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Four new anticipated novels about the decline of oil and gas prices

Harlequin novel cover“We are drowning in information but starved for knowledge,” said John Naisbitt, American author and public speaker. Because of this fact, intuition and instinct, rather than rational thinking, often guides leadership behavior. Guess right, based on what your intuitive self or instinct tells you concerning your iterative policy decisions — particularly the big ones — and the payoff for you and the nation may well be significant. Guess wrong, and the nation could be hurt in various ways and you might not be around for a long time, or get buried in an office close to a windowless washroom. Charles Lindblom, noted political scientist, probably said it correctly when he noted that in complex environments we often make policy by “muddling through.”

Confusion reigns and analyses are opaque and subject to quick amendment concerning the current, relatively rapid decline in oil and gasoline prices. Indeed, key government institutions such as the EIA (Energy Information Administration) and the IEA (International Energy Agency) appear to change their predictions of prices of both, almost on a daily basis. Oil and gas production, as well as price evaluations and predictions resulting from today’s imprecise methodologies and our inability to track cause-and-effect relationships, convert into intriguing fodder for novels. They do not often lend themselves to strategic policy direction on the part of both public and private sector. Sometimes, they do seem like the stuff of future novels, part fiction, and, perhaps, part facts.

Ah … the best potential novels on the decline of oil and gas, particularly ones based on foreign intrigue, will likely provide wonderful bedtime reading, even without the imputed sex and content of the old Harlequin book covers and story lines. Sometimes their plots will differ, allowing many hours of inspirational reading.

Here are some proposed titles and briefs on the general theme lines for four future novels:

An Unholy Alliance: The Saudis and Qatar have joined together in a new alliance of the willing, after secret conversations (likely in a room under a sand dune with air conditioning built by Halliburton, in an excavated shale play in the U.S., a secret U.S. spaceship, or Prince Bandar’s new jet). They have agreed to resist pressure from their colleagues in OPEC and keep both oil production and prices low. By doing so, they and their OPEC friends would negatively affect the Russian and Iranian economy and limit ISIS’s ability to convert oil into dollars. Why not? The Russians and the Shiite-dominated Iranians have supported Syria’s Assad and threated the stability of Iraq. Qatar and the Saudis support the moderate Syrian rebels (if we can find them) but not ISIS, and are afraid that Iran wants to develop hegemony over Iraq and the region, if they end up with the bomb. Further, ISIS, even though it’s against Assad, is not composed of the good kind of Sunnis, and has learned a bit from the Saudis about evil doings. If ISIS succeeds in enlarging the caliphate, it will threaten their kingdoms and the Middle East. According to a mole in the conversations, Russia was really thrown into the mix because, sometimes, it doesn’t hurt to show that you might be helping the West while paying attention to market share.

OPEC in Fantasy Land: Most OPEC members see U.S. oil under their bed at night and have recurring nightmares. “Why,” they asked, “can’t we go back to the future; the good old days when OPEC controlled or significantly influenced oil production and prices in the world?” Several members argued for a counter intuitive agreement.

Let’s surprise the world and go against our historical behavior. Let’s keep prices low, even drive them lower. It will be tough on some of us, whose budgets and economy depend on high oil prices per barrel, but perhaps our “partner” nations who have significant cash reserves, like my brothers (the hero of this novel started to say sisters, but just couldn’t do it) in the Kingdom, can help out.

Driving prices lower, agreed the Saudis, will increase our collective market share (really referring to Saudi Arabia), and may permanently mute any significant competition from countries such as Russia, Mexico, Iraq, Venezuela, and others. But, most importantly, it will probably undercut U.S. producers and lead to a cutback in U.S. production. After all, U.S. production costs are generally higher than ours. Although some delegates questioned comparative production cost numbers and the assumption that the U.S. and its consumer-driven politics will fold, the passion of the Saudis will win the day. OPEC will decide to continue at present production levels and become the Johnny Manziels of oil. Money, money, money? Conspiracy, conspiracy, conspiracy!

Blame it on the Big Guys: The U.S. will not escape from being labeled as the prime culprit in some upcoming novels on oil. The intuitive judgments will go something like this: Don’t believe what you hear! U.S. producers, particularly the big guys, while worried about the fall in oil and gas prices, on balance, believe both will have intermediate and long-term benefits. They have had it their way for a long time and intuitively see a rainbow around every tax subsidy corner.

Why? Are they mad? No? Their gut, again, tells them that what goes down must come up, and they are betting for a slow upward trend next on the following year. Meanwhile, technology has constrained drilling costs. Most feel they can weather the reduced prices per barrel and per gallon. But unlike the Saudis and other OPEC members, they are not under the literal gun to meet national budget estimates concerning revenue. Like the Saudis, however, with export flexibility in sight from Congress, many producers see future market share as a major benefit.

Split Dr. Jekyll and Mr. Hyde personalities exist among the U.S. producers. Jekyll, reflecting the dominant, intuitive feeling, supports low prices. The Saudis and OPEC can be beaten at their own game. We have more staying power and can, once and for all time, reduce the historic power of both concerning oil. While we are at it, big oil can help the government put economic and political pressure on Russia, Iran and ISIS, simultaneously. Wow, we may be able to get a grant, change our image, a Medal of Freedom and be included in sermons on weekends!

