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Bipolar, manic depressive and natural gas

Although a bit bipolar concerning the data, the editors of Real Clear Energy published a useful graph and narrative on Tuesday. It showed the slow, steady increase of natural gas use in the U.S. over the past few years. The graph and narrative noted a 33% increase in vehicle fuel consumption since 2007. More good news for those who support natural gas, given its ability to reduce GHG emissions: the editors reported that the T. Boone Pickens’ “Natural Gas Highway” appears to offer hope that the trend will continue upward. Indeed, the EIA indicates that natural gas will increasingly substitute for gasoline in the truck, bus and rail freight sectors. So much good news! However, don’t open the champagne yet!

Now the bad news! Despite the increasing popularity of natural gas, over the next 25 years, the editors suggest it will only replace or displace 3% of the nation’s oil budget. What a bummer! But, paraphrasing Frank Sinatra (the noted oil man turned singer), when you have “your chin on the ground, there’s a lot to be learned, so look around… [we’ve] got high hopes…all problems just a toy balloon, they’ll be bursted soon, they’re just bound to go pop”…cause we’ve got high hopes.

Thanks Frank. Now, back to the editors. They correctly advised their readers that we, as a nation, will “never make any real progress until we start using liquid methanol and ethanol in regular passenger cars.” I assume the editors mean that we should increase the amount of ethanol in our cars. All of us now use at least 10% ethanol when we fill-er-up. Some of us, if we are lucky and have a flex-fuel vehicle (over 17 million of us do, but likely don’t know it), can use E15 and E85, assuming we can find a station with the necessary pumps. With the exception of a few states, such pumps are relatively few and far between. Sales of E15 and E85 constitute only a small share of the fuel market.

Why? Neither ethanol not methanol is a perfect fuel. Yet, study after study indicates that, on most dimensions, they are better than gasoline. Both are cheaper, both are generally environmentally superior and both emit less GHG emissions. Competition with gasoline from both would allow the U.S. to become less dependent on oil imports and add to our nation’s security. Over time, opening fuel markets to consumers by adding choice would likely help stabilize, and even reduce, the price of gasoline and limit its frequent nonstructural cycles.

As a former dean of a major School of Public Policy, I would gladly supervise a Ph.D. thesis or an “independent” student study concerning consumer decisions relative to the purchase of gasoline vs. replacement fuels, particularly ethanol and the acquisition of new or the conversion of existing cars to FFV status. The student could start off with some reasonable, contextual assumptions and/or hypotheses. For example:

1. Consumer decisions about alternative fuels often must be speculative, given the fact that oil companies, most times, prohibit their franchises from adding a replacement fuel pump or require them to put the pump in a hidden sidebar location.

2. There are sufficient anecdotes that price management is also a barrier to the development of competitive fuel markets. Data descriptive of the life cycle of ethanol suggests that costs for production, distribution and sales would permit ethanol to compete well, price-wise, with gas. However, anecdotes suggest that producers, distributors, blenders and retail stations — including independent stations — often raise or lower the price of gasoline relative to replacement fuels, which often impedes real consumer choice. There are no angels here. Retail stations carrying E85 have been known to raise its price to capture extra revenue.

3. Although the gap is narrowing in light of technological improvements, replacement fuels, including ethanol, get less mileage per gallon than gasoline. But, as noted earlier, the costs at the pump, if recognized in the price per gallon, generally work out in favor of ethanol. However, consumers find the calculations difficult to make without the addition of simple signs at the pump, a willing and patient station attendant, or an app in your hand. As a rule of thumb, replacement fuels should be at least 22% cheaper than gasoline to cement the deal for a knowledgeable consumer.

4. Despite EPA studies and approvals to the contrary, groups mainly associated with, supported by or historically favorable to the oil industry have planted the worry seed in car owners’ minds. E15 and, likely E85, they say, will damage engines that are actually built to use both. Saying it often enough has likely made many consumers consciously or subconsciously avoid replacement fuels like ethanol. The best answer to bad speech — whether written or oral — is good speech. Yet, only a handful of writers, editors, TV and cable anchors have responded to negative stories and rumors about replacement fuel safety.

I could go on. But I am over my word limit. Thank you, Real Clear Energy, for making me manic depressive — my friends would say it’s a rather normal state. I hope the brief comments by your editors will be discussed over and over again by others and stimulate strategies to increase the use of natural gas based ethanol, and someday soon, the legalization of methanol.

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Let freedom ring: Oil companies, capitalism and fuel choice

It’s a free county, ain’t it? Americans have many choices that are denied to citizens of other less-fortunate nations. But we forget how many decisions are made for us, sometimes out of necessity, such as paying taxes; sometimes out of greed, such as the monopolistic actions of oil companies in denying many Americans the ability to purchase alcohol-based fuels at their corner gas station. Try it someday! On your way home from work, on your shopping trip to your friendly supermarket or on your way to see a movie at your favorite theater, make a stop for fuel at a gas station. Make sure to have some gasoline in your tank, because it likely will take you a lot of time to find a gas station that sells E85 or even E15.

