, non-partisan, citizens lobbying group also promoting government accountability - called it a problem.

"These are definitely conflicts," Heck said. "In the case of Hahn, he ought to divest himself of the stock in ethanol companies, or the public perception will be that he will benefit personally by passing this legislation."

Heck said the situation was particularly problematic because Hahn and Sheridan, as the lead authors and sponsors, are actively pushing for passage of the bill. No votes have yet been cast on the bill, and a hearing has not been set.

"There is some distinction between being supportive and voting and being the lead proponents," he said.

Hahn has made out pretty well on the deal already:

Hahn said he's already received an 80% return on his ethanol investment.

Hahn also recently invested $2,000 in a start-up biodiesel plant, he said.

"Maybe I'll have to convert that to my wife's name," he said.

Hahn also voted in 2005 for a bill that would have mandated that 10% ethanol be blended into all gasoline in Wisconsin. The bill later stalled in the Senate.

Yes, convert it to your wife’s name. That should resolve those ethical issues, because clearly you would no longer have a vested interest. Politics. What a hoot.

Inventories are Falling Fast

There has been a lot of speculation lately over whether the Saudi oil production cuts over the past year have been voluntary. I have argued that they were voluntary based on a combination of what was happening with inventories last spring (crude inventories were very high and trending higher), and then price (started falling in the summer and fell for the rest of the year). But I think we will soon know for sure.

This is subscriber information from the daily OPIS report, so I will only post a small portion of the report:

Over the past five weeks, there has been a fundamental shift in the oil Market -- a shift that has resulted in increasingly higher prices. The shift has to do with basic fundamentals; not speculation, not hedge funds, not futures trading. Oil supplies in the U.S. have dwindled sharply in the past five weeks, more than some people may realize.

According to the EIA, in the U.S., total company-held oil inventories have shed 87.4 million barrels since OPEC's 0ct. 20 meeting. By the end of the first quarter of 2007, stocks will be 100 million barrels below end-September 2006 levels, the EIA forecasts. Meanwhile, demand has been higher than normal, so the "supply cushion" has been depleted.

Over the past five weeks total product inventories have dropped nearly 60 million barrels, an average of more than 10 million barrels per week. Gasoline supplies, which comprise the largest part of the U.S. petroleum stock base, have shrunk as well. Inventory dipped almost 4 million barrels this week leaving supplies 8 million barrels under year-ago levels and less than 3 million barrels over the five-year average for this time of year.

What we are seeing right now is a combination of falling inventories and rising prices. This should provide both the opportunity and the motive for Saudi to increase production. Demand will really kick up in April and May, when refineries are coming out of their turnarounds. If the current trend continues, the Saudis are going to be called upon to bump up production pretty soon.

If they don't, then I will conclude that at least for the time being, they can't. That may mean that their production has peaked, either due to geological constraints, or because they failed to anticipate demand and didn't bring their projects online soon enough. I have seen the announced projects they have in the pipeline, and they won't be enough to satisfy demand any time soon. If their current reduction is involuntary we are in for some tough sledding ahead, resulting in all kinds of price records this year. I might start thinking about buying a more fuel efficient vehicle if I hadn't just bought one.

Why Are Gas Prices Rising?

Gas prices are once again headed higher, and most people are probably wondering why. The Charleston Gazette (1) provides a typical reaction:

Lee Franc, a client manager from St. Petersburg, spent about $40 to put 16 gallons in her Toyota Highlander. She works at home and can go a week or two without filling up.

"Katrina, I can understand," Franc said. "I didn't see a very good explanation this time. You hear so many excuses it gets to where you don't believe anything anymore."

The thing is, they are not excuses. There are valid reasons that gas prices are rising, and people should take time to educate themselves on this very important issue that affects all of our lives. As I have said again and again, look to the product inventories – which are published on a weekly basis by the Energy Information Administration (EIA) - to guide you on what prices will do in the short term. USA Today (2) writes:

Nationwide, the reasons behind the increase in gasoline prices are ripped from an Econ 101 textbook:

*Supply. Gasoline inventories fell for the fourth-consecutive week last week and were 4% lower than a year ago, partly because of lower imports and refinery maintenance, according to the Energy Department. The amount of gasoline was enough to meet demand for 23.7 days, the lowest since the week ended Jan. 12.

*Demand. Drivers have been pumping more gasoline, despite the higher prices. Average gasoline demand in the four weeks through March 2 was 1.2% higher than the same period a year ago, according to the Energy Department.