Hyde, who rarely shows up at the oil company table until duty calls, now joins the group. He offers what he believes is sage, intuitive advice. He is the oldest among the group and plays the “you’re too young to know card” a bit, much to the chagrin of his younger colleagues. He expresses some rosy instincts about the oil market but acknowledges the likelihood that the future is uncertain and, no matter what, price cycles will continue. He acknowledges that there might be a temporary reduction of the political pressure to open up the fuel markets and to develop alternative fuels because of present relatively low prices. However, based on talking to his muses — both liberals and free market conservatives — and reading the New York Times, he suggests that it might not be a bad idea to explore joining with the alternative fuel folks. Indeed, Hyde indicates that he favors adding alternative fuel production to the production menu of many oil companies. If this occurred, oil companies could hedge bets against future price gyrations and maybe even win back some public support in the process. The industry also might be able to articulate their overblown claim that the “drill, baby, drill” mantra will make the U.S. oil independent. (At this point, the background music in the room becomes quite romantic, and angelic figures appear!) Hyde doubt that going after global market share would bring significant or major early rewards because of current regulations concerning exports and may interfere with the health of the industry in the future as well as get in the way of the country’s still-evolving foreign policy objectives.

Tough sell, however! Contrary to Hyde’s desires, Jekyll carries the day and “kill the bastards” (assumedly the Saudis) becomes the marching orders or mantra. Let’s go get ‘em. Market share belongs to America. Let’s go see our favorite congressperson. We helped him or her get elected; now is the time for him or her to help us eliminate export barriers. A U.S. flag emerges in the future novel. Everyone stands. The oil groupies are in tears. Everybody is emotional. Even Hyde breaks down and, unabashedly, cries.

David and Goliath: Israel has also become a lead or almost lead character in many potential novels on oil. According to its story line, because of Israel’s need for certainty concerning U.S. defense commitments, it has convinced the “best in the west” to avoid a significant reduction in drilling for and the production of oil. Israel advises the U.S. to extend its security-related oil reserves! Glut and surplus are undefined terms. Compete with the Saudis. Drive the price of oil lower and weaken your and our enemies, particularly Iran and Russia. The U.S. should play a new and more intense oil market role. For some, an alliance among U.S.-Israel and other western nations to keep oil and gas prices low is not unimaginable and, indeed, seems quite possible. What better way to anesthetize Iran and Russia? Better than war! An Iran and a Russia unable to unload their oil at what it believes are prices sufficient to support their national budgets would be weakened nations, unable to sustain themselves and meet assumed dual objectives: defense and butter. Finally, what more “peaceful” way to deal with Hezbollah and Hamas, to some extent, than to cut off Iran’s ability to lend them support?

Each of the future novels summarized above clearly suggests some reality driven by what we know. But overall, each one has a multitude of equally intuitive critics with different facts, hypotheses, intuition and instincts. As indicated earlier, it is too bad we cannot generate better more stable analyses and predictions. For now, however, just realize how complex it is to rest policy as well as behavior on, many times, faulty projections and intuition or instinct. Borrowing a quote by the noted comic and philosopher, George Carlin, “tell people there’s an invisible man in the sky who created the universe, and the vast majority will believe you. Tell them the paint is wet, and they have to touch it to be sure.” Similarly, restating but changing and adding words, a quote from the Leonard Bernstein of science, Carl Sagan, that the nuclear arms race (if it does occurs in the Middle East) will be like many “sworn enemies waist-deep in gasoline,” the majority with many matches and one or two with only a few matches.

Novels and Alternative Fuels:

Where does this all leave us with respect to alternative fuels and open fuel markets? Too many producers and their think tank friends believe that low oil and gas prices will reduce the likelihood that alternative fuels will become a real challenge to them in the near future. They, instinctively, opine that investors, without patient money, will not risk funding the development of alternative fuels because prices of oil and gas are so low. Further, their “house” economists argue that consumers will be less prone to switch from gasoline to alternative replacement fuels in light of small or non-existent price differentials between the two.

The truth is that we just don’t know yet how the market for alternative fuels and its potential investors will respond in the short term to the oil and gas price crash. Similarly, we don’t know how long relatively low prices at the pump will last. We do know that necessity has been and, indeed, is now the mother (or father) of some very important U.S. innovations and investor cash. In this context, it is conceivable that some among the oil industry may well add alternative fuels to their portfolio to mute boom, almost boom and almost bust or bust periods that have affected the industry from time immemorial. Put another way, protecting the bottom line and sustaining predictable growth may well, in the future, mean investing in alternative fuels.

