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The military/oil complex – Do we deserve a chance to debate when the nation goes to war?

Marshall-soldiers

Dwight D. Eisenhower was America’s iconic military leader during World War II and its president from 1953 until 1961. His fatherly smile and his general demeanor lent confidence to Americans. Whether he was one of America’s best presidents is a question for historians to decide. But his last comments before leaving office were historically profound and very prophetic with respect to U.S. involvement in the Middle East.

Ike, as he was affectionately called, said in his farewell address to the nation on Jan. 17, 1961 that “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. … Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

Regrettably, perhaps since WWII, no American entanglement on foreign soil, indeed, no American war (except perhaps critical wars like Grenada and Panama … a bit of cynicism), has reflected the sustained support of the American people from beginning to end. Many American citizens have had trouble justifying our involvement on moral, military, political, economic and social welfare grounds. Some of the theories, often embellished in rhetoric, used by our leaders as rationales for various wars since WWII, have been discarded because of their simplicity or their failure to conform to post-war facts on the ground. Remember The Domino Theory justifying the Vietnam War?

We have not been entirely honest with the service personnel we have sent to Afghanistan and Iraq. While not a random sample, I have been fortunate to talk with many of the returning soldiers from the wars in Afghanistan and Iraq (including a Special Forces veteran or two), and most believe that, at its core, the nation’s involvement in both countries rests not on bipartisan justifications concerning exporting democracy and freedom, but on the desire to preserve and protect access to oil for the west. Implicit in their comments is a belief that Eisenhower’s warning about the military industrial complex has now become a reality (except that with respect to Iraq and Afghanistan, it is more accurate to call it the military/oil company complex).

The intensity of their perspective, while perhaps forged in part by their being involved up front in the horrors of war and killing, is not theirs alone. “Of course it’s about oil; we cannot really deny that,” said Gen. John Abizaid, former head of U.S. Central Command and Military Operations in Iraq. Former Federal Reserve Chairman Alan Greenspan agreed, writing in his memoir, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” In 1998, Kenneth Derr, then CEO of Chevron, said, “Iraq possesses huge reserves of oil and gas — reserves I’d love Chevron to have access to.” Today it does. According to a policy brief from scholars at Harvard’s Kennedy School, “Although, the threat of ‘resource wars,’ over position of oil reserves is often exaggerated, the sum of the political effects generated by the oil industry makes oil a leading cause of war.”

Media reports from over the last decade or more suggest the same nefarious link between war and oil exists concerning Afghanistan; indeed, this link exists between all of our country’s recent wars in the Middle East. Sure, oil is not the only reason we go to war, but those of us concerned with public policy and the fog, as well as human, economic and social costs of war ought at a minimum, try to make sure that citizens in this nation are aware of and can debate the role of oil. More transparency may lead to less national harm and more rational decisions about joining or starting conflicts.

Why, in light of the fact that oil, oil exploration, oil development and oil distribution has been and remains a key variable generating U.S. involvement in many past and present wars, do we, as a nation, avoid a sustained strategic drive to foster the use of alternative competitive fuels, such as ethanol, methanol, natural gas, electricity and hydrogen fuel? Our efforts to date have been relatively minuscule and often are impeded more by a lack of a vision of the public good, ideological and partisan whims, economic and political interests than by an honest appraisal of independent analyses and honest debate. We owe the young people that we sent to battle at least this much. Give them a chance to make love, not war! We can be fuel agnostic and let the public interest and ultimately the marketplace choose the winners when it comes to cheaper, cleaner, safer fuels. The nation and its residents deserve a chance to safeguard the country’s environment, its economy and its security!

(Photo: A ceremony in Iraq in December 2011 marking the withdrawal of the last U.S. troops from the country. 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.

 

Photo Credit: http://priceofoil.org/

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?

 

Photo credit: http://blogs.telegraph.co.uk/finance/

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.

Does the man doth protest too much? The impact of attacks on coal by oil and gas

BHP-Billiton-Middelburg-1Did you read about Andrew Mackenzie, CEO of BHP Billiton, and his plea to his colleagues in the oil and gas industry? He asked them to stop publicly asserting that natural gas and oil produce fewer carbon emissions than coal. Interpreting, liberally: You guys (a euphemism for men and women) are hurting BHP and its mining and resource development businesses, as well as the entire sector.

