Utah governor: Alt-fuels have to stand on their own

Utah Gov. Gary Herbert believes in an “all of the above” approach to energy. That means renewable fuels have to stand on their own merits and compete against established transportation fuels like oil and natural gas.

“We don’t think government should pick winners and losers; we think consumers should pick winners and losers,” Herbert said Thursday at the fourth annual Governor’s Utah Energy Development Summit in Salt Lake City. “The competition between the greener sources of energy and the traditional sources of energy are acute and demanding. What I see is, because of the competition between the various sources of energy, those that are greener and cleaner are having to find ways to compete and be economic.”

That also means that there’s pressure on the oil and gas industry, too, to get cleaner. Herbert, a Republican, said energy must achieve three objectives: sustainability, affordability and less dirty.

“There is a raised sensitivity in our society to make sure we’re responsible stewards of our home, the Earth.”

Although he announced no new initiatives for cleaner energy, he touted a new state report showing the strong impact the energy sector has on the state economy. Oil, natural gas, coal and other natural resources contribute $21 billion a year in activity for the state, the report said.

Herbert said the biggest challenge he faces is how to make sure there’s sufficient infrastructure, including enough energy — coal and natural gas for electricity generation, cost-effective gasoline and diesel for drivers — to meet the demands of a growing state.

“If anything keeps me awake at night, it’s, ‘How can I handle the challenges of growth? Well, energy is a big part of that also. Part of the challenge we have is planning and anticipating for the growth pressures that surely are going to happen, whether we like it or not. I actually think growth is a healthy thing.”

Later, during an onstage discussion with Gov. John Hickenlooper of Colorado, Herbert maintained that working with the private sector has helped Utah clean up its notoriously dirty air, which accumulates along the Wasatch Front in wintertime, an affliction known as “inversions.”

“We’ve reduced the pollution levels on the Wasatch Front by 87 percent,” he said. Some critics “it’s dirtier now than ever … well, it’s not.”

After a joke from moderator Jack Gerard of the American Petroleum Institute about Hickenlooper, a Democrat, possibly being a Democratic contender for vice president, Herbert said energy policy shouldn’t be a partisan issue in the 2016 campaign.

“The focus should be on the economy, having a healthy economy. We’re not there yet in this country. This is the longest, driest recovery period we’ve had since the Great Depression. Something’s not working right. … If your focus is on the economy, it’s got to be at least part of the focus on energy.”

“We have an opportunity to have a sustainability where we don’t have to risk national security, or our economic well-being, because the people we have to deal with [importing oil] don’t like us.”

(Photo: Utah Office of Energy)

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Economist touts natural gas at Utah energy summit

The natural-gas industry and people who promote gas as a cleaner fuel alternative need to “manage” environmental concerns about fracking, a key economist said at the fourth annual Governor’s Utah Energy Development Summit.

Dan North, chief economist for the credit-insurance company Euler Hermes North America, said Wednesday that despite the abundance and cheapness of natural gas compared with oil, only 3 percent of natural gas is used in transportation.

He said there are 17 million passenger vehicles around the world that run on natural gas (primarily CNG and LNG), but only 100,000 such vehicles in the United States. “This is an enormous opportunity going forward,” North said. “It’s terrific that we have this cheap natural gas.”

But, he added, “WE do have to manage one thing, which is the environmental concerns about fracking.” After listing all the countries, states and municipalities that have banned the oil-and-gas drilling technique also known as hydraulic fracturing, North said: “Environmental concerns have not been addressed well enough.”

4 Non Blondes, The King and I and alternative fuels

4-non-blondes-650-430“Twenty-five years [lots more years for me] and my life is still
Trying to get up that great big hill of hope
For a destination”

Combine the lyrics from 4 Non Blondes with the personal frustration suggested by the “it’s a puzzlement” comment from the King of Siam in “The King and I,” expressed when he was perplexed by a changing world, and you will understand why many are confused by three relatively recent actions that limit or impede the growth of alternative fuels.

Most advocates of consumer choice at the pump and the end of Big Oil’s near-monopoly concerning transportation fuel praised the president’s State of the Union address a couple of years ago. He proposed that the nation wean itself off of oil. Wow, some fuel choice advocates were thrilled, almost orgiastic. Just think, in a couple of years customers might search for fuel stations selling a range of lower-cost alternative fuels, instead of only gasoline. Environmentalists welcomed the president’s comments. Less pollution and fewer GHG emissions! Most economists were pleased. They saw more jobs and further GNP growth. Servicemen were happy. They would be asked to fight fewer wars for oil.

In this context, there was hope that the cheaper cost of oil, and its derivative, gasoline — both of which are now rising in cost — juxtaposed with the regulations resulting from the BP Deepwater Horizon oil spill, Shell’s failure to use its original drilling permit to drill successfully and the availability of less expensive competitive fuels, would end the prospect of drilling in the pristine Arctic Circle off of Alaska’s coast. It would be just too costly. Good news! We can dream, can’t we!?

Similarly, some of my colleagues and friends who support fuel choice and a better shake for consumers than gasoline (concerning costs and GHG emissions), were hoping that improved technology, lower prices, and inventions like Elon Musk’s just-announced solar storage unit, could soon generate an increased ability for solar energy to power many coal-fired utilities, homes and even vehicles. In the aggregate, the U.S. would produce significantly fewer emissions and pollutants. What a welcome, possible, short-term happening! Musk for president!