Low gas prices presently will likely be followed by higher prices. This is not a projection. History tells us this: importantly, lower gas prices now may well build a passionate coalition of consumers ready to, figuratively, march, if gas prices begin to significantly trend upward. The extra money available to consumers because “filling ‘er up” costs much less now, could well become part of household, political DNA. Keeping fuel prices in line for most consumers, long term, will require competition from alternative fuels — electricity, natural gas, natural gas-based ethanol, methanol, bio fuels, etc. Finally, while our better community-based selves may be dulled now by lower gas prices, most Americans will probably accept a better fuel mousetrap than gasoline because of their commitment to the long-term health and welfare of the nation. But the costs must be competitive with gasoline, and the benefits must be real concerning GHG reduction, an enhanced environment and less oil imports. My intuition and instincts (combined with numerous studies) tell me they will be! Happy Holidays!

CNG-pump

Will falling gas prices hurt alternative vehicles?

Everyone is saying that falling gas prices will ruin the market for alternative fuels and vehicles. But it isn’t time to give up on them now.
Ethanol and methanol are still two liquid fuels that will easily substitute for gasoline in our current infrastructure. Ethanol is making headway, particularly in the Midwest, where it is still cheaper than gasoline and has a lot of support in the farm economy. The big decision will come when the EPA finally sets the quota for ethanol consumption for 2015 – if the agency ever gets around to making a decision. (The decision has been postponed since last spring.) A high number should guarantee the sale of ethanol no matter what the price of gasoline.

That leaves methanol, the fuel that has the most potential to replace gasoline and would it fit right into our present infrastructure but must still run the gamut of EPA approval and would require a change in habits among motorists. Methanol is still relatively unknown among car owners and is hindered by people’s reluctance to try new things. But the six methanol plants that the Chinese are building in the Texas and Louisiana region could break the ice on methanol. The Chinese have 100,000 methanol cars on the road now and are shooting for 500,000 by 2015. Some of that methanol might end up in American engines as well.

Another alternative that is still in play is the electric car. In theory, electric cars should not be affected much by gas prices because that is an entirely different infrastructure. The appeal is not based on price so such as the idea of freeing yourself from the oil companies completely and relying on a source of energy.

The Nissan Leaf has not been badly hit by oil prices. Tesla’s cars, of course, have not gone mass market yet, but the company is relying on a new breed of consumer who does not worry too much about the price and will appreciate the car for its style and performance. Elon Musk has shown no indication of backing down on his great Gigafactory, and Tesla is still aiming to have the Model III (its third-generation vehicle, which will come at a much lower expected price point of $35,000) ready by 2017.

This leaves natural-gas-powered vehicles as the only group that might be hurt by falling gas prices, and here the news is not too good. Sales of vehicles that have compressed natural gas as their fuel declined 7.2 percent in November. As David Whiston, an analyst at Morningstar, told the Houston Chronicle’s Ryan Holeywell: “I hear all the time from dealers: As soon as gas starts to go down, people look at light trucks.”

CNG’s appeal has always been that it will be cheaper than regular gasoline, so plunging gas prices make it lose much of its appeal. It costs $5,000 to install a tank for CNG fuel, and that is not likely to attract a lot of takers with oil prices low. For a gas-electric hybrid, there is similar math. For the Toyota Corolla, the electric portion adds another $7,000 to the price. That’s why the CNG-based solutions never caught up with the light-duty vehicle. They are still attractive for high-mileage vehicles like buses and garbage trucks. “For the consumers doing the math, if gas goes below $3 per gallon, the payback period goes out a number of years,” Whiston told Holeywell. “And the break-even point makes sense for fewer people.”

The collapse in gas prices is not the end of the road for alternative fuels. In a couple of months, the price may be up again, and all those people who have rushed out to buy light trucks will be stuck with them. The changeover to alternative fuels is a slow process, fraught with false starts and misleading signals. But in the end, it will be well worth it to reduce our dependence on imported oil and achieve some kind of energy independence. Car buyers have very short memories and an inability to look very far into the future. Remember, it’s always a passing parade. Consequently, their reaction has been only short-term. But once people buy those trucks, they’re stuck with them for the next 5 to 10 years. If the price of gas goes up again, they may live to regret it.

Abbott and Costello, war, sectarianism and Middle Eastern oil — a trifecta

Abbott & CostelloI bet only those on Medicare, like me, remember the old Abbott and Costello joke, “Who’s on first, What’s on second, I Don’t Know is on third”… or something like that.

The dialogue was funny at the time. But the joke, in some respects, tracks the current, very serious situation in the Middle East: Who’s on first, a very militant Sunni group called ISIS; What’s on second, well maybe Iraq (if it can get its act together, which is increasingly unlikely); and, I Don’t Know exactly who’s on third, maybe the Peshmerga from among the Kurdish Regional State in Iraq and, perhaps soon, a surprise addition from the Kurdish PKK military group living among Kurds in Turkey. Who are the umpires? Perhaps Israel. Maybe OPEC. How about the world’s respected ethicists — if they can ever agree.