Mackenzie said it nicely. He suggested that they lay off the criticism. Because we live in a peaceful, collaborative, problem-solving era (you’re supposed to laugh at this point), his solution, sort of Isaiah-like, was, “Come, let us now reason together.” On behalf of BHP, a conglomerate and the biggest mining company (dollar capitalization) in the world — a company that also has big stakes in oil and gas — Mackenzie asked that fossil fuel companies break bread together and find mutually beneficial solutions to the carbon problem — assumedly consistent with their respective bottom lines. Put another more interpretive way, why should his colleagues in the industry undercut each other by demeaning each other’s products? Paraphrasing a common phrase today, Mackenzie seems to believe that we are all BHP; we are all Exxon; and we are all Texaco. We all have carbon issues and face government emission regulations.

Mackenzie called for the industry to develop carbon capture and storage solutions. His proposals can be construed as relatively company-friendly in that they start off seemingly focused on protecting the diverse resource production menu of each company, particularly, but not only, coal. They also may help each company avoid (at least initially) caps, taxes and fixed emission or production targets.

We shouldn’t be cynical. Carbon capture and storage have been, and continue to be, supported by some respected environmentalists and scientists. Both are endorsed in their many papers, speeches and media.

By his proposal, Mackenzie suggests that the resource-development industry is stronger when the companies that are in it work together. Accordingly, they should not be at each other’s throats and denigrate products of their competitors. We should have peace rather than war! The calls from oil and gas companies to switch from coal to gas, as a strategy to reduce GHG emissions, Mackenzie indicates, is a “very western, rich country solution.” People in many developing countries have easier access to coal than gas. To get out of poverty, they will need to “burn coal cleanly.” He said: “I think there is a marketing ploy, which is ‘give up coal and burn more gas.’ ” Very insightful! Wow! When did he discover this?

The transition to natural gas from coal among utilities has led to a visible reduction of GHG emissions. Natural-gas-based ethanol promises the same kind of reduction in transportation. Don’t knock competition or abort it unless his desired industry collaboration can result in something better and cheaper!

Whether Mackenzie’s thoughts generate from the public interest or the bottom line, from expiation of guilt or inner wisdom, it doesn’t really matter. The industry, as a whole, has been laggard in coming up with and carrying out proposals concerning GHG or criteria pollutants. Maybe we need an Australian-based firm to energize it to ultimately play or pay! But maybe not!

Mackenzie said: “I still accept the drift from coal to gas is a good thing, but these things happen gradually. We need the power of the whole oil and gas industry and the whole mining industry, together aligned on this agenda to move the needle.” What needle, and where is it being moved? Doing good while making money? Perhaps. But his language doesn’t quite go that far. Sounds more like making money by doing as much good as we have to do. From a business standpoint, both are consistent with the view of those that the business of business is business.

It’s hard to know, from a policy perspective, exactly what to do with Mackenzie’s industry-wide collaboration idea or his proposals. It’s not a case of like them or leave them. But caveat emptor!

Sequestration, the fancy name for what he opines as a solution to GHG emissions, is expensive, uses lots of energy, takes a lot of time to initiate, and is unsafe in some areas, depending on geology. Contrary to his words, it may not be relevant to poor nations or poor areas. Yet, on the other hand, it’s worthy of consideration by both the public and private sector because its strategic use can reduce emissions. We need to weigh relative benefits and costs of emissions-reduction strategies. Further, and most important, if public funds are sought, the opportunity costing analyses must be transparent and convincing before moving toward scale-up possibilities.

Elimination of competition within the industry could end up muting the value of alternative fuels and alternate power sources. It could be very costly to the public. Most experts indicate there is no such thing as “clean” coal. There is cleaner coal, but it’s still dirty, and oil remains a major GHG emitter and criteria pollutant. Reliance on both coal and oil, when we have access to cleaner alcohol-based transitional fuels for power, industrial plants and transportation is problematic, at best, and bad policy concerning GHG and other pollutants, at worst.

Lots of questions: Is Mackenzie an enlightened business leader or a leader mainly interested in preserving the value of his coal reserves? Is sequestration in its various forms a viable option that would allow the use of coal, and other portfolio resources, without major GHG impacts? Are there better alternatives? Since market segmentation is external and will likely result in increased sensitivity by CEOs to criticism concerning the public harm caused by multiple energy related products, will collaboration among them generate controlled energy markets and ultimately minimize efforts to reduce GHG emissions and provide a cleaner, healthier environment? Remember that the industry, particularly the companies in it that produce lots of oil, has been and remains against open fuel markets and increasing the number of flex-fuel vehicles. There are no easy answers.