The increased popularity of battery electric vehicles (BEVs) from Tesla (among those who can afford them) and the emergence of cheaper battery-powered vehicles from Detroit have also lent hope to those who are fuel agnostic or favor a long-term, robust renewable fuel market and more consumer choices at the pump. While electric cars offer a vision of the future, their broad acceptance by the public depends on design and technology improvements to both end the fear of running out of battery power while on the road, and provide more internal space — both at costs most Americans can afford. Both problems seem to be on the way to resolution, based on the pronouncements from Tesla and Detroit. We can only hope!

But despite the optimism gene internal to most Americans, the great “big hill of hope” has recently become even bigger to climb. While alternative fuel advocates remain relatively quiet and often unable to speak with one effective voice, federal and state policies and regulations have been changed to limit the ability of alternative fuels to secure significant market penetration. Despite large subsidies to the oil industry, neither the administration nor Congress has been willing to seriously try to weaken the ability of Big Oil to restrict alternative fuel sales at local gas stations. Indeed, several attempts to enact open fuels legislation have failed to even get out of Congressional committees.

Although the country seems awash in oil, just this week, the president gave conditional approval to Shell to drill in the Chukchi Sea off of Alaska, despite the company’s mismanagement of earlier attempts to do the same, and despite the objections of many environmental groups and Alaskan natives. Both industry and critics of the permits note that drilling will be risky, given very high waves, icy seas, strong winds, bitter cold weather and the need to protect the routes of migration and feeding areas for marine mammals. As The New York Times indicated this week, the permit is a “major victory for the petroleum industry and a devastating blow to environmentalists,” and for consumers, I would add. Estimates of the oil in the Chukchi Sea range all over the place. However, if oil companies are able to overcome high drilling costs and secure a significant flow of oil, even for a relatively short time, they will increase their ability to limit sales of alternative fuels among their franchises and through differential pricing, the sales of alternative fuels by independent retailers.

It doesn’t get any better. Just as opportunities to secure and store solar power — power that could be used to power homes, autos and utilities — seem almost ready for prime time, many of America’s utility companies — another great supporter of competition (excuse the cynicism) — have begun to seek legislative relief to impede solar’s growth. Their argument deserves discussion. If solar power grows, it could well be at the expense of improvements in the grid. But the use of their political power with state legislatures to seek ad-hoc remedies, different in each state, is not in the public interest. Legislative efforts to lower the price solar users secure from utilities when they put excess power on the grid may or may not be good policy or practice. Shouldn’t we know before such policies are enacted by states? Similarly, putting up regulatory impediments impeding the sale of solar units, including storage units, would likely really hurt what is now a risky start-up industry. The net result of poorly conceived state-by-state initiatives to protect the utility industry would be to limit the capacity of solar energy to substitute for coal in powering utilities and to reduce options to produce cleaner electric cars with almost zero GHG emissions. Similarly, restricting the storage of solar energy would end up slowing down the development of another alternative fuel — one based on solar-derived power.

Finally, the continuing efforts by several states to change Tesla’s business model have and will reduce competition for fuels and the use of electricity as a fuel. Why? Several state legislatures, under political pressure from auto dealers, have banned its direct-sales approach. If Tesla wants to sell its electric-powered cars in Texas, for example, it must sell through an auto dealer. Remember, some Texans recently wanted to secede from the union in order to free the state from “federal dictatorship” and, ostensibly, extend personal freedom and its corollary market competition! (I thought of signing the petition that was floating around to let Texas go.) Passing laws to protect one kind of business from another is un-American…almost like sending the Texas National Guard to monitor the training of U.S. soldiers to be sure they are not digging tunnels under Walmart and engaging in other nefarious activities contrary to the interest of the good citizens of Texas. Davy Crockett would be offended. The bottom line is that Texas and other states with similar regulations are limiting fuel choice by placing a Berlin Wall around their boundaries and not letting Tesla and its electric vehicles in. Ah. Freedom!

So, supporters have some big hills to climb and sometimes it may be a puzzlement to the climbers. But, as the singer Billy Ocean once vocalized, “When the going gets tough, the tough get going.” Building a coalition among the willing supporters of alternative fuels should not be difficult. They share goals concerning the need for increased consumer choices and the value of open fuel markets. If they reach out to include, rather than define boundaries to exclude; if they acknowledge that absolute wisdom concerning strategies does not exist; if they are willing to work toward consensus and bring their respective constituencies along with them; and if they recognize that time is of the essence concerning achievement of key public interest and quality of American life objectives, following Robert Frost, they will travel the road less traveled, and will likely soon begin to see light at the end of their travails and travels.


Photo Credit: Getty Images

Canada, oh Canada, will your tar-sands oil help or hurt US fuel objectives?

Tar Pit #3I just finished a recent Forbes article by Jude Clemente, “Canada is North America’s Great Oil Security Blanket.” Gosh, it’s good to know that Canada can supply 10 million barrels a day for the next 675 years. Just think of the biblical proportions of Canada’s reserves. Methuselah lived only 969 years! I feel safer already.

I am (fairly) comfortable that the French won’t take over Quebec and act out residual imperial desires and that the British won’t try to recapture their former colonies. So, sleep easy and leave a note in the morning to your children, their children and their children’s children, ad nauseam. Future generations of U.S. residents won’t have to worry about the definitions of peak oil or real oil shortages, and we will always have fossil fuel in our future. Our very valued friend to the north can and will produce whatever oil the U.S. requires for centuries.

Aren’t we lucky?! Our decedents will be able to depend on what the author calls “ethical Canadian oil.” Why? He argues that “Canada is a democracy and a free market sought by investors that desire less risk.” Wow…freedom to choose and capitalism; John Rawls and Adam Smith. I am crying with joy. But my emotional high lasts for only a few minutes.