Isn’t this fun? Let’s try it again, for there are several possible lineups. Let’s try this one: Who’s on first, how about the Assad-related Shiites in Syria. What’s on second, the new caliphate in Iraq and Syria. I Don’t Know exactly who’s on third, maybe, but unlikely, in light of its numerous conflicting interests (e.g., NATO, Islam, etc.), Turkey. Who’s the hapless lonely umpire or umpires at home plate? Perhaps, the U.N. — the so-called moderate rebels. Perhaps the USA, England or France, or perhaps all three. After all, each Western country has had, at best, a difficult, morally ambiguous historical record in the area, and faces a tough, complex future. Justice and fairness have not always guided their respective objectives and actions. If you believe they have, step up to the plate and you can buy the Brooklyn Bridge for a dollar.

It’s a crazy baseball game! I know the Israelis are in the stands but they have found it tough to get emotional. In their view, at least, both of the team’s captains are Iranian. Since it’s not in the official lineup, the game has little meaning to the Israelis.

We are not sure that all the batters, base runners and umpires are on the same team or in the same game. At times, some players appear to run right and some left. Some run into each other. Others don’t run at all. Most appear to be playing by Middle Eastern norms, which mean they frequently change uniforms, roles, rules and alliances. The umpires seem to be confused and frustrated. They may be ready soon to go for a higher legal or spiritual reviewer but they cannot agree on which one (e.g., the International Court of Justice, God or his or her surrogate).

I yearn for the simplicity of just a year or two ago — before ISIS. Many of our leaders and media types referred to America’s role then in terms of seeking stability in the Middle East. Some even suggested, often knowing better, that it was based on a commitment to establishing western-style democracy. Very few played Don Quixote, or even a good forensic economist searching for the truth. U.S. and Western involvement in the Middle East for a long time has been, to a large degree, premised on dependency on oil. As dependency on oil imports was recently reduced significantly to about 30-35 percent of total oil use because of tight oil development, increased fuel standards, and a slow growth economy, the U.S. has agreed to defend our allies’ right to unfettered international oil transportation from wellhead to refinery.

Democracy and oil proved to be an uneasy mix. Secular animosity and intense internal as well as external competition for oil revenue and market share seemed much more difficult than the naive assertion made after 9/11 that the Iraq citizenry would welcome U.S. military with cheering crowds — shades of WWII after U.S. troupes retook Paris. If only it could have been!

What has occurred in the past year or so has once again shifted the game players, the rules and roles (the ecology of Middle Eastern games). The rise of ISIS and its quick absorption of land in both Syria and Iraq combined with its brutality toward the vanquished in captured territories as well as detained westerners has shifted U.S. and its new coalition’s (e.g., England, France, Saudi Arabia, Qatar, Iraq, Kurds, etc.) attention away from getting rid of Assad to stopping establishment of the caliphate. No longer is democracy a major goal. How could it be with such tested democratic states as Saudi Arabia and Qatar front and center? I shouldn’t be cynical…or should I? Now the focus is on stability — translated: salvage what can salvaged from what is left of Iraq and assumedly prevention of what appears to be an increasing sectarianism from disintegrating into wars fought over God and Mammon or maybe my God and your Mammon or vice versa. The new coalition led by the U.S., apart from the British and French includes:

  • Implicitly, Iran, despite Iran’s enmity and its support of groups like Hamas and Hezbollah.
  • Syria, despite its vicious regime, a regime that has killed or terrorized large sectors of its population, far more than ISIS has to date and probably will far into the future.
  • Qatar, whose chameleon foreign policy reminds one constantly of Ronald Reagan’s quote about the Russians, “Trust but verify.”
  • Saudi Arabia, a Sunni-dominated kingdom, that, until the Arab Spring, seemed reasonably secure in its religious, non-democratically based, very conservative legal framework, as well as a caste and class system based on discrimination and corruption.
  • Iraq, a country that, despite U.S. support, is a nation in name only. It is divided by sectarianism into at least three potential would-be nations — each one dominated by dominant religious and ethnic groups. Its central government is unable or unwilling to secure consensus as to governance and military approaches. Its army, despite years of U.S.-supported training and U.S.-supplied weaponry has been, up to now, no match for ISIS. Its sectarian-controlled militias are not committed to consensus building and may end up as a threat to further nation building.

The new coalition has shaken up the Middle East and suggests the old adage that, “The enemy of my enemy is my friend.” Endorsement of the present nation states in the Middle East, as well as opposition to territorial aggrandizement and religious extremism, provides the rationale for U.S. and Western involvement in the current war.

But, irrespective of the coalition’s normative marching orders about stopping extremism and a big land grasp, I suspect that oil or trafficking in oil remains a key factor, indirectly or directly, in back-room decisions to push back ISIS boundaries. Let’s see: the Saudis must soon consider increasing the price of a barrel of oil if it is to avoid the need to cut back on services to its citizens and risk tension. It also must soon consider an increase in oil prices if it is to sustain its defense budget in terms of the present conflict with ISIS. While the U.S. has surpassed the Saudis in oil production, Saudi oil is needed by the West and Asia to avoid significant future price rises premised on future growth. As a result, the U.S. will remain a protector of oil transit. Apart from fearing the collapse of Iraq for political, economic and moral reasons, the U.S. is still committed to safeguarding Iraq’s oil and the oil from one of its regions, the Kurdish Regional Government, for its allies and also for the revenue needed by both. Qatar is a conundrum. Today, it’s a western ally against ISIS; yesterday, reports indicated it supported militants in the Gaza. Which twin has the Tony? Where will it be tomorrow? Finally, remember ISIS needs oil for revenues to function as a government.

