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Tesla has to compete for customers. So should fuels

Americans love their freedom to choose. Someone invents something, and competitors rush in with their own similar products to fight for a market that didn’t exist before.

This is what Tesla has done with the electric vehicle: The Model S is making cold-eyed journalists swoon, and the next few months are huge: The company will soon release its eagerly awaited crossover SUV, the Model X, followed by its more-eagerly awaited “affordable” sedan, the Model 3.

But Tesla shouldn’t get too comfortable, because the established auto-makers want to steal some of its quiet, zero-emission thunder with EVs of their own: In the past week, Toyota unveiled the new Prius, trying to assure everyone it can be cool as well as get 10 percent more miles out of a battery charge; Edmunds gave its blessing for the 2016 Chevy Volt; there was a possible sighting of the 2016 Nissan Leaf, the best-selling EV in the U.S.; and there were rumors that Mercedes-Benz is working on an electric car than has a range of 311 miles.

It’s a basic rule of economics: Competitive markets are good for consumers. Which is why drivers should be demanding fuel choice as well.

Gasoline is cheap now, but it doesn’t take much to cause a price spike: The threat of a supply constriction overseas; a refinery going down (and staying down, in California’s case); output quotas in OPEC nations. Anything can cause volatility in the global market. Businesses don’t like uncertainty, and it’s bad for consumers as well.

The only way to reduce the cost structure of fuels over the long term is to create fuel choice, something the United States has never known. To quote former Shell Oil president John Hofmeister: “We will never get past the volatility of oil until we get to alternatives to oil.”

We’re not advocating an end to fossil fuels. We just want fuel choice: Ethanol, methanol, CNG, LNG, biodiesel, hydrogen and, yes, electric batteries. Anything that reduces our dependence on oil is good for America.

If gasoline, the same fuel we’ve been stuck with for more than a century, is the superior fuel for vehicles, let it compete with other choices at the pump. If oil companies don’t want competition, what are they afraid of?

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The demise and resurrection of the natural gas industry

Borrowing from Mark Twain, the reports of the natural gas industry’s death have been greatly exaggerated. Words and phrases — like epic decline, demise, abandonment, crushed, confused, over-leveraged, bankrupt ideas and financially ill — have been used by many in the media and some analysts to define the state of the sector. Why? According to a recent article from USA Today, “the U.S. is producing more natural gas than ever in 2015, despite low prices that make it increasingly difficult for companies to spend money on drilling.”

Henry Hub-2015While the negative evaluation of the industry’s health sounds a bit premature, and perhaps hyped up a bit to sell papers as well as economic and market news on cable, there are real problems facing producers, refineries and distributors:

1. Gas inventories are higher than they’ve been in a long time. This fact, combined with decreased demand, has and will continue to put downward pressure on prices. While a hot summer kept the natural-gas market relatively stable (e.g., high demand for air conditioner use), the mild weather that’s projected for late fall and winter will exacerbate the gap between supply and demand as gas-powered utilities face lower consumer need for heat.

2. Natural gas prices have dropped by more than 30 percent since a year ago. Understandably, falling prices have aborted investment in new rigs and drilling. The recent decline in the development of new rigs and the abandonment or capping of older rigs dropped the number of natural gas rigs from near 1,600 in 2009 to just over 200 presently. But the totals are blurred because many rigs produced both oil and natural gas and were reclassified as oil rigs for investment purposes. The diminished production of legacy wells, even if demand increases, are unlikely to result in significant and immediate pressures on gas prices, given the extent of inventories and a recent history of annual surpluses. Assuming visible growth in demand, it will probably take 1-3 years for the equilibrium to return to the natural gas markets and for prices to move significantly higher. Instead, what we are likely to see is relatively short-term, modest up-and-down movements.

3. Bankruptcies, particularly among small and medium-size participants (e.g., drillers, suppliers, operators, etc.) in the gas industry, have and will continue to increase, leading to increased market share for larger firms.

More than a handful of lender/investors/bankers seemed to have benefited from the recent rise and fall of natural gas prices. Indeed, some skeptics, even more cynical than I am, have suggested that in the relatively recent past, Wall Street investors “orchestrated” gas gluts by investing in shale exploration knowing that prices, because of overproduction, would decline and transactional costs would be worth millions. In essence, bankers lent, production increased and prices declined. Subsequently, lenders sold – many on the upside of the down curve and many at bottom prices. Some generated mergers and acquisitions and, in the process, secured large fees. It’s a tough dog-eat-dog world out there.

I suggest the cynics are overplaying the ability of bankers to make what they believe are rational decisions and, contrary to law, work together to achieve nefarious ends. Right now, the financial industry, despite the rewards flowing to some for guessing right on recent short-term price movements as well as the values embedded in some firms, has tightened up on investment, whether equity or debt, for the capital costs associated with natural gas production and distribution.

Sorting out whether the current changes in the natural gas industry are likely to lead to permanent structural changes is difficult. We know there will be fewer firms, at the least at the outset of any long-term recovery. Clearly, starting new capital-intensive natural gas companies is more difficult, for example, than starting new housing firms after a down or unstable economic period.

It is surprising that an industry with an uncertain present and future seems wedded to playing only a minor role concerning the development and use of natural gas as a transportation fuel. Because of variables, related mostly to costs and access to infrastructure, only approximately 150,000 vehicles in the U.S. out of nearly 300,000,000 are powered by natural gas – either CNG or LNG. The industry, paraphrasing Israel’s former Ambassador Abba Eban’s comments on the Middle East, has and appears willing to continue to miss opportunities and therefore misses opportunities to commit, in a meaningful way, to use of natural gas as a transportation fuel.

In light of available technology, natural gas and/or its possible derivative, ethanol, would be cheaper for consumers and emit fewer pollutants and GHG emissions. Because of its abundance in the U.S., if used more extensively, natural gas and/or ethanol could reduce dependency on oil imports from currently unfriendly or potentially unfriendly nations. Neither natural gas nor ethanol are perfect fuels. But in terms of the environment, global warming, the price at the pump and national security, natural gas and ethanol are both better than gasoline. Both are welcome transitional fuels until electric cars, hydro fuels and other renewable fuels are ready for prime time.

Existing and proposed federal and state regulations already have and, in the future, will reduce methane leakage problems (e.g., methane traps significantly more heat than carbon dioxide and therefore is a potent global warming contributor) and hopefully respond to fracking problems.

Natural gas-fueled vehicles are generally more costly than gasoline-fueled vehicles. However, lessons learned from the multi-state demonstrations led by Gov. John Hickenlooper of Colorado (Democrat) and Gov. Mary Fallin of Oklahoma (Republican) show promise in reducing vehicle costs. Twenty-two states are participating in the demonstration. Collectively, they have agreed to purchase natural gas vehicles to replace older, internal combustion cars from state fleets. The “market scale” of the demonstration will facilitate an effort by manufacturers to develop cheaper cars. Finally, the growing number of Detroit-produced flex-fuel vehicles and the development of simple ways to convert older vehicles to flex-fuel status suggest an increased market for natural gas-based ethanol. Happily, technology is emerging that will be able to convert natural gas to ethanol efficiently and at a scale and cost necessary to respond, hopefully, to increased demand and compete with gasoline.

Socrates, the legendary natural gas philosopher, once said, “the unexamined [future business plan] is not worth [having]” (I only added a couple of words)., Paraphrasing the “The Elephant’s Child” from Rudyard Kipling’s “The Just So Stories,” the natural gas industry needs “six honest serving men” or women (my addition. Kipling was a sexist.) to develop a doable plan and strategy to expand the use of natural gas as a fuel. “Their names are What and Why and When and How and Where and Who.” The old way of doing business may be changing but a new, better way can be resurrected with expanding natural gas markets to develop a decent, competitive transitional transportation fuel.


Oil is cheap, so why is gasoline sky-high in some places?

Even with a surge the past two days, oil prices have been on the downward slide the past 14 months, dropping from about $115 a barrel to around $40. But that hasn’t translated to savings at the pump for all drivers.

In some areas of the United States, gas prices have remained stubbornly flat during the oil plunge, or have inexplicably risen. Fuel Freedom Policy Manager Gal Sitty has put together this informative graph that tracks the price of oil (an amalgam of Brent crude, the international benchmark, and West Texas Intermediate, the U.S. standard) compared with the average price of gasoline in three big states: California, New York and Ohio.

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Experts have no shortage of explanations for these anomalies. They usually sound like this: Something-refineries-inaudible. Cue Charlie Brown’s teacher talking wah-wah speak.

It’s true that a unit at the BP refinery in Whiting, Indiana, one of the largest refineries in the Midwest, is back online after breaking down Aug. 8. Media outlets report that gas prices in the region already have begun falling again, but they’re sure not doing so as quickly as they shot up. And it doesn’t explain that gentle slope of a line for New York above.

In California, where gas prices pushed toward $5 in July after a sudden, insufficiently explained shortage, prices remain high, purportedly owing to the Exxon Mobil refinery in Torrance still being below capacity six months after a fire. As Sue Carpenter, automotive writer at the Orange County Register, explains:

Crude oil typically accounts for just 46 percent of the cost of a gallon of gasoline, according to U.S. Energy Information Administration. Taxes account for 16 percent, 13 percent is marketing and distribution, and 25 percent is refining.

In California, though, crude oil is just 34 percent of the cost of a gallon of gas, and refining is 35 percent, according to the California Energy Commission.

Still, it’s curious that just as California motorists were getting hammered, oil refineries weren’t sharing the pain: Refineries in the state collected $1.61 per gallon in July, the highest since the state began keeping records in 1999.

It’s clear that there isn’t enough refinery capacity in the U.S. (Raise your hand if you’d like one built in your back yard. There are people in Whiting who still remember what happened there 70 years and a day ago.) But even if refinery disruptions are partially to blame, it’s only further evidence that we’re too beholden to a volatile global oil market, and we’re dependent on an aging, infrastructure for refining.

The only way to make the fuel pricing structure sustainably affordable is to introduce fuel choice so gasoline has to compete with cheaper, cleaner alternatives like ethanol and methanol.

Until that happens, wild price swings and supply disruptions will be the norm in America.

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The pot calling the kettle black: The AEA and alternative fuels

justice2I have great sympathy for the coal miners of this nation. Their job in supplying this nation with coal is among the toughest in the world. Their historical contribution to the nation’s economic well-being is well established. They were, and many remain, beset with long hours, moderate pay (currently $22,000 to $64,000 per year), negative health and safety problems, and, at times, an unsavory public and private sector bureaucracy.

The glory years for coal appear to be over. Increasingly, the public and environmental experts and policy leaders view coal as a dirty fuel. Succinctly, coal emits significant amounts of greenhouse gases and other pollutants. Most analysts believe the future of the coal industry is dim.

Clearly, in the past decade, market forces, not public policy, have forced many electric utilities to substitute natural gas for coal, and the competition with coal to date suggests coal will be the economic loser. The cost differential between the two, generally, has favored natural gas.

Without a bipartisan commitment to find transitional pathways for miners and/or successful economic development options for their communities, present-day miners will regrettably become part of America’s throwaway society — consumed and discarded by technological change and the fear of global warming. Congress, the White House and the American public have a moral — if not an economic, social and political– obligation to look hard at training and mobility initiatives for miners, as well as economic development strategies in their places of residence and work.

Regrettably, the conservative American Energy Alliance (AEA) has put its muscle behind a frontal attack on the president’s effort to substitute alternative fuels for coal to power utility plants instead of a well-defined effort to define workable strategies to help miners find other than declining mining positions. If a coalition cannot be built to find feasible solutions to expand job opportunities for miners, many miners, whose experience is often limited, will find themselves locked in place and will face a life of poverty or near-poverty — even when the economy returns to health and unemployment decreases. The structure of the American economy has changed, and the change does not favor mining.

Surprisingly, given its history in opposing social welfare initiatives, AEA indicates that the EPA’s recently announced Clean Power Plan, which requires the states to cut back significantly on GHG emissions, is “justice denied” to millions of minorities and low-income households. While analyses of the impact of the Clean Power Plan on different demographic and income groups are not yet precise, the AEA statement does not acknowledge the fact that alternative fuels, like natural gas, have been on a per-dollar kilowatt-hour cost cheaper than coal. The AEA also fails to note the potential savings in health and other societal costs (for low-income families in particular) resulting from lower GHG emissions and other pollutants. A disproportionate number of low-income people live near utilities, refineries and coal mines because of the absence of affordable housing and cheap transportation. Until relatively recently, gasoline prices limited the ability of many low-income households to travel from decent housing to their current or potential jobs. Several respected economists view the current drop in oil and gasoline prices as a relatively short- to intermediate-term phenomenon (1-2 years), and that the norm, once the world economy improves, will much higher than it is today.

The American Energy Alliance is pro-oil and pro-coal. That’s okay — this is its right. But in this context, its support of both fuels should mute its legitimacy as a research organization or the research of many of the organizations it supports or its supporters support. The AEA is, plain and simple, an advocacy group whose causes are predetermined by the self-interest and ideology of its donors.

Unfortunately but understandably, the AEA is unlikely to ever support the considered use of high-octane alternative fuels or their independent study, whether for utilities or transportation. Placing alternative before fuels, even though it could mean improved choices and lower costs for low-income consumers, improved environmental conditions, less GHG emissions and greater overall economic benefits is and will not be in AEA’s lexicon. In this context, AEA seems to have hijacked the term or phrase “justice denied” in a manner that does not fit the intent of some of the original users — Martin Luther King, Jr., William Gladstone, and Frederick Douglass. Their respective purposes in using the term were to expand choices, to redress societal inequities and to lessen the burdens of the disadvantaged. It is time we consider alternatives to weaning the nation and the world off of oil and coal, and acknowledge the fact that justice denied diminishes justice everywhere, and in the ethicist John Rawls’s words, hurts the least advantaged among us.