Do we need to substitute Middle East imports for Canadian imports, even though Canada is a trusted ally? Are Canadian oil reserves a real, long-term, strategic benefit to the U.S. and are they ethical (a funny term used in the context of big oil’s historical behavior, speculation with respect to investment in oil and the perils of surface mining)? According to many analysts, oil from tar sands is among the most polluting and GHG emission causing oil in the ground. Aren’t you happy? In light of reserves, we can tether ourselves to fossil fuels for hundreds of years and a range of environmental problems, including, but not limited to, air pollution, landscape destruction, toxic water resulting from tailing ponds and excessive water use. Many scientists warn of increased rates of cancer and other diseases. While the tar sand industry, to its credit, has tried to limit the problems, according to the Scientific American article by David Biello, “tar sands may be among the least climate- [and health-] friendly oil produced at present.” By the way, conversion to gasoline will likely result in higher prices for the least advantaged among us, not exactly Rawlsian ethics.

We are in a difficult position, policy wise. Sure, we can establish long-term institutional relationships with Canada and its provinces that will assure U.S. on-demand access for Canadian oil sands. To do this would be comforting to vested interests and some leaders who still believe that oil is the key to America’s economic future. But business, academic, nonprofit, community as well as government leaders are increasingly searching for alternatives that will be better for the economy, the environment and national security. Weaning the U.S. off of oil, as the president has sought, will require, at least for the transportation sector, substituting a “drill, baby, drill” mentality for a strategy that includes increased use of alternative fuels, open fuel markets and flex-fuel vehicles.

Alternative fuels are not perfect, but for the most part, they are much better than gasoline in light of national energy and fuel objectives. Many replacement fuels, like natural gas and natural gas-based ethanol, cannot compete easily because of government regulations (e.g., RFS, etc.) and oil company efforts, despite large subsidies to limit their purchase by consumers (e.g., lobbying against open competitive markets, franchise agreements, price setting, etc.). Most alternatives appear to have sufficient reserves to provide the consumer with cheaper and better fuel than gasoline for a long time. For example, natural gas seems to have more than a proven 100-year supply, and that’s without further exploration.

The policy framework is easier to define than implement given America’s interest group politics. It would go something like this: As soon as they are ready for prime time and reflect competitive prices, design and miles per tank, increasing numbers of electric and perhaps hydrogen-fueled cars will appeal to a much wider band of U.S. consumers than they do now. The nation should support initiatives to improve marketability of both thorough research and development. Until then, the good or the better should not be frustrated by the perfect or an unreal idealization of the perfect. Please remember that even electric cars spew greenhouse gas emissions when they are powered by utilities that are fired up by coal, and that the most immediately available source of hydrogen-based fuel is natural gas. Currently, there are no defined predictable supply chains for hydrogen fuel. Perhaps, more important, neither electricity nor hydrogen fuel cells can be used in the 300,000,000 existing cars and their internal combustion engines.

So what’s a country to do, particularly one like the U.S., which is assumedly interested in reducing GHG emissions, protecting the environment, growing the economy and decreasing dependence on foreign oil? Paraphrasing, the poet Robert Frost, let’s take the road less traveled. Let’s develop and implement a strategic, alternative-fuels approach that incorporates expanding consumer choices regarding corn and natural gas-based ethanol, a range of bio fuels and more electric and hydrogen fuel cars. Let’s match alternative fuels with initiatives to increase Detroit’s production of new FFVs and the capacity (through software adjustments and conversion kits) for consumers to convert their existing cars to FFVs. To succeed, we should take a collective Alka-Seltzer and build a diverse strong fuels coalition that will encourage the U.S. to develop a comprehensive, alternative fuel strategy. The coalition, once formed, should place its bet on faith in the public interest and good analysis to gain citizen and congressional support. I bet the nation is ready for success — just remember how Linus of the famous Peanuts comic strip ultimately gave up his security blanket.


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Oil, petrodollars and war. Does the U.S. need to permanently police the Middle East?

Soldiers Conduct Combined Clearing OperationThe U.S. interest in going to war or supporting war efforts on behalf of our “democratic” allies like Iraq, Qatar, the United Arab Emirates, Egypt and Saudi Arabia is not based, as said by some political leaders, on converting those countries to democracies or providing their citizens with increased freedom. Neither is it, primarily, aimed at reducing terrorism possibilities here at home. For the most part, it is instead aimed at protecting the U.S. and our allies’ interests in oil and stability in some of the most corrupt, autocratic oil-producing states in the Middle East.

Surely, recent history indicates that use of patriotic and compassionate language reflecting America’s historical ethos to justify our actions often wins initial public support for “Operation This” or “Operation That,” but as conflicts drag on and U.S. soldiers, sailors or marines suffer physical and emotional wounds, the gap between articulated justifications and reality becomes clearer to the public. When the fog of war or near-wars lifts a bit, support for U.S. military activity, often becomes muted among the citizenry.

Concern for protecting oil resources, production and distribution has been, and is currently, a paramount objective of the U.S. The U.S. and its allies have helped overturn governments, remake global maps, redefine national or tribal borders, create new nation states and abandon old ones and dispatch national leaders. Contrary to Gen. Powell’s admonition, we sometimes have failed to own the disastrous results of the wars that we have fought (Libya, Iraq, etc.). Based on our own desire for oil, we have tolerated sometimes exotic and many times terrible behavior among private oligarchs and despotic rulers, which, regrettably, often, escapes coverage in text books and in the media. Clearly, the link between our large-scale addiction to oil and its negative political, social and economic consequences in several Middle Eastern countries lacks sustained attention in our public policy dialogue.