Mark Twain, a great oil and gas man, once said, “It takes your enemy and your friend, working together, to hurt you to the heart: the one to slander you and the other to get the news to you.” Finally, borrowing and amending Shakespeare, maybe Mackenzie doth protest too much!

Photo Credit: africagreenmedia.co.za

Ich bin ein Norwegian and Swedish — expanding open fuel markets

artI have been intensely involved in urban policy issues since the early sixties — that’s the 1960s, for those who are young. Once, I was at a conference with the late and wonderful mayor of Minneapolis, Art Naftalin. He was a dear and valued friend and colleague. I asked him why the Minneapolis St. Paul Metropolitan Metro area had given rise to more urban policy innovations than most other areas of the nation (including metropolitan delivery of services, tax-base sharing, etc.).

I expected the mayor to respond with something like, “Well we have good leaders,” or, “Our citizens care,” or, “We really do have a solid institutional structure,” or “The politics are ripe.” Without batting an eye, however, Mayor Naftalin— “Art” — looked at me and indicated, “It’s because we have more Scandinavians here.”

What an interesting answer! I queried the mayor on his response. He said, “It’s because folks who emigrated from Norway and Sweden came to the area with a strong sense of community and social conscience.” He added, laughingly, that the weather often “was so cold, and the environment in Scandinavia so tough, that [they] began life at an early age, assuming shared responsibility for taking in someone else’s wash, children, and caring for the community’s public good.”

I think that Mayor Naftalin’s comments about the impact of demography and community consciousness were interesting and, for Minneapolis St. Paul in the sixties, probably reasonable. Jumping to 2015, and the present political polarization of Washington and many states and communities, I have some “fabulistic” ideas. First, why not create an innovative Avis-Rent-a-Scandinavian program to encourage Scandinavian emigration. Involved immigrants would receive fast pathways to citizenship as long as they show strong involvement in community life and leadership. Second, why not organize Scandinavian leaders in communities in the U.S. that illustrate a vibrant, strong Swedish or Norwegian demographic? They could make wonderful facilitators and spread the word about community building. Third, why not grant subsidies to surrogate mothers who agree to bear a Scandinavian child for parents desiring Norwegian or Swedish children? All right, this one is only presented to wake you up! It will take too long a time to make a difference in population numbers. No genetic engineering here. (As an aside, the idea is akin to relying only or even primarily on renewable fuels at the present time to significantly reduce GHG and other pollutants, given the number of existing internal combustion vehicles.)

Again, this discourse seems to be right out of Peter Pan’s Neverland. But, bottom line, there is wisdom in Mayor Naftalin’s comments, particularly with respect to developing strong concepts of the public good to secure support for polices to increase use of alternative fuels, FFVs and open fuel markets.

Because of the media’s wall-to-wall coverage of what was, until two weeks ago, focused on declining prices of gasoline and often real-dollar savings to low- and moderate-income households, an opportunity to create a nonpartisan constituency for sustained lower-fuel costs probably now exists among America’s population, particularly among less-than-affluent folks and their advocates. So, let’s make everyone a bit Swedish or Norwegian.

But human memories are often short lived and if gasoline continues to rise over the next few months, our memory of nearly $2 dollar a gallon gasoline will likely be lost. How many remember when gas was only twenty-five cents a gallon? I do. Only because I ran out of money when I was 16 several times and had to cash in bottles to secure gasoline.

Seriously, a brief window exists to create a broad community or public interest coalition (e.g., government, business, environmental groups, national, state and community groups interested in helping low- and moderate-income people, etc.) to sustain lower fuel prices. The coalition’s agenda, if successful, would open up gas markets to competition from safe, lower-priced, environmentally better alternative fuels — natural gas, ethanol, methanol, electricity and other renewables. They are not perfect fuels, but they are better than gasoline. Let gasoline compete on an even playing field instead of being protected by franchise agreements between stations and oil producers as well as the present absence of equitable and efficient public policies. I bet by trolling computerized Yellow Pages, the coalition could find Swedes and Norwegians — or their counterparts throughout the population — to provide strategic local, state and, indeed, national leadership and support for alternative fuels. Or, better yet, we all could become, in Mayor Naftalin’s terms, Scandinavian. Paraphrasing President Kennedy, “Ich bin ein Norwegian, Swedish.” Yes, we can! Instead of “drill baby drill”, let’s substitute “alternative fuels grownups alternative fuels!”