There are multiple factors right now affecting supply. Refinery turnaround season – when refineries shut down or scale back to do maintenance – peaks in the early spring and early fall. This is because those time periods provide a combination of moderate weather and off-peak gasoline demand. In the spring, however, there is also the transition to summer-gasoline. I have previously explained what this transition is all about. The result is that it lowers the available supply of gasoline just as driving season is picking up. Lower supply + higher demand = higher prices. This is why gas prices tend to spike at this time every year, although this year’s spike is early than normal.

Gasoline demand was unusually high throughout the winter. This could pose problems in the coming weeks, as it has resulted in gasoline inventories being pulled down. The U.S. relies on gasoline imports to satisfy part of the demand, but when the price falls it becomes less profitable for those exporting the gasoline. When the price comes back up, imports increase and the exporter can make higher profits.

Because the price was lower over the winter – and because demand is typically lower than what was seen this year – imports were low in the winter. Because prices have come up, expect to see gasoline imports rise and take some of the pressure off of the supply constraints. On the other hand, demand will pick up over the next few months, so it is going to be a tight race to see if imports can keep up.

My personal belief is that even though there may be lulls in price, higher gasoline prices will be the norm rather than the exception in upcoming years. Refinery capacity is just too tight, and some argue that Saudi Arabian oil production has peaked (although I disagree). If (when) the latter is true, this would (will) put incredible pressure on prices because growing demand is going to run head on into falling supply. That is what Peak Oil, or oil depletion discussions, are all about.

My advice to all would be to plan for a future in which energy prices are much higher, and start making efficiency improvements in the car you drive, the electricity you use, and the fuel you use to heat your home. I believe this will pay big dividends for you going forward, and your budget won’t be quite so exposed to volatile energy prices. As a bonus, making these changes will lower your greenhouse gas emissions.

References

1. Californians Pay $3 Again for Gas, The Charleston Gazette, March 8, 2007

2. Gasoline Prices Getting Pumped Up Again, USA TODAY, March 9, 2007

The Handy-Dandy Khosla Refuter

The web site Seeking Alpha has just published a new article on ethanol:

Ethanol: A Few Myths Debunked

To be honest, there are so many misconceptions and myths in the article that a better name for it would have been Ethanol: A Few Myths Repeated. I think all of these "myths" have been covered at one time or another in this blog, but he does quote Vinod Khosla at length. So, this might be a good time to re-debunk Khosla, given that he has repeated this claims many times since the first debunking.

So, once again, here are Vinod Khosla's claims, repeated from the above article, dissected and debunked.

VK: Energy balance is not even the right question to answer. It is not the energy balance of ethanol that matters but the energy balance of ethanol relative to the energy balance of gasoline.

I agree 100%. But this is exactly the comparison that I and others have consistently made. The problem is that VK is comparing apples to bananas, as I will show.

VK: Dr. Wang at Argonne National Labs has built one of the most rigorous and transparent public models for energy balance calculations. His results indicate that corn ethanol has almost twice the energy balance compared to gasoline, yet this crucial fact is seldom mentioned in the press.

That’s because it is just flat-out wrong. If this was true, we wouldn’t even use gasoline, and ethanol wouldn’t need federal subsidies. After all, why on earth would we invest our BTUs into gasoline when we could get twice the energy return with ethanol? The reason is that VK is grossly misinformed, but he has no excuse because I have explained this to him over the phone. Twice.

VK: According to the majority of studies, corn ethanol has an energy balance between 1.3-1.8 while gasoline is substantially worse, at about 0.8 (since it takes energy to extract, transport, refine and handle gasoline).

Doesn’t it take energy to plant and harvest corn, ferment the ethanol, refine it, and transport it? Of course it does. Except with gasoline, the planting and fermenting have already been done by nature. The harvesting involves drilling a hole in the ground and extracting an energy rich, water-insoluble mixture that takes a fraction of the energy to refine that ethanol takes.

Here is the true story. If I have 1 BTU to invest, and I want a return on that BTU, where am I going to invest it to get the most value? Well, if I invest in ethanol - according to studies that the afore-mentioned Dr. Wang has co-authored - I am going to end up with about 1.06 BTUs of fuel and 0.25 BTUs worth of animal feed. So, for an investment of 1 BTU, I netted 0.06 BTUs of liquid fuel. Again that is backed up by the USDA’s own studies that Dr. Wang has co-authored.