The importance of oil and the U.S. willingness to go to war or engage in covert activities to protect it has been intensified by the relationship between petrodollars and the U.S. economy. Since 1944 at The Bretton Woods Conference, the global reserve currency has been the good old U.S. dollar. First, gold was the back-up to the dollar. As reported by the Huffington Post, the dollar was pegged at $35 to an ounce of gold and was freely exchangeable. “But by 1971, convertibility of gold was no longer viable as America’s gold resources had drained away. Instead, the dollar became a pure fiat currency (decoupled from any physical store of value) until the petrodollar agreement was concluded by President Nixon in 1973. The essence of the deal was that the U.S. would agree to military sales and defense of Saudi Arabia in return for all oil trade being denominated in U.S. dollars.” We as a nation committed to go to war in return for ostensible economic benefits and access to oil.

Was it good for the American economy? Sure, at least in the short run. The dollar became the only currency for energy trading. All foreign governments desiring to secure and trade for oil had to hold U.S. currency. The dollar was easily converted into barrels of oil. As the Huffington Post indicated, the dollar costs for oil flowed back into the U.S. financial system. What a deal!

Recently, lower U.S. interest rates, a troubled, slow-growing U.S. economy and the rise of oil-shale production in the U.S. has muted the almost-absolute, four-decade direct relationship between the dollar, and other nations’ need for oil and or export of oil. Instead of “next year in Jerusalem,” some nations like China, Russia and even France and Germany have indicated next year either a return to gold or the use of their own currencies as a peg to trading. However, the petrodollar still plays an important role in the exchange of oil in the global trading system. Its demise, as Mark Twain suggested about reports of his death, is, if not greatly, (at least) somewhat exaggerated. I suspect the petrodollar will be with us for some time.

Our nation’s willingness to militarize support of countries that depart radically from supposed U.S. norms of global behavior (encoded in the U.N Charter and other international agreements), because of their oil resources and the post-World War II emergence of dollar-based trading in oil and its benefits, has muddled U.S. foreign policy. Critics have questioned our not-so benign initiatives in countries throughout the Middle East and, as a result, they have raised issues concerning supposed American exceptionalism.

We have more than just a Hobson choice (that is, there is no real choice at all) if we choose to break from oil dependency. Increased U.S. oil production to secure profits and reach demand will still require both importing and exporting oil. This fact, coupled with the desire to keep the dollar the key oil-trading denomination, will sustain U.S. entanglements and the probability that we will continue to play oil policemen in many places.

A different future could be achieved if we took the president seriously and tried to “wean” ourselves off of oil. Paraphrasing liberally and adding my own meaning, Léon Blum, former French leader, “Life doesn’t give itself to one [nation] who tries to keep all of its advantages at once…morality may consist solely in the courage of making a choice [between energy sources and fuels].” The U.S. has not had the political guts yet to really focus on converting from an oil- and gas-based economy and social structure to an alternative energy and fuel-based one (e.g., natural gas, ethanol, methanol, biofuels, electricity and hydro fuels). Such a strategy would allow consumers greater freedom at the pump. It would be fuel agnostic and let consumers pick winners and losers based on cost, and impact on the quality of their lives and the nation’s life. We know that if we do make alternative energy and fuel choices now, based on equity, efficiency, GHG emissions and pollution reduction criteria, we can secure important environmental, economic, social and security benefits. To fail to act is an act itself, one that will harm the nation’s efforts to become the country on the shining hill and pave the way for other countries and itself to access a better, more peaceful future for present children and their children.


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The Saudis and oil prices — the diminishing value of conspiracy theories

saudi_1880139cEveryone likes hidden conspiracies, either fact or fiction. Covert conspiracies are the stuff of great and not-so-great novels. Whether true or false, when believed, they often cause tectonic policy shifts, wars, terrorism and ugly behavior by groups and individuals. They are part of being human and sometimes reflect the inhumanity of men and women toward their fellow human beings.

I have been following the recent media attention on conspiracies concerning oil, gasoline and Saudi Arabia. They are all over the place. If foolish consistency is the “hobgoblin of little minds” (Ralph Waldo Emerson), then the reporters and editorial writers are supportive stringers for inconsistency. Let me briefly summarize the thoughts and counter thoughts of some of the reported conspiracy theorists and practitioners:

  1. The Saudis are refusing to limit production and raise the price of oil because they want to severely weaken the economy of Iran. The tension between the two nations has increased and, to some extent, is now being framed both by real politics (concerning who’s going to carry the big stick in the region) and by sectarianism. Iran’s oil remains under sanction and the Saudis hope (and may even be working with Israel, at least in a back-office way) to keep it that way.
  2. No, you’re wrong. The Saudis are now after market penetration and are lowering the price of oil to impede U.S. development and production of oil from shale. Right now, they are not worrying so much about oil from Iran-given sanctions…but they probably will, if there is a nuclear deal between the West and Iran.
  3. You both are nuts. The Saudis and the U.S. government are working together to blunt Russian oil sales and its economy. The U.S. and Saudis can withstand low oil prices, but the Russians are, and will be, significantly hurt economically. If it hurts Iran so much, the better! But the Cold War is back and the reset is a failure.
  4. Everyone is missing the boat. The Saudis don’t really control prices or production to the extent that they did in the past. Neither does OPEC. Don’t look for conspiracies, except perhaps within the Kingdom itself. The most powerful members of the Saudi royal family understand that if they limit production to raise prices per barrel, it probably wouldn’t work in a major way. The U.S. has become a behemoth concerning oil from shale. If a nuclear deal goes through, Iran will have sanctions lessoned or removed relatively soon. Should the Russian and West reach some sort of cold peace in Ukraine, Russia will become a player again. When you add Canada, Iraq, Libya and the Gulf States to the mix, lower global demand, and increase the value of the dollar, you get an uncertain oil future. The Saudis, led by their new king, are buying time and casing out their oil future.