What does loving America have to do with the whims and opportunity costing of the oil industry?

The Greeks are going broke…slowly! The Russians are bipolar with respect to Ukraine! Rudy Giuliani has asked the columnist Ann Landers (she was once a distant relative of the author) about the meaning of love! President Obama, understandably, finds more pleasure in the holes on a golf course than the deep political holes he must jump over in governing, given the absence of bipartisanship.

2012-2015_Avg-Gas-Prices1-1024x665But there is good news! Many ethanol producers and advocacy groups, with enough love for America to encompass this past Valentine’s Day and the next (and of course, with concern for profits), have acknowledged that a vibrant, vigorous, loving market for E85 is possible, if E85 costs are at least 20 percent below E10 (regular gasoline) — a percentage necessary to accommodate the fact that E10 gas gets more mileage per gallon than E85. Consumers may soon have a choice at more than a few pumps.

In recent years, the E85 supply chain has been able to come close, in many states, to a competitive cost differential with respect to E10. Indeed, in some states, particularly states with an abundance of corn (for now, ethanol’s principal feedstock), have come close to or exceeded market-based required price differentials. Current low gas prices resulting from the decline of oil costs per barrel have thrown price comparisons between E85 and E10 through a bit of a loop. But the likelihood is that oil and gasoline prices will rise over the next year or two because of cutbacks in the rate of growth of production, tension in the Middle East, growth of consumer demand and changes in currency value. Assuming supply and demand factors follow historical patterns and government policies concerning, the use of RNS credits and blending requirements regarding ethanol are not changed significantly, E85 should become more competitive on paper at least pricewise with gasoline.

Ah! But life is not always easy for diverse ethanol fuel providers — particularly those who yearn to increase production so E85 can go head-to-head with E10 gasoline. Maybe we can help them.

Psychiatrists, sociologists and poll purveyors have not yet subjected us to their profound articles concerning the possible effect of low gas prices on consumers, particularly low-income consumers. Maybe, just maybe, a first-time, large grass-roots consumer-based group composed of citizens who love America will arise from the good vibes and better household budgets caused by lower gas prices. Maybe, just maybe, they will ask continuous questions of their congresspersons, who also love America, querying why fuel prices have to return to the old gasoline-based normal. Similarly, aided by their friendly and smart economists, maybe, just maybe, they will be able to provide data and analysis to show that if alternative lower-cost based fuels compete on an even playing field with gasoline and substitute for gasoline in increasing amounts, fuel prices at the pump will likely reflect a new lower-cost based normal favorable to consumers. It’s time to recognize that weakening the oil industry’s monopolistic conditions now governing the fuel market would go a long way toward facilitating competition and lowering prices for both gasoline and alternative fuels. It, along with some certainty concerning the future of the renewable fuels program, would also stimulate investor interest in sorely needed new fuel stations that would facilitate easier consumer access to ethanol.

Who is for an effective Open Fuel Standard Program? People who love America! It’s the American way! Competition, not greed, is good! Given the oil industry’s ability to significantly influence, if not dominate, the fuel market, it isn’t fair (and maybe even legal) for oil companies to legally require franchisees to sell only their brand of gasoline at the pump or to put onerous requirements on the franchisees should they want to add an E85 pump or even an electric charger. It is also not right (or likely legal) for an oil company and or franchisee to put an arbitrarily high price on E85 in order to drive (excuse the pun) consumers to lower priced gasoline?

Although price is the key barrier, now affecting the competition between E85 and E10, it is not the only one. In this context, ethanol’s supply chain participants, including corn growers, and (hopefully soon) natural gas providers, need to review alternate, efficient and cost-effective ways to produce, blend, distribute and sell their product. More integration, cognizant of competitive price points and consistent with present laws and regulations, including environmental laws and regulations, is important.

The ethanol industry and its supporters have done only a fair to middling job of responding to the oil folks and their supporters who claim that E15 will hurt automobile engines and E85 may negatively affect newer FFVs and older internal combustion engines converted to FFVs. Further, their marketing programs and the marketing programs of flex-fuel advocates have not focused clearly on the benefits of ethanol beyond price. Ethanol is not a perfect fuel but, on most public policy scales, it is better than gasoline. It reflects environmental, economic and security benefits, such as reduced pollutants and GHG emissions, reduced dependency on foreign oil and increased job potential. They are worth touting in a well-thought-out, comprehensive marketing initiative, without the need to use hyperbole.