If only! If only we could find home-grown, market-acceptable substitutes for oil and its derivative gasoline that would relieve any hint or suspicion that oil or gasoline would be even an indirect consideration in a U.S. or Western nation decisions to go to war. We are not there yet, in terms of the majority of the vehicle owners. But we are getting close with alcohol-based fuels, biofuels, and hydrogen and electric cars.

coin flip

Are Americans risk-averse?

The name of the game is “the St. Petersburg Paradox,” and it proved that people are risk-averse, even when they have nothing to lose and a chance to win big from playing a game. It has become a well-established principle in economics and helps explain why people are so reluctant to switch to alternative fuels, even when they stand to gain from the exchange.

The architect of this theory is Daniel Bernoulli, the 18th century Swiss mathematician who is also responsible for Bernoulli’s law, which states that pressure becomes less intense as a fluid travels over one side of a surface at greater speed. It is the basis of airplane flight.

Bernoulli lived in St. Petersburg for a period and became involved in the gambling scene, which was very intense. Like any good mathematician, however, he became more interested in why people bet, rather than the outcome of the game.

He became particularly intrigued by something called the “St. Petersburg Game.” The rules were fairly simple: It involved the simple flip of a coin. If the coin came up tails, the player would receive a dollar (ruble). If the coin came up tails a second time, the player would receive $2, third time $4 and double for each round thereafter. In other words, as long as the coin kept coming up heads, you kept winning. Theoretically, a player could make $500 and on up. The question is, how much would you pay to play this game?

Bernoulli found that even though the average payout was $2, players were very reluctant to buy into the game for more than $2. Their thinking was very short-term and logical. The possibility of a huge payout was of little appeal to them. They were risk-averse.

From this observation, Bernoulli deduced another principle he called the “marginal utility of wealth.” Bernoulli differentiated between “wealth” and “utility.” The utility curve, he said, was concave, and people tended to put more value on the money they lost rather than what they gained. Therefore, they were much less inclined toward risk. Even the possibility of a large payout in an uncertain future is not enough to entice them into the game for a higher price.

What does this have to do with alternative fuels and alternative vehicles? Well, the early adopters are taking big risks. They risk that the new technology may not work out, and they will be stuck with a white elephant. They risk that the fuel savings may not be as great as they are led to believe. The risk that the price of fuels may change drastically – such as the current free fall in oil prices – and any advantage they might have had with the alternative fuel may quickly evaporate. The natural gas tank on a utility truck costs about $5,000, on top of the cost of the normal gas tank. Anyone who as one installed is taking a big risk. Is it worth the extra investment?

The concave marginal utility curve also explains why wealthier people are more inclined to try the alternative vehicles than the average person. They have more room to experiment and are less concerned about losses. Tesla has been deliberately targeting the $75,000 and up market. The first Tesla driven in the United States was bought by Leonardo DiCaprio. Elon Musk is taking a tremendous risk himself by trying to manufacture a $45,000 Tesla that will appeal to a much larger audience.

But risk aversion for the average person is very hard to overcome. Look at another version of the St. Petersburg game: You are allowed to buy into a game where you flip a coin for money. If you win that one flip, you will be awarded $1,000 each year for the rest of your life. Alternately, you may flip the coin every year for $1,000 for that year. Which would you choose?

Experience proves overwhelming that the majority of people prefer to flip every year rather than stake it all on one flip. This proves that people are not risk-takers but would rather have incremental increases rather than an all-or-nothing opportunity. People do not expect extraordinary events to occur to them, but base their decisions on the more normal rate of chance.

Peter Drucker said that in order to replace an existing technology you had to have something that is 10 times as good as what you are trying to do. There are so many impediments – inertia, trying to get known, trying to overcome people’s aversion to risk –that it’s a very difficult task.

That’s why many believe that we need the intervention of the states and the federal government to prime the pump for alternative fuels and vehicles. There are just very few people willing to take the risk. California’s program to put 15,000 cars on the road running on methanol in the 1990s was a good example. Should it be duplicated? There is no downside to running on ethanol or methanol, and there are probably some environmental advantages, as well as money to be saved. But the societal benefits – energy independence and freedom from imported oil – are spread out, while the risks remain on one person – the individual who buys the vehicle.

Individuals are risk-averse – there’s no getting around it. It may take some initiative from the government to mitigate those risks and spread them out over a wider range of people. That way they become more tolerable.

corn-tank

EPA delays decision on whether to reduce ethanol in gas

The federal government’s new threshold for the amount of ethanol blended into America’s gasoline supply was already 10 months overdue. So officials have gone ahead and delayed the decision further, into 2015.

The Environmental Protection Agency announced Friday that it would defer an announcement on the renewable fuel standard (RFS), which stipulates that ethanol should make up 10 percent of gasoline.