To me, the Saudi decisions and the subsequent OPEC decisions were muddled through. Yet, they appear reasonably rational. Saudi leaders feared rising prices and less oil production. Their opportunity costing, likely, went something like this: “If we raise prices, and reduce production, we will lose global market share and maybe, in the current market, even dollar or riyal value. Our production costs are relatively low, compared to shale development in the U.S. While costs may go higher in the future, particularly once drilling on flat desert land becomes more difficult in light of geology, we can make a profit at the present time, even at $30-40 a barrel. Conversely, we believe that for the time being, U.S. shale developers cannot make a profit going below $40-50. Maybe we are wrong, but if we are, our cost/profit equation is not wrong by much. By doing what we are doing, we will undercut American production. Sure, other exporting countries, including our allies in the Gulf will be hurt temporarily, but, in the long run, they and we will be better off. Further, restricting production and assumedly securing higher prices is not a compelling approach. It could cause political and social tension in the country. We rely on oil sales, cash flow and profit as well as reserves to, in effect, buy at least short-term civic peace from our citizens. Oil revenue helps support social services and basic infrastructure. We’ve got to keep it coming.”

The Kingdom understands that it can no longer control prices through production — influence, yes, but, with the rise of U.S. oil development, it cannot control production. Conspiracy theories or assumed practices don’t add much to the analysis of Saudi behavior concerning their cherished oil resources. Like a steamy novel, they fill our reading time, and sometimes lead to a rise in personal adrenaline. Often, at different moments, they define the bad guys vs. the good guys, or Taylor Swift vs. Madonna.

No single nation will probably have the power once held by OPEC and the Saudis. While human and institutional frailties and desires for wealth and power suggest there always will be conspiratorial practices aimed at influencing international prices of oil and international power relationships, their relevance and impact will diminish significantly. Their net effect will become apparent, mostly with respect to regional and local environments, like Yemen and ISIS in Syria and Iraq.

Recently, I asked a Special Forces officer, “Why is the U.S. fighting in Iraq?” I expected him to recite the speeches of politicians — you know, the ones about democracy, freedom and a better life for the citizens of Iraq. But he articulated none of these. He said one word, “Oil”! All the rest is B.S. I think he was and remains mostly right. His answer might help us understand part of the reason for the strange alliance between the Saudis and U.S. military efforts in or near Yemen at the present time. Beyond religious hatred and regional power struggles, it might also help us comprehend at least part of the reasons for Iran’s support of the U.S.-led war against ISIS — a war that also involves other “democratic” friends of the U.S. such as the Saudis and the Gulf States.

The alliances involve bitter enemies. On the surface, they seem somewhat mystifying. Sure, complex sectarian and power issues are involved, and the enemies of my enemies can sometimes become, in these two cases, less than transparent friends. But you know, these two conflicts — Yemen and ISIS — I believe, also reflect the combatant’s interest in oil and keeping oil-shipping routes open.

President Obama has argued that we should use alternative energy sources to fuel America’s economy and he has stated that we need to wean the U.S. off of oil and gasoline. Doing both, if successful, would be good for the environment, and limit the need to send our military to protect oil lifelines. Similarly, opening up U.S. fuel markets to alternative fuels and competition would mute the U.S. military intervention gene, while curing us, to a large degree, of mistakenly granting conspiracy advocates much respectability. Oh, I forgot to indicate that the oil companies continue their secret meetings. Their agenda is to frustrate the evolution of open fuel markets and consumer choices concerning fuel at the pump. Back to the conspiracy drawing boards! Nothing is what it seems, is it?


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Car buyers go shopping for better mileage

With the price of oil down from about $115 to $63 since last June, the impression has been created that the auto world is once again in the hands of the oil industry, and that the gasoline engine is here to stay.

But this week at the Bloomberg New Energy Finance Conference, there was the distinct impression that alternatives to the gasoline engine are moving up so fast that within another five years we may see big changes. Bloomberg Business wrote that the result is “Future transport is likely to look a lot different than what the major oil companies are fueling now. Instead of biofuels such as ethanol and green diesel making the internal-combustion engine fit into a world with greenhouse gas limits, wholesale new solutions are coming fast.”

“Where we are is in an age of plenty,” Michael Liebreich, BNEF’s founder, told Bloomberg. “We have cheap oil, cheap gas, cheap renewables. You do have an abundance of supply in a way you haven’t had for decades. We also are in an age of competition.”

The biggest piece of news is that gasoline consumption has leveled off over the last decade and now is lower than it was in 2006. This is a remarkable development that no one knows quite how to explain. Part of it may be the lingering recession. Fleet mileage improvement has definitely made a difference, improving from 24.5 in 2001 to 31.6 today, a dramatic surge of 29 percent in 13 years. The Age of the Hummer is over, and people are being more selective in shopping for better mileage, even as the vehicles improve.