America and Americans have done well when monopolistic conditions in industrial sectors have lessened or have been ended by law or practice (e.g., food, airlines, communication, etc.). If you love America, don’t leave the transportation and fuel sector to the whims and opportunity costing of the oil industry.

Porgy and Bess, Marxian dialectic, oil and alternative fuels

Porgy and Bess poster“We got plenty of oil and big oil’s got plenty for me” (sung to the tune of “I Got Plenty of Nutting” from Porgy and Bess). “I got me a car…got cheap(er) gas. I got no misery.”

This is the embedded promise for most Americans in the recent article by David Gross, “Oil is Cratering. American Oil Production Isn’t.” His optimism concerning at least the near future of oil — while a bit stretched at times, and economically and environmentally as well as socially somewhat misplaced — serves at least as a temporary antidote to individuals and firms with strong links to the oil industry and some in the media who have played chicken with oil (or is it oy little?). But in a Marxian sense (bad economist, but useful quotes), Gross does not provide a worthy synthesis of what is now happening in the oil market place. Indeed, his was a thesis in search of an antithesis rather than synthesis. Finding a synthesis now is like Diogenes searching for truth in light of almost daily changes in data, analyses and predictions concerning the decline in oil and gas prices by so-called experts.

Gross’s gist is that “Signs of the oil bust abound….The price of West Texas Intermediate crude has fallen in half in the past six months. The search for oil, which fueled a gold-rush mentality in North Dakota and Texas, is abating.” Rigs have closed down, employment is down and oil drilling areas face economic uncertainty, but, despite signs of malaise, “a funny thing has happened during the bust. Oil production in America has been rising…In November, the U.S. produced 9.02 million barrels of oil per day, up by 14.5 percent from November 2013… Production in January 2015 rose to 9.2 million barrels per day. And even with WTI crude settling at a forecasted price of about $55 per barrel for the year, production for all of 2015 should come in at 9.3 million barrels per day — up 7.8 percent from 8.63 million barrels per day in 2014…The U.S., which accounts for just 10 percent of global production, is expected to supply 670,000 new barrels — 82 percent of the globe’s total growth.”

Somewhat contrary to his facts about rigs closing down, Gross indicates that America’s oil largesse results from “American exceptionalism.” Shout out loud! Amen! American oil companies are able to produce larger amounts, even when oil numbers suggest a market glut, because they play by new rules. They are nimble, they are quick, they jump easily over the oil candlestick. They rely on new technology (e.g., fracking), innovation and experimentation. They don’t have to worry about environmental or social costs. The result? They bring down the cost of production and operations, renegotiate contracts and lay off workers. “The efforts at continuous improvement combined with evasive action mean a lot more profitable activity can take place at these prices than previously thought.” The industry appears like a virtual manufacturing and distribution version of Walmart. It, according to Gross, apparently can turn a positive cash flow even if the price per barrel stays around where it has been….from close to $50 to $70 a barrel. Holy Rockefeller, Palin and Obama! Drill, baby, drill! Just, according to the President, be circumspect about where and how.

Not so fast, according to both Euan Mearns, writing for the Oil Drum, and A. Gary Shilling, writing for Bloomberg Oil, both on the same day as Gross.

Mearns’ and Shilling’s perspectives are darker, indeed, gloomy as to the short term future of the oil market. The titles of their pieces suggest the antithesis to Gross article: Oil Price Crash Update (Mearns) and Get Ready for $10 Oil (Shilling). “The collapse in U.S. shale oil drilling, that looks set to continue, must lead to U.S. oil production decline in the months ahead…It looks as though the U.S. shale oil industry is falling on its face. This will inevitably lead to a fall in U.S. production” Mearns evidently places much less value on the industry’s capacity to literally and strategically turn on the present oil market dime.