Now, I went to Harvard Law School for four days, before I decided that there were too many lawyers around and memorizing case studies was not my forte. But Harvard provides significant value added, apart from being near Harvard Square and Boston. I was exposed to terms and content related to antitrust, restraint of trade, collusion and monopolies. Now, I didn’t stay long enough to know whether those concepts applied to oil companies that restrict consumer choices of alternative fuel. Probably not, because I am sure, by now, one of my Harvard colleagues would have filed a well-reimbursed case to break open the fuel market to options like ethanol, methanol and more. But whether legal or not, oil companies deserve their comeuppance for limiting many of us who, too often, are required to use more expensive, environmentally harmful gasoline, instead of existing, safe, alternative fuels.

How do they do this? Well, if you are a gas station owned or franchised by an oil company, your contract and rules related to behavior often prevent you from adding a pump or adding to an existing pump to sell E15 or E85. As relevant, since oil companies generally require the stations they own to buy fuel from them, and since they don’t sell E15 or E85, adding a pump would be akin to waiting for the hereafter (and acting on faith that you will get there).

Wait, there is more! Every now and then an oil company wants to publicly show it is a bit beneficent (for image purposes), but don’t hold your breath with respect to proof that image and reality are the same. Sure, you might find an alternative-fuel pump near the rear side of the garage proximate to the men’s room, or, if you are lucky, on the side of the station near the air pump. Most oil-company-owned stations and franchisees are generally precluded from putting an alternative-fuel pump under the covered island or space out front. They also face restrictions on advertising alternative fuels as an available product and oil-company pricing limits competition from alternative fuels.

Congress has refused to enact open fuels legislation, which would require oil companies to open up their gas stations to other fuels. Ongoing efforts by public and private sector advocates, as well as nonprofit groups, to encourage policies that would convert older cars to flex-fuel vehicles and to encourage Detroit to build more FFVs could well lead to a large consumer market for alternative fuels and generate a positive market reaction among independent gas companies and, perhaps, even some smart oil companies. While I have been wading through the pros and cons of allowing oil companies to increase exports to other nations, I do believe that if increased exports are in the nation’s future, they should be approved only if the oil companies agree to require their stations and franchises to offer alternative fuels in a primary space alongside gasoline. A bit of tat for tat is in the public interest. Let freedom ring for consumer! Let capitalism mean competition for gasoline and alternative fuels at your nearby gas station! Oh, I forgot, alternative fuel station!

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Outnumbered 100-to-1, Methanol Is Upbeat

“Why is it that we hear every day some new story about Elon Musk’s electric car, about Clean Energy Fuel’s efforts to build a CNG highway, or about some laboratory breakthrough that is at last going to bring us cellulosic ethanol, yet with methanol now cheaper than gasoline, you still never hear anything about it?”

That’s the question I posed to the three-member panel while serving as moderator for the wrap-up session at the 2014 Methanol Policy Forum in Washington last week.  The sponsors were the Methanol Institute, the Institute for the Analysis of Global Security (IAGS) and the Energy Security Council.

Anne Korin, co-director of IAGS, who earlier had moderated an even bigger panel that included former U.S. Senator J. Bennett Johnston, former National Security Advisor Robert McFarlane and former Ambassador to the European Union Boyden Gray, had a very unusual answer.  “If I may be permitted to be a bit cynical here,” she said, “I think the reason may be because methanol doesn’t require any subsidies.”  The implication, of course, is that those who come to Washington begging for money receive a lot more attention from Senators and Congressmen than those who don’t.

The question of politics versus economics had been raised at the outset of the daylong conference by Korin’s co-director at IAGS, Gal Luft, in his opening remarks.  “We’ve all heard this business about the circular firing squad and how the various alternatives to foreign oil shouldn’t be fighting each other,” he told the audience of about 400.  “But you have to acknowledge the importance of what goes on in Washington.  You can’t just talk about production you need money.  If you’re not at the table, that means you’re probably on the menu.

Luft showed a chart illustrating that while corn ethanol production exceeds methanol production by a factor of only 5-to-1 (14 billion gallons/year as compared with 2 bg/yr), the amount of money spent lobbying for ethanol is 50-to-1 (less than $100,000 vs. $5 million).  “When you add in the politics of the farm belt, it’s probably closer to 100-to-1,” he added.

So was anyone discouraged?  Not at all.  The news from industry executives is that methanol production is ramping up everywhere due to the bonanza of the fracking revolution.  It seems like only a matter of time before the idea of replacing large portions of our fuel imports with domestically produced methanol begins to command attention.

“In the past decade we closed down five methanol plants in the U.S. and moved them all to China,” John Floren, CEO of Methenex told the gathering of 400 at the Capital Hilton.  “The price of gas had become just too high.  Now we’ve moved two plants back from Chile and are looking at a third relocation.  We’ve got 1000 people working on our Louisiana site.  The chemical industry is starting to build as well.”