But Bloomberg Energy sees alternatively fueled vehicles also making headway in a way that is just becoming visible. Electric car sales have quintupled over the last four years, although they did start at a very low base. But battery prices are coming down as rapidly as solar-panel prices, which means that they soon will be in a range where the average American can afford them. Tesla’s 2017 debut of the Model 3, priced in the $35,000 range, is going to be a real turning point, if everything goes right.

Also coming along rapidly is the hydrogen car, which the Japanese auto industry has chosen as its alternative to gasoline. Toyota and Honda are just beginning to market their models in Japan, and BNEF anticipates there will be 4,200 on the road in Japan by 2018. But California is another big potential market, and sales are scheduled to begin there sometime late this year. The California Legislature has responded by expanding the Hydrogen Highway initiated by former government Arnold Schwarzenegger, making it easier for drivers to refuel.

Of course, all these predictions are taking place on a world scale, and there the progress may be even more rapid than in the United States. One thing Tesla discovered in its relatively abortive attempt to crack the Chinese market is that China already has a thriving electric-car industry. The cars, moreover, are not scaled-down versions of powerful sports cars but slow-moving vehicles that have been designed from the ground up.

In an article in Forbes last week, Jack Perkowski outlined what he called “China’s other electric vehicle industry:”

While the global automotive giants struggle to find a winning formula for electric vehicles, approximately 100 manufacturers in China have already identified a large potential market undiscovered by the traditional players. The common problems faced by EV automakers — high cost, driving range, and the availability of charging stations — are not issues for these manufacturers because their target customers are satisfied with low-speed and limited range EVs, as long as they provide affordable transportation. In 2014, 400,000 so-called ‘low-speed’ EVs were sold in China, compared to only 84,000 conventional all electric and hybrid electric vehicles.

To get a glimpse of the size of China’s potential market, consider this: China is already the world’s largest vehicle market, accounting for 25 percent of all vehicles manufactured globally. Yet there is only 1 vehicle per 10 people in China, whereas in the United States there are 8 for every 10 – more than one vehicle for every person of driving age. China also has another huge market for other electric vehicles. It has sold 90 million motorcycles and 120 million electric bicycles.

Estimates are that China now has a million such low-speed EVs on the road now and might reach 3 million by 2020. These cars can do about 48 miles per hour and are used for short runs around town in smaller cities, so range is not a problem. They are doing wonders for air pollution. Manufacture only began in 2006, and already some provincial governments are starting to write requirements that they be preferred to the older gasoline types.
Surprisingly, the only government entity that has been slow to embrace the low-speed EVs is the national government in Beijing. The Central Government has not counted these EVs is their official automotive statistics and is only now starting to write regulations on how crash-worthy they must be and on what roads they will be allowed to travel.

Perkowski concludes: “Low-speed EVs may not fit the stereotype of today’s modern passenger car, but in China, where incomes remain low for a large part of the country’s population, affordability often trumps those values held dear in more developed countries.”

Could China’s low-speed EVs find a market in the United States? It’s certainly possible. In any case, the anti-gasoline revolution may be coming in ways we did not anticipate.

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Simple antidote to Earth Day guilt: Use more ethanol

It’s Earth Day. Fuel Freedom is here to absolve you of your feelings of guilt.

Forty-five years ago today, on April 22, 1970, the first Earth Day was observed, in what is generally considered the birth of the modern U.S. environmental movement.

Earth Day-NYT2Even though there were plenty of other causes to occupy the minds of activists, 20 million people turned out at various gatherings around the country. Check out The New York Times front page from the next day:

No offense meant to contemporary agitators, but today many Americans just don’t have the sense of urgency commensurate with the enormity of the threat. As John Robinson, associate provost of sustainability at the University of British Columbia, notes, the goal of activists “is to get to a point where we don’t need special occasions” to raise awareness.

Earth Day as an annual event also might have the unintended consequence of overwhelming the casual observer — someone who wants to protect the planet but views the task as impossibly huge. Robinson says:

When you’re guilt tripped, it often leads to denial or apathy – and neither of those is a good basis for action. Denial means that you resist the whole message. A lot of climate change skepticism is of that nature – people feel beaten over the head with this stick of bad behavior. And so they just deny that anything is happening. Or they throw up their hands and say this is intractable – “what can I do, as a single individual, about this global problem?”

At Fuel Freedom, we’ve stayed out of the hitting-over-the-head business. Our message is simple: fuel choice for vehicles can bring a long list of benefits, from reduced overall costs for fuel; to greater stability for the overall economy; strengthened national security; and of course less impact on air, water and health.

Using more ethanol-blended fuel would achieve all these objectives: It’s a cleaner fuel than gasoline, and so there are fewer heat-trapping emissions (like carbon dioxide) produced. Because the nation’s gasoline supply contains 10 percent ethanol, last year the equivalent of 39.6 million metric tons of CO2 didn’t go into the atmosphere. That’s like removing 8.4 million cars from the road for a year.

If you’re concerned about the environmental impact of using corn for ethanol, which accounts for virtually all ethanol produced today, you should know that most corn ethanol is made from inedible, starchy varieties of the plant, and a co-product of the process is feed for livestock. Also, ethanol doesn’t have to be made from just corn: Natural gas, and a range of inedible plants, serve as “feedstocks.” A lot of this info is in our new documentary, PUMP, which you should check out, since it’s now on Netflix.

If saving the planet still seems like too Herculean a task, focus only on the issues we can see, smell and taste: Displacing more oil with ethanol would reduce harmful tailpipe emissions, like particulate matter, ground-level ozone and nitrogen oxide. This pollution has a devastating effect on health, worsening problems like asthma and heart disease. The American Lung Association says 47 percent of Americans live in places “where pollution levels are too often dangerous to breathe.”