Shilling asks us to wait for his next article in Bloomberg for his synthesis of what’s likely to happen- sort of like the trailers in Fifty Shades of Grey, except his data is not enticing. His voice through words is just short of Paul Revere’s: price declines are coming! The economy is at risk! Men and women to the battlefields! “At about $50 a barrel, crude oil prices are down by more than half from their June 2014 peak at $107. They may fall more, perhaps even as low as $10 to $20.” Slow growth in the U.S., China and the euro zone, and negative growth in Japan, combined with conservation and an increase in vehicle gas mileage, places a limit on an increase in global demand. Simultaneously, output is climbing, thanks mostly to U.S. production and the Saudis’ refusal to lower production. Shilling’s scenario factors in the prediction from Daniel Yergin, a premier and expensive oil consultant, that the average cost of 80% of new U.S. shale oil production will be $50 to $69 a barrel. He notes, interestingly, that out of 2,222 oil fields surveyed worldwide, only 1.6% would have a negative cash flow at $40 per barrel. Further, and perhaps more significant, the “marginal cost of efficient U.S. shale oil producers is about $10 to $20 dollars a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf. Like Gross, Shilling pays heed to American efficiency but suggests its part of a conundrum. “Sure, the drilling rig count is falling, but it’s the inefficient rigs that are being idled, not the [more efficient], horizontal rigs that are the backbone of the fracking industry.” Oil production will continue to go up, but at a slower rate. This fact, juxtaposed with continuing, relatively weak growth of global and U.S. demand, will continue to generate downward pressures on oil prices and gasoline.

Even a Marxist, who is a respected dialectician, would find it tough to make sense out of the current data, analyses and predictions. More important, if you wait just a bit, the numbers and analyses will change. Those whose intellectual courage fails them and who generally put their “expert” analyses out well after facts are created by the behavior of the stock market, oil companies, consumers and investors deserve short shrift. They are more recorders of events than honest analysts of possible futures — even though they get big bucks for often posturing and/or shouting on cable.
So what is the synthesis of the confused, if there is one? Oil could go down but it could also stabilize in price and start going up in fits and starts. Production is likely to continue growing but at a slower rate. Demand sufficient to move oil prices depends upon renewed and more vigorous GDP growth in Asia, the U.S. and Europe. Realize that very few analysts are willing to bet their paychecks on definitive economic predictions.

Saudi reserves will likely provide sufficient budget revenues to support its decision to avoid slowing down production and raising prices at least for a year or so (notice the “or so”). Market share has supplanted revenue as (at least today’s) Saudi and OPEC objectives. But how long Saudi beneficence lasts is anyone’s guess and, indeed, everyone is guessing. Deadbeat nations like Venezuela and Russia are in trouble. Their break-even point on costs of oil is high, given their reliance on oil revenues to balance domestic budgets and their use more often than not of aging technology and drilling equipment.

As the baffled King from “Anna and the King of Siam” said, concerning some very human policy-like issues, “It’s a puzzlement.” There are lots of theses and some antitheses, but no ready consensus synthesis. Many Talmudic what ifs? What is clear is that the dialectic is not really controlled or even very strongly influenced by the consumer. Put another way, the absence of alternative fuels at your friendly “gas” station grants participation in the dialectic primarily to monopolistic acting oil and their oil related industry and government colleagues. Try to get E85 or your battery charged at most gas stations. Answers to most of the “what ifs” around oil pricing and production, particularly for transportation, would be shaped more by you and I — consumers — if we could break the oil monopoly at the pump and select fuels of personal choice including an array of alternates now available. Liberty, equality and fraternity! Oh, those French.

Alternative and renewable fuels: There is life after cheap gas!

usatoday_gaspricesSome environmentalists believe that if you invest in and develop alternative replacement fuels (e.g., ethanol, methanol, natural gas, etc.) innovation and investment with respect to the development of fuel from renewables will diminish significantly. They believe it will take much longer to secure a sustainable environment for America.

Some of my best friends are environmentalists. Most times, I share their views. I clearly share their views about the negative impact of gasoline on the environment and GHG emissions.

I am proud of my environmental credentials and my best friends. But fair is fair — there is historical and current evidence that environmental critics are often using hyperbole and exaggeration inimical to the public interest. At this juncture in the nation’s history, the development of a comprehensive strategy linking increased use of alternative replacement fuels to the development and increased use of renewables is feasible and of critical importance to the quality of the environment, the incomes of the consumer, the economy of the nation, and reduced dependence on imported oil.

There you go again say the critics. Where’s the beef? And is it kosher?