(The Des Moines Register has some of the day’s best reporting on this issue. Agriculture.com also has a good explanation of the granular details.)

The standard, first established under a 2005 law, calls for the amount of renewable fuels in gasoline to progressively increase each year. But the law was written at a time when demand for gasoline was expected to keep going up. Slackened demand around the world, combined with stepped-up U.S. production, has dropped domestic prices below $3 a gallon.

Based on that reality, the EPA recommended, in November 2013, that the amount of corn ethanol in the should be reduced, from 14.4 billion gallons a year to 13.01 billion gallons.

This upset the corn growers and ethanol producers, most of them clustered in the Midwest and Great Plains. They said the delays deterred investment in biofuels, and even the oil companies complained that the regulatory vacuum created too much uncertainty in the fuels market.

The EPA’s recommendations had not been finalized. They had been sent to the White House Office of Budget and Management for review, but that office “ran out the 90-day clock to review the agency’s proposed standards, which for the first time signaled a retreat by the EPA on the percentage of biofuels that must be blended,” The Hill reported.

Since the EPA was already so late in setting the 2014 guidelines, the agency “intends to get back on track next year, though details on how it would do that weren’t available Friday,” The Wall Street Journal wrote. The EPA statement said: “Looking forward, one of EPA’s objectives is to get back on the annual statutory timeline by addressing 2014, 2015, and 2016 standards in the next calendar year.”

The reaction among the affected parties was mixed Friday. The WSJ tries to untangle the various interests:

The debate over the biofuels mandate triggers strange bedfellows, with trade groups representing the oil and refining companies, car manufacturers, livestock and even some environmental interests all opposed to the policy for different reasons. Proponents of the standard include the corn industry, which is the most common way ethanol is produced, and producers of ethanol.

The EPA’s announcement gave cautious hope to ethanol-industry leaders that the agency will fundamentally rethink how it proposes the annual biofuels levels. The draft 2014 biofuels levels, which the agency proposed almost a year ago, were much lower than the ethanol industry lobbied for.

“I am truly pleased that they’re pulling away from a rule that was so bad,” said Bob Dinneen, president and CEO of the Renewable Fuels Association, a trade group representing biofuels companies. “But I recognize as well we have to work with the agency to try to figure out a path forward that everybody can live with.”

Executives in the oil-refining industry criticized the delay, and said it was evidence the renewable-fuel standard was itself inherently flawed and should be repealed.

“Each year is dependent upon the previous year, and to some extent dependent upon the following year,” said Charlie Drevna, president of the American Fuel & Petrochemical Manufacturers, a trade association representing the nation’s refining industry. “The problem is, every year EPA is late in getting this out, it exacerbates it. They’re never going to be able to catch up.”

 

Religion, structural changes in the oil Industry and the price of oil and gasoline

Oil barrelAmericans — in light of the decline in oil and gas prices — don’t take happy selfies just yet! Clearly, the recent movement of oil prices per barrel below $80 and the cost of gasoline at the pump below $3 a gallon lend cause for, at least strategically, repressed joy among particularly low-income consumers, many of whose budgets for holiday shopping have been expanded near 10 percent. Retail stores are expressing their commitment to the holiday by beginning Christmas sales pre-Thanksgiving. Sure, sales profits were involved in their decisions, once it appeared to them that lower gas prices were here to stay, at least for a while. But don’t be cynical; I am sure the spirit moved them to play carols as background music and to see if in-store decorations made it easier for shoppers to get by headlines of war, climate change and other negative stuff and into, well yes, a buying mood. If retail sales exceed last year’s and GNP is positively affected, it will provide testimony and reaffirm belief that God is on America and the free market’s side, or at least the side of shopping malls and maybe even downtowns. Religious conversions might be up this year…all because of lower costs of gasoline at the pump. The power of the pump!

But, holy Moses (I am ecumenical), we really haven’t been taken across the newly replenished figurative Red Sea yet. There are road signs suggesting we won’t get there, partly because of the historical and current behavior of the oil industry. Why do I say this?

If history is prologue, EIA’s recent projections related to the continued decline of oil and gasoline prices will undergo revisions relatively soon, maybe in 6 months to a year or so. I suspect they will reflect the agency’s long-held view that prices will escalate higher during this and the next decade. Tension in the Middle East, a Saudi/OPEC change of heart on keeping oil prices low, a healthier U.S. economy, continued demand from Asia (particularly China), slower U.S. oil shale well development as well as higher drilling costs and the relatively short productive life span of tight oil wells, and more rigorous state environmental as well as fracking policies, will likely generate a hike in oil and gasoline prices. Owners, who were recently motivated to buy gas-guzzling vehicles because of low gas prices, once again, may soon find it increasingly expensive to travel on highways built by earthlings.

Forget the alternative; that is, like Moses, going to the Promised Land on a highway created by a power greater than your friendly contractor and with access to cheap gas to boot. Moses was lucky he got through in time and his costs were marginal. He was probably pushed by favorable tides and friendly winds. The wonderful Godly thing! He and his colleagues secured low costs and quick trips through the parting waters.