Ethanol works, and there are about 17 million flex-fuel vehicles on the road, ready to take blends up to E85 (which is actually 51 percent to 83 percent ethanol). It doesn’t damage engines, it’s often much cheaper, vehicles run with more power on it, and it’s available if you go looking. In fact, new stations are opening all the time.

So all you Chevy Tahoe and GMC Yukon soccer moms out there, and you tough-guy pickup drivers. Everyone with a flex-fuel vehicle. You can make a difference, today.

And every day will be Earth Day for you.

Adam Smith is dead! Will moving his body help secure absent competition in fuel markets?

Former Gov. Richard Lamm of Colorado and I once led a group of CEOs on a trip to London. It was focused on what Colorado could learn from the British healthcare system. During the trip we visited St. Elizabeth Hospital. There in the lobby was a stuffed, mummified body of Sir Jeremy Bentham, so I took a picture with him. He was not very talkative.

But the resulting photograph brings back memories, perhaps apropos to the oil industry. Seeing Bentham looking so well and remembering how much he meant to my life — both the pain and joy — I propose we bring back Adam Smith, and place him in the lobbies of the big oil companies. Why? Easy: they seem to have forgotten about the value of free markets, competition and capitalism. A little dose of recall and guilt every morning when they go to work and when they leave their offices every evening wouldn’t hurt. Over time, maybe there would be substance behind their luncheon or dinner speeches concerning free markets and capitalism. Maybe they would remember Smith’s warning that, “People of the same trade [in this case, the oil industry] seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Right on, Adam! You are not my favorite economist or ethicist, but your quotation appears to fit the behavior of the oil industry. Sen. Dianne Feinstein, during California’s increase in gas prices a couple of years ago, suggested that oil companies and investors might have tried to set prices and blur their actions by casting blame on the refinery fires for gas price spikes. Her view was that market variations alone did not explain the high prices consumers were paying at the pump. Her comments implied some sort of collusion or manipulation.

E85 and E10 PricesThe general behavior of the big five oil companies concerning competition from E85 lends credence to Feinstein’s suspicions. Listen, my reader, and you shall hear some examples of big oil’s apparent, sometimes seemingly coordinated, efforts to restrict the growth of E85 sales here (sorry, Longfellow), even though E85, at the time, posed no real immediate competitive threat to overall gasoline sales. Of the just over 150,000 retail fuel or gas stations in the nation, only 2.5 percent offer E85 and less than one half of one percent of the major brands provide E85 under their branded canopy. How nice of them! Read a franchise agreement from Exxon or Texaco, and see if you can find a provision for an E85 pump…maybe there are words suggesting a location in the back of the station, near the men’s or ladies’ room or in front of the station, clearly off center and not under the canopy.

Look hard at the language and the decisions of nationally branded retail stations. Franchisees are generally limited as to price, fuels, location of pumps and marketing strategies. Maybe these restrictions are legal and from a monetary and profit point of view, understandable. But from a consumer perspective, they limit choice and often frustrate competition.

Some have charged oil companies with price fixing or collaboration in setting prices (a nicer way to say fixing). “No, not in America,” you say? Adam Smith would turn over in his grave! According to a report by AJW company in 2014, “Since RIN prices began to rise in 2013, the nationwide average discount for E85 vs. E10 at independent stations has been 14 percent or greater for all but one month. During the same period, the nationwide average discount for E85 at major branded stations reached 14percent only once. This discount is only a price comparison and does not factor in relative energy content of the fuels. As long as there is limited availability and unattractive pricing at major branded stations, low E85 demand likely will persist among consumers using those stations.”

Generally, I am not a fan of special-interest group research or funded research. I prefer to rely on, at least, relatively independent think tanks, universities and scholars. Yet, recently gifts of money for research blurs the line between the interest of funders and the integrity of the word independent. Caveat emptor!

A 2014 case study by the Renewable Fuels Association (RFA), an advocacy group funded, in part, by self-interested donors, tracked the per gallon fuel costs of all nine retail stations selling E85 in St. Louis during the summer of 2014. Each station had the brand names of one of the five largest oil companies.

The data indicated that there is some support for the notion that gasoline producers/suppliers and their franchised retailers in at least St. Louis purposely employed pricing strategies to discourage E85 consumption. They, apparently, wanted to negatively influence the consumer perceptions about the fuel.

Oil companies appeared to control key price behavior at the nine stations and, to some extent, worked together to set prices, either formally or informally. RFA argues that it’s hard to believe that the price similarities at stations in St. Louis happened by chance. For example, the average E10 retail prices were $3.45 dollars per gallon while the average E85 retail price was $3.47 dollars per gallon. Wholesale prices of E85 were an average of $2.58 per gallon, while E10 averaged $2.93 per gallon. “Based on prices for locally available ethanol, hydrocarbon blend stock, RFS RIN credits and a typical markup, E85 could have been offered at retail for $2.44-2.55 dollars per gallon.” There probably are many reasons why average E85 prices were more expensive than E10 and almost one dollar larger than their wholesale price….like someone from outer space tampered with the pumps or consumer demand for E85 overwhelmed supply and the stations responding to market pressures raised the E85 price to mute interest from buyers. Neither, of course, was true!