If I invest that BTU into gasoline production, here is what I get. The worst conventional fields in the world have a 10/1 energy return on getting crude oil out of the ground. According to Cutler Cleveland (and consistent with my own personal experience), the world wide average energy return for crude oil extraction is 17/1. So, for my 1 BTU investment, I average 17 BTUs of crude in the crude tank. But I have to refine it. A heavy, sour refinery has an energy return of about 10/1 (producing gasoline, diesel, heating oil, jet fuel, etc. from the crude). So, my 17 BTUs of crude are going to take 1.7 BTUs – in the worst case – to refine. I have then invested 2.7 BTUs (1 to extract and 1.7 to refine) to process 17 BTUs of crude into liquid fuels.

Typically, there are losses of around 5% in refining crude. These losses often have BTU value that is recovered, but let’s say they don’t. Then, my gross is 17 * 0.95 = 16.15 BTUs of usable liquid fuels for my BTU investment of 2.7 BTUs. My energy return is 16.15/2.7, or 5.98. This compares to an energy return of 1.3 for ethanol (when we count animal feed as BTUs). So, gasoline has about 4.6 times the energy balance of ethanol, as opposed to VK’s claim of twice the energy balance for ethanol. He is off by an order of magnitude. Now it should start to become clear why ethanol will always need subsidies to compete.

Moving on:

VK: Electricity has an energy balance four times worse than corn ethanol. Do we stop using electricity?

No, because we can’t plug our toasters into a pile of coal. We can, however, run vehicles on the fossil fuel inputs that we used to make ethanol. That is the key difference. Electricity is a much more user-friendly form of energy than is coal. There is no advantage to recycling fossil fuels into ethanol (well, there’s coal, but I won’t go there).

VK: Dr. Wang goes on to say that energy balance is “not a meaningful number for any fuel in evaluating its benefits. "Why then does the press continue mentioning it?

It is ironic that in the same essay VK argues that the energy balance of ethanol is twice that of gasoline, he also argues that it is not a meaningful question. I have pointed out the absurdity of this position before, because this isn’t the first time he has taken it.

VK: Why do they fail to mention that electricity has a substantially worse energy balance than ethanol?

See above. Think about plugging your DVD player into a pile of coal and the picture will start to become clear.

VK: What is often inferred by the press is that it takes more petroleum to make ethanol than is displaced. This is emphatically NOT true, even in the most vintage of plants.

He is correct here, but fails to mention that the majority of the fossil fuel input into an ethanol plant, natural gas, works just fine as a vehicle fuel. Compressed natural gas (CNG) buses are very popular mass transit options, for instance.

VK: In fact if we have to pick an alternative to gasoline, then ethanol is the best choice today.

Ethanol, also known as recycled natural gas. My question is: Why go to the trouble of recycling the natural gas into ethanol, when CNG buses have a proven track record?

VK: Energy balance is the wrong question. Greenhouse gas emissions per mile driven is the right question.

Those questions go hand in hand. In fact, they are inversely proportional. The lower the energy balance, the higher the overall greenhouse gas emissions for the process. For an energy balance of 1.06, you have a 6% reduction in greenhouse gas emissions. Along with that, we get more pesticide and herbicide runoff into our waterways, increased soil erosion from expanded corn production, and we all get to pay more for our food.

We can do better. If we put half the effort into supporting conservation measures that we do into supporting corn ethanol, we could make a significant reduction in our fossil fuel usage. But, there isn’t any money to be made in that, so this option tends to be ignored. Sooner or later we won’t have a choice, but I would like to see us make the choice while we do still options.

More Amateurs to Build Ethanol Plants

I couldn’t make this stuff up if I tried. The following was called to my attention in an e-mail earlier today after Ron Steenblik uncovered the story:

Yuma doctor hopping on board booming ethanol trend

Continuing the trend that I reported on previously, amateurs continue to jump onto the ethanol bandwagon:

Dr. Sultan Lalani doesn't lose sleep over the biggest project he has ever done. And he said he doesn't lose any sleep over criticism of the proposed 55-million-gallon per year ethanol plant he hopes to build near Tacna either.

With a construction cost of $125 million, this plant is serious business, but Lalani said it doesn't overwhelm him. He wants to do the project, located at Avenue 47-1/2E and Highway 80, because he believes it will be good for the environment and good for Yuma County.