Tim Vail, the CEO of G2X, another methanol producer, had a similar take.  “The U.S. is a great place to invest right now,” he told the audience.  “The argument was always that you had to go to the ends of the earth to build methanol plants because that gas wasn’t available here.  Now all that has changed.  Our big worry is labor shortages but the construction industry is responding to our needs.  It takes away a lot of anxiety about having your assets appropriated by other countries.  China may seem like a good place to invest, but can you really trust the rule of law?”

Philip Lewis, chief technology officer of Zero Emission Energy Plants (ZEEP) was equally upbeat.  “I think the whole shale thing is being underestimated,” he said at the close of the morning session.  “It’s another industrial revolution.  And it won’t happen anywhere else because we have the thing that makes it work – private ownership of the resource.  In France, the government owns all the mineral rights and no one wants drilling on their land.”

But governments do have control over other things in this country and there was some questioning of whether federal agencies will be receptive to methanol as a fuel substitute or additive.  Matt Brusstar, deputy director of the EPA’s National Vehicle and Fuel Emissions Laboratory, claimed that his agency had been in the lead of methanol development for 30 years.  “Charlie Grady, who was in our department, was a big supporter of methanol,” said Brusstar.  “He even wrote a book about it.”  (Unfortunately, a Google search for Charlie Grady and methanol turns up no mention of Grady or his book.)  Patrick Davis, the director of the Fuel Cell Technologies Office in the Department of Energy, was even less encouraging.  “The Office of Science does not currently have any projects to create methanol as an end fuel,” he said.  “It could take a decade to sell enough methanol-compatible vehicles before a widespread distribution network would be feasible.”

When I queried Brusstar about Robert Zubrin’s documentation of the multi-thousand-dollar fines that the EPA is imposing for unauthorized conversions of engines to methanol, [See “Making the Case for Mars and Methanol,” Feb. 11] several government officials, plus Fuel Freedom Foundation director of research Mike Jackson, argued that faulty conversions can increase air pollution.

Despite the notable lack of enthusiasm from government agencies, however, there was a strong sense among the rank-and-file that methanol may be about to find a place in the sun.  “This is a much bigger crowd than we’ve ever had,” said one veteran of previous conferences.  “It’s a very exciting time for methanol.”

 

 

 

 

 

 

 

 

 

 

 

 

 

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What Would It Take to Achieve Energy Independence?

With all the talk about “energy independence” and “Saudi America” going around, you might feel like we are well on our way to solving our energy problems.  However, Eyal Aronoff, co-founder of Fuel Freedom, has produced a study that casts doubt on all of this optimism.

With the help of researchers Nathan Taft and Gal Sitty, Aronoff has prepared a position paper accessible here. His arguments are impressive and his conclusions definitely worth consideration.

Aronoff begins by asking the question: “What constitutes energy independence?”  He answers that it can be defined in three different ways:

1)    We produce more domestic energy in terms of BTUs than we consume.

2)    We no longer have a negative balance of trade with regard to energy and therefore don’t have to send money to other countries.

3)    We have enough spare capacity to become a price setter on the world market; no longer susceptible to unpredictable swings in price

The third goal is pretty ambitious but let’s look at the first two and see if they are in fact achievable.

Aronoff notes that in terms of BTUs, we are already 80 percent independent.  That’s a figure from Daniel Yergin, director of Cambridge Energy Research Associates and one of the country’s leading energy experts.  Yergin projects that if current patterns persist, we may be 90 percent efficient by 2035.

That doesn’t help much though, argues Aronoff.  The problem is that all those BTUs are not interchangeable. We do produce plenty of energy from coal and nuclear sources– and relatively cheaply at that.  The big problem is that none of this is stuff can be used to power our automobiles.  Oil still leaves us vulnerable, and that’s where things get expensive again.  “Coal can produce a million BTUs for $2.60,” Aronoff notes.  “Natural gas is $3.50 per mBTU but gasoline at $3.43 a gallon is $30 per mBTU – about ten times as much.”

To the third point about achieving energy independence, all this talk about our becoming “Saudi America” is not likely to pan out.  As Aronoff shows, even if we are able to increase our output to 12 million barrels per day (mbbd), higher than it was in 1970, we will still be far short of our 18 mbbd in consumption.  Talk about how America has surpassed Russia and Saudi Arabia in energy output lumps oil and natural gas together.  That still leaves us with the problem of conversion and direct use.  As far as oil is concerned, we are still tethered to a world price.

All this leaves us still paying upwards of $400 billion a year for imports.  This dynamic is unlikely to change.  Using projections from the Energy Information Administration, Aronoff shows that over the next 20 years, our oil deficit is not likely to drop below $350 billion annually and by 2035 it will be higher than today.  This is because the OPEC cartel is still able to impose a monopoly price.  If we import less, they just push the price up a little more, which leaves us paying the same amount.

