The Oil Drum: Australia/New Zealand

A few days ago I participated in a conference call (recording available here) about biofuels with an organization called Biotechnology Industry Organization (BIO). In this article, I will discuss some things I found interesting, including a new technique for making biodiesel that involves feeding biomass to algae.

The call had three speakers. The first, Jim McMillan of the National Renewable Energy Laboratory gave an overview of the current US biofuel situation. According to him, a lot of current interest is in cellulosic ethanol, since corn ethanol doesn't scale up very well. At this point, the cost of cellulosic ethanol seems to be double or more that of corn ethanol. The economics are still being clarified by demonstration projects. Until there is some sort of climate legislation that raises the price of carbon, it will be difficult to overcome the price gap.

Modelling Biofuel Production as an Infectious Growth on Food Production

Biofuel capacity or production as a fraction of food supply for three different cases, along with sigmoidal (ie logistic) projections, 1998-2018. Plum curves show US corn ethanol processing capacity in service or under construction as a fraction of ethanol potential of entire US corn crop. Brown curve shows actual production of US ethanol as a fraction of ethanol potential of US corn crop. Violet curve shows global biofuel production as a fraction of estimate of biofuel potential of entire global human food supply. Sigmoidal curves all have K = 1/3 (infection doubling time of three years), and cross the 50% line at 2008, 2010.8 and 2014.2 respectively. Sigmoids are scenarios, not forecasts. Actual biofuel production growth will depend heavily on oil prices and policy responses to increasing food prices. See text for sources and methods.

(Ed note: Stuart has been an important part of this team, but no, he is not "back." It has just been more than six months since he wrote this article, and it seemed like it might be a good time to revisit it.)

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:

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.

In the last year, the price of gasoline has risen by 38%. The prices of other fuels have risen much more--diesel has risen by 64% and jet fuel has risen by 91%, and the price of West Texas Intermediate (WTI) crude oil has risen by 100%. Why aren't gasoline prices rising more than they are? Some will recognize this as the "crack spread" issue.

I see several possible explanations, including a long term shift in prices valuing diesel (or "distillate") more highly than gasoline; political pressure to keep gasoline prices low; and integrated oil companies not really needing a high gasoline pricing margin to keep overall profits at an acceptable level. I do not see ethanol as playing a significant role at this time. Regardless of the explanation, refineries and gasoline stations that are not part of oil conglomerates may find this a difficult storm to weather.

Figure 1 shows that the differential between the retail price of gasoline and the per-gallon cost of crude oil has recently dropped dramatically, leaving a much smaller margin to cover expenses and profit. It is this shift that I am discussing in this article.

Figure 1. Average gasoline price minus WTI crude price; average diesel price minus WTI crude price; and average jet fuel price minus WTI crude price. (Averages are for full years, except 2008 which is for 6 months; crude prices have been converted to a per gallon basis.)

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.

The hydrogen and ethanol powered car

[Editor's note, 10:30 UK Tuesday: Andris now has 44 excellent comments to contemplate (up from 10 on Friday). All are well worth reading. If you feel strongly about this then please leave him a message.]

“Alright!” says the Actress, “You’ve convinced me we have a problem with oil. So what’s the answer?” Well, actually I didn’t. Eloquent and persuasive though I might like to think that I am, what really convinced her was the price she had to pay to fill the gas tank in her car. And it is that way with most of the world. We can talk about the causes, and explain why the situation won’t get better, with graphs and projections and calculations, and most folk will, under the cynical guidance of most of the press, merely look for someone to blame. Oh, and there had better be an answer, pretty quick.

In my last post I tried to show that new solutions take time, more time than I believe that we have available. And because of this, if we are going to get through this evolving period we are largely going to be stuck with the solutions that are already either being introduced or are close to large-scale implementation. Though that is one of the things I tried to allude to in the earlier post about Camry mileage. The scale of the difference between likely supply and demand at a decent price is going to get quite large. If a solution does not provide supply levels that measure in millions of barrels a day (or significant fractions thereof) then it is not going to have enough impact to make much difference in the medium term.

For a bit of weekend energy listening, here's a conversation that I had with Tad Patzek (who should need no introduction around here), talking about ethanol's energy balance. This was recorded 2 years ago now, but it still remains quite timely today. You can listen to the mp3 either by downloading the link or clicking play in the built in audio player.

or download mp3: Conversation with Tad Patzek (52min, 21MB)

A long transcript of this conversation is available below the fold.

This discussion is especially relevant in Canada now because of Bill C-33 which amends the Canadian Environmental Protection Act and is supposed to be debated in the House of Commons around May 28th, 2008:

Amendments to the Canadian Environmental Protection Act, 1999 proposed in this bill allow the federal government to implement regulations requiring 5% average renewable content in gasoline by 2010. Subsequent regulations will also require 2% average renewable content in diesel and heating oil by 2012 on successful demonstration of renewable diesel fuel use under the range of Canadian environmental conditions.

Back at the beginning of January I changed cars, and now drive a Camry Hybrid. It came with the usual displays for mpg, where the power was flowing and such, and for a month I played with looking at the different displays and then, as with most new toys, started to ignore them. However, pulling into the garage one night just over a month ago, I switched off the engine and a little “Excellent” appeared in a hitherto un-noticed final display on the dash. Now how do I confess this? Since then my driving habits have changed - more than I would freely admit - by the wish to be praised by a machine. The commute home is under three miles, and in somewhat hilly country so this requires a little effort on my part, but more often than not I now get that little glow of satisfaction from such a sign as I enter the house, generating a feeling that I am doing my part.

Well, not completely, and in terms of the greater scheme of things not even at any level of significance. The problem that we are coming to face is much larger, and more imminent than can be solved with simple small measures. Yet by touting the gains in efficiency through use of hybrid cars, or the growth rates of the solar and wind industries, one can convey to the general public that there is a considerable amount of technical progress being made in solving what “short term inconvenience” we might face as this “peak oil thingee” comes to pass and we have to live through it. The scale of the problem is glossed over, and the inadequacy of currently proposed solutions in their impact on the overall size of the problem is lost in the debate over issues that may be resolved with additional investment and time.