Lalani, an ear, nose and throat doctor in Yuma, said the idea to build an ethanol plant grew out of conversations with his daughter, Anita, who is a staunch environmentalist. They created Agrinext Ethanol LLC to try to make that happen.

"I come from a family that is industrial, business. Medicine is my passion, medicine is what I do, but of course, I do enjoy other challenges," Lalani said. "I thought this was a very good challenge."

Speaking of which, I have been thinking of getting into the ear, nose, and throat business. I enjoy a challenge, and I think I could make a lot of money. It would be a nice compliment to my other planned business ventures in raising llamas, writing software, and manufacturing pharmaceuticals.

The article continues:

Lalani was born in India and came to the U.S. in 1969. He received his medical training at St. Louis University, and in 1978, he came to Yuma to start his practice. While he says he would never leave medicine, Lalani said he had other goals, too. One is to make the ethanol plant a reality.

Because of America's dependence on foreign oil, Lalani said, he was interested in fuels that are renewable and domestic. One of the investors for the ethanol project started a grain facility in Kenya that Lalani later joined as a partner. Lalani said that experience in the grain business combined with the Arizona location make ethanol a logical next step.

What is it with people born in India and ethanol? They certainly seem to have a special passion for it. I have written extensively about ethanol. Needless to say, the energy balance is marginal, and the further the ethanol plant is from the feedstock, the more marginal the energy balance becomes. I think it is a decent bet that the energy balance of an ethanol plant in Arizona will be less than 1.0, which means it would actually increase greenhouse gas (GHG) emissions. And of course if he proceeds with this plan:

Lalani said Agrinext hasn't decided on a power provider but is leaning toward clean-burning coal to run the plant.

You can be pretty confident that GHGs will increase. Yep, good old clean-burning coal. Good stuff. That is also a good signal that his energy balance is not good, given that he is leaning toward cheap coal over more expensive natural gas.

There was one other funny note to this story:

"Minor" Land Use Change

In other business, the board is scheduled to hold a public hearing on a minor amendment land use change to the Dome Valley/Wellton Planning Area of the Yuma County 2010 Comprehensive Plan for the proposed Agrinext Ethanol plant. The change would be from Agriculture Rural Preservation to Heavy Industrial.

Likewise, I am thinking about a minor land use change as well. I would like to turn my home into a nuclear power plant. I hope there are no permitting issues.

I will say again: When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That's why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980's.

Wisconsin's "Robin Hood" Tax

Those Bewildering Energy Markets

Wisconsin Governor Jim Doyle has a new proposal for punishing those "greedy, gouging oil companies" for their "unfair profits." His proposal is to rob from the "rich" - the oil companies - and give to the "poor" - the state government of Wisconsin. However, as I will show in this essay, the irony of the situation is that the poor in this case are already making bigger profits in Wisconsin than are the rich.

Based on Governor Doyle's recent comments, I have to include him among those with a very naive view of how the energy markets work. His understanding appears to be like that of the proponents of Prop 87, about which I wrote several essays. They apparently think oil companies conduct business like this: Calculate all of your expenses - salaries, utilities, raw materials, capital - and then add on a markup. Historically, this "markup" has been 5-7% - not that great. But, the perception seems to be that if oil companies think they can get away with it, they jack the profit up to 9% - in which case they are now accused of gouging consumers. Setting prices based on costs and markup may be how Microsoft sells software (except with a much higher markup) but it isn't how oil and gas are sold. And I know that there are many - perhaps even a majority - who think this is how oil companies operate. However, the primary purpose of this blog is to shed light on energy issues, so that is what I will attempt to do in this case.

I should first point out that this is not the first time that Governor Doyle took on Big Oil. In fact, on the Jim Doyle for Governor website it says:

Under Governor Doyle’s leadership, Wisconsin became the first state in the nation to subpoena executives from the big oil companies to come and explain how they could justify sky high gas prices and billions of dollars in profits in the wake of Hurricane Katrina. The Governor called on Congress and President Bush to force the big oil companies to give a refund to American consumers.

So, how did that turn out Governor Doyle? Oh right, none of the executives actually showed up. Those CEOs had just finished explaining to a befuddled U.S. Senate at a joint hearing of the Commerce Committee and the Energy and Natural Resources Committee just how energy markets work. I guess Governor Doyle missed the broadcast, because he subpoenaed these same CEOs to explain to him in person what's going on. And since these CEOs have multi-billion dollar businesses to run, they can't just fly away on a moment's notice to satisfy a governor's whim. So, they didn't show up in person.