So what to do? Aronoff argues that we will not become truly “energy independent” until we can reduce our consumption to the point where we become a “swing producer;” able to act as a price-setter on the world market ourselves.  He suggests a five-point plan:

1)    Replace 4 million barrels of imported oil by producing methanol and other oil substitutes using natural gas as a feedstock.

2)    Replace another 2 mbbd with alcohol made from biomass and trash.

3)    Deploy electric cars to replace ½ million bbd.

4)    Make improvements in fuel efficiency for another ½ mbbd reduction.

5)    Continue changing driving habits in order to save an additional 1 million bbd.

That plan would reduce our consumption by 8 million bbd and free us from imports.  “Doing this will deflate the power of the OPEC cartel to set the price of oil,” Aronoff concludes.  “This is the only way that America can insulate itself from world price shocks and attain true energy independence.”  It is certainly a plan

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Bio-processing of Gas-to-Liquids: A Report Card

If finding microbes that can convert cellulose plant material into ethanol is of the holy grails of biofuels, an equally elusive goal is using microbes to make liquid fuels out of natural gas.

Almost everyone agrees that the best way to apply our now-abundant natural gas resources to transportation would be to convert it into a “drop-in” liquid fuel that would fit easily into our current gas-station infrastructure. T. Boone Pickens’ CleanFuels Corp. and others are trying to supply compressed natural gas to diesel trucks, but the effort has obvious impediments and will require a whole new infrastructure.

Much easier would be the direct conversion of natural gas to methanol, the simplest alcohol, which is now produced at a rate of 33 billion gallons per year for industrial purposes. But methanol still suffers from its Prohibition-Era reputation as poisonous “wood alcohol” (although gasoline is equally poisonous) and has run into stiff EPA regulations on converting contemporary engines to burn alternative fuels. (See “Making the Case for Mars and Methanol”) And so the vision has arisen that a golden gas-to-liquids pathway can be carved by the nation’s laboratories working with nature’s existing microbial stock.

A year ago, ARPA-E, the fast-track research funding agency modeled on the Defense Department’s Advanced Research Project Agency, announced a new initiative: REMOTE – the Reduced Emissions Using Methanotrophic Organisms for Transportation Energy.  Methanotrophic organisms are microbes that feast on methane, the simplest carbohydrate, and can convert it into more complex molecules such as butane or formaldehyde, which can in turn be synthesized by other microbes into butanol, methanol or other liquids that can be cleanly burned as fuels.  As the agency wrote in its Funding Opportunity Announcement (FOA):

The benefits of converting natural gas to liquid fuels for use in transportation have long been recognized. First, the existing transportation infrastructure is based on liquids, and such fuels can be conveniently “dropped in” without substantial changes in vehicles. Second, liquid fuels from methane have lower emissions than petroleum-based fuels. Liquid fuel produced from methane decreases emissions by up to 50%, compared to unconventional petroleum, and decreases particulate matter by up to 40%, compared to combustion of conventional diesel. Further, methane is responsible for 10% of the nation’s greenhouse gas emissions (on a CO2 equivalent basis), in part because its global-warming potential is 20 times greater than that of CO2 over a 100-year period. Technologies capable of capture and conversion of methane will help mitigate the global-warming potential of these emissions.

There are several interesting things going on here. First, ARPA-E has chosen the goal of reducing emissions rather than reducing dependence on foreign oil as the motivating force of the project. Alcohols do burn cleaner than gasoline. In fact, the whole California effort that put 15,000 methanol cars on the road in the 1990s was aimed at reducing air pollution, not replacing oil imports. This may satisfy environmentalists, who tend to see natural gas as just another fossil fuel and would prefer to pursue cellulosic ethanol in order to remain “carbon neutral.”

Second, although the chemical synthesis of methanol, butanol and other potential fuels is already economical, employing biotechnology gives the whole plan a “green” tinge. Chemical processes are regarded as “old economy” and unlikely to attract investment from Silicon Valley and other centers of venture capital, whereas biotechnology has a New Age sheen to it. Already ARPA-E has handed out $20 million to small startups and others have been forthcoming.

Finally, by latching onto natural gas flaring, ARPA-E is addressing a problem that is gaining more and more attention, particularly the publication of a paper in Science last week claiming that will be no climate benefits in switching from diesel and other crude-oil-based fuels to natural gas derivatives. Indeed, flaring is now said to consume the equivalent of one-third of America’s consumption of crude oil. Obviously, anything that addresses this will get attention.

So how are thing going?  Last week Robert J. Conrado and Ramon Gonzalez, two researchers in the Department of Energy, issued a progress report in Science. Basically, the news is that while there’s still lots of optimism about the idea, nothing much has been accomplished yet.

Conrado and Gonzalez note that the process of biological conversion involves three steps:   1) the “activation” of the stable methane molecule so it becomes chemically receptive; 2) the conversion of methane to formaldehyde and other intermediates; and 3) the synthesis of these intermediates into alcohols and other fuels through bioreactors. All three steps need improvement. “To access small-scale and time-varying resources [i.e., flared gas at remote wells], process intensification leading to an order-of-magnitude increase in volumetric productivities is needed and will require technological breakthroughs in [all] three areas.”