Gasoline prices are at their lowest in years. Today’s prices convert gasoline — based on prices six months ago, a year ago, two years ago — into, in effect, what many call a new product. But is it akin to the results of a disruptive technology? Gas at $3 to near $5 a gallon is different, particularly for those who live at the margin in society. Yet, while there are anecdotes suggesting that low gas prices have muted incentives and desire for alternative fuels, the phenomena will likely be temporary. Evidence indicates that new ethanol producers (e.g., corn growers who have begun to blend their products or ethanol producers who sell directly to retailers) have entered the market, hoping to keep ethanol costs visibly below gasoline. Other blenders appear to be using a new concoction of gasoline — assumedly free of chemical supplements and cheaper than conventional gasoline — to lower the cost of ethanol blends like E85.

Perhaps as important, apparently many ethanol producers, blenders and suppliers view the decline in gas prices as temporary. Getting used to low prices at the gas pump, some surmise, will drive the popularity of alternative replacement fuels as soon as gasoline, as is likely, begins the return to higher prices. Smart investors (who have some staying power), using a version of Pascal’s religious bet, will consider sticking with replacement fuels and will push to open up local, gas-only markets. The odds seem reasonable.

Now amidst the falling price of gasoline, General Motors did something many experts would not have predicted recently. Despite gas being at under $2 in many areas of the nation and still continuing to decrease, GM, with a flourish, announced plans, according to EPIC (Energy Policy Information Agency), to “release its first mass-market battery electric vehicle. The Chevy Bolt…will have a reported 200 mile range and a purchase price that is over $10,000 below the current asking price of the Volt.It will be about $30,000 after federal EV tax incentives. Historically, although they were often startups, the recent behavior of General Motor concerning electric vehicles was reflected in the early pharmaceutical industry, in the medical device industry, and yes, even in the automobile industry etc.

GM’s Bolt is the company’s biggest bet on electric innovation to date. To get to the Bolt, GM researched Tesla and made a $240 million investment in one of its transmissions plan.

Maybe not as media visible as GM’s announcement, Blume Distillation LLC just doubled its Series B capitalization with a million-dollar capital infusion from a clean tech seed and venture capital fund. Tom Harvey, its vice president, indicated Blume’s Distillation system can be flexibly designed and sized to feedstock availability, anywhere from 250,000 gallons per year to 5 MMgy. According to Harvey, the system is focused on carbohydrate and sugar waste streams from bottling plants, food processors and organic streams from landfill operations, as well as purpose-grown crops.

The relatively rapid fall in gas prices does not mean the end of efforts to increase use of alternative replacement fuels or renewables. Price declines are not to be confused with disruptive technology. Despite perceptions, no real changes in product occurred. Gas is still basically gas. The change in prices relates to the increased production capacity generated by fracking, falling global and U.S. demand, the increasing value of the dollar, the desire of the Saudis to secure increased market share and the assumed unwillingness of U.S. producers to give up market share.

Investment and innovation will continue with respect to alcohol-based alternative replacement and renewable fuels. Increasing research in and development of both should be part of an energetic public and private sector’s response to the need for a new coordinated fuel strategy. Making them compete in a win-lose situation is unnecessary. Indeed, the recent expanded realization by environmentalists critical of alternative replacement fuels that the choices are not “either/or” but are “when/how much/by whom,” suggesting the creation of a broad coalition of environmental, business and public sector leaders concerned with improving the environment, America’s security and the economy. The new coalition would be buttressed by the fact that Americans, now getting used to low gas prices, will, when prices rise (as they will), look at cheaper alternative replacement fuels more favorably than in the past, and may provide increasing political support for an even playing field in the marketplace and within Congress. It would also be buttressed by the fact that increasing numbers of Americans understand that waiting for renewable fuels able to meet broad market appeal and an array of household incomes could be a long wait and could negatively affect national objectives concerning the health and well-being of all Americans. Even if renewable fuels significantly expand their market penetration, their impact will be marginal, in light of the numbers of older internal combustion cars now in existence. Let’s move beyond a win-lose “muddling through” set of inconsistent policies and behavior concerning alternative replacement fuels and renewables and develop an overall coordinated approach linking the two. Isaiah was not an environmentalist, a businessman nor an academic. But his admonition to us all to come and reason together stands tall today.

What good are economists, including oil and fuel economists?

RobertShillerNobel-Prize winning economist, Dr. Robert Shiller, is one of the top economists in the nation, actually, let’s make him an imperialist, in the world. He is best known, perhaps, as the co-creator of the S&P/Case Shiller Home Price Indices. His books on economic theory and issues populate many college classrooms and personal libraries, including mine. He is an impressive, smart and accomplished intellectual giant.