Added to the by-now conventional litany concerning variables affecting the short- and long-term cost and price of gasoline and oil (described in the preceding paragraph), will likely be the possible structural changes that might take place in the oil industry. If they occur, it will lead to higher costs and prices. Indeed, some are already occurring. Halliburton, one of the sinners in Iraq concerning overpricing services and other borderline practices (motivated by the fear of lower gas prices), has succeeded in taking over Baker Hughes for near $35 billion. If approved by U.S. regulators, the combined company will control approximately 30 percent of the oil and gas services market. According to experts, the new entity could capture near 40 percent relatively quickly. Sounds like a perfect case for anti-trust folks or, if not, higher oil and gas costs for consumers.

Several experts believe that if low gas prices continue, oil companies will examine other profit-making, competition-limiting and price-raising activities, including further mergers and acquisitions. Some bright iconoclasts among them even suggest that companies may try to develop and produce alternative fuels.

Amen! Nirvana! Perhaps someday oil companies will push for an Open Fuels Law, conversion of cars to flex-fuel vehicles and competition at the pump…if they can make a buck or two. Maybe they will repent for past monopolistic practices. But don’t hold your breath! Opportunity costing for oil companies is complex and unlikely to quickly breed such public-interest related decisions. Happy Thanksgiving!

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10 reasons why falling oil prices is good for the U.S. and replacement fuels

While they might not make the Late Show with David Letterman, here are ten reasons why the fall in oil and gas prices, if it is sustained for a while, is, on balance, good for the U.S. and replacement fuels.

  1. U.S. consumers are getting a price break. While the numbers differ by researchers, most indicate that on average they have saved near $80 billion. According to The Wall Street Journal, every one cent drop in gasoline adds approximately a billion dollars to nationwide household consumption.
  2. Low- and moderate-income households will have extra money for basic goods and services, including housing, health care and transportation to work.
  3. Increased consumer spending will be good for the economy and overall job growth. Because of the slowdown in production and the loss of jobs in the oil shale areas and Alaska, the net positive impact on GNP will be relatively small, higher at first as consumers make larger purchases, and then lower as oil field economic declines are reflected in GNP.
  4. Low prices for oil and gas will impede drilling in tight oil areas and give the nation time to develop much-needed regulations to protect environmentally sensitive areas. Oil is now under $80 a barrel. The price is getting close to the cost of drilling. Comments from producers and oil experts seem to suggest that $70-75 per barrel would begin to generate negative risk analyses.
  5. Low prices for oil and gas will make it tough on Russia to avoid the impact of U.S. and EU sanctions. Russia needs to export oil and gas to secure revenue to meet budget constraints. Its drilling and distribution costs will remain higher than current low global and U.S. prices.
  6. Low prices of oil and gas will reduce U.S. need to import oil and help improve U.S. balance of payments. Imports now are about 30 percent of oil used in the nation.
  7. Low prices of oil and gas will further reduce dependence on Middle East oil and enhance U.S. security as well as reduce the need to rely on military intervention. While the Saudis and allies in OPEC may try to undercut the price of oil per barrel in the U.S., it is not likely that they can sustain a lower cost and meet domestic budget needs.
  8. Low prices of oil and gas will create tension within OPEC. Some nations desiring to improve market share may desire to keep oil prices low to sustain market share, others may want to increase prices and production to sustain, if not increase, revenue.
  9. Low prices of oil and gas will spur growth in developing economies.
  10. Low prices for oil and gas will likely secure oil company interests in alternative fuels. It may also compel coalitions of environmentalists and others concerned with emissions and other pollutants to push for open fuel markets and natural gas based ethanol, methanol and cellulosic-based fuels as well as a range of renewable fuels.

We haven’t reached fuel Nirvana. The differential between gasoline and corn-based E85 has lessened in most areas of the nation and now appears less than the 20-23 percent needed to get consumers to think about switching to alternative fuels like E85. But cheaper replacement fuels appear on the horizon (e.g., natural gas-based ethanol) and competition in the supply chain likely will reduce their prices. Significantly, in terms of alternative replacement fuels, oil and gas prices are likely to increase relatively soon, because of: continuing tensions in the Middle East, a change of heart on the part of the Saudis concerning maintaining low prices, the increased cost of drilling for tight oil and slow improvements in the U.S. economy resulting in increased demand. The recent decline in hybrid, plug-in and electric car sales in the U.S. follows historical patterns. Cheap gas or perceived cheap gas causes some Americans to switch to larger vehicles (e.g., SUVs) and, understandably, for some, to temporarily forget environmental objectives. But, paraphrasing and editing Gov. Schwarzenegger’s admonition or warning in one of his films, unfortunately high gas prices “will be back…” and early responders to the decline of gasoline prices may end up with hard-to-sell, older, gas-guzzling dinosaurs — unless, of course, they are flex-fuel vehicles.