One institution that is working on the problem is the Sandia National Laboratory in New Mexico. Blake Simmons, manager of the lab’s biofuels and biomaterial science group, says the challenges are daunting but he remains optimistic. “There have been plenty of investigations into this in the past since there are plenty of organisms in nature that thrive and multiply off natural gas,” he said in an interview with Phys.org. “The problem, though, is that they exist in unique, tailored environments and are typically very slow at what they do. People have been trying to express this class of enzymes for a couple of decades, so this won’t be a slam dunk. But we have the collective experience and capabilities at Sandia to figure it out.”

And so the search for a clean, green conversion of methane to a liquid fuel goes on. In the meantime, however, it might be worth opening the door to methanol and other chemically synthesized products just as a placeholder.

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Can the Methanol Revolution Start on Indiegogo?

Indiegogo, the crowd-funding site normally populated by documentary filmmakers may seem like an unlikely place to try to launch the methanol revolution. But Scott Morris is ready to give it a try. shutterstock_154960103

The Alabama native has experience in driving and servicing racing cars, so he knows the role that methanol has played in places such as Indianapolis, where the Indy 500 cars raced on methanol since the 1960s until finally pressured recently to give it up by ethanol producers.

“If racing cars going 200 miles per hour can run on methanol, why can’t ordinary consumer vehicles?” asks the (tk-year-old native of Alabama.  “The government has been shoving various alternative fuels down the public’s throat for some time but it obviously isn’t working,” he says. “We’ve got something here that’s going to be driven by consumer desires and nothing else.”

That “something” is a plan to open methanol stations around his native Montgomery with the promise of a free tuneup that will allow drivers to use methanol without any problems, a warrantee on the converted engine, and a chance to fill up at a methanol pump for a cost of about half the price of a gallon of gasoline.

“Ultimately, our business plan is shaped around the idea – give the consumer what they want,” says Morris. And what they want is a cheaper fuel that’s good for America and not sending dollars overseas to countries that could be funding terrorism.”

What Morris has discovered as a car mechanic and fledging entrepreneur is what a lot of experts also recognize – that there’s a huge market opportunity in turning our abundant natural gas supplies into a liquid fuel that could replace gasoline. All it would take is a little engine adjustment and a little initiative.

“What we’re doing is converting the customer’s car to methanol for free,” says Morris. “Then we give them a warrantee against any damage. [This is opposed to the reluctance of the auto companies, which are saying they will not honor warrantees on cars built before 2001 if they use methanol.]  “Then they can fill up at one of the methanol stations in Birmingham we’re going to open up. But if they can’t find a methanol station, they can still use gasoline.

“To me that’s the free market,” he adds. “Give the customer a choice and see which fuel wins.”

Morris is confident that at a per-mile cost that is 40 percent lower than gasoline, methanol is ready to win the day. But he needs some help in getting started.

“We already have the support of one of the nation’s largest methanol producers,” he says. “They’ve pledged $200,000 but we have to match it with $300,000 of our own money.” That’s where Indiegogo comes in.  Morris has posted under the title, “Kiss Gasoline Goodbye.”

“There is a fuel that costs as much as 40 percent LESS per mile driven and can easily replace gasoline, without requiring you to buy a new car or pay to have yours converted, and can be sold at the gas stations we already have in America,” he tells prospective contributors. “Methanol is that solution. Methanol can be made form almost anything . .. Currently natural gas is the most viable feedstock and will be for many years to come.  But coal is a close second, and we have a LOT of coal. Between natural gas as coal, we have enough to fuel every vehicle in the USA for the next 400 years!”

Unfortunately, Crimson Fuel has a long, long way to go. With 33 days left on its Indiegogo campaign it has still only raised $100. Beyond that it will have to deal with the lack of approval from the Environmental Protection Agency in using methanol in gasoline engines.

In truth, Morris’s campaign is pretty quixotic at this point. But he’s recognized all the advantages of methanol and has a sound business plan. If nothing else, it’s a way of getting out the news. With all its advantages, the methanol revolution is bound to start somewhere. Birmingham, Alabama just might be the place.

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Altruism Aside, Is Ethanol A Competitive Alternative Fuel?

I was a bit under the weather this past weekend. I thought it would be a good time to catch up on some reading; something assumedly simple- the relatively recent literature concerning the ability of ethanol, particularly E85, to compete with gasoline and the capacity of consumers to make rational decisions in their choice of alternative fuels.