Oil companies and their retailers appeared to set the price of ethanol to steer E85 and fuel-agnostic buyers to gasoline. They also wanted to keep the loyalty of gasoline buyers. The similarity of prices could have occurred by chance. Sometimes, I wear a blue shirt in the morning and so does my colleague. We never discussed what we would wear. But our color schemes are coordinated. What the study doesn’t answer is why other St. Louis stations, independent from national brands, did not see an opportunity to come in below the prices of majors and sell E85. Personally, I would have liked the analysis better if other cities were included as cases for comparison and if the time period went beyond the summer. But it was an interesting provocative report and you can’t have everything.

Anecdotes and studies based on the relatively recent California methanol fuel experience and Colorado’s effort to build E85 sales seem to support the RFA study. They suggest that the fear of competition from alternative fuels among oil companies and or retailors led to, at best, begrudging support for both methanol and ethanol. They often located pumps (if they agreed to have them at all) in unfavorable positions in their or their franchisee’s retail stations. Marketing strategies were marginal at best, and non-existent at worst. Stories from some astute observers suggest that relatively high methanol and E85 prices were put in place to detour customers to gasoline. Among other factors leading to problems with each state’s initiatives, there was a lack of sustained interest by major oil companies in building and sustaining sales of both alternative fuels with competitive pricing.

Maybe things will change. The present downturn in oil and gasoline prices has led some oil company leaders to think more charitably about alternative fuels —natural gas, ethanol, methanol, biofuels — particularly in light of the development of more flex-fuel cars coming from Detroit, and from consumers who convert their older cars to be flex-fuel vehicles. They have begun to view alternative fuels more favorably as part of their future business and strategic plans. If they go further, they will have to face questions, which include: whether they integrate gasoline and alternative fuels under one organization and canopy or separate both, perhaps, as different brands. Real competition, probably, will require Congress to consider some variations on a theme of open fuels legislation. Success in building competition at the pump would make Adam Smith happy, were he alive, and be good for the environment, the economy and consumers.

E85: Can it break through as an alternative fuel?

Harry_S._TrumanPresident Harry S. Truman once said, “A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties.” Over the past few weeks, my colleagues at Fuel Freedom Foundation and I have spoken with and read about several optimistic owners of E85 fuel stations.

Our selection wasn’t random. We focused on chains or fuel stations that apparently overcame literature-defined problems in marketing E85 and, according to their owners or senior managers, were on their way to success in securing profitable market penetration. Frankly, we wanted to find sufficient cases that testify to the fact that E85 can compete successfully with gasoline. Succinctly, we wanted to respond to a question that’s frequently asked of us, which goes something like this: “Assuming no major policy and feedstock changes (at least in the near term), can E85, in light of the current price of gasoline, provide consumers and the nation with a real competitive choice of alternative fuels that are safer, environmentally better and cheaper than gasoline?”

Future articles will provide mini case studies of some of E85 retailers. But for the present, based on many phone calls and Google descriptions, we found at least four or five stations (relatively quickly) with prices ranging from 60 cents to just over a $1 below the price of gasoline, despite the current, relatively low gas prices. The lowest price described was below $1.50 a gallon. All stations seemed committed to the continued sale of E85, and each one expressed conviction that they have sufficient price flexibility to build a vehicular fuel market able to meet cash flow and profit expectations. Their optimism was based on their present sales and future forecasts of sales.

Clearly, we need to know more. But what we heard deflated (at least partially) conventional wisdom suggesting that while a large pool of newer FFVs s and older vehicles that can be converted to FFV status exists, increased sales of E85 is unlikely because of the decline in the price of gasoline.

The E85 retailers we talked to and reviewed online appear to be using some of the following strategies to take on gasoline successfully in the market place. They are paraphrased and summarized from direct quotes for brevity:

Loosen Ties with Brand Names: Loosening ties with major brand-name franchisers provides the ability to sell E85 and permits more flexibility to set prices based on market perceptions.

Share Value of RINs: RINs are tradable and are valuable, particularly when their value is high. The ability to secure RINs from members of the supply chain is an incentive. Producers and blenders have a stake in retailer success; retailers have a stake in feedstock. The RINs help make the price right at the pump.

Amend Supply Chain: By incorporating blending as a function, retailers are able to manage costs and, indeed, lower costs. By avoiding the need to contract for transferring E85 from terminal to station and doing it themselves, retailers are able to also better manage costs.

Intuitive Marketing: Choosing an easily accessible location within which there is a high density of FFVs, along with recognition that price matters, are threshold needs to penetrate the fuel market. Smaller fuel stations often make their locational decision, in part, based on intuition and not on expensive market studies. Some might do a study…but those who did appeared to keep the costs low. They saw the possibilities in diverse locations by talking to the market and marketing folks and checking available data concerning FFVs in the area, as well as watching traffic patterns. They also had a feel for the area.

Anecdotes and small samples should not generate formulaic or prescriptive “one size fits all” market or marketing strategies. Maybe we were lucky in our calls! Maybe we were fortunate to quickly find the right articles or presentations. One of my colleagues fortuitously drove by a fuel station on his way to the airport and saw a sign touting a very low E85 cost per gallon. Clearly, economic, social, environmental, political and cultural variables are different in different areas of the country, and could very well negatively affect predictability of retail success, particularly concerning location, price and consumer acceptance. Just as clearly, supply-chain differences between and among retailers in different parts of the nation could well impede or facilitate success. What is important at this stage is to recognize that there are individuals and groups out there who own or manage fuel stations, and whose early market achievements should generate a positive bet concerning their intermediate and long-term success. Borrowing from Harry Truman, they appear, at least at first glance, to be making opportunities out of what others perceive as difficulties. If they succeed and generate copycats or variations on a theme, it will be good for the nation, its communities and consumers.