It seems that every election season, conspiracy theories arise that the oil companies are trying to bring down gasoline prices in order to influence elections. The thinking is that oil companies tend to favor Republicans (true) and that they bring prices down to help Republican candidates. When I hear this sort of talk, I try to explain to people that U.S. oil companies control so little of the world oil market that there isn’t much they can do to influence prices. They simply don’t have the stroke that people think they have.

But a poll in 2006 showed that nearly half of Americans thought Bush had successfully manipulated prices down as the election approached:

Almost half of all Americans believe the November elections have more influence than market forces. For them, the plunge at the pump is about politics, not economics.

Retired farmer Jim Mohr of Lexington, Ill., rattled off a tankful of reasons why pump prices may be falling, including the end of the summer travel season and the fact that no major hurricanes have disrupted Gulf of Mexico output. “But I think the big important reason is Republicans want to get elected,” Mohr, 66, said while filling up for $2.17 a gallon. “They think getting the prices down is going to help get some more incumbents re-elected.”

[break]

No doubt that incumbents like to see gas prices falling ahead of an election. But having any real power to influence price is a different matter. Since gas prices are once again falling as we head toward an election, I thought I would try to put this myth to rest. So, I decided to tabulate the price behavior of gasoline stretching back over the past three presidential elections. I chose to track the price from the beginning of summer driving season – Memorial Day – until the first part of November when the elections take place.

The results are shown below:

Table 1. Comparison of Gasoline Prices Between Memorial Day and Elections Source: Energy Information Administration

Personally, I think one would be hard-pressed to find a pattern there. The biggest price drop happened in a non-election year, albeit it was an anomaly caused by 9/11. Of the thirteen years recorded, gasoline prices fell between Memorial Day and November during nine of the years. This is what I generally tell people: Prices fall for seasonal reasons, and do so even when there are no elections. The reason prices fall is that demand for gasoline falls after the summer. The price generally peaks in early summer, and following Labor Day in early September the price falls. (The details of why this generally occurs was explained in The Transition to Winter Gasoline).

Of the presidential election years, the price fell in 1996 when President Clinton was running for reelection, was essentially unchanged in 2000 and 2004 when President Bush ran against Al Gore and then John Kerry, and will almost certainly fall this year as oil prices pull back from their record highs.

In fact, if you take out the major anomalies on the graph – the slowdown caused by the 9/11 attacks, and the 2005 run-up of price in the wake of Hurricane Katrina, followed by easing in 2006 as refineries recovered, the truth is that gas prices usually don’t change dramatically between May and November – election year or not.

So why does this myth persist? There are a couple of reasons I can think of, but I think they generally fall under the category of confirmation bias. There really isn’t a strong pattern of gas price behavior (other than a stair-step up year after year); people just notice it more in an election year. In addition, because prices rise and fall over the course of any year, you can always point to a price drop in an election year to support possible biases. But if you use objective analyses (e.g., start and stop the price check on the same date every year) the non-pattern becomes obvious. Had I allowed my dates to be variable, no doubt I could have shown prices falling during any election year. Or, I could have shown them rising.

As for the idea that the president has that much power, all he can really do is go with his hat in hand and beg the Saudis to pump more oil in an attempt to ease prices. OPEC has indeed had historical pricing power, but even that is eroding as spare capacity dwindles. But the idea that Bush can pull any strings and get Big Oil to manipulate gas prices demonstrates that people give him, and Big Oil for that matter, far too much credit. Besides, as Joanne Shore, an analyst at the EIA noted in the previously linked article “What company in their right mind would step forward to kill their profit?”

I won’t go so far as to say that gas and oil prices can’t be manipulated. OPEC as a group can manipulate prices if they still have a couple million barrels of spare capacity. But U.S. oil companies do not have the power to manipulate prices to impact elections. I would further argue that for those who do think oil prices are presently being manipulated down, do you also believe that they were being manipulated upward as they rose to near $150/bbl? After all, that manipulation argument can cut both ways.

This is a reposting of an article written by Robert Rapier two years ago, on how winter gasoline differs from summer gasoline, and why this tends to make winter gasoline less expensive than summer gasoline. We also now have a lot of reports of gasoline outages due to short supply following Hurricanes Gustav and Ike. Feel free to discuss those in this thread also.

Every year in late summer, you will start hearing references in the media about the conversion to winter gasoline, such as the following (originally in the Bradenton Herald, but the link is long dead):

Motorists can thank a mild hurricane season in the Atlantic for the lower gas prices, according to the American Automobile Association.

Other factors include the end of the summer driving season and a cheaper winter fuel mix.

Gas stations sell a special, more expensive fuel blend during the summer to cut down on smog during hot months. Stations nationwide will start selling a less-expensive winter fuel blend Friday, which could lead to even lower prices, analysts said.

So what does this mean, and why does it make winter gasoline less expensive?
[break]

A Primer on Gasoline Blending

Gasoline is composed of many different hydrocarbons. Crude oil enters a refinery, and is processed through various units before being blended into gasoline. A refinery may have a fluid catalytic cracker (FCC), an alkylate unit, and a reformer, each of which produces gasoline blending components. Alkylate gasoline, for example, is valuable because it has a very high octane, and can be used to produce high-octane (and higher value) blends. Light straight run gasoline is the least processed stream. It is cheap to produce, but it has a low octane. The person specifying the gasoline blends has to mix all of the components together to meet the product specifications.

There are two very important (although not the only) specifications that need to be met for each gasoline blend. The gasoline needs to have the proper octane, and it needs to have the proper Reid vapor pressure, or RVP. While the octane of a particular grade is constant throughout the year, the RVP spec changes as cooler weather sets in.

The RVP is the vapor pressure of the gasoline blend when the temperature is 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 local atmospheric pressure, that liquid boils. For example, when you heat a pot 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 boiled off 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.

A typical summer gasoline blend might consist of 40% FCC gas, 25% straight run gas, 15% alkylate, 18% reformate, and 2% butane. The RVP of the gasoline blend depends on how much of each component is in the blend, and what the RVP is of each component. Butane is a relatively inexpensive ingredient in gasoline, but it has the highest vapor pressure at around 52 psi.

In a gasoline blend, each component contributes a fraction to the overall RVP. In the case of butane, if there is 10% butane in the blend, it will contribute around 5.2 psi (10% of 52 psi) to the overall blend. (In reality, it is slightly more complicated than this, because some components interact with each other which can affect the expected RVP). This means that in the summer, the butane fraction must be very low in the gasoline, or the overall RVP of the blend will be too high. That is the primary difference between winter and summer gasoline blends.

Why Prices Fall in the Fall

Winter gasoline blends are phased in as the weather gets cooler. September 15th is the date of the first increase in RVP, and in some areas the allowed RVP eventually increases to 15 psi. This has two implications for gasoline prices every fall. First, as noted, 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 effectively increase as the RVP requirement increases. Not only that, but this all takes place after summer driving season, when demand typically falls off. On the other hand, refiners usually draw down inventories of summer gasoline leading up to September 15th to make room for the changeover, and this can lead to vulnerabilities should hurricanes come into play (as they did this year).

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. But lest you think of buying cheap winter gasoline and storing it until spring or summer, remember that it will pressure up as the weather heats up, and the contained butane will start to vaporize out of the mix.

And that’s why gasoline prices generally fall back in the fall, and spring forward in the spring.

ED: This post originally ran September 15, 2006.

I recently received an interesting e-mail:

Nancy Pelosi, Speaker of the House and Author of “Know Your Power: A Message to America’s Daughters” will answer questions in a live discussion on washingtonpost.com today (Wednesday, Aug. 6 at 3 pm ET).

Pelosi will discuss the current political scene heading into the conventions, the message of her new book and other questions submitted by readers.

To submit questions and participate in the live discussion click here: http://www.washingtonpost.com/wp-dyn/content/discussion/2008/08/01/DI2008080102174.html

This seemed to me to be an ideal opportunity to question her on two issues that she is clearly passionate about, but seem to me to be diametrically opposed: Tapping the Strategic Petroleum Reserve (SPR) and reducing carbon emissions. So, I submitted the following question, several hours prior to the chat: [break]

Dear Speaker Pelosi,

Perhaps you could clarify an issue that is confusing to me. On the one hand, you have spoken passionately for the need to combat global warming by reducing our carbon emissions. This is clearly a priority for you, as well as for the Democratic Party. On the other hand, you have also come out strongly in favor of tapping oil from our Strategic Petroleum Reserve in order to bring oil prices down. Given that high prices are causing the public to abandon SUVs and to embrace fuel efficiency and mass transit – exactly the sorts of things that need to happen if we are to reduce carbon emissions – how is your position on the SPR not completely at odds with your position on global warming? If in fact you push through your proposal on the SPR, won’t that lead to increased consumption and therefore increased carbon emissions?