By Sunday night, apart from watching the Denver Broncos happily beat New England on TV, and the amusing dialogue and extensive media time generated by Seattle’s cornerback, Richard Sherman, concerning his athletic and his academic prowess; I spent about 10 hours reviewing several well cited pieces concerning the price relationship between ethanol and gasoline. I also read the intense, often seemingly less than civil debate in papers authored by two professors at Iowa State (Dermot Hayes and Xiadong Du)  and two at MIT (Christopher Knittel and Aaron Smith) concerning methodology associated with defining the relationship between ethanol and gasoline prices. (The Iowa and MIT faculty vigorously attacked each other, sometimes personally, over mistaken attribution of research funding sources. More important, the Iowa folks generally argued that their data suggested a link between ethanol production and the price of gasoline. They indicated that, as ethanol production increased the price of gasoline decreased relative to the price of crude oil.

The MIT folks poo poo’d their distant colleagues’ findings. They indicated that their empirically based models illustrate only a statistically insignificant set of relationships concerning ethanol, gasoline and crude oil prices. They also opined that the Iowa writers misapplied the crack ratio –the relationship of gasoline to crude oil prices- and did not use or mistakenly used the crack spread ratio (the weighted average of the gasoline and distillate products produced by a barrel of crude oil minus the cost of crude). Put in another way, what the Iowa writers recorded was correlation not causation. (I know the etymology but we need to help the economists among us find a better set of terms than crack spread and crack ratio. For a minute, I thought that the texts described a line up at a police station or FBI statistics about drug use.)

What can we learn from recent literature about the effect of ethanol production and gasoline prices at the pump?

1. Most independent experts, not affiliated with advocacy groups, seem willing to support as fact that increased ethanol use, at times, will lower the price of gasoline or slow the increase in the price of gasoline. But the caveat is “somewhat.” They disagree on how much on either side of zero. The recent conventional wisdom, stimulated by the Iowa study that ethanol has and likely will reduce the wholesale price by $.89 cents to $1.09 per gallon seems wrong. It appears to reflect an overstatement based on analyses and models that do not accommodate the many complex variables affecting price and costs (e.g. costs of refining, rapid changes in the costs of corn, the costs of distribution, the lack of infrastructure, the unanticipated increases or decreases in costs of crude oil based on investor speculation, escalation or de-escalation of tension in Middle East, uncertain federal policy, etc.). If I were a betting person, I would place my bet on Knittel and Smith’s conclusions that, over time, the price impact of ethanol at the pump on gasoline prices is likely marginal at best.

2. However, to be fair, some scholars and practitioners in the energy business believe that if gasoline is blended with a larger proportion of ethanol (e.g. E85), the price of a gallon of fuel could well drop, given the idiosyncrasies of the present market.  If this occurs and the reduction appears to consumers as beneficial, a number of observers think that owners of flex fuel vehicles (new or converted) could be enticed to switch to E85. What they generally don’t know, is the cross over point where alternative fuels like E85 become a viable option to drivers because the prices seem to be a good deal. A smart and astute participant in a recent forum on alternative fuels indicated that “people drive to COSTCO or Wal-Mart to save 5-8 cents a gallon on gasoline. Why wouldn’t they switch to E85 blends, if they reflected similar or indeed larger savings and fuel stations were accessible?”

Maybe they would, maybe they wouldn’t! If the price is low enough, many drivers will likely engage in personal opportunity costing. But what is low enough? Getting gas at Wal-Mart and Costco is different from getting E85. Gas is a familiar product to most drivers. Consumers of E85 will have to surmount doubts over product safety, stimulated, I believe erroneously, by groups such as the AAA. Further, because E85 will get fewer miles per gallon, drivers will probably think about perceived price savings in the context of miles per gallon and extra trips to the fuel station (If they forget to do the personal math, they will be reminded to do so by oil companies).

3. Uncertainty exists concerning how much consumers will pay for ethanol based on personal preferences or commitments to societal well-being, what I call the altruism thing.

As one author put it, “ …the demand for ethanol (E85) as a substitute (E10) is sensitive to relative fuel prices: a  $.10 per gallon increase in ethanol’s price relative to gasoline leads to a 12-16% decrease in quantity of ethanol demanded. Price responses are considerably smaller, however, than they would be if households had identical willingness to pay for ethanol as a gasoline substitute and… results imply that some households are willing to pay a premium for ethanol.”

Why? Maybe to improve the environment, provide support for farmers, to express concern over national security, etc. A recent report from Brazil indicates that some Brazilians are willing to pay more for alternative fuels because of what seem to be altruistic reasons. Before we say hallelujah, I should note that we don’t really know the numbers seeking salvation. They are not your average household but rather as one economist notes they are likely “marginal” households in terms of numbers. Further, several respected survey firms in the U.S. doubt that goals related to the larger community or nation, even if consumers articulate them in their living rooms, will overcome large differences between the price of E85 and gasoline, if they occur.

Similarly, altruism or civic values will not overcome fear of engine damage or the need for relatively long trips to fuel stations to secure alternative fuels. The pews, at least until we know more, probably will remain filled with a proportionately large share of guilty drivers on Saturday or Sunday.