Governor Doyle's Proposal

Now Governor Doyle is striking back. Again reminiscent of the aims of Prop 87, the governor has proposed enacting additional taxes on oil companies and to put those funds toward highway and other transportation projects. His proposal would assess a 2.5 percent tax - directly on the oil companies - for gasoline coming into the state of Wisconsin. He projects that this would raise $272 million dollars over two years and he would provide jail time if gas prices rise as a result.

I almost hate to point out that Wisconsin has one of the highest gas taxes in the country and that it is indexed to inflation to automatically increase [a commenter from Wisconsin indicates that the indexing has been repealed]. Given the staggering 9% profit on sales that oil companies have enjoyed recently (this is profiteering?) that means that the Wisconsin government is already making more money from gasoline sales than the oil companies are. Has Governor Doyle offered to step up and refund some of that money back to the consumers given that he took more from them than did the oil companies? (I want to make it clear that I don't oppose higher gas taxes. However, I do oppose hypocrisy and pandering.)

What Drives Oil and Gas Prices?

So, how are oil and gas actually priced? They are commodities, and as such they are priced on the basis of supply and demand (or actually the perception of supply and demand, which is sometimes wrong). They trade in large volumes on commodities exchanges. When supply is crimped, prices go up. The alternative to increasing prices when supply is crimped would be rationing. Allowing the price to go up also rations product, but it does so by price. Those who really need the gas are able to get it, albeit at a higher price.

There have been two primary drivers for higher prices in the past few years. First, the excess oil production capacity has largely dried up in recent years, putting supply and demand in very tight balance. As excess production capacity has eroded, oil prices have risen. That also means that any hiccup that affects global oil production (hurricanes, civil unrest in Nigeria) or even fears of hiccups (war with Iran) can quickly drive the price higher. And the price of oil is a major factor in the price of gasoline.

The other factor driving up product prices is that we have a capacity bottleneck in our refineries. Gasoline demand continues to grow, and while refiners are expanding capacity, it has not been added fast enough to stay ahead of the demand curve. This puts additional upward pressure on finished product prices. If, for instance, the price was articificially lowered across the country, demand would go up and we would literally run out of product. So price keeps supply in balance with demand. Again, the alternatives to this are price controls and rationing.

Effects of Increased Costs

Now, let's say that the costs for an oil company increase in a specific location. What the oil companies are going to do is look at their economic models, and they are going to ship the gasoline into the area with the best payback. If costs go up in Wisconsin, supply will likely go down as gasoline gets diverted to other areas with better economics (and believe me, they will do it for a penny a gallon). That means that - you guessed it - prices would go up in Wisconsin because the supply will have been restricted.

Experts are Skeptical of the Plan

But the Governor thinks he can control the price. He proposes to make it illegal for oil companies to pass on the costs, and he is going to hire a team of auditors (one of the articles below suggested it could take 40 auditors to police) to make sure the costs aren't being passed on. This is discussed in the Wisconsin State Journal's article Doyle's oil tax plan difficult to enforce:

The state can tax gasoline brought into the state, as Doyle proposed in his budget last week. But it's unlikely the governor can follow through on his promise to prevent oil companies from passing the tax along to consumers by raising prices at the pump, said economists and others familiar with the industry. Doyle wants to hire a team of auditors to help enforce a proposed law that would fine, and possibly jail, oil companies or executives who passed the tax on to consumers.

But experts were skeptical whether state auditors could prove that rising gas prices reflected the costs of the tax, as opposed to some other factor in a complex global market. The issue comes as some Republican lawmakers question whether the measure could mean consumers pay up to 5 cents more at the pump.

Wisconsin is Price-Gouging Consumers

The article continues, reiterating Doyle's claims that oil companies made "unfair profits."

"Government and policy makers have not been very successful in controlling prices to achieve their policy goals. Taxes tend to be borne by both producers and consumers. It's hard for me to imagine how this would be any different," Scholz said.

For his part, Doyle said last week the tax was needed to help pay for much needed investments in the state's roads and to respond to what he said were the unfair profits that oil companies have made at the expense of consumers in recent years.

"Now in transportation we face a real issue about how we fund the infrastructure of the state," said Doyle, adding he preferred trying to lay at least part of the bill at the feet of the oil companies. "To me, that's the better choice."