It’s tough, given Dr. Shiller’s pedigree, to even suggest a bit of criticism. But because I think it’s important to current policy debates concerning economic, energy and transportation fuel policies, I do want to take issue with his recent short piece in Project Syndicate (What Good Are Economists?). In it, he defends economists and their mistakes concerning economic forecasts.

Shiller seems oversensitive to the pervasive criticism of economists in the media and literature. Because of the esteem with which he deservedly is held, his somewhat-thin response may mute a needed dialogue concerning the weaknesses attributed by respected critics of the work of economists. Shiller admits they failed to warn the nation in advance of economic downturns as far back as 1920-1921. By implication, he also suggests that because of this fact economists did not have a major impact or may have even had a negative impact at the policy table and often gave up their places to business and political leaders. Certainly Dr. Lawrence Summers and Alan Greenspan have not escaped criticism for failing to predict both the recent recession and for instituting policies that may have exacerbated the recession itself.

Over the past several years, many Americans have been frustrated by the errors of omission and commission made by respected economists from America’s think tanks and its government institutions, like the EIA, concerning analyses, forecasts and predications of the price of oil and gas as well as, demand for and supply of fuel and the role alternative fuels have and will play in America’s future economy. Their numbers and analyses often seem like the “once a day” or maybe “once a month” variety. Many of you don’t remember the famous (now clearly seen as a sexist) joke by I believe Ilka Chase in the old Reader’s Digest that a “woman’s mind is cleaner than a man’s because she changes it so often.” The comment now fits many energy-related economists. Their minds may be cleaner than those of normal folks because, as seen in many of their energy and fuel forecasts, they change it so often. But by doing so, they present obstacles to government, congressional leaders, industry, academic and environmental officials anxious to develop sound energy and fuel policies and program initiatives.

Can you name — on more than one hand — the economists who predicted the recent significant decline of oil and gasoline prices? Can you find consensus among economists concerning oil and fuel prices in the future? Can you identify economists willing to go out on a limb and describe, other than in generalities, the causes of the current decline in prices? Put two economists in a room and you will get three or more different reasons, most resting on opinion and not on hard data. Paraphrasing, oh, yes, the reason(s) are (or is): the Saudi Kingdom and its unwillingness to limit production and desires to gain market share; another favorite: the American producer’s recent oil shale largess is too good to pass up by slowing down drilling significantly; and don’t forget: the rise of the value of the dollar and the fall off in travel mileages resulting from the global recession. For the politically susceptible and sometimes cynical economists, throw in the genius of American and Saudi foreign policy as a factor. They fail to sleep at night, believing the decline is the purposeful result of the State Department and/or their counterparts in the Kingdom. If you keep prices low, who does it hurt most…Russia, Iran and Venezuela, of course!

There are many theories concerning recent price declines but no real hard answers based on empirical evidence and factor analysis.

Energy and transportation fuel economists, at times, seem to practice art rather than science. Diverse methodologies used to forecast oil and gasoline prices; demand and supply are unable to easily manage or accommodate the likely involved complex economic, technical, geopolitical and behavioral factors. As a result, specific cause and effect relationships among and between independent and dependent variables concerning oil and gas trends are difficult to discern by expert and lay folks alike.

Understandably, American leaders often appear to value what they feel are the good artists among economists, particularly if they lend credence in their speeches and reports to their own views or ideological predilections. Shiller’s question about economists in his piece is not a difficult one to answer. He asks, “If they were unable to foresee something (the 2007-2009 financial crisis and recession) so important to people’s wellbeing, what good are they?”

The best in the profession have provided insights into the economy and what makes it tick or not tick. They, at times, have increased public understanding of corrective public and private-sector actions to right a weak economy. They, again at times, have helped lead to at least temporary consensus concerning options related to fiscal and monetary policy changes and the need for regulations of private sector activities. But Dr. Shiller goes too far when he offers a mea culpa for the profession by comparing its failure to predict economic trends to doctors who fail to predict disease. Doctors probably do suffer more than economists for their mistakes, particularly when their analyses result in increased rates of morbidity and mortality. At least economists can bury their errors in next week’s or next month’s studies or reports; many times doctors can escape their errors only by burying their patients. The article could have been a provocative and an important one, given Dr. Shiller’s justifiable stature. It might have stimulated self examination among some of the best and brightest if it had linked weaknesses in economic forecasts to proposals to strengthen the rigor of methodological approaches. Presently, the brief article regrettably reads as an excuse for professional deficiencies. Res ipsa loquitur.