Had I been a bit more long-winded, I would have pointed to reports that gasoline demand is in fact down this year, breaking a multi-year trend of increasing demand. Or I could have shown many news stories showing record demand for Priuses while SUVs are not moving. Of course the reason demand is down is price-driven. Price is the most practical handle we have on moderating demand.

Unfortunately, Speaker Pelosi (or the person screening the questions) decided not to answer my question. Instead, they answered a question in which she could once more push for tapping the SPR!

Marietta, Georgia: Dear Madam Speaker,

Although this forum is primarily focused on your book, I cannot help but bring up an issue that is affecting each and every American. Why have the American people not seen energy legislation that lowers the price of gas?

Thank you

Nancy Pelosi: Now let’s pivot from book questions to a topic many of you have raised: the high price of gasoline at the pump and what we can do about it.

Every American family is affected by the high price of oil and gas. It is our responsibility in Congress to protect the consumer and increase the domestic supply of energy. For the past 18 months, the Democrats in Congress have set forth an energy agenda. Some has been passed into law – and some has been blocked by the Republicans.

House Democrats have put forward 13 major proposals that would increase supply, reduce prices, protect consumers and transition America to a clean, renewable energy-independent future. Each time a majority of House Republicans have voted against these proposals.

Let me be very clear: drilling for oil in protected areas offshore will not bring down the price at the pump for 10 years – and then only 2 cents. To say otherwise is a hoax on the American people.

Here’s what we can do:

1. Free Our Oil

We can have immediate price relief at the pump. Freeing our oil from the Strategic Petroleum Reserve will bring down the price of oil in 10 days. President Bush refuses to take this step for immediate relief.

10 years or 10 days – the choice is clear.

2. Use It or Lose It

Democrats passed the Drill Bill which says to Big Oil “Use it or lose it!” – drill in the 68 million acres in the lower 48 states or let someone else drill there. Also, “use it or lose it in Alaska. All of these areas have permits for drilling – and will produce oil sooner than drilling in protected areas offshore.

3. End Excessive Speculation Which Raises the Price of Oil

Democrats were part of a strong bipartisan vote was taken in the House but GOP leaders twisted arms to block passage.

4. Repeal the subsidies for Big Oil

With Big Oil making record profits, they do not need American taxpayers funding their drilling.

Instead we can invest in research, renewable energy, and tax credits for wind, solar and other renewables. This passed the House but failed in the Senate by one vote – John McCain was absent that day but said he would have voted no.

5. Increase Our Energy Supply With Increased Use of Natural Gas – a cleaner energy source.

There is immediate relief for the consumer – if only President Bush would free our oil.

I must say that Number 5 is a surprise. I have long advocated that instead of recycling our natural gas into ethanol, it would be much more efficient to use it directly as fuel. As I have pointed out before, Brazil – the poster child for ethanol production – also has 8 times the number of natural gas vehicles on the road as we do in the U.S. They don’t waste their natural gas separating ethanol from water. In addition to Brazil – Argentina, Pakistan, Italy, and India all have larger natural gas fleets than does the U.S. So for those who suggest that we don’t have the infrastructure in place to manage this, maybe we can learn from India and Pakistan. So I agree with Pelosi on this point: As our supply of oil depletes, we can ease the decline with natural gas.

Number 1 on Pelosi’s list is the very contradiction I asked about, Number 2 promotes a myth (there already is a ‘use it or lose it’ provision in the law) and is nothing more than pandering, Number 3 is again in contrast to her position on global warming (higher prices equal lower carbon emissions), and Number 4 says that oil companies should not be entitled to the same sorts of tax deductions afforded every other industry. I will let you all in on a little secret: Big Oil also deducts the salaries of their employees from their gross receipts, just like every other business. Maybe that ‘subsidy’ should be eliminated. Maybe their deductions for capital spending should be disallowed. More subsidies. But I digress.

But can anyone explain to me why championing action on global warming while also championing tapping the SPR is not blatantly contradictory? Anyone? Or why nobody in the Democratic Party seems to have the guts to speak out on this contradiction? Instead, Barack Obama – long opposed to tapping the SPR – has now embraced the party line and is calling for the same.

Actually, I think I know the answer to the contradiction. Proponents of tapping the SPR think that alternative fuels are going to rapidly scale up, displace petroleum with cheap ethanol, and the consumer won’t have to suffer in order to bring fossil fuel consumption down. To that, I would point out that the Energy Information Administration – the source of Pelosi’s claim that drilling in the OCS would only bring prices down by 2 cents a gallon – testified last year that they don’t foresee that cellulosic ethanol is going to scale up to even a billion gallons by 2030.

The EIA also predicts that fossil fuels will continue to be the dominant source of our energy supply for decades to come. So, the very agency Pelosi references in her argument for tapping the SPR is telling us in no uncertain terms that alternative fuels aren’t going to ride to the rescue as petroleum supplies deplete. With that in mind, I believe it is impossible to reconcile a position of tapping the SPR with a position that reducing our carbon emissions is a high priority. It’s like saying “I propose that the nation needs to go on a diet. And by the way, I also propose that we increase the supply of donuts to make them more affordable.”

I just wish a politician would have the guts to step forward and address this contradiction.

I have seen the question frequently arise as to whether the ethanol blending mandate is based on rigid numbers (e.g., 9 billion gallons in 2008) or whether it is actually a percentage requirement, and the number is an estimate based on projected gasoline sales. In other words, let’s say that hypothetically gasoline sales this year are only half the level of last year. Is the mandate still for 9 billion gallons, or does it drop to 4.5 billion gallons?

Also, a claim was recently made here that refiners are underblending ethanol this year, and are likely to end the year in violation of the mandate. So, I also sought some clarification around this issue. I contacted Peter Gross at the EIA, who seemed to be their expert in this area. He was kind enough to reply, and clarified both issues:[break]

9 billion gallons (and future levels) are mandated and not based on projected total gasoline sales. The scenario you mention of gasoline sales falling way off (10% at most maybe from last year), would still put the total motor gasoline consumption at more than 130 billion gallons (which includes the 9 billion gallons of ethanol) for the year. Thus, there is plenty of gasoline around even in this extreme case to absorb the ethanol and still not saturate the E10 market. In fact, 9 billion gallons of ethanol means 90 billion gallons of E10 which leaves over 40 billion gallons of conventional gasoline without ethanol.

The immediate problem is not that there will be enough gasoline to absorb the ethanol in 2008, 2009, and probably 2010; in these years the questions are “Is there enough infrastructure to send the ethanol to (and blend with gasoline in) as-of-yet untapped regions, esp. the southeast?” or “Will mounting political pressure over food/grain costs force the EPA to lower the mandate?” (witness Texas’s recent waiver application).

After 2011 EIA projects there will not be enough gasoline sold to absorb the ethanol as E10; then the big question becomes how does the U.S. absorb the excess; as E85? (currently the only legal option) or as E15/E20? (as of yet not fully tested). Can the EPA lower the mandate if the E85 infrastructure is inadequate or too costly and the E15/E20 option is not available? Yes, but again this probably would not happen until after the “blend wall” (i.e., saturated E10 market) has occurred.

All obligated parties (refiners and importers of refined fuel products) must satisfy their “renewable volume obligation” (RVO) which is essentially their share (based on how much fuel they produce or import) of the total renewable fuel that must be used (this year 9.0 billion gallons). Volumes of blended renewable fuel are assigned RINs (renewable identification numbers). If a particular party cannot blend their share, they may buy these RINs from parties that have over complied on their RVO (though some alternatives exist such as carrying a RIN deficit for one year or using one’s own excess RINs from the previous year). In any case, every year every obligated party is required to document its RINs and show that they have the same or more than their RVO to the EPA. If they don’t, they can carry a deficit as mentioned earlier or they will be penalized by the EPA.

Peter Gross
EIA, DOE
202-586-8822

To summarize, the ethanol mandate is based on a fixed number. This means that even as gasoline demand softens, demand for ethanol will not – unless the mandate is rolled back. Even if gasoline demand continues to fall, the ethanol mandate escalates from 9 billion gallons this year to 10.5 billion gallons next year to 12 billion gallons in 2011. This is interesting because right now you can buy a contract for January 2011 delivery for less than you can buy an August 2008 contract. Traders must believe that enough new ethanol capacity will come online to meet the additional mandated demand. (Note: I have learned that ethanol contracts are hard to buy and sell, so there is an added element of risk if you buy a contract.)

Further, refiners can technically underblend, but they must make up for it by either buying credits from parties who overblend, or by carrying a deficit that they have to make up – or suffer penalties. Thus, they can underblend and not be in violation of the mandate, because there are provisions for that. If they don’t meet those provisions, they are in violation and are penalized.

I have given a lot of thought to the issue of opening up new areas for drilling in the Outer Continental Shelf (OCS) and in the Arctic National Wildlife Refuge (ANWR). My position has always been to leave that oil in place for a very rainy day. I wanted to see major conservation efforts in place before we considered tapping that oil. Opening those areas when oil was $20 a barrel would have meant that much of it would have been used frivolously.

Now that oil is over $100 – and in my opinion will be much higher in 5 or 10 years (T. Boone Pickens predicts $300/bbl in 10 years) – we will have tightened our belts a good deal by the time any of this oil could actually reach the market. Therefore, I think now is the time for Congressional hearings on opening up these areas. Let’s have an open debate on the issue. However, if these areas are opened for drilling, I have a compromise that should be very attractive to those in opposition. [break]

Hopefully this essay conveys a pragmatic approach designed to bring two sides in this debate closer together. At present it is hard to imagine that they could be further apart. A big part of the reason for the chasm between views is that there is a great deal of misinformation and misunderstanding surrounding the issues. I hope to address those in this essay.

A recent sampling of letters to the New York Times gives a flavor of the views of the opposing sides:

To Drill or Not to Drill? There’s the Rub

First a letter opposed to further drilling:

Allowing offshore drilling for gas as a solution to high fuel costs, as President Bush urges Congress to do, is as sensible as growing more food in response to rising levels of obesity or robbing a bank in response to overspending one’s budget.

While it is not popular, the clear answer, as it is in the case of overeating and overspending, is to cut back in the consumption of food, in the consumption of one’s salary and in the consumption of fuel.

Painful as it is, I applaud the $4 gallon because it is the one thing that has finally gotten the public to focus on the fact that we need to consume less. For the first time, one hears from every quarter, turn off the lights in rooms you are not in, recycle that paper, drive less and take public transportation or ride your bike. That is the kind of talk political leaders should be encouraging, not new ways to keep up the old habits.

And one in favor:

As a 40-year Alaskan, I can tell you that opening of the Arctic National Wildlife Refuge is the most sensible solution for America’s oil problems. Most of the people who are trying to stop drilling in the refuge have never been in our state.

You have no idea how little space they are talking about. Take a regular envelope, pretend that is the refuge … now where you would put the stamp, that is the area they want to open.

Alyeska Pipeline has worked, the gas pipeline is in the process, and the Arctic National Wildlife Refuge should be. Congress is making this a party fight. How about putting that energy into fighting for all Americans, as oil prices don’t care whether you are Republican or Democrat?

So, where does the truth reside? Is it not worth the effort? Or can we “drill here, drill now” and make a significant step toward energy independence? Let’s investigate.

What is the Objective?

This is the key to the entire debate. Different groups have different agendas, and desires are often based on misinformation. Take a couple of extreme examples. I consider myself an environmentalist, but one who is practical, and informed on energy issues. Let’s take an environmentalist who may be less-informed. Like me, they are concerned about the impact of continued fossil fuel consumption on our environment. When they think of drilling, they envision oil slicks washing up on the shore, and a polluted ANWR. They see oil companies – not ordinary citizens – as the primary beneficiaries if drilling is allowed. They are optimistic about the ability of alternative fuels to rapidly scale up and replace depleting fossil fuel reserves. Or, they don’t fully understand the implications of falling fossil fuel reserves, or in an extreme case they don’t care and think the earth could use a healthy die-off of the human population.

Each of these groups is going to be vehemently opposed to opening up areas to additional drilling. They simply don’t think there is a need, and that it will simply delay our transition to alternatives. Those in Congress who are so outspoken against additional exploration likely fall into the category of ‘alternative fuel optimist.’ If they can only keep the ban in place, alternatives, mass transit, and conservation will rise to the challenge. The key to this approach is that the alternatives must deliver when they are needed, and they must cover severe shortfalls. What if they don’t? What is Plan B? Shortages? Rationing?

For our other extreme example, let’s consider the Hummer-driving, non-negotiable lifestyle mentality. The majority of this group is also not very informed on energy. They believe that underneath U.S. territory lies an ocean of oil, waiting to be tapped – if those darned environmentalists would only get out of the way. They are prepared to drill through a polar bear’s head if it will mean cheap gasoline – which they know it will. These people are going to be very outspoken about the need to drill anywhere, anytime. This approach suffers from a very similar problem as the previous approach: What if the oil that is available simply can’t cover any severe shortfalls? What if the expectations of these vast oceans of oil lead us to delay actions on alternatives? Again, what is Plan B? Military action?

The majority of us fall somewhere in between, but it breaks pretty sharply along party lines. Democrats don’t want to drill, Republicans think we should drill. Perhaps we should first develop an idea of the stakes.

How Much Oil is at Stake?

That’s a big problem. We don’t know. All we have right now are ‘educated’ guesses. Multiple government agencies have made assessments. The Minerals Management Service in the Department of the Interior estimated in 2006:

The MMS estimates that the quantity of undiscovered technically recoverable resources ranges from 66.6 to 115.3 billion barrels of oil and 326.4 to 565.9 trillion cubic feet of natural gas. The mean or average estimate is 85.9 billion barrels of oil and 419.9 trillion cubic feet of natural gas.

Of that, they estimate that reserves in areas currently off-limits to exploration amount to just under 18 billion barrels. Based on the 2007 U.S. consumption rate of 20.7 million barrels of oil per day, 18 billion barrels would last just under 2.5 years.

The EIA estimate from areas currently off-limits to exploration was very similar at just over 18 billion barrels:

Impacts of Increased Access to Oil and Natural Gas Resources in the Lower 48 Federal Outer Continental Shelf

This graphic was recently used in a post at Grist by Joseph Romm, who argued that the amount of oil that is off limits has been greatly exaggerated. Based on the above graphic, Romm has a point, as the amount of undiscovered oil in areas open to exploration is more than twice the estimate from areas off limits to exploration. However, much of that oil is mile-deep water that will be very expensive to develop. So the comparison isn’t necessarily apples to apples.

Estimates of recoverable oil from ANWR are of a similar magnitude. The Energy Information Administration (EIA) in a 2008 report noted:

In the mean oil resource case, the total volume of technically recoverable crude oil projected to be found within the coastal plain area is 10.4 billion barrels, compared to 5.7 billion barrels for the 95-percent probability estimate, and 16.0 billion barrels for the 5-percent probability estimate.

The EIA also presumes that it will take 10 years to scale up and bring production online:

At the present time, there has been no crude oil production in the ANWR coastal plain region. This analysis assumes that enactment of the legislation in 2008 would result in first production from the ANWR area in 10 years, i.e., 2018.

The primary constraints to a rapid development of ANWR oil resources are the limited weather “windows” for collecting seismic data and drilling wells (a 3-to-4 month winter window) and for ocean barging of heavy infrastructure equipment to the well site (a 2-to-3 month summer window).

The timeline broke down as 2 to 3 years to obtain leases, 2 to 3 years to drill an exploratory well, 1 to 2 years to develop a production development plan, and 3 to 4 years to build infrastructure.

What’s the bottom line? With an estimated 18 billion barrels of oil offshore and 10 billion barrels in ANWR, there is potentially enough oil there to meet four years of U.S. demand. However, in terms of imports, currently around 10 million barrels a day, there is potentially enough there to eliminate oil imports for nearly 8 years. Further, based on my proposal below, there may be enough there to eliminate imports for 20 years.

Finally, consider the economic ramifications. If we do nothing, despite well-intentioned calls for conservation, our insatiable demand for oil imports will continue. With production from some of our major suppliers having peaked (e.g., Mexico) and with internal consumption in other countries negatively affecting their exports, the price of oil will be under constant upward pressure over the long term. If we don’t produce those 28 billion barrels of oil, we will go and buy those barrels on the open market. At today’s oil price, that means that about $3.5 trillion will leave this country, much of it flowing into countries that are hostile to the U.S. By keeping that money at home, we can not only create jobs, but we have an opportunity here to fund a transition away from oil, and to more sustainable options.

Let’s Compromise

Both sides generally agree that our dependence on petroleum is a problem. Among the arguments from both sides is that this dependence puts our national security at risk and that it endangers the environment. I think both sides would agree that a long-term solution to the problem could be a combination of conservation, along with alternative options such as higher efficiency vehicles, electric transport, and mass transit. Where large numbers will start to disagree is whether this is achievable in the short-term, or whether it is going to take a few more years and a few more technological developments.

I fall into the latter category, for a variety of reasons. I am pretty familiar with a lot of the alternatives, and they are simply not competitive even at gasoline prices of >$4/gallon. To illustrate that point, consider Europe, where gasoline prices in many locations are now approaching $10/gallon. Even at that price, fossil fuels remain the dominant choice for transportation. It is going to take more than price – or at a minimum much higher prices than Americans probably anticipate – to drive us away from a very high level of dependence upon fossil fuels.

So how about a compromise? I propose that we open up some of the more promising areas to exploration, and then devote the royalties to funding fossil fuel alternatives. We could subsidize public transportation. We could provide a tax credit of $1,000 for each person who purchases a car that gets over 40 mpg. We could borrow a page from T. Boone Pickens’ plan, use these oil revenues to fund wind and solar power, and displace natural gas which could then be used to displace petroleum.

It is true that the oil won’t flow from these areas for perhaps a decade, but by then we are likely to be in very bad need of it. Prices will probably be very high, which means the royalties from the oil will provide a lot of money for funding alternatives. This should be a compromise that parties from both sides could agree to. If not, then what’s going to happen is that as prices continue to rise, so will the pressure to drill, and Congress will eventually cave in to these demands. But by failing to earmark the money for alternatives, it will just postpone the inevitable. So now is an opportune time to hold open Congressional hearings on the subject.

That’s a compromise I prefer. However, one that would have even greater support behind it would be to return an oil dividend to U.S. citizens (as Alaska has historically done). That is tangible for people, whereas funding the alternatives may not be. However, while I think this compromise would find wide support among many people with stretched budgets, it does nothing to address the problem of oil dependence. That, in my opinion, must be part of any solution.

A final excerpt from those New York Times letters summed it up best, in my opinion:

People say we should have a Manhattan Project-style program to develop alternative energy. That is fine, but while the Manhattan Project was continuing, we did not put World War II on hold while we waited for the atom bomb. The conventional war was continually fought throughout that time.

Conclusion

As I recently calculated, we could displace a great deal of our fossil fuel consumption with solar power, but it will ultimately take a multi-trillion dollar investment. We could borrow from T. Boone Pickens’ plan and use wind and solar power to displace natural gas that is currently used to produce electricity. That natural gas could then be used in CNG vehicles to displace petroleum. The net impact would be a large reduction in our fossil fuel consumption (and note that it is much easier to produce natural gas from biomass than it is to produce liquid fuels).

We sit on top of trillions of dollars of oil. We should use it – sparingly – to wean ourselves from oil dependence. The realistic alternative to this is that we continue to be highly dependent upon petroleum. As a result, we will watch those dollars flow out of the U.S. – right up until the point that our imports dry up and we watch a new generation of sons and daughters march off to fight resource wars because of our failure to plan ahead.

I have a friend who is addicted to nicotine. His liberal friends tell him that this addiction is bad, and point out that it is costing him too much money. Therefore, they want policies passed that ensure that he can continue to consume as much as he likes, and not hurt his budget too much. They are sure that nicotine substitutes will come along soon to save the day. For reasons I detail below, I call this the Boxer approach, but it could just as easily be the Pelosi/Democratic Party approach.

His conservative friends agree that he is addicted, but their solution is to carve out areas in the U.S. where we can grow more tobacco, and therefore his addiction can at least be homegrown. Sort of like “If you are going to smoke pot, at least smoke American pot.” This is the Bush approach.[break]

It seems to me that his friends perhaps have good intentions, but their policies are misguided and don’t address the root cause of the addiction. In fact, much like their policies on our addiction to oil. On one hand, the Democratic Party argues 1). We are too dependent upon fossil fuels; 2). We must find alternatives; 3). Carbon emissions are too high; and 4). We need to promote higher fuel efficiency.

Those are good points. But they can’t seem to see the irrationality in one of their proposals. At a time when Americans are starting to conserve; starting to trade-in their SUVs for Priuses, it seems to be fast-becoming a core principle of the Democratic party that we should: 5). Tap the Strategic Petroleum Reserve (SPR) to bring oil prices down so people can afford to consume more. In fact, in a recent chain letter to me, Senator Barbara Boxer – who even maintains a website on the importance of acting on global warming, stated that we must go after “real solutions on gas prices“, like “releasing some oil from the Strategic Petroleum Reserve.”

Ignoring for a moment the glaring inconsistency between this proposal and her position on global warming, just what is the purpose of the SPR?

In the event of an energy emergency, SPR oil would be distributed by competitive sale. The SPR has been used under these circumstances only twice (during Operation Desert Storm in 1991 and after Hurricane Katrina in 2005). Its formidable size (700-plus million barrels) makes it a significant deterrent to oil import cutoffs and a key tool of foreign policy.

However, the calls for tapping the reserve continue to come, because high prices apparently constitute an energy emergency in some people’s minds. Here American Progress defends this view:

Eight Reasons to Release Oil from the Strategic Petroleum Reserve

Let’s look at a couple of the reasons given:

1. Record oil prices have hurt American families

Ordinary families are struggling with record high energy prices. Many families’ gas costs have increased by hundreds or even thousands of dollars a year. The price of home heating oil has doubled in the past year. And the Department of Energy predicts that average electricity prices will increase by 5 percent this year, and go up 9 percent in 2009.

Yes, and we are seeing significant drops in gasoline demand as a result. You know what that means? The people who argue for lower fossil fuel usage and by extension lower carbon emissions should be happy. The kicker is that the author of this article, Daniel J. Weiss, is “the Director of Climate Strategy at American Progress, where he leads the Center’s clean energy and climate advocacy campaign.” What’s wrong with this picture? Do climate advocates think getting people to change is going to be easy? No, there is going to be cost, pain, and inconvenience. But people respond to price, and we are seeing that now. It is not hypothetical, it is observable. What people don’t respond to are feel-good speeches about the need to cut back.

Let’s look at one more:

6. There is plenty of oil in the reserve to withstand a supply disruption

The SPR has more oil than ever before—706 million barrels, which is 98 percent capacity. Selling 50 million barrels over 100 days would still leave it filled to over 90 percent capacity. This is enough oil to cope with a complete foreign supply disruption for nearly two months, assuming zero reduction in demand in the wake of such a catastrophe.

This is just an argument that the SPR is bigger than it needs to be. Yet the authorization to fill (eventually to 1 billion barrels) was made by congress as a part of the Energy Policy Act of 2005. Per the DOE, it the filling of the SPR is also funded by royalties on oil companies extracting oil from the Outer Continental Shelf (OCS):

The royalty-in-kind program applies to oil owed to the U.S. government by producers who operate leases on the federally-owned Outer Continental Shelf. These producers are required to provide from 12.5 percent to 16.7 percent of the oil they produce to the U.S. government. The government can either acquire the oil itself or receive the equivalent dollar value.

As someone who is very concerned about disruptions of future oil supplies, I want a healthy volume in the SPR. I want it tapped only in the event of something like a major supply disruption that actually threatens to sharply reduce the amount of available oil. I didn’t want it tapped at $20 oil, and I won’t want it tapped at $500 oil. If my choice in the long run is between a gallon of gasoline for $30 or no gasoline at all, guess which one I am going to pick?

Let’s also not forget the history here. A story right here at TOD shows that Chuck Schumer has been Wrong on the SPR Since 1999, when oil was hitting the outrageous value of $20 a barrel. He won’t learn his lesson, as here Schumer (and others) are at it again in 2004 (which was also an election year). Oil at that time had risen to $35 a barrel. Here’s another TOD essay that recognizes Schumer’s misguided logic in tapping the SPR.

Where would we be had we heeded these perpetual calls to tap the reserve? With higher gasoline consumption, higher carbon emissions, a drained SPR, and Senator Schumer still complaining that we need to reduce our dependence on oil. We would be much more vulnerable to supply disruptions, and our financial position with respect to the SPR would be billions of dollars worse off than it is now (i.e., down 100 million barrels or more from today’s level with oil at $130/bbl). Think about that. Heeding Schumer’s calls would have endangered national security, and put us in a multi-billion dollar hole.

High fuel prices have led to many positive changes in people’s behaviors. Demand is down, fuel efficiency is being embraced, and sales of SUVs are down. The very same people who advocate these things are the same people who would reverse these positive changes by tapping the SPR. It appears that they don’t understand that cheap energy is the very reason we became so dependent upon fossil fuels. We won’t wean from fossil fuels if they remain cheap. As I have noted before, a big reason that Europe’s per capita energy usage is half that of the U.S. is because they have maintained prices at artificially high levels. This caused them to develop different living/transportation/consumption preferences than is the case in the U.S.

If people are forced to tighten budgets – and heaven forbid carpool, ride the bus, or simply drive less as a result of high prices – that does not constitute an energy emergency. We need to get past these ridiculous calls to tap the SPR, and highlight the inconsistencies (and past history) of those who advocate such a move.

In the next essay, I am going to address President Bush’s calls to answer our addiction to oil with more drilling. It makes as much sense to tell a heroin addict that what they really need is homegrown heroin. I think there is a compromise that may satisfy both sides.

At least I hope it is my last one. I have made a few long-distance trips by car in my life. The first few were a lot of fun. I was seeing the country for the first time. But after crisscrossing Nebraska, Kansas, and Oklahoma a few times, I would honestly rather have a root canal than have to do it again – especially when it means 25 hours on the road with three impatient kids in the car.

Things have changed quite a bit since my last trip, though. When I was in college, my first long distance road trip took me from College Station, Texas to Gaspé, Quebec (2,600 miles) and back. My most recent long-distance trip, in 2005, had taken me 1,150 miles from Northern Oklahoma to Montana (twice). This time, I drove from Montana to North Texas (1430 miles). For reference, New York to Los Angeles is about 2,800 miles. Here are my observations.

When we left Montana, I noticed that traffic was very light. That is unusual for Montana in the summer, because a lot of traffic passes through Billings on I-90 headed to Yellowstone National Park. The road is usually packed with RVs, but I was well into Wyoming before I saw the first RV. In fact, in the first 300 miles of driving, I saw only one RV on the road. This theme was consistent throughout the trip: Light traffic, and very few RVs. My wife commented that high gas prices had really done a number on the traffic. I told her that I thought an era had passed and that going forward we would start looking at personal mobility in a different manner. [break]

I was towing a packed 4′ x 8′ U-Haul Cargo Trailer behind a Ford Escape, and I was pretty concerned about the impact on fuel efficiency. So I started out driving about 60 miles an hour, both to conserve fuel and because the trailer behind me was fairly heavy. I maintained my discipline throughout the first day, and I kept track of my gas mileage. With the trailer, and driving up and down some fairly steep hills, I managed about 22 mpg on that first day. According to the EPA, that particular model should get about 24 mpg on the highway. So, I figured that wasn’t too bad, considering there were five people in the car, and a heavy trailer behind me. I don’t know what fuel efficiency the vehicle normally gets, as this was my first time to drive it. This is my wife’s car. (As for me, since I will be in Europe half of the time, I don’t intend to get a car.)

I couldn’t help but reflect upon how desolate most of Wyoming is. We drove down a very empty I-25, which runs well east of the Rocky Mountains. It is scenic, but towns are few and far between. The soil is thin, and there isn’t a lot of water. Life there is probably going to become very hard as energy prices continue to escalate. In fact, a recent story in the New York Times identified rural Wyoming as one of the areas hardest hit by high gasoline prices. It made me think of Jim Kunstler’s prediction that areas like this are likely to be abandoned in a peak oil world.

I noticed as I made my way down Wyoming that my fuel efficiency was dropping. I wasn’t quite sure why, unless my elevation was changing and that was having an impact. I had started out at about 23 mpg, but then by the time I got into southern Wyoming, it had dropped to 21 mpg. It would drop further to 20 mpg as we turned east and traveled across Nebraska. It struck me that I could be getting some ethanol, but I tried to avoid the pumps that indicated that there was ethanol in the gasoline.

As I entered Nebraska, my thoughts turned to corn and ethanol. You enter Ogallala country right away when you enter Nebraska on I-80 from the west, and of course the depletion of the Ogallala aquifer has long been cited as a threat to agriculture in large parts of the Midwest. As I passed acre upon acre of corn being irrigated by drawing down the aquifer – now being spurred by misguided ethanol mandates – I couldn’t help but think about what the future holds for the area if the aquifer continues to deplete. I talked to my daughter a little bit about this, explaining to her the role of the aquifer in making corn production possible in that part of Nebraska. This would be one of those normally unaddressed negative externalities we talk about when discussing ethanol production from corn.

Regardless of your opinion on ethanol, Nebraska is one of the most energy intensive states in which to produce ethanol due to the irrigation requirements. In fact, in the USDA’s various analyses of corn ethanol energy inputs, Nebraska has consistently had the highest energy inputs of the nine Midwest states they examined. For a relative comparison, see The Energy Balance of Corn Ethanol; Table 4. (Note that while the energy inputs themselves may have declined over time, Nebraska will remain as the high energy producer).

Further, the USDA averaged all of the energy inputs across the nine states when they reported the energy balance. So the next time someone tells you about the energy balance of corn ethanol, remember – Nebraska is worse. From that report, the energy inputs for Nebraska corn were 54% higher than those of Wisconsin. It is certainly not out of the question that the net energy from ethanol produced in a typical Nebraska ethanol plant and shipped to Texas or California may be negative.

We finally got to our stopping point for the night in Lexington, Nebraska. We were staying at a hotel right off of I-80, and there were few cars in the parking lot. We had smelled the hog farms for quite a while, and we could smell them from there as well. If you have never smelled a large hog operation, let’s just say it isn’t pleasant. In fact, I doubt you could get away with building a factory anywhere with that kind of smell coming out of it.

Day 2, we were up early and off. I made a strategic decision on this day that is contrary to my typical obsessive desire to conserve energy. We had spent 13 hours in the car the previous day. Google Maps had indicated 10 hours and 39 minutes. While my wife and I can deal with that OK, that’s cruel and unusual punishment for three kids. So I decided to bump the speed up to 70 mph for the drive today. I estimated that this would get us to our new home in Texas in 11 hours. After driving for the day, I calculated that it also had the impact of dropping our fuel efficiency down to 18 mpg.

The second strategic decision was to take a shortcut. We did not have a map, but at the hotel I had calculated that I could save about 20 miles by leaving I-80 at its most southerly point in Nebraska and cutting across to Kansas on U.S. 183. At first this seemed like a great decision. Traffic was very light, and the road was pretty straight. However, after entering Kansas, we suddenly encountered a construction worker standing in the road with a stop sign.

Twenty minutes later, my short cut wasn’t looking like such a good idea. We were just parked in the middle of nowhere – no traffic in sight. I told the family that maybe some joker was pulling a prank to see how long he could hold up traffic. But after 20 minutes, we were allowed to go. And the part that I could never understand is that we drove 4 miles before coming up on any signs whatsoever of construction – and then it was a spot of less than 100 feet. Why they had to back up traffic four miles away from that spot was lost on me.

But that wasn’t the end of our delays on the shortcut. I remembered the town of Phillipsburg, Kansas from one of my previous trips. It stood out in my mind for three reasons. First, when I was driving from Oklahoma, it had the first gas station I had encountered for many miles. I was in danger of running out of gas when I finally pulled in there. Second, there is a train track that crosses Highway 183, and my previous time through the train had blocked traffic for 15 minutes. Third, there is a rusting refinery on the north end of town that had been owned by a farmer’s co-op until it was shut down in the 80′s.

So, as we pulled into town, there were the rusting remnants of the refinery. And up ahead, I could see the crossing barrier on the train tracks descending. So we pulled up, parked, and watched car after car of (ADM) ethanol go past. And just as the train was about to clear the tracks, it reversed direction. We went through this routine several times. The train would pull up, almost clear the tracks, and reverse direction. I kidded that the ethanol producers must have known I was coming. Finally, after another 20 minutes of delays, the tracks were cleared and we proceeded toward I-70. I had always heard that a train could only delay traffic for five minutes in case there was a medical emergency and an ambulance had to get through. Given our 20 minute delay, this may be just urban legend. But I won’t voluntarily travel through Phillipsburg, Kansas again.

Finally, we got to I-70 in Kansas. Wouldn’t you know it? The interstate was down to one lane, and traffic was creeping along at 40 mph. This ended up costing us another 15 minutes or so, and my shortcut ultimately ended up costing us almost an hour.

Traveling along I-70 toward Salina, Kansas, I started to see a lot of wind turbines. I mean a lot. There may have been more wind turbines concentrated together than I have ever seen before. I looked it up when I got a chance, and it turns out that this was the Smoky Hills Wind Farm, which is ultimately a 250 megawatt project. You can see a map of the various wind projects in Kansas here; there are a lot.

At Salina, we finally turned south toward Wichita. I had chosen our route to avoid cities, and the only ones we would pass through were Wichita and Oklahoma City. Wichita was actually a breeze, although we did encounter our only road tolls of the trip south of Wichita. The trip across the rest of Kansas and Oklahoma down I-35 was uneventful, although I did have one close call in traffic outside of Oklahoma City when a semi tried to move over on top of us. One thing I did note in Oklahoma is that I saw fields that had been planted in nothing but wheat as far back as I can remember, but they were now planted in corn as far as the eye could see.

We arrived pretty late – about 9:30 p.m. – at our new home in North Texas. It had taken us 12 hours on the second day (thanks to my “shortcut”) for a total of 25 hours in two days. It was a long grind, and I hope to never have to repeat it. Despite traveling without a map or a navigation system, we never got lost, nor took any wrong turns.

Gas prices had varied during the trip. The most we paid for gasoline was $4.08/gal at a truck stop in Nebraska. Montana, Wyoming, and Nebraska tended to all have gasoline above $4.00. Gasoline in Kansas, Oklahoma, and Texas was generally below $4. The cheapest price we paid for gas was $3.78 at a Flying J station in Ardmore, Oklahoma.

Reflecting back on the trip, I firmly believe that we are undergoing a permanent shift in traffic patterns. Those summer RV trips are going to become increasingly reserved for the wealthy, and people are going to think twice about taking long road trips to vacation destinations. The roads are going to be less crowded, and the cars on them will be smaller. The world is going to seem a little bit bigger to future generations.

The following is a guest post by Bill James.

<!– –>

Gasoline prices give a a clear measure of consequences of
making oil the lifeblood of our economy. As our economic lifeblood, oil
is giving us:

1. Heart attacks, unstable price spikes in this plateau of
   Peak Oil
2. Leukemia, undermining our planets ability to support us
   with Global Warming

Facing the facts and acting to resolve them can defeat peak
Oil and Global Warming, both civilization killers. A primary fact is
that our current infrastructure is the cause of these killers. We built
the infrastructure. We can build better. The purpose of this essay is a
call to action to defeat these civilization killers by changing the way
we govern infrastructure from specifying HOW to
build it, to stating WHAT is needed and allowing
a free market to find the rare individuals with lucky breakthroughs
that can build sustainable infrastructure. We must get lucky and
discover the energy equivalents of lasers, personal computers, cell
phones, the Internet, etc….

[break]Examples of How versus What:

Government control over infrastructure has created brittle and
fragile structures completely addicted to finite and depleting oil.
Example, urban transport is less than 4% efficient. Yet food
distribution is 97% dependent on oil that is mostly imported.

Performance Governing changes HOW to WHAT.
Dictates of HOW to build infrastructure becomes
performance standards of WHAT is needed. The
limited suite of government contractors becomes anyone willing and able
to exceed performance standards. Exceeding standards will change the
lifeblood of our economy from oil to ingenuity. Following are
comparisons of results between HOW, a planned economy, and WHAT, a
performance economy.

• Communications Infrastructure, Changes in How
  versus What are easily identified:
• How:  AT&T’s
  monopoly:
• Monopolized in the mobilization for World War I.
• Analog networks essentially unchanged in a century.
• Long distance calling was an expensive luxury.
• What:  Creating a free
  market in 1984 allowed sweeping ingenuity:
• Re-tooling infrastructure from analog to digital.
• Re-tooling infrastructure from wire to fiber and
  wireless.
• Expansion in scope and quality of many services such as
  the Internet and cell phones.
• Economic driver and job creator.
• Long distance calling is virtually free
• Biofuels, How versus What:
• How:  The President and
  Congress directed and subsidize ethanol production:
• Corn prices jumped from $2/bushel in 2005 to $7/bushel
  in Jun 2008.
• US Secretary of Agriculture expects 43% increase in
  food prices in 2008.
• Growing food riots in the world.
• Likely, first SUV famine in 2008-2009 as burning food
  in cars at less than 4% efficiency causes the first biofuel famine.
• What:  Define sustainable
  efficiency standard, such as 100 miles per gallon.
• Efficiency, How versus What:
• How:  The President and
  Congress passed a 50% increase in CAFE standards (gas
  mileage).  For simplicity consider they are 20 miles per
  gallon.  Government directing this efficiency improvement will:
• Start in 2012 and requires about 25 years to rotate out
  the current car fleet.
• Require everyone to borrow money to buy a car.
• A .02X solution to a 2X problem (50% divided by 25
  years versus oil doubling in price in 2007)
• What:  Set a standard and
  allow anyone beating that standard to implement.  For example,
  inventors at JPods, SkyTran, SkyWeb, ULTra, MISTER and others easily
  beat 100 miles per gallon.  A summary of their capabilities
  are:
• Provide urban transport as a service (no loans
  required)
• Achieve efficiencies from 100-400 miles per
  gallon.  See CSX
  commercial for 423 miles per gallon.
• Operate at 1/14th the cost of oil-based transport.
• Move people and cargo 24 x 7.
• Zero-emissions, some are solar powered.
• Convenience of a chauffeured car at the cost to operate
  an elevator.
• Based on riders per day, the elevator is the most
  successful form of public transportation.  Yet these inventors
  of a physical-Internet, of horizontal-elevators are not allowed access
  to rights of way.  What is possible is
  disallowed by the current How.  There is
  no conspiracy.  Far worse, there are well-meaning rules and regulations
  of a bureaucracy.




• Oil, How versus What:
• How:  Presidents and
  Congress directed and subsidize oil production. Subsidies distorted
  free market innovation.
• Borrow $700 billion a year to consume oil.
• Weakening dollar, increasing inflation, increasing
  trade deficit.
• Exposed to Peak Oil. We were warned of the geology in 1956. It was
  confirmed in US Peak Oil in 1970.
• Crisis in Economic Growth as Energy
  Growth peaked in May 2005.
• Government refusal to respond to Peak Oil, watch comments from EIA Administrator
  Caruso. Policy makers created circumstances where spendable
  incomes rose enough for people to risk their life’s savings to afford a
  mortgage and then allowed more and more of those mortgages to be
  crushed between rising interest rates and rising gas prices. The 2007
  foreclosure actions, 2.1 million, happened with 4.8% unemployment.
  Foreclosures in 2009 will jump as $200+ oil increases unemployment.



• CO2 from automobiles contributes to Global Warming.
  

  Global Warming is the destruction of human and biosphere habitat. Yet governments are building more highways. From BBC, summer ice cover in the Arctic has declined sharply. Arctic ice loss in 2007 was horrific. Much worse than models predicted. Arctic ice flow in the winter of 2007-2008 indicates risk. Pentagon Study on Abrupt Climate Change. Cracks in old ice found in 2008 indicates more risks. This author spent 3 years as an Arctic Light Infantryman. I have been back several times and the changes are massive. The consequences are uncertain but again, massive.

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• Government assume personal mobility equates to the
  automobile regardless of the consequences.
  This quote, written by Dr Patrick Driscoll, is taken from West Point’s
  Decision Making in Systems Engineering and Management.

  In fact, one of the most significant
  failings of the current U.S. transportation system is that the
  automobile was never thought of as being part of a system until
  recently. It was developed and introduced during a period that saw the
  automobile as a standalone technology largely replacing the horse and
  carriage. So long as it outperformed the previous equine technology, it
  was considered a success. This success is not nearly so apparent if the
  automobile is examined from a systems thinking perspective. In that
  guise, it has managed to fail miserably across a host of dimensions.
  Many of these can be observed in any major US city today: oversized
  cars and trucks negotiating tight roads and streets, bridges and
  tunnels incapable of handling daily traffic density, insufficient
  parking, poor air quality induced in areas where regional air
  circulation geography restricts free flow of wind, a distribution of
  the working population to suburban locations necessitating automobile
  transportation, and so on. Had the automobile been developed as a
  multilateral system interconnected with urban (and rural)
  transportation networks and environmental systems, U.S. cities would be
  in a much different situation than they find themselves in today.

  What is important here is not that the
  automobile could have been developed differently, but that in choosing
  to design, develop and deploy the automobile as a stand alone
  technology, a host of complementary transportation solutions to replace
  the horse and buggy were not considered.

• What:  Tax oil for its true
  cost to secure and cleanup after use. This would have made alternatives
  financially attractive since the 1973 Oil Embargo. We would have had 35
  years from the 1973 Oil Embargo to have iterated alternatives.

Ingenuity

There is no mystery to breakthrough insight or
ingenuity.  Ingenuity is a personality trait. Find more
ingenious people, give their ideas a chance to work out and you will
get lucky breaks. Here are some personalities:

• Edison, discovered 4,000 ways not to make a light bulb.
• Goodyear, after decades of work, twice in debtor’s prison,
  dropped a rubber blob on a sooty stove and instantly recognized what
  had been missing to vulcanize rubber.
• Einstein, spent a decade unemployed and as a patent clerk
  refining ideas.
• Wright Brothers, relentless study matched by insightful
  testing.
• Pasteur, “chance favors the prepared
  mind”.

Their process is relatively simple.  Invest and
mortgage everything you have for very long periods of time without
reward.  If you are lucky you will clarify a breakthrough
concept.  Then find someway to navigate the commercial
requirements to churn that clarity of thought into commercial
acceptance.  The process is simple and ruthless. It is an
effort driven by passion, not a government job.

Relative to building infrastructure, government control over HOW
creates three additional barriers, each nearly perfect at stopping
ingenuity that changes WHAT. Innovators must
convince government people to:

• Take professional risk for which there is no reward or
  precedent.
• Knowingly accept failures in the process of churning a
  concept from insight to breakthrough. 
• Often wait years to decades for the iterative process of
  churning ideas into commerce have a successful breakthrough. 

Government Actions, Changing What

By abandoning HOW, Leadership can define
WHAT is needed and empower everyone to do what
they can.  As a starting point, here are some simple actions
leaders can take to nurture ingenuity, self-reliance, getting lucky and
staying lucky.

Self-reliance:  Disciplined people,
Discipline Thought, Disciplined Action.

Small steps, relentlessly taken will create durable people and
communities, economic lifeboats. There may not be time to save
everyone, but there is time for everyone to save themself. Start simple
by asking everyone to plant a garden. This may seem insignificant but
it accomplishes vital tasks

• Each person is responsible for self-reliance.
• Builds agricultural skills and a sense that we are part of
  the land.
• Cuts food-miles and reduces oil dependence.
• Strengthens the social fabric with confidence that we are
  durability from famine caused by oil shortage.
• Affirms by action that we can and will prevail. 
  We need only exercise our liberty and responsibility. 
• Community gardens strengthen communities with shared
  responsibility and knowledge.

Getting Lucky, Finding Rare Events and Odd People

Ingenuity is a personality trait.  Forging ingenuity
into insight and breakthrough require great personal investment with
improbable chance of success.  For governments and businesses
to exploit such rare and extreme behavior requires organizations adapt
their rules to be susceptible to such individuals. 

For every breakthrough, there is vast “silent
evidence,” failures that we do not pay attention
to.  Without failures we cannot find breakthrough. 
These failures cannot be avoided but they can be contained in scope by
requiring attempts to be privately funded.  People risking
their own money are much more sober about the managing risks than
governments. 

The process is relatively simple.  Invest and
mortgage everything you have for very long periods of time without
reward.  If you are lucky you will clarify a breakthrough
concept.  Then find someway to navigate the commercial
requirements to churn that clarity of thought into commercial
acceptance.  Vast numbers of truly brilliant ideas are weeded
out.  The process is simple and ruthless. It is an effort
driven by passion ,not a government job.

Organizational Methods for Encouraging Ingenious
Personalities

Two books outline some key concepts and mechanics of greatness
and uncertainty:

• Good to Great defines the process of
  forging excellence from mediocrity, of transforming a good organization
  into a great one.  We have good infrastructure and good
  government based on unsustainable assumptions of cheap oil. 
  Building a great sustainable culture requires leveraging the Stockdale
  Paradox and exuding greatness from our commercial entities, our
  governments and our lives.
• The Black Swan is about rare events
  and getting lucky. This book is about how not to be a
  “sucker” in the face of uncertainty. We face the
  uncertainty of civilization killers.

• Performance Governing. 
  Establish standards for infrastructure.   Define what
  is needed and allow anyone willing to risk their capital to beat that
  standard a franchise to profit from performance forged from their
  ingenuity.
• Government grants should be very limited, or better, not
  used at all.  There are several problems with grants and
  government funding for research:
  • Breakthrough concepts are abnormal and are not likely
    to be funded. Example, Einstein could not get a teaching job until 5
    years after publishing the Special Theory of Relativity, Quantum
    Mechanics via the photoelectric effect, and the other breakthrough
    clarities of 1905. Establishments like iterations of how
    not change in what (See CAFE above).
  • Refining a breakthrough concept to clarity costs
    about as much as chasing a government grant. The passion for creating
    should focus on creating not chasing permission to create.
  • Innovators of breakthroughs are not personally wired
    to wait for government handouts. Example: Steve Jobs and Bill Gates are
    both college dropouts. Their breakthrough ideas on personal computers
    did not wait for the government or academia,
  • Dependence on government money conditions capital
    markets to wait for such money. Venture capitalists are almost as risk
    averse as bureaucrats and policy makers. It also conditions innovators,
    always desperate for cash, to chase permission not insight.
• Government backed loans can be effective if:
• Private risk builds infrastructure. This keeps focus on
  what is practical.
• Infrastructure achieves public policy objectives.
• Infrastructure provides profitable service and can
  repay loans. Then low cost government back loans can refinance the
  infrastructure. These loans can be paid back from profitable operation
  of the infrastructure. The loans free the private capital to build more
  infrastructure.
• Care and transparency are required to get the benefits
  but not the corruption of a Transcontinental Railroad model.

Staying Lucky, Honestly Accruing All Costs

There are no lasting victories.  Winning today yields
the opportunity to compete again tomorrow. Embracing responsibility
will enable us to compete again tomorrow:

• Accept that excellence is the process of relentlessly
  improving,
• Open our institutions to the odd personalities that find
  breakthrough.
• Assure all costs are accounted for and resources accrued to
  compensate.

Performance governing requires honestly accounting for all costs.  That is not easy.  We have a tendency to shove long-term costs off on the future.  The failure to prepare is illustrated by: The collapse of the I-35W Bridge.  The American Society of Civil Engineers grades US infrastructure as a D. The collapsing, 100-year oil sewers in Atlanta.  The average age of electrical transformers is at the end of their design life.  Long-term maintenance was sacrificed for short-term rate reductions. The average age of farmers is 54.  Soon we face a loss of farming art.  Long-term skill building was sacrificed for short-term gains. Borrow $700 billion a year to consume oil.

Preparation and self-reliance are simple and tough
standards.  We need only return resources used in a condition
we are proud to hand to our grandchildren; everything we waste stays
with us. If resources can not be restored in pristine condition or if
we are unsure if our actions cause harm, we must assume they cause harm
and collect estimated costs to compensate as honestly as
possible.  If industries do not reserve these costs, then to
protect the general welfare and common defense, it is the duty of
government to assess, collect and exercise such funds to provide a
sustainable habitat. Earth is a spaceship; the glass of water you use,
your grandchild will drink.

As a conservative, I am amazed that conservative political
leaders seem the least interested in the conservative principle that
all costs should be accounted for, subsidies eliminated.  Had
we accounted for pollution costs, security costs and maintenance costs,
today we would not be facing an energy crisis.  Had
governments declared what is needed and allowed free markets to carve
profits from waste, today we would not be facing an infrastructure
crisis.  The civilization killers of Peak Oil and Global
Warming would have been preempted. Had we accounted for all costs,
gasoline prices would be only as significant as a cell phone bill;
instead gas prices force home foreclosures as people choose between
paying for their commute and their house.

As tough and dangerous as Peak Oil is, we are lucky it is
impacting our economy faster than Global Warming is killing our planet.
Gas prices force us to change the lifeblood of our economy from oil to
ingenuity. As noted by Benjamin Franklin: “To be
thrown upon one’s own resources, is to be cast into the very lap of
fortune; for our faculties then undergo a development and display an
energy of which they were previously insusceptible.”

Performance Governing will result in a performance economy, an
economy driven by profits and jobs created by preempting current waste.
There will be many breakthrough ideas that will look like luck.
Mobility and electricity costs will be reduced, our footprint on our
environment minimized and our addiction to oil and borrowing money to
pay for oil will end. It will only take 15-20 years of hard work. The
process is waiting for government to allow a free market.

Executive Summary: The current cost to produce a gallon of ethanol is approximately $3/gal. The current price of ethanol is $2.86/gal, which explains why ethanol producers are shutting down. If corn and natural gas prices remain high, I think ethanol has to rise to something like $3.40-$3.60/gal to make it worthwhile to ethanol producers. So, if I was a commmodities investor, I would probably go long ethanol right now. The only risk factors I can see – given that there is a mandated (and rising) demand for ethanol – is if corn or natural gas prices collapse. The other remote possibility is that that mandate is repealed, but I don’t see that happening.

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This is an update to a post I originally made back in February 2008: Corn Ethanol Economics. While this is approximate, I think I captured most of the major economic considerations. In fact, one of the comments I received following the first essay was: “I work in an ethanol plant. Those numbers are pretty accurate, but the price we get for ethanol has been going up lately. Our margins have been poor lately, but are improving. But you did capture the important economic factors that have hurt us lately.”

Since then, natural gas, corn, and ethanol prices have all risen. So what do the economics look like today? The following is my previous analysis, with updated numbers.

I found multiple references for all of the numbers I am going to use, but I will only reference a single source. According to Ethanol Reshapes the Corn Market, one 56-pound bushel of corn will yield up to 2.7 gallons of ethanol and 17.4 pounds of distiller’s dried grains with solubles (DDGS).

The price of corn for July delivery as of this writing is $7.24/bushel, so each gallon of ethanol contains $7.24/2.7, or $2.68 of corn per gallon of ethanol. However, the DDGS can be sold, so a credit is applied for that. The current price of DDGS as of this writing is $175/ton, which is $0.0875/lb. Given that a bushel of corn yields 17.4 pounds of DDGS, there is then a $1.52 credit, which spread over 2.7 gallons is equal to $0.56 gallon. This reduces our cost per gallon to $2.68 minus $0.56, or $2.12 for just the corn input. (Note that there is sometimes a credit for carbon dioxide sales, but it is very small relative to the other costs and credits).

I still have to consider utilities (natural gas is a major cost), labor, enzyme and yeast costs, and depreciation. I have a spreadsheet from an actual ethanol plant, but there isn’t much in the public domain that I could find on this. The closest thing to a source on these is the spreadsheet in the presentation Fossil Fuels and Ethanol Plant Economics (for a standard dry mill process). If you look at Page 16 of the presentation, you can see that all of the miscellaneous costs together total approximately as much as the corn inputs. If you take the spreadsheet on Page 24 and change the natural gas price to the current price of $13.20/MMBTU, you get an overall energy cost of $0.51/gal of ethanol. (You can play around with the original spreadsheet that is in the PDF here). The sum of enzymes, yeast, and other chemicals comes out to be $0.14/gal, and labor, maintenance, and various miscellaneous expenses add another $0.23/gal.

On depreciation, I have several sources for capital costs that are pretty consistent. In the EIA’s Energy Outlook 2006, capital costs per daily barrel of corn ethanol ranged from $20,000 to $30,000, depending on the size of the plant. This breaks down to between $1.30 and $1.95 per gallon of installed capacity. This is also consistent with A Guide for Evaluating the Requirements of Ethanol Plants, which states “Current capital cost per annual gallon of installed capacity for an ethanol plant ranges from $1.25 to $2.00.” So let’s be conservative and say that we want to build a big plant, so the capital costs are on the low end at $1.30/gallon. Depreciate that over 15 years and this portion amounts to about $0.08 per gallon (but is captured above already).

However, for biomass to liquids facilities – which would include the biomass gasification to ethanol that some are calling cellulosic ethanol – the capital costs in the EIA’s Energy Outlook 2006 are listed at around 5 times that of a conventional corn ethanol plant. Thus, the capital depreciation portion is going to be around $0.40 per gallon of ethanol. (On the other hand, the feed costs should be much lower).

Summary

Times are tough for ethanol producers. This is what the economics roughly look like at $7.24 per bushel of corn and $13.20/MMBTU of natural gas. To produce 1 gallon of ethanol requires:

• $2.68 of corn
• $0.51 of energy
• $0.14 of enzymes, yeast, etc.
• $0.23 of labor, maintenance, and various miscellaneous expenses

There is a DDGS credit per gallon of ethanol of $0.56. Thus, the total cost to produce a gallon of ethanol today is $2.68 + $0.51 + $0.14 + $0.23 – $0.56, or exactly $3/gallon of ethanol. For reference, the July contract for ethanol in the Midwest closed yesterday at $2.86. And $3/gallon is merely cost of production. It doesn’t take into account any return on investment.

Also note that due to the lower energy content, this production cost is equivalent to a $4.48 per gallon production cost for gasoline ($3/0.67) – and that this production cost is a moving target: As long as the ethanol mandates are driving up the price of corn and increasing the demand for and cost of natural gas, corn ethanol producers must chase their tails in a vicious circle.

Producers are going to be hard-pressed to ever match the 2006 windfall that was given to them when the MTBE phaseout drove ethanol prices sky-high. But my conclusion is – since ethanol is mandated – some marginal producers will shut down and prices will rise. If everything else remained constant, I think ethanol would have to rise to something like $3.40-$3.60/gal to make it worthwhile to ethanol producers. So, if I was a commmodities investor, I would probably go long ethanol right now.

I have written periodically on ‘green diesel’, which is not to be confused with biodiesel. Neste, Petrobras, and ConocoPhillips (in a venture with Tyson foods), have all entered the green diesel arena. (See a bit on announced projects from these companies here; explore previous green diesel stories I have written here).

Green diesel is produced either from hydrotreating or hydrocracking plant oils or animal fats (Neste, Petrobras, and COP) or via the BTL reaction (Choren). Green diesel is chemically different from biodiesel. Green diesel has chemical properties identical to petroleum diesel, while biodiesel is not a pure hydrocarbon (it contains oxygen atoms, hence the somewhat different physical properties). [break]

On Friday the 13th, Neste issued a press release announcing that they will build a facility in the Netherlands:

Neste Oil to build a NExBTL renewable diesel plant in Rotterdam

Neste Oil is to build an 800,000 t/a plant to produce NExBTL renewable diesel in Rotterdam in the Netherlands. Construction will start immediately and the facility is scheduled to be completed in 2011. Total cost of the investment is projected to be €670 million. Neste Oil announced its decision to go ahead with a similar-sized plant in Singapore in November 2007. Both plants are linked to Neste Oil’s goal of becoming the world’s leading producer of renewable diesel fuel.

NExBTL renewable diesel is based on Neste Oil’s proprietary technology, which can use a wide range of raw materials. In its plant in Finland, the company currently uses a mix of palm oil, rapeseed oil, and animal fat to produce renewable diesel. Offering excellent product quality – even better than fossil diesel – NExBTL can be used in all diesel engines.

Neste Oil has a major R&D program under way to develop new renewable raw materials for fuel production, and is working towards a target of completely non-food raw material use by 2020. Neste Oil is cooperating with over 20 universities and research institutions globally as part of this program, which is divided into six areas, including non-food vegetable oil, wood-based materials, and algae.

Regarding the NExBTL diesel, Neste says:

NExBTL renewable diesel is an advanced fuel based on renewable raw materials that performs more efficiently and has a lower level of environmental impact than fossil diesel or FAME-type biodiesel. Neste Oil requires its raw material suppliers to observe a responsible approach to sustainability. Feedstock of this type ensures that NExBTL renewable diesel has a 40-60% lower level of greenhouse gas emissions over its entire lifecycle compared to fossil diesel. NExBTL renewable diesel can be blended with conventional diesel fuel or used as such, and is suitable for all diesel engines.

Neste Oil is the leader in renewable diesel production. The company’s first NExBTL facility was commissioned in Finland at Neste Oil’s Porvoo refinery in summer 2007. Second facility is due to come on stream there in 2009. They both have a capacity of 170 000 t/a. In addition Neste Oil is building 800 000 t/a plants in Singapore and Rotterdam. Singapore facility is due to be completed by the end of 2010 and Rotterdam facility in 2011.

While this is an improvement, in my opinion, over biodiesel, they are still going to rely on oil crops such as palm oil. Destruction of rain forests in Malaysia and Indonesia to plant palm oil plantations poses a serious environmental threat. The future of green diesel needs to be based on non-food crops – especially those like jatropha that can be grown on marginal land – and waste materials such as biomass that is currently destined for landfills.

I was curious about the costs per barrel, so I worked that out. A barrel of oil weighs 0.137 metric tons (and has density similar to pure diesel). Then 800,000 t/yr is equal to 5.8 million bbl/year (16,000 bbl/day). For perspective, a mid-sized oil refinery will be around 250,000 bbl/day, but the Neste facility is certainly of a respectable size. The cost is projected to be €670 million. If I convert that to dollars, I can compare the cost to various other fuel technologies. A Euro is currently worth $1.53, so the project is going to cost US $1.025 billion. That works out to $64,000 per daily barrel. Again, for perspective the recently announced 400,000 bbl/day Jubail Refinery Project that Total is building with Saudi Aramco is currently estimated at $10 billion ($25,000/daily barrel).

Capital Costs of Fuel Facilities
Source: EIA Annual Energy Outlook 2006

To be honest, if Neste pulls the project off for that, it will come in at a competitive cost relative to other fuel technologies. See the above EIA figure for estimated costs of various fuel facilities. And that was from a couple of years ago, when stainless steel prices were significantly lower. So, on the one hand I hope Neste pulls this off, but on the other they need to source a different feedstock than edible oils for the facility.