The Fuel Freedom Foundation is involved in three state pilot projects aimed at converting existing cars to flex fuel cars; cars that will permit their owners to use natural gas based fuel such as ethanol and, when it is legal, methanol. Hopefully the pilot projects, combined with strategic federal, state, foundation and private sector supported research, will expand knowledge concerning consumer decisions and variables such as the importance of price differentials, altruism, distance, access, etc.

A study supported by Fuel Freedom Foundation recently completed by the respected independent Resources for the Future optimistically noted that “…we see alternative pathways for bring a lower-cost E85 to the pump. If and when ethanol produced by the newly patented, NG-driven Celanese process becomes available, owners of FFVs could realize substantial cost savings, up to $0.83/gge in 2015. If and when cellulosic ethanol becomes available at projected cost for full-scale productions, owners of FFFs could realize similar cost savings.”

Sleep easy! Good Times are coming for the nation and the consumer.

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Is E85 the Solution to the Ethanol Debate?

Professor Bruce Babcock, of the Center for Agriculture and Rural Development at Iowa State University, believes he has a simple solution to the corn ethanol mandate problem – encourage people to fill their tank with fuel that is 85 percent ethanol instead of the current 10 percent.

“There may be a few good reason for cutting back on our consumption of corn ethanol,” says Babcock, who holds the Cargill Endowed Chair for Energy Economics. “But the reason the EPA is giving sure isn’t one of them.”

In case you haven’t been following, the Farm Belt is in an uproar over Environmental Protection Agency’s recent decision to cut back on the ethanol mandate from 14.4 billion gallons to somewhere around 13 billion for 2014. Iowa Senator Chuck Grassley blames “special interests” – meaning the oil companies – while Governor Terry Brandstat has talked darkly about a “war on corn.”

But dissatisfaction with the corn ethanol mandate extends well beyond the oil companies and the refineries. In December a coalition of liberals and conservatives – led by California Democrat Diane Feinstein and Oklahoma Republican Tom Coburn – introduced a bill to do away with the corn mandate altogether. “I strongly support requiring a shift to low-carbon advanced biofuel,” said Feinstein, “but corn ethanol mandate is simply bad policy,” “This misguided policy has cost taxpayers billions of dollars, increased fuel prices and made our food more expensive,” added Coburn.  “The time has come to end it.”

What’s the problem?  Well, the mandate – adopted by Congress in 2007 at the behest of President George Bush, Jr. – has fallen out of sync with the “blend wall” – the theoretical 10 percent mark where ethanol starts harming car engines. The mandate pushed up to 14.2 billion gallons last year while gasoline consumption actually dropped to 135 billion gallons last year from 142 billion gallons in 2007, pushing it way past the 10 percent benchmark.

Faced with this dilemma, refiners were forced to buy “credits” in the form of “renewable identification numbers (RINS),” which give them bookkeeping credit for consuming ethanol. But the pressure on the market pushed the price of RINs from pennies per gallon to $1.40 last August, pushing up the price of gasoline. Hence the rebellion and President Obama’s apparent instructions to the EPA to cool it on the mandate for 2014.

Professor Babcock says this is all a result of the artificial barrier limiting ethanol content to 10 percent. “E85 [a blend that is 85 percent ethanol] is selling all over Iowa at 15 percent less than gasoline,” says Babcock, who is originally from southern California. “That actually makes it a little more expensive than gasoline because you only get 80 percent of the energy.  But last August E85 was selling 25 percent below gasoline and it was a bargain.  The notion that cars can’t tolerate mixes of more than 10 percent ethanol is purely fictional.”

The 10 percent blend wall is based on the premise that putting more ethanol in your tank can harm your engine. Several years ago the auto companies have announced they will not honor warrantees on older cars that use more than 10 percent ethanol. The EPA has approved E15 (15 percent ethanol) for cars built after 2001, even doing elaborate tests to prove it could work, but no one has paid much attention. “The automakers say, `We didn’t build those older cars for E15 and we don’t want them running on E15,’” says Babcock.  “As far as they’re concerned, that’s the end of it.”

Without much fanfare, however, both Ford and GM are now manufacturing close to half their cars for “flex-fuel” – capable of burning any mix of gasoline and ethanol – or even possibly methanol, which has not been tested yet. “There’s a little embossed insignia on the back of the car but it’s easy to miss,” says Babcock.  “There are now 17 million flex-fuel cars on the road, although most people who have them don’t even realize it.”

Adjusting older vehicles to flex-fuel isn’t that difficult, either.  On the oldest models, it involves only replacing a few rubber fuel lines with aluminum, which a good mechanic could do it for less than $200 – if it weren’t illegal.  On newer models it requires only an adjustment to the software.  New flex-fuel cars sell for the exact same price as ordinary gasoline vehicles.  “GM has done a really good job of figuring out flex-fuel technology,” says Babcock.  “All their trucks are now designed for it. Chrysler is coming around as well but the Japanese cars have stayed away from it.  They’re putting all their bets of hybrids, hydrogen and electric vehicles.  They’re not at all interested in biofuels.”