Again, what about the higher profits that the Wisconsin state government makes from fuel sales? Are those profits unfair? Why or why not? What constitutes a fair profit?

Doyle repeats his charge of unfair profits in Doyle wants tax on oil companies:

"It seems to me that these companies that have had such a big killing - and this is money that has come directly out of the pockets of the people of Wisconsin and the people of the United States - they ought to be doing their share to help with the infrastructure needs," Doyle said.

Again, the current gas tax has also "come directly out of the pockets of the people of Wisconsin." Why is it unfair that oil companies earn 9 cents on a dollar while taking huge risks to bring that product to market, yet the Wisconsin government earns 17 cents on a dollar¹ for doing nothing but taxing it? I certainly don't wish to leave the impression that I think gas taxes are too high; in fact I think they are much too low. But his statements seem hypocritical when the Wisconsin government earns almost twice the money from a gallon of gasoline as the companies Doyle is calling greedy and unfair.

The Penalties if Prices Rise

Continuing on, the article spells out the penalties that would be faced if the tax does result in higher prices:

Oil company officials would face up to six months in jail if they passed the tax on to consumers. The state Department of Revenue would audit the firms to ensure they do not.

"I think, given the severity of the penalties and the enforcement unit we'll put in place, any oil company would run a very big risk in Wisconsin if they attempted to violate that law," Doyle said.

So, like the Prop 87 proponents, Doyle thinks he can control the price. I am not sure, as an oil company executive, I would actually risk selling gasoline in Wisconsin if I was going to face jail for a price increase. Sounds like a prescription for a long court battle trying to prove why the price went up.

Conclusion

Finally, let me say that I really don't care if they do enact the tax. In fact, I think it would be an interesting case study to see one of these taxes pass and watch the impact. I think it will drive prices higher. This will encourage conservation, which I strongly support. So, this essay is not meant to argue that gas taxes are a bad idea. I am just commenting on the stunning naivety of government officials regarding the pricing of global commodities, and I viewed it as an opportunity to address price drivers in the energy markets.

Incidentally, I am not aware that my company sells gasoline in Wisconsin. We may, I don't know, but I know we don't have a refinery in that part of the country. So, it will probably be firms like Koch, next door in Minnesota that have to deal with this new tax. Anyway, should be another interesting piece of legislation to keep an eye on.

Notes

1. Based on the current spot price for gasoline ($1.84/gal on the NYMEX) and Wisconsin's $0.31/gal gas tax.

A special thanks to Gary Dikkers for bringing this to my attention.

How to Make an Easy $875,000

No experience or special skills are required. You don't even need good credit. But you are going to need a post office box and a (preferably catchy) company name.

Looks like some of the good citizens of North Carolina are up in arms because $875,000 in taxpayer dollars is being given to a person with absolutely no experience (but a catchy company name) to build an ethanol plant. The backer of the plant is an Indian billionaire (but not Vinod Khosla). Here are some excerpts from an article discussing the controversy, Passing Bad Gas:

E85 is described as a Delaware-based corporation with corporate offices in the Seattle area. What the CCBC has not publicly disclosed, perhaps because they do not know, is that E85 corporate headquarters is the private residence of Mark Dassel in Indianola, Wash. The corporate staff consists of Mr. And Mrs. Dassel.

An investigation earlier this month indicated that the county property taxes on this house were in arrears. Also the corporate address is a post office box with no listed corporate telephone number. The Dassels have a listed telephone. So much for E85. Would you buy stock in this company or a used car from Mr. Dassel? Neither would I.

Bill Martin, CCBC [Cumberland County Business Council] president was quoted in a December 29, 2006 newspaper article as saying "he knew E85 had a foreign affiliation but he did not know the specifics" Come again? If your job is to research a prospect before it is recommended to local government for funding, how could you not "know the specifics?" How could you not know that Mr. Sivasankaran (a.k.a. Mr. Siva for us occidentals) is an Asian Indian billionaire, and a corporate raider and trader who has zero, zip, nada experience in building and operating ethanol plants? His lieutenant Mark Dassel, spokesperson for E85, has none either. But let's give them $875,000 anyway. Else we might lose this splendid opportunity to further screw up our local environment.

The air quality permit was issued two months and 12 days after it was applied for by a state agency with absolutely no experience with the construction or operation of ethanol plants. The County Commissioners have made no public statements indicating any concerns about the hazards this plant will pose or the absolutely negative effect the plant will have on the environment in our community. All they have said is that $875,000 of your money and mine will be awarded to a foreign billionaire.

Linda Devore also weighed in on this in her blog in the Fayetteville Observer:

E85, the company-on-paper located in the personal residence of Mr. and Mrs. Mark Dassel in Indianola, WA, wants to begin its first ever business venture in
Cumberland County, NC. Neither the company nor the Dassels have ever built an ethanol plant before--but with our cash, PWC giveaways, and federal tax credits--they are willing to give it a try. This isn't a unique undertaking.

Proposals for ethanol plants are popping up all over the country--especially in areas that have never seen an ethanol plant up close and personal. Federal tax credits are the reason, and the naive residents of small, desperate, economically-depressed communities are the target.

This is the kind of thing that often happens when the government throws lots of money at a problem without conducting the proper due diligence. It reminded me of the situation after Hurricane Katrina where they were giving money to everyone claiming to have been affected. The first time I heard that, I said to my wife "It won't be long before you start hearing about all kinds of fraud." And that is exactly what happened.

About $1 billion in relief meant for victims of Hurricane Katrina was lost to fraud, with bogus claimants spending the money on Hawaiian holidays, football tickets, diamond jewellery and Girls Gone Wild porn videos, the US Congress was told yesterday.

The fraud, exposed through an audit by the Government Accountability Office, found a staggering amount of abuse of the housing assistance and debit cards given out by the beleaguered Federal Emergency Management Agency as a way of granting relief to those who lost their homes to Katrina.

"Fema paid over $20,000 to an inmate who used a post office box as his damaged property," Gregory Kutz, the GAO's director of audits, told the committee.

The audacity of the fraud exposed shocked the congressional committee yesterday. As much as 16% of the relief distributed by the agency was lost to fraud, the auditors said. They also said it was likely they were underestimating the scope of the fraud.

This happens when due diligence is not carried out. In our rush to build ethanol plants, taxpayers will lose money to opportunists who don't know the first thing about making ethanol. They just smell money. Unqualified people are going go to step forward to grab a piece of the action.

I saw the same thing following my ethanol testimony at the Montana legislature. I talked to a lot of people afterward who were trying to secure funding to build an ethanol plant. After visiting with some of them, it became apparent that many were way over their heads and didn't even know the most basic information, yet because funding was being offered they thought they would step up and get some. Usually, this sort of thing gets sniffed out before governments start handing them loads of money. But not always.

I guess I should start brainstorming catchy company names and then apply for funding. I wonder if "Cellulosic" is taken?

The FTCR Slander Continues

I have written previously about the Foundation for Taxpayer and Consumer Rights (FTCR). You can see a list of these essays here. Their web site states:

FTCR is a non-profit, non-partisan consumer watchdog group. We fight corrupt corporations and crooked politicians every day.

Now that sounds like a noble goal. That is, until you start to dig a little deeper, and find out that “corrupt corporations” too often means “we are paying too much for gasoline, and it must be because of corrupt corporations.” In fact, they have stated that they think gasoline should be under $2.00/gallon for everyone. They seem to feel that this is some sort of a birthright for Americans. Given my often-repeated mantra that we need to conserve, and that I think that a higher gasoline price is the most effective conservation mechanism we have, the kind of logic employed by the FTCR is anathema to me. Just think of how much "cleaner" that California air would be if you lowered the gasoline price to $2.00/gallon.

Well, they are at it again. The FTCR just released another report:

California's Call to Arms: Gasoline Spikes 45 Cents a Gallon Higher Than U.S. Average

Yes, a “call to arms", because they aren’t happy about gasoline prices. Some choice pieces from the report:

The Foundation for Taxpayer and Consumer Rights, saying there is no credible reason for the large and widening disparity, called for immediate action by Congress and California lawmakers to regulate gasoline supplies and curb price-gouging by oil companies and refiners.

Now, I want to emphasize that the FTCR is constantly complaining of price-gouging and calling for an investigation. Well, they got one last year by the California Energy Commission. Here were the findings:

The report, by the California Energy Commission, puts down refinery outages leading to a supply squeeze, coupled with a surge in exports, as the key factors behind record high prices in the state this year.

The lengthy report cites a stunning number of planned outage days at California refineries in the first six months of 2006 compared with same period last year - 175 vs. 58. Most of the unplanned outages, comparing the same periods, lasted twice as long this year.

Also, it found port congestion a factor, as well as high additives costs and the introduction of the new ultra-low-sulfur diesel fuel (ULSD).

It dismisses the notion held by some that pump prices dashed to $3.33/gal because refiners practiced price gouging (dubbed goug-onomics by some consumer groups).

As you might imagine, this was a slap in the face to the FTCR, as it was a direct repudiation of their constant complaints about price-gouging. Instead of retracting their charges, they responded by simply making more unsupported claims:

"Oil companies are ripping off Californians in exactly the same way electricity profiteers did by artificially shorting the market," snapped FTCR President Jamie Court.

Continuing with their most recent report, the FTCR is demanding that more taxpayer money be spent to once again investigate, despite their most recent slap-down:

"California's price spike in February, nearly the lowest consumption period of the year, is setting up the state to smash last year's $3.38 a gallon record," said Judy Dugan, research director of the nonprofit, nonpartisan FTCR. "Lawmakers will be guilty of political malpractice if they ignore this blatant profiteering at the expense of the nation's most populous state and largest gasoline market."

Really, what would be the purpose? The FTCR has already concluded that price-gouging is going on. When an investigation found that it isn't, they rejected the findings. Their minds are made up, so no investigation is going to suit them unless it has their desired conclusions. Perhaps they could fund an investigation themselves, and then if the finding turns out to be that price has risen and fallen due to supply and demand, perhaps they should pay a penalty for all of their slander. Continuing on:

FTCR pointed to the oil industry's manipulation of gasoline supplies on hand to keep prices higher in California than in the rest of the country.

Once more, careless and unsubstantiated charges, which they have shown that they will not retract when their charges are shown to be without merit. Let’s see what the Energy Information Administration recently had to say about this issue in This Week in Petroleum:

One way to assess current conditions is to look at the inventory situation. If inventories are relatively plentiful, an immediate source of supply is available should market conditions tighten, thus lessening upward price pressure. However, if inventories are relatively scarce, prices would likely need to rise more than they would otherwise to attract more supply should market conditions tighten. At first glance, Figure 4 in the Weekly Petroleum Status Report (WPSR), it appears that gasoline inventories are more than comfortable when looking at the absolute level.

However, as the chart below illustrates, when the level of demand is taken into consideration and the number of days of supply is compared to the last two years, gasoline inventories are actually lower this year, at this point in the calendar. Partly as a result of the inventory situation, the gasoline crack spread (the difference between the average spot price for gasoline and the spot price of West Texas Intermediate crude oil) will likely be a record for the month of February. This February, the spread will be about 19 cents per gallon higher than last February (28 cents per gallon this year vs. 9 cents per gallon last year). This reflects both weak refining margins last year (the 5-year average for February is about 15 cents), and record strength this year.

I have consistently said that if you want to understand what's going on with prices, look to the inventories. Falling inventories mean that prices must rise, and vice-versa. (Another key issue is that gasoline demand is at an all-time record for this time of year). The inventory picture also explains why oil prices have fallen since last summer. Inventories have been high. This is a concept that the FTCR took a long time to understand, but once they did they started charging that refineries were keeping inventories low on purpose. Their evidence? Well, I am still waiting for that. But lack of evidence has never stopped them from making these charges in the past.

The FTCR can't even seem to do the most basic of fact-checking:

"If oil companies won't increase their refinery capacity and gasoline storage in the state, government must do it. Otherwise California drivers will remain the oil industry's pick-pocketing victims."

Refinery capacity has increased by a very large amount over the past 20 years, and continues to increase year after year. These expansions take many billions of dollars, and are made possible by the profits that the FTCR would like to see disappear.

Also, it might be a good time to repost the following graphic:

Oil Industry "Windfall"
Source: Facts on Fuel

For reference, the 4th quarter of 2005 was the quarter after Hurricane Katrina when oil companies made multi-billion dollar profits and were universally accused of price-gouging. I know it's tough for organizations like the FTCR to understand, but a look at the graph should show you that you aren't being gouged. Oil company profits are huge because the companies themselves are huge. Imagine that if you formed a company from all the small farmers in the U.S., and pooled their profits. The overall profit number would be huge, because the organization would be huge. But their profit margins aren't going to be all that impressive.

People who think that big profits alone equate to gouging don't understand the difference between a profit and a profit margin. And the FTCR has demonstrated on numerous occasions that they are ignorant of this basic distinction, as well as the most rudimentary economic principles.