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The decline of oil and gas prices, replacement fuels and Nostradamus

“It’s a puzzlement,” said the King to Anna in “The King and I,” one of my favorite musicals, particularly when Yul Brynner was the King. It is reasonable to assume, in light of the lack of agreement among experts, that the Chief Economic Adviser to President Obama and the head of the Federal Reserve Bank could well copy the King’s frustrated words when asked by the president to interpret the impact that the fall in oil and gasoline prices has on “weaning the nation from oil” and on the U.S. economy. It certainly is a puzzlement!

What we believe now may not be what we know or think we know in even the near future. In this context, experts are sometimes those who opine about economic measurements the day after they happen. When they make predictions or guesses about the behavior and likely cause and effect relationships about the future economy, past experience suggests they risk significant errors and the loss or downgrading of their reputations. As Walter Cronkite used to say, “And that’s the way it is” and will be (my addition).

So here is the way it is and might be:

1. The GDP grew at a healthy rate of 3.5 percent in the third quarter, related in part to increased government spending (mostly military), the reduction of imports (including oil) and the growth of net exports and a modest increase in consumer spending.

2. Gasoline prices per gallon at the pump and per barrel oil prices have trended downward significantly. Gasoline now hovers just below $3 a gallon, the lowest price in four years. Oil prices average around $80 a barrel, decreasing by near 25 percent since June. The decline in prices of both gasoline and oil reflects the glut of oil worldwide, increased U.S. oil production, falling demand for gasoline and oil, and the likely desire of exporting nations (particularly in the Middle East) to protect global market share.

Okay, what do these numbers add up to? I don’t know precisely and neither do many so-called experts. Some have indicated that oil and gas prices at the pump will continue to fall to well under $80 per barrel, generating a decline in the production of new wells because of an increasingly unfavorable balance between costs of drilling and price of gasoline. They don’t see pressure on the demand side coming soon as EU nations and China’s economies either stagnate or slow down considerably and U.S. economic growth stays below 3 percent annually.

Other experts (do you get a diploma for being an expert?), indicate that gas and oil prices will increase soon. They assume increased tension in the Middle East, the continued friction between the West and Russia, the change of heart of the Saudis as well as OPEC concerning support of policies to limit production (from no support at the present time, to support) and a more robust U.S. economy combined with a relaxation of exports as well as improved consumer demand for gasoline,

Nothing, as the old adage suggests, is certain but death and taxes. Knowledge of economic trends and correlations combined with assumptions concerning cause and effect relationships rarely add up to much beyond clairvoyance with respect to predictions. Even Nostradamus had his problems.

If I had to place a bet I would tilt toward gas and oil prices rising again relatively soon, but it is only a tilt and I wouldn’t put a lot of money on the table. I do believe the Saudis and OPEC will move to put a cap on production and try to increase prices in the relatively near future. They plainly need the revenue. They will risk losing market share. Russia’s oil production will move downward because of lack of drilling materials and capital generated by western sanctions. The U.S. economy has shown resilience and growth…perhaps not as robust as we would like, but growth just the same. While current low gas prices may temporarily impede sales of electric cars and replacement fuels, the future for replacement fuels, such as ethanol, in general looks reasonable, if the gap between gas prices and E85 remains over 20 percent  a percentage that will lead to increased use of E85. Estimates of larger cost differentials between electric cars, natural gas and cellulosic-based ethanol based on technological innovations and gasoline suggest an extremely competitive fuel market with larger market shares allocated to gasoline alternatives. This outcome depends on the weakening or end of monopolistic oil company franchise agreements limiting the sale of replacement fuels, capital investment in blenders and infrastructure and cheaper production and distribution costs for replacement fuels. Competition, if my tilt is correct, will offer lower fuel prices to consumers, and probably lend a degree of stability to fuel markets as well as provide a cleaner environment with less greenhouse gas emissions. It will buy time until renewables provide a significant percentage of in-use automobiles and overall demand.

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Eyal Aronoff: on a drive for alternatives to oil

(Photo Credit: Ann Johansson, Financial Times)

By Ed Crooks, Financial Times

Eyal Aronoff’s life has been shaped by conflict in the Middle East. His father, a tank crewman in the Israel Defense Forces, was killed in the Six Day War of 1967. His stepbrother and stepbrother’s wife died in the World Trade Center in the 9/11 attacks.

Until then, he had not thought much about energy, or its implications for global security. He was a successful entrepreneur, a co-founder of Quest Software, which was sold to Dell in 2012 for $2.4bn.

Since the terror attacks of September 2001, however, he has increasingly focused on the role that oil plays in the Middle East and around the world: supporting repressive regimes and breeding violence.

“I came into the energy security space because I asked the following question: ‘What caused people to drive an aeroplane full of people into a building full of people?’” he says. “It’s not like some guy was fired and he went home and got his gun and started shooting. They trained for years for this.”

His answer is that the attackers were “the product of a system” sustained by the revenues that flow from oil.

“The governments that are creating this system can afford to do it because they don’t have to invest in their people. That was the realisation: if we can undercut the price of oil, they will be forced to invest in their people; they will be forced to invest in education; they will be forced to liberalise.”

Talking over breakfast in a New York hotel, he still looks like the archetypal tech entrepreneur: focused and somewhat intense, wearing a black polo shirt and charcoