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A big flaring opportunity in North Dakota

Recently I wrote about how oil companies are flaring off $100 million worth of gas a month in the Bakken formation and what a huge waste or resources that represents.

Well, it didn’t take long for something to happen. A group of five law firms representing Bakken property owners sued 10 oil companies to end the practice. Their logic? It doesn’t involve environmental pollution or global warming. Instead, they’re arguing that the oil companies are depriving them of hundreds of millions in royalties by flaring off all that gas.

The case makes perfect sense. Gas is a valuable resource and the property owners are being deprived of huge amounts of money by wasting it. The case also avoids the complications that would come if the suit had been brought by the Sierra Club or Natural Resources Defense Council on environmental grounds. That would have involved all kinds of testimony about whether the flaring is really having an impact on the weather and what the level of damages might be. Instead, this is a straightforward case of dollars and cents. The property owners are being deprived of huge royalties. The oil companies have to compensate.

But beyond that, the lawsuit also offers a glittering opportunity to put methanol and its potential role in the transportation economy in the spotlight. So far, nobody’s talking about it much, but the conversion of natural gas into methanol could play a huge part in resolving this case.

The Bakken has developed so fast that the producers have not even been able to build oil pipelines into the area yet. Instead, the oil is being shipped by truck and rail. Burlington Northern has extended its lines into the region and most of the oil is now finding its way into major pipelines. As a result, Bakken production has leaped to 850,000 barrels a day, catapulting North Dakota into the number two position as an oil-producing state, behind Texas.

But the gas is a different thing. It can’t be stored in large quantities and pipelines are a long way from being extended and probably not worth it. Oil is now give times more valuable than gas at the wellhead, which gives drillers an enormous incentive to go after the oil and forget about the gas, hence the flaring. Thanks largely to North Dakota, we have moved into fifth place for flaring, behind Russia, Nigeria, Iran and Iraq, and ahead of Algeria, Saudi Arabia and Venezuela. The amount of gas flared around the world equals 20% of U.S. consumption. When we’ve moved ahead of Hugo Chavez, it’s time to do something about it.

So far, the proposed solutions have involved compressing natural gas or synthesizing it into more complex liquids. “The industry is considering and adopting various plans to flare less gas, including using the gas as fuel for their rigs and compressing gas into tanks that can be transported by truck,” reports The New York Times. “A longer-range possibility would be the development of projects that could produce diesel out of gas at or near well sites.” Hess, which already has a network of pipelines in the area, is rushing to complete a processing plant at Tioga that will turn gas into diesel and other more complex fluids.

But a better solution would be portable, on-site processing plants that can convert methane to liquid methanol, a far simpler process. Gas Technologies, a Michigan company, has just developed a conversion device that sits on the back of a trailer and can be hauled from well to well. “We have a patented process that reduces capital costs up to 70%,” said CEO Walter Breidenstein. “If we’re using free flare gas, we can reduce the cost of producing methanol another 40-5%.” Other companies are working on similar technologies for converting natural gas to methanol on-site.

All this would help bring attention to the role that methanol could play in replacing oil in our transportation economy. California had 15,000 methanol cars on the road in 2000 and found drivers were extremely happy with them. Methanol also fits easily into our current infrastructure for gasoline. But California gave up on the project because gas supplies seemed to be dwindling and the price was too high. Now we are flaring off 25% of the nation’s consumption in one state and methanol could easily be produced for $1.50 a gallon. It’s time to re-evaluate.

Of course, Walter Breidenstein will probably find that flared gas will not be offered for free. Those Bakken property owners still want their royalties. But the North Dakota lawsuit proves a spur for on-site methanol conversion and great opportunity to highlight the role methanol could play in our transportation economy.

The U.S. and China on methanol: Two roads converge

Nobel-Prize-winning chemist George Olah recently put methanol front and center again with a powerful Wall Street Journal editorial arguing for the conversion of carbon dioxide emissions from coal plants into methanol for use as a gasoline substitute in our car engines. Co-writing with University of Southern California trustee Chris Cox, Olah noted, “Thanks to recent developments in chemistry, a new way to convert carbon dioxide into methanol — a simple alcohol now used primarily by industry but increasingly attracting attention as transportation fuel — can now make it profitable for America and the world to reduce carbon-dioxide emissions.”

The authors argued that President Obama’s recently announced policy of mandating carbon sequestration for emissions from coal plants wastes a potentially valuable resource. “At laboratories such as the University of Southern California’s Loker Hydrocarbon Research Institute [founded by Olah], researchers have discovered how to produce methanol at significantly lower cost than gasoline directly from carbon dioxide. So instead of capturing and “sequestering” carbon dioxide — the Obama administration’s current plan is to bury it — this environmental pariah can be recycled into fuel for autos, trucks and ships.”

Olah, of course, has been the principal advocates of methanol since his publication of “Beyond Oil and Gas: The Methanol Economy,” in 2006.

To date, he has been recommending our growing natural gas supplies as the principal feedstock for a methanol economy. But the emissions from the nation’s coal plants offer another possibility.

This is particularly important since indications are that the Environmental Protection’s Agency’s assumption that a regulatory initiative will “force” the development of carbon-sequestering technology may be mistaken. A recent report from Australia’s Global CCS Institute said that, despite widespread anticipation that carbon capture will play a leading role in reducing carbon emission, experimental efforts have actually been declining.

The problem is the laborious task of storing endless amounts of carbon dioxide in huge underground repositories plus the potential dangers of accidental releases, which have aroused public opposition. Olah and Cox write, “By placing the burden of expensive new carbon capture and sequestration technology on the U.S. alone, and potentially requiring steep cuts in domestic energy to conform to carbon caps, the proposal could send the U.S. economy into shock without making a significant dent in global emissions… In place of expensive mandates and wasteful subsidies, what is needed are powerful economic incentives. These incentives should operate not just in the U.S., but in other countries as well.”

All this brings into stark relief the diverging paths that China and the United States have taken in trying to find some alcohol-based fuels to substitute in gas tanks. While Olah has been advocating a transformation to a methanol economy in this country, China is actually much further down the road to developing its own methanol economy. There are now more than a million methanol cars on the road in China and estimates show the fuel substitutes for 5-8% of gasoline consumption — about the same proportion that corn ethanol provides in this country.

In this country, the proposal has been that we derive methanol from our now-abundant supplies of natural gas. California had 15,000 methanol cars on the road in 2003 but curtailed its experiment because gas supplies appeared to be too scarce and expensive! Instead, the main emphasis has been on tax incentives and mandates to promote corn ethanol.

China has vast shale gas supplies and could benefit from America’s fracking technology. We could benefit strongly from China’s greater experience in developing methanol cars. The pieces of the puzzle are all there. Perhaps Olah’s proposal may be the catalyst that puts them all together.

Ironically, all this began with a Chinese-American collaboration in 1996. At the time, China had little knowledge or interest in methanol but was persuaded by American scientists to give it a try. Ford provided a methanol engine and China began ramping up its methanol industry and substituting it for gasoline. As a result, China is now the world’s largest producer of methanol, with about one-quarter of the market.

A year ago the Chinese national government was about to mandate a 15% percent methanol standard for gasoline when it ran into opposition from executives in its oil industry. Those leaders have since been deposed, however, and the 15% mandate may go ahead this year. In the meantime, provincial governments  have developed their own standards, with the Shanxi province west of Beijing in the lead.

Ironically, because methanol is only half the price of gasoline, many local gas stations are diluting their gasoline with methanol anyway in order to shave their costs. As a 2011 Energy Policy article by Chi-jen Yang and Robert B. Jackson of Duke University’s Nicholas School of the Environment reported, Private gasoline stations often blend methanol in gasoline without consumers’ knowledge… In fact, its illegal status makes methanol blending more profitable than it would be with legal standards. Illegally blended methanol content is sold at the same price as gasoline. If legalized, standard methanol gasoline would be required to be properly labeled and sold at a lower price than regular gasoline because of its reduced energy content. Such unannounced blending is now common in China.”

So both countries are feeling their way toward a methanol economy. As Olah points out, the problem in the U.S. is that the various advantages given to ethanol have not been extended to methanol.One means of addressing this inequity would be for Congress to pass the bipartisan Open Fuel Standard Act of 2013, which would put methanol, natural gas, and biodiesel on the same footing as ethanol (but without subsidies and without telling consumers which one to choose) for use in flex-fuel cars.

In China, the concern is about coal supplies but this could be alleviated with help from America’s fracking industry or by implementing Olah’s new technology for tapping coal exhausts.

Either way, the pieces are all there. It may be time to start putting them together.

Model building, Playboy and the impact of ethanol on gasoline prices

I recently read a number of provocative articles (or their summaries) by MIT’s Christopher Knittel and Aaron Smith. They faulted a pair of respected researchers from Iowa State University, Dermot Hayes and Ziaodong Du, in somewhat harsh tones. According to Knittel, the Iowa State pair, in their ethanol-related studies over a three year period (from 2009 through 2012), exaggerated the impact of ethanol on gas prices using relatively low present day ethanol blends.

I thought I was reading the script for a new urban crime show about drugs. Knittel, frequently, used terms like crack ratio and crack spread, ostensibly to note the weak link, found by Hayes at Iowa State, between the prices of ethanol and oil and both to gas costs at the pump. According to the authors, the price of gasoline is not substantially affected by the crack ratio; that is, the relative value of gasoline compared to oil or the price of gasoline divided by the price of oil and the current volume of its ethanol content.

Knittel’s papers angered Hayes, of the Iowa study. He claimed that, over time, the crack ratio and crack spread reflected a pretty strong causal relationship to gas prices. Language in his response to Knittel’s critique reminded me of those wonderful days when I was a dean, listening to different faculty, sometimes personally and sometimes based on methodology, criticize other faculty based on differing research results. The search for academic truth is often a noble road, but paraphrasing Robert Frost, a “road less traveled” — a road often full of human frailty and intellectual potholes.

Despite their critique of each other, both Knittel and Hayes’ studies are important and both, when read in context, should help one better understand the role of ethanol in affecting the cost of gas at the pump. Knittel is more right than wrong when he indicates that the crack ratio and spread does not fully explain the effect of ethanol on gas and oil prices, over time, and he is also correct in challenging the model used by Hayes to identify a reduction of $0.89 to $1.09 on gas prices because of higher ethanol production and higher crude oil prices.

Hypothetically, in isolation from other variables, the higher the crack ratio, the higher the price of gasoline. Further, if the price of ethanol is relatively low or on a downward trend, increased use of ethanol in gasoline blends, in theory, would cause the crack ratio to go down and the spreads to be higher, assuming gas prices remain the same or increase. Good news for consumers! Right? Maybe? Not always? Not at all? Not sure? What if?

I cannot claim real modeling expertise and would not, even for a minute, arbitrate between Knittel and Hayes concerning their use of models and its result — in terms of Hayes, significant impact of ethanol, in terms of Knittel, minor impact of ethanol.

But in terms of the policy argument between them, I suspect Knittel comes out the winner (full disclosure: I did graduate from MIT and while I love Iowa’s rolling hills, I do not like the climate and the fact that the state does not have a great symphony, nor a NFL football or American League baseball team). He points out that the crack ratio’s fluctuations in the ‘80s occurred when oil prices both declined and increased. Ethanol was not a factor and the movements in the crack ratio were not based on ethanol production. He seemingly, correctly, faults the folks in Iowa for not using the crack spread model in their 2011 and 2012 papers to evaluate the impact of eliminating ethanol because the two models —crack ratio which they used and crack spread which they didn’t — produce significantly different results and policy implications.

What does the dispute over models and model use have to do with public policy? A lot! The ethanol supporters touted the Iowa studies to support their claim that increased ethanol use reduces costs to consumers in a major way. Conversely, the ethanol critics suggest that the Knittel analysis debunks the assertion that use of ethanol as a blend will reduce gas prices in a major way.

Knittel suggests the Iowa studies vastly overstate the cost-related benefits of ethanol to the consumer and that Iowa’s model disregards or blurs the effect of price changes and swings in price of both ethanol and oil. Knittel also indicates that that the relationships between oil and gas prices, as well as oil, gas and ethanol prices are much less precise and more complicated than indicated by Hayes’ modeling efforts. Prices of all three fuels are much more subject to behavior and external events than acknowledged by either Knittel or Hayes.

The dialogue between Knittel and Hayes is helpful in sorting cost and price issues regarding ethanol and gasoline. I hope they continue at it, with less emotion, and with analyses better grounded in methodological analyses that generate a better job of linking model building with experience and empiricism. Meanwhile, no matter whether you believe the effect of ethanol on gas prices is high, moderate or low, if the U.S. government acquiesces in the use of higher ethanol blends like E60 and E85, and if the cost spread between ethanol and gasoline continues, an increasingly visible positive impact on fuel prices will likely be witnessed at the pump. Apart from any possible price differential related to use of higher blends, increased use of ethanol as an alternative transitional transportation fuel is in the public interest. According to most reputable studies, such use will respond well to many environmental problems caused by gasoline and it will help reduce America’s need to import oil…a continuing security problem.

Epilogue: I once taught a reasonably popular class on policy development and models. To liven up the class, I told the students that economic and policy models are abstractions of reality and to the extent that the models’ abstractions helps students understand reality, they are “good” models. They asked for examples. It was a late evening and I was tired. I told them to go look at the centerpieces in Playboy and Playgirl. Both presented models of airbrushed men and woman. At our next class, I asked the students if the models increased their understanding of men and women. They were bright and eager students, at least for this assignment, and they indicated, “No.” The models tilted too far toward abstractions and too far away from real world experience. They seemed to learn a lesson about the value of at least some models.

Carnivals, peas and oil predictions

Earlier in my life, I volunteered as a carnival “barker” — you know, the guy who tries to inveigle passers-by to throw a ring around a bottle to win something for their date or children. At the time, most paid a buck, lost, and were happy as I was, because the funds went to charity. While I was at my station, I happened to see a would-be magician working the old pea trick. You know, you followed the pea in the magician’s open hand and when the magician closed his hands, you picked the hand that you believe covers the pea. Again, passers-by lost all the time, because his sleight of hand was faster than their eyes (or their brains and their eyes). Charity, once again, came out ahead.

What’s all this got to do with oil? Well yesterday, I was bemused by a piece in the Financial Times by Ed Crooks, titled “U.S. oil boom resets on shaky foundations.” Earlier this week another article in another respected paper quoted an expert that stated that America is now and will be in the future much less dependent on Middle Eastern oil because of the oil boom and its likely continuance into the future. Numerous papers have called the now and future oil boom the Saudization of America.

Which pea will be picked up tomorrow by the media — the oil is a shaky pea, or the oil is our country’s genetic future pea. Can we, as consumers, based on often different expert projections related to the supply and demand for oil, pick the right pea ahead of the media’s grand pronouncements concerning oil production and consumption? The answer, given the probability of frequent expert-related projection amendments, the different methodologies involved and, yes, in some cases the captive quality of the projector, is no. If it’s Monday, oil is our salvation and America’s oil largess will be a road to riches; if it’s Tuesday, oil salvation is uncertain and we will remain dependent on importing oil; if it’s Wednesday, you put two oil experts in a room and you get three or four or more future projections; and if it’s Thursday, oil analysts, including some of the best, throw up their hands and say we really don’t know where oil is going. How can we be sure, given all the complex variables? Why did I go to college to study research and statistics? I want my tuition money back.

Oil projections recently seem more an art than science. Paraphrasing Ralph Waldo Emerson, and in defense (just kidding) of what often seems like “one a day” projections, foolish consistency is the hobgoblin of foolish minds , and the King from The King and I, oil projections are a “puzzlement.”

More attention should probably be paid to the Financial Times article. The author indicates that a question hangs over the U.S. oil boom in relation to increasing production costs. “The effort required to squeeze the oil out of the rock, from which it will not flow easily, means that shale production has a relatively high cost, compared with the traditionally cheap to extract reserves of the Middle East.”

Up to this point, Crooks (while he is named Crooks, he is not really a crook, but a fine writer) has been easy to follow. Relatively high oil per barrel costs, he indicates, lead to investment in drilling and, as important, innovative fracking technology, products and services. Small and mid-sized independent firms seemed to flourish, given their cost efficient innovative production processes. Service companies supporting drillers and production firms positioned themselves well, given the oil boom. It all seemed like fun and games. Everyone made money and met investor or stockholder expectations. Dinners at fancy restaurants seemed the norm.

But Crooks maintains that with the fall in prices for natural gas in 2012, the oil related equipment and service industry quickly met its waterloo. “Capacity utilization for pressure pumping equipment dropped to just 74%. Prices for pumping services dropped an estimated 22% between the first quarter of 2012 and the third quarter of 2013.” It was tough time for service firms. Many tried to switch from gas to oil drilling, but over capacity and underutilization were pervasive.

Recently, things appear to be looking up for the service and equipment sector. Oil prices seem relatively stable, at least until tomorrow, and gas prices seem on the uptake. Interestingly, several respected industry spokespersons suggest that a rise in prices for equipment and activities is likely more dependent on the hope for significant LNG exports and assumed higher natural gas prices (and production) than on significant increases in shale drilling for oil. But as Crooks points out, gas producers and servicers’ gain is oil’s pain. An increase in prices for services and a reduction in equipment overcapacity, the article suggests will raise the costs of oil production and lead to more investor as well as producer caution concerning investment in new risky oil wells. Remember most experts indicate that the best sites for new oil drilling have been leased or acquired. “It is possible that U.S. shale oil can continue to thrive only if shale gas continues to struggle.”

Several of the assumptions in Crooks’ piece seem to reflect the same shaky foundations that he indicates weaken projections concerning the U.S. oil boom. For example,

  • Yes, hard-to-get-at oil from shale will cause producers pause when thinking about future development. It will be much more expensive than drilling from conventional, easy-to-get-at U.S. or Middle East reserves. Since oil is globally traded, we could see an increase in dependency on imports.
  • Yes, the service and equipment industry will be in better shape if the natural gas industry grows and thrives. The costs of its equipment and services will rise accordingly. However, the increases in the price of natural gas, if they occur, and, if they are sustainable over time, will probably be relatively small in terms of dollars and may not significantly affect oil production and decisions. Sure, there are similarities between oil and natural gas drilling equipment and services, and while they constitute a large share of the on-site drilling costs (40-70%), rapid technological improvements matched by improved management of drilling have and continue to occur, lessening cost impact by improving productivity. They may reduce the harm seen by Crooks that could come to the oil industry from increased service costs. Other related factors, such as global oil consumption, supply and per barrel costs, international tensions, environmental sensitivities, financial speculation and profit seeking etc., will probably affect oil industry opportunity costing concerning drilling — even more than the increased cost of equipment and services. Taken together, these factors often explain short term changing oil-per-barrel prices. A large anticipated and continuous increase or decrease in per barrel costs will provide a drilling marker for investors and producers — over $100 more wells, under $70 or so less wells and uncertainty in between.
  • Yes, exporting LNG will improve the economic condition of the natural gas industry; just as removing export restrictions on crude oil will improve the economic viability of the already thriving oil sector. But the impact of extended large LNG sales abroad will likely take years, given the need to gain regulatory acquiescence to develop infrastructure and product. Similarly, the likelihood of eliminating restrictions on crude oil exports remains politically iffy.

Concern with the health of the natural gas industry— whether from Crooks’ perspective, because he believes growing gas prices will help strengthen the oil boom’s foundation, or my own, because the increased use of natural gas and its derivatives, ethanol and methanol as transitional transportation fuels will help reduce GHG emissions and improve the quality of the environment as well as reduce the price of gasoline at the pump and enhance America’s security, is legitimate. I wonder why Crooks neglected to discuss natural gas as a transportation fuel and the need for competition in America’s gasoline market in his otherwise provocative article. But it seems his core objective in the piece was the health and well-being of the oil industry. A bit more balance would have served him and the readers well.

Flaring gas in North Dakota – what a waste!

You can see them from outer space. The flames from natural gas flares in the Williston Basin of North Dakota now throw off a nighttime glow larger than Minneapolis and almost as big as Chicago. All that energy is going up in smoke.

Ceres, a Boston nonprofit organization, issued a report last week illustrating that the huge surge in oil production in the Bakken Shale has outrun the drilling industry’s ability to cope with the natural gas byproduct. “Almost 30% of North Dakota gas is currently being burned off,” the report said.

The report also states, “Absolute volumes of flared gas have more than doubled between May 2011 and May 2013. In 2012 alone, flaring resulted in the loss of approximately $1 billion in fuel and the greenhouse gas emissions equivalent of adding one millions cars to the road.”

The loss rate has actually been reduced from 36% in 2011, but production has tripled in that time, meaning that an additional 266 billion cubic feet (BCF) a day is going up in smoke.

Moreover, according to the report, North Dakota gas contains other valuable products. “The natural gas from the Bakken formation contains high volumes of valuable natural gas liquids (NGLs), such as propane and natural gasoline, in addition to dry gas consisting mostly of methane. It is potential worth roughly four times that of the dry gas produced elsewhere in the United States.”

“There’s a lot of shareholder value going up in flames,” Ryan Salomon, author of the report, told Reuters.

So why can’t more be done to recover it? Well, unfortunately, according to the North Dakota Industrial Commission, the spread between the value of gas and oil, which has stayed pretty close historically, has now increased to 30 times in favor of oil in the Bakken. Even nudging up gas prices to $4 per thousand cubic feet (MCF) in recent months hasn’t made much difference. Consequently, it isn’t worthwhile trying to collect gas across widely dispersed oil fields.

Encouraging this waste is a North Dakota statute that exempts flared gas from paying any severance taxes and royalties during the first year of production. Since most fracking wells have a short lifespan, gushing forth up to 60% of their output in the first year, this makes it much easier to write off the losses.

Nonetheless, all this adds up to a colossal waste. As of the end of 2011, the amount of gas being flared each year in North Dakota was the equivalent of 25% of annual consumption in the United States and 30% Europe’s. The high burn off has moved the country up to fifth place in the world for flaring, only behind Russia, Nigeria, Iran and Iraq, and ahead of Algeria, Saudi Arabia and Venezuela. Although the World Bank says worldwide flaring has dropped by 20% since 2005, North Dakota is now pushing in the opposite direction. Altogether, 5% of the world’s gas is wasted in this way.

Efforts are being made to improve the situation: with big hitters are doing their part. Whiting Petroleum Corporation says its goal is zero emissions. Hess Corporation, which has a network of pipelines, is spending $325 million to double the capacity at its Tioga processing plant, due to open next year. Continental, the largest operator in the Bakken, says it has reduced flaring to 11% and plans to reduce it further. “Everybody makes money when the product is sold, not flared,” Jeff Hunt, vice chairman for strategic growth at Continental, told Reuters.

But it’s all those little independent companies and wildcatters that are the problem. Storage is impossible and investing in pipeline construction just too expensive. Entrepreneurs are doing their part. Mark Wald, a North Dakota native who had left for the West Coast, has returned to start Blaise Energy Inc., a company that is putting up small gas generators next to oil wells and putting the electricity on the grid. “You see the big flare up there and you say, `Something’s got to be done here,’” he told the Prairie Business.

But the long-term solution is finding new uses for natural gas and firming up the price so that its collection is worthwhile. What about our transport sector? We still import $290 billion worth of oil a year at a time when as much as half of that could be replaced with domestic gas resources. Liquid natural gas, compressed natural gas, conversion to methanol, conversion to ethanol – there are many different ways this could be promoted right now. Ford has just introduced an F-150 truck with a CNG tank and an engine that can run on either gas or gasoline. With natural gas selling at the equivalent of $2.11 a gallon (and even cheaper in some parts of the country), the new model can pay off the additional $9,000 price tag in two to three years. There are now an estimated 12,000 natural gas vehicles on the road and the number is growing rapidly. “This is an emerging technology in a mature industry,” Ford sustainability manager Jon Coleman told USA Today.

But an even better way to harvest this energy might be to design small, transportable methanol converters that could be attached to individual gas wells. Methane can be converted to methanol, the simplest alcohol, by oxidizing it with water at very high temperatures. There are 18 large methanol plants in the United States producing 2.6 billion gallons a year, most of it consumed by industry. But methanol could also substitute for gasoline in cars at lower cost with only a few adjustments to existing engines. The Indianapolis 500 racers have run on methanol for more than 40 years.

The opportunities in the Bakken are tremendous – and the need to end the waste urgent. The U.S. Energy Information Administration estimates that production in the Bakken is due to rise 40%, from 640,000 to 900,000 barrels per day by 2020. North Dakota has already passed Alaska as the second-biggest oil producing state and now stands behind only Texas, where pipeline infrastructure is already built out and less than 1% of gas is flared.

The increased production, matched with the expanding technology for using gas in cars, presents an enormous opportunity.

And that’s the way it is or isn’t — stable oil and gas markets

“And that’s the way it is” was used by my favorite news anchor, Walter Cronkite, to sign off on his highly respected network news show. And that’s the way the content he generally delivered generally was — clear, factual, helpful. I have tried to apply Cronkitism to today’s media analyses and commentary on oil production and oil prices. The new assumed “way it is” regrettably sometimes seems like the way the journalist or his boss — whether print, TV or cable — wants it to be or hopes it will be. Frequently, partial sets of facts are marshaled to ostensibly determine clear cause and effect relationships but end up confusing issues and generating questions as to the author or speakers mastery of content and conclusions.

What’s a Cronkitist to do? I often look to The New York Times for the wisdom grail. Generally, it works. But, I must confess that a recent piece in the Times by outstanding journalist, Clifford Kraus, titled “Is Stability the New Normal?” Oct. 9 bothered me. I found its thesis that a new stability has arrived with respect to oil prices and by implication gas prices at the pump a bit too simple.

The author indicates that “predictions about oil and gas prices are precarious when there are so many political and security hazards. But it is likely that the world has already entered a period of relatively predictable crude prices…there are reasons to believe the inevitable tensions in oil-producing countries will be manageable over at least the next few years, because the world now has sturdier shock absorbers than at any time over at least the past decade.”

What are these absorbers? First, more oil production in the U.S., Canada, Iraq and Saudi Arabia, to balance the loss of exports from countries like Iran, Libya and, I assume, Venezuela and possibly Nigeria. Second, the continued spread of oil shale development throughout the world, including many non-Middle East or OPEC countries. Third, increased auto efficiency, conservation and lower demand for gas in the U.S. Finally, near the end of the article and not really seemingly central to the author’s stability argument natural gas becomes in part a hypothetical “if.” He notes that American demand for gasoline could drop below a half a billion barrels a day from already below peak consumption, if natural cheap gas replaces more oil as a transportation fuel. (At least he mentioned natural gas as a transportation fuel. Most media reports fail to tie natural gas to transportation) break open the champagne! Nirvana is near! Michael Lynch, a senior official at Strategic Energy & Economic Research Inc., is quoted in the article, saying, “Stable oil prices could reduce future inflation rates and particularly curb transportation costs, helping to steady prices of food and construction materials that travel long distances…Lower inflation can also help reduce interest rates. By reducing uncertainty, investor and consumer confidence should both be increased, boosting higher spending and investment and thus economic growth.”

In the words of Oscar Hammerstein II, I want to be a cockeyed optimist…but something tells me to be at least a bit wary of a too-good-to-be-true scenario, one premised on a historically new relatively high price of oil per barrel (bbl.), just under $100 (the price is now about $105) and gas prices likely only modestly lower than they are now (the U.S. average is close to $3.50 a gallon)

So why be wary and worry?

1. The Times accepts the rapid significant growth in oil shale development and production too easily. Maybe they are right! Perhaps the oil shale train has left the station. But the growth of environmental opposition, particularly opposition to fracking, will likely slow it down until regulations perceived as reasonable by the industry and environmentalists are put in the books. Further, the often very early large expectations with respect to new pools of oil in places like the Monterey Shale, featured in media releases, have not panned out after later sophisticated analyses. Finally, the price of hard to get at oil may come in so high as to limit producer enthusiasm for new drilling.

2. The Times correctly suggests that the relationship between oil prices and gasoline costs may be less than thought conventionally. Lower oil costs in the U.S. do not necessarily trigger lower gasoline costs, and higher gasoline costs are not necessarily the result of higher oil costs per barrel

The Times credits the recent visible break in the relationship primarily to an abundance of oil linked to oil shale production in the U.S. and in many other countries and to falling demand for oil throughout the world, including China, to the lack of economic growth and higher efficiency of vehicles.

It’s more complicated. For example, price setting is affected in a major way by speculation in the financial community, and by oil producers and refiners who govern production and distribution availability. Respected analysts and political leaders suggest that companies base their decisions concerning price at least in part on market and profit assumptions. Fair. But, oil’s major derivative gasoline does not function in a free market, rather, it is a market controlled by oil companies. There is little competition from alternative fuels. Unfair and inefficient.

3. The quest for oil independence and the related justification for drilling lead the media to suggest and the public to believe that there is an equivalency between increased production of oil and closing the gap between what we consume and produce as a nation. Yes, we have reduced the gap — both demands have fallen and production has increased. But it is still around 6.0 to 6.5 million barrels per day. Yet, we continue to export nearly half of what we produce every day or nearly 4 million barrels. Our good friends, China and Venezuela, get 4% and 3% respectively. Companies may sing “God Bless America” while extracting, refining, exporting and importing oil, but theologically based patriotism doesn’t govern the oil market. Sorry, but global prices and profits have precedence. Remember the adage — “the business of business is business.”

4. A recently released Fuel Freedom Foundation paper suggests that energy independence is a misnomer. Based on its review of EIA data and projections through 2035, negative energy balances exist that never drop below a $300 billion deficit. If EIA data is to be believed, energy independence, Saudi America and control of our energy future are developments that will not occur anytime soon.

I am disappointed that natural gas as an alternative fuel seems more like an afterthought coming at the end of Kraus’s long piece. I am glad the author mentioned it but it seems at least a bit forced. The commentary was limited to natural gas and not its derivatives, ethanol and methanol, or, for that matter, other alternative fuels. Put another way, it seemed to assume a still very restricted fuel market. Opening up consumer choices at the pump is a key factor in stabilizing oil and gas markets. It also is a key factor achieving reduced prices at the pump for low and moderate income families; the former spending from 14-17% of their limited income on gasoline.

The oil industry and API, at it again. When will they ever learn?

Never a dull moment! The API is at it again. Just a few days ago, it dramatically issued a survey indicating that close to 70% of all consumers were worried that E15 (a blend of 15% ethanol and 85% gasoline) would damage their cars. While the survey was done apparently by a reputable firm, it was not attached to the press release, preventing independent experts or advocate group experts from commenting or verifying the questions and the sample. More importantly, the survey was preceded by an expensive oil industry media blitz that illustrated or talked about the so-called evils of ethanol. The survey and media show reflected an attempt by the oil industry to eliminate or weaken the renewable fuel mandates and lessen competition from alternative transitional fuels.

Americans are usually not Pavlovian in demeanor or behavior; we do ask for second and even third opinions from our doctors. But when only one group, in this case, the oil industry, has put out a continuous flashy very expensive multimedia message, the API’s survey results were almost preordained to reflect the published results. Whatever the industry wanted it got! If you tell a misleading partial story to create fear and uncertainty, long enough, it will likely influence many. In this case, the API, if it had a nose, its nose, similar to Pinocchio’s, would be growing and growing and growing.

Let’s look at the facts — never acknowledged by the API in its “Fuel for Thought” campaign.

  1. DOE effectively demolished the API-supported study many months ago indicating that the sampling approach was wrong and the analysis was faulty. DOE’s study used a much larger number of vehicles and was far more rigorous concerning methodology. (Just to let you know, API is an oil industry funded group.)
  2. Many countries around the world have used E15 and higher ethanol blends as a fuel without significant problems. They are seen as a way to reduce environmental problems. They are cheaper than gasoline and they reduce the need, at times, for oil imports. Put another way, they improve quality of life, lower costs to the consumer, and are good for the economy and security.
  3. Although oil company franchise agreements with gas stations have limited the number of stations able to sell E15, several states (mostly in the Midwest) with multi-fuel stations, have demonstrated the merits of E15. Early data appears to discount engine problems.

Hell, Henry Ford’s initial car was designed to run on pure ethanol until the temperance movement supported by Standard Oil banned the use of manufactured alcohol. I know Standard Oil was very concerned that Americans would drink ethanol at their favorite bars or in front of their favorite fire place with their favorite significant other. Praise be to Standard Oil for salvation!

The law (RFS) requires a 10% ethanol blend with gasoline. More than a year ago, EPA OK’d the sale of E15 (for most cars particularly those produced after 2001). In June, the Supreme Court refused to hear the appeal by the oil industry of EPA’s standards.

API’s media campaign raises the food versus fuel fight canard because ethanol is produced mostly from corn as the feedstock. But the narratives neglect to raise the fact that the evidence concerning the negative impact on food is disputed by reputable analysts who indicate that, for the most part, the corn used for ethanol production is not your friendly grocery counter corn. Put another way, most of the corn to ethanol conversion comes from corn not able to be used for food. Yes, there still maybe some impacts on corn production and prices because of the growers reallocation of land, in light of the differential between corn and ethanol prices, to ethanol. However, many studies suggest that if a negative food impact exists, it is relatively minor. It is a worthy debate.

It appears, that API, conveniently, forgets to mention that ethanol can be produced efficiently and effectively from natural gas and that cellulosic based ethanol is now being manufactured or will soon be manufactured in large volumes by several companies. Further, Clean Energy Fuels announced this week that it will start selling fuel made from methane in landfills and other waste sources in over 40 stations in California. Success of these initiatives, likely, will mean the end of the fuel versus food issue. If success is combined with the inexpensive conversion of existing cars to flex fuel cars permitting them to use alternative fuels, America will be blessed with a much cleaner, environmentally safe, and cheaper alternatives to gasoline- assuming the oil industry doesn’t block their sale at fuel stations.

Clearly, the oil industry does not want competition at the pump from ethanol…whether corn, cellulosic, garbage or natural gas. The American public should be wary of misleading guerilla marketing through industry funded surveys or not so benign expensive media blasts by captive organizations like API. Hopefully, the American consumer will not be confused for long. Paraphrasing a song by Peter, Paul and Mary about war and peace and a statement by President Lincoln, when will the oil companies ever learn?, and, if they don’t learn, when will they recognize “they can fool all the people some of the time and some of the people all the time but they cannot fool all the people all the time.”

Robert Rapier loves methanol

Robert Rapier – “R2” as he calls himself in good scientific notation – is one of the smartest people out there when it comes to energy. A master’s graduate in chemical engineering from Texas A&M University, Rapier is chief technology officer and executive vice president for Merica International, a renewable energy company. He also writes a regular column at EnergyTrendsInsider.com.

And he is a big enthusiast of methanol.

In a series of recent columns, Rapier has made a strong case that methanol is our best option for replacing foreign oil. He believes it can be done cleanly and in a way that also reduces carbon emissions. Unfortunately, one of the biggest impediments, according to Rapier, is the huge political momentum behind corn ethanol, which he regards as an inferior fuel. He is also highly critical of the biofuels effort, which has attracted so much attention in the form of venture capital from Silicon Valley.

“You can buy methanol today for around $1 per gallon,” he said. “This is a big, well-established business that does not receive heavy subsidies and government support as ethanol does. On a per BTU basis, unsubsidized methanol costs $17.61 per million BTUs. You can buy ethanol today – ethanol that has received billions in taxpayer subsidies – for $1.60 per gallon. On a per BTU basis, heavily subsidized and mandated ethanol sells for $21.03 per million BTUs.”

Yes, you read that correctly. We are paying 20% more for ethanol, enabled via highly paid lobbyists, heavy government intervention, taxpayer funds and protectionist tariffs than we are for methanol that has long been produced subsidy-free.

Unfortunately, the decision to mandate ethanol consumption while ignoring methanol has been based much more on politics than on the two fuels comparative advantages. “The fact is, methanol simply has not had the same sort of political favoritism, but is in [Rapier’s] opinion a far superior option to ethanol as a viable, long-term energy option for the world.”

Where biofuels are concerned, Rapier states that the effort has always been predicated on the assumption that we will eventually switch from corn ethanol to much more abundant, non-food cellulosic feedstocks such as switch grass. We just have to wait until somebody comes up with a way to break down cellulose. What investors do not seem to realize is that techniques for breaking down cellulose have been around since the 19th century. They just have proved to be too expensive.

But “high costs have never been a deterrent for Silicon Valley entrepreneurs who wielded Moore’s Law as the solution to every problem. In their minds, the advanced biofuel industry would mimic the process by which computer chips continually became faster and cheaper over time. But advanced biofuels amounted to a fundamentally different industrial process that was already over 100 years old. A decade into this experiment it is clear that Moore’s Law isn’t solving the cost problem.”

(Actually, if you read George Gilder’s latest book, “Knowledge and Power,” you would realize that mathematicians such as Claude Elwood Shannon and John von Neumann have determined that information as an entirely separate entity from energy and matter. Moore’s Law applies only to information, not matter and energy.)

Rapier says biofuels will never succeed until the effort at developing them is redirected into producing methanol rather than ethanol once again:

For methanol, we can produce it from biomass via a similar process to how it is produced for $1 per gallon today. There are numerous biomass gasifiers out there. Some are even portable. They do not require high fossil fuel inputs and they utilize a much larger fraction of the biomass. They aren’t limited to cellulose. They gasify everything – cellulose, hemicellulose, lignin, sugars and proteins – all organic components. And if there is also a heating application, the combined heat and fuel or power efficiency of a biomass to methanol via gasification route is going to put cellulosic ethanol to shame. In any case, the efficiency of biomass gasification to methanol is going to put cellulosic ethanol to shame, because it doesn’t have to deal with all of that water present in the ethanol process.

Altogether, Rapier argues that methanol has a much broader potential feedstock, is easier and cheaper to produce and could be manufactured in much larger quantities than corn ethanol. And this doesn’t even consider the possibility of synthesizing it from our superabundant supplies of natural gas. The problem is that “methanol doesn’t have a big lobby and 42 senators from farm states it can count on for perpetual support.”

At Fuel Freedom Foundation, we believe we should pursue all these options – ethanol, biofuels, compressed natural gas (CNG), liquefied natural gas (LNG) and electric cars. They all offer the possibility of reducing the $350 billion we shell out each year for imported oil. But we can’t help but admire Rapier’s observation that the methanol option is greatly underappreciated. The reasons are: 1) the EPA restrictions that make it illegal to use in car engines and 2) the lack of any large constituency such as the farm lobby that stands to gain from it. For that reason alone we’re very encouraged by Rapier’s writings and look forward to more in the future.

Matching ethics and policy: Free markets, subsidies and fuel

There is probably a reason that ethicists rarely sit at the public policy table with respect to transportation fuel. Let’s think about it for a few minutes in the context of a diverse group of econo-ethicists. Let’s match the ethics of presently monopolistic gasoline markets, the huge oil subsidies granted to oil companies and, yes (for environmental folks), the gift of HOV lanes and tax subsidies for those with the “right” cars, with:

  • John Rawls’ ethical guideline that we should respond to the least among us as we would want to be responded to ourselves,
  • Jeremy Bentham’s ground rule that we should seek the greatest good for the greatest number),
  • Karl Hayek’s admonition that the least government is, generally, the best government,
  • Michael Douglas’ statement in “Wall Street” that “greed is good.”

Currently, oil company policy and behavior with respect to gas stations they own, franchise or influence is very restrictive. Even when they allow alternative fuels to be sold in gas stations, companies play the role of Cinderella’s ugly stepmother. Alternative fuel pumps, often, are placed apart from the gas pumps, sometimes out of sight. If they were human, the alternative fuel pumps, legitimately, would have a discrimination case, need psychiatrists and would probably cry a lot because of loneliness. Lacking choices, consumers must pay an extra tariff for gasoline. Prices for gas reflecting little or no competition are arbitrarily high.

Congress supports the oil monopoly at the pump. It has failed to allow methanol as a transportation fuel and has not passed open fuels legislation.

Certainly, an ethical judgment of the current fuel market and those who establish its limited boundaries should be easy to make. You would get an “A” from both Rawls and Bentham as well as from Hayek if you said, “It is rough on the poor who pay upwards of 15-17% of their income for gasoline and it forces extra costs for all of us at the pump.” Finally, it illustrates Hayek’s warning that too much government restrictions limit freedom. Gosh, who ever thought I would agree with Hayek, even in a limited way? Perhaps, however, Mike Douglas wins this one. Greed has been good for the oil companies.

Douglas also wins big on tax subsidies to oil companies. Yet, despite diverse ethical principles, everyone scores well on the granting of tax subsidies to the oil industry. Both liberal and conservative groups, as well as the Congressional Research Service (CRS) agree that many of the tax subsidies are not needed to secure production and distribution. Why, then, does the industry benefit from such beneficence? History granted them favored status; politics and money give them influence at budget-making time.

I was in favor of (and probably deep down still tilt toward) HOV lanes. But, I do have some real doubts about tax subsidies, particularly subsidies not tied to income.

I am worried about the ethics of both. Most of the benefits of HOV lanes and tax subsidies to secure buyers of cars that use them go to relatively affluent income folks. Both are paid for by general taxpayers, including income-deprived tax payers.

Further, most low and moderate-income households face severe budget constraints if they try to buy new so called clean vehicles that are now allowed in the HOV lanes and secure tax benefits. No preference is granted to other alternative fuels like ethanol, and the federal government does not readily allow the relatively inexpensive conversion of existing cars to alternative fuels — methanol, ethanol. States generally do not permit the small number of converted cars in HOV lanes. Lastly, in terms of debits, HOV lanes do increase congestion, when they are not utilized to the fullest, increasing driving costs for every one of us who are not so lucky to own the “right” vehicles.

So HOV lanes and tax subsidies for favored cars do raise ethical questions. They don’t treat the least among us fairly, they are not good yet for the greatest number of us, and they reflect government behavior that reflects a bit of shooting from the hip before tough analysis concerning efficiency, and effectiveness. Let me see, Rawls, Bentham and Hayek would at least be sensitive to the involved ethical issues.

Alright, are you happy, indifferent or sad that ethicists are not at the policy table? Let me know.

The Dennis Prager Show: Breaking Our Oil Addiction With Fuel Freedom

Radio host Dennis Prager speaks to Fuel Freedom Foundation cofounder, Yossie Hollander, about how the organization is planning to end America’s addiction to oil by opening the fuel market to American-made replacement fuels that are cheaper and cleaner. Hollander discusses the alternative fuels, the current regulatory environment and dispels some common myth surrounding the price of oil.