Babcock’s proposal, outlined in a paper released earlier this month, is for the EPA to sanction E85 so it can start selling somewhere else besides Iowa, where ethanol remains popular and corn is aplenty. “It just doesn’t make sense to have all the stations concentrated in the Midwest,” says Babcock. “The real place for these cars should be on the East and West Coasts.”

Who would pay for upgrading all these stations to handle E85?  Babcock’s answer is the oil refineries. “The cost would be about $130,000 per station or 20 cents for each additional gallon they could expect to sell,” he says.  “If the price of RINs becomes too high, the refiners will have to do something.  People call me naïve to think they will spend all that money building new pumps but they’re already done it in several instances. I’m not some wide-eyed academic economist.”

But the refineries do have another option and that is to go to Congress and the President and insist that the mandate be lowered – which is what they’ve just done. And with a rebellion against ethanol brewing in the non-farm states, it isn’t likely the mandate will be reinstated any time soon – at least until the Presidential candidates start trooping to Iowa again.  On the other hand, Babcock’s proposal for approving E85 so that the 17 million flex-fuel cars already on the road can start using it makes perfect sense.

At this point, the “blend wall” may more of a mental barrier than a physical one. Once we break through it, ethanol, methanol and a lot of other things become feasible.

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Ford Leads the Way

The Ford Motor Company stepped front-and-center in the effort to fine alternatives to high-priced imported oil last week with the announcement that it will offer compressed natural gas (CNG) tank as an option in the F-150 pickup truck, its most popular brand that currently sells 700,000 models a year.

Now it won’t come cheap. There’s a $250-$350 charge for the vehicle to come “prepped” from the factory. That means putting hardened valves, valve seats, piston and rings into the V6 engine. But after that, there’s a $7-9000 charge for installing the CNG tank in the cargo bay – made considerably more expensive than in Europe because safety standards are interpreted in a way that makes them much more expensive. This lifts the showroom price from $24,000 to around $32,000. That’s a big chunk but Ford swears you’ll make it back in three years by substituting fuels.

With the price of gas at around $3.80 per gallon and the oil-equivalent of natural gas at around $1.20, those savings should add up fast.  Of course all this assumes that the price differential won’t narrow to its traditional level, but that doesn’t seem very likely now. Electrical plants have shown a tendency to move quickly back to cheaper coal if the price of gas rises, but the difference between the crack spread and the spark spread seems to have separated permanently, much to natural gas’s advantage.

All this is good news for those looking to substitute some of our abundant natural gas for foreign oil in our transport sector.  In fact, there’s a lot of progress being made right now:

Clean Energy Fuels of Newport Beach, CA already has a network of 360 natural gas fueling stations at truck stops along Interstate highways and is trying to build a complete national infrastructure.  NGV stations cost $750,000 a pop but Clean Energy is looking at the long term.  The ready availability of filling stations will help spur the conversion of giant 18-wheel diesel haulers, which most people see as the ripest target for conversion.

Heavy-duty fleet vehicles are making rapid progress.  Buses and garbage trucks are in the forefront. Eight out of ten new vehicles bought in 2012 by Waste Management, the leader in the field, were powered by natural gas.

There are now 120,000 gas vehicles on the road in the United States, according to Natural Gas Vehicles of America, the trade group.  Unfortunately, this constitutes only a tiny fraction of the 15.2 million NGVs worldwide. Iran, Pakistan and Argentina, improbably, are the leaders. We’re behind in making the transition, but there’s plenty of room to catch up.

In a report issued in June, Citi Research estimated that one-quarter of the world’s present consumption of oil could be replaced by natural gas under present conditions. More than 9 million barrels per day could be replaced in truck transport, 2 million of these in the US. Another 3 million b/d could be opted out in marine transport and 200,000 b/d in railroad locomotives.

All this would be fairly easy to transact since it involves large commercial organizations with centralized decision-making.  Sooner or later, however, this approach is likely to run up against limits.  The stumbling block will be the vastly more decentralized system of private automobiles, which still consumes 60 percent of our oil and involves a car in every garage and a gas station on every other corner. Here the problem of building an infrastructure and achieving widespread distribution is much more difficult.

The problem comes because reformers are viewing natural gas as a fuel instead of a feedstock. Compressed natural gas (CNG) and liquefied natural gas (LNG) are the most readily available options – and both are legal – but in the end they are going to have their limits. It will make much more sense to use methane as a feedstock for the manufacture of liquids, methanol in particular.  These will be much easier to transport and will substitute for gasoline in current car engines with only minimum adjustment – nothing like the $8000 required for the F-150. Valero has just opted to build a $700 million methanol manufacturing plant in St. Charles, Louisiana in anticipation of this demand. All depends on whether the Environmental Protection Agency decides to give a go-ahead to use methanol in car engines. The matter is pending.

So the effort to use our abundant natural gas resources to reduce our dependence on expensive, unpredictable and unreliable foreign sources of oil is making headway. Ford’s decision to equip the F-150 with CNG is a beginning. But there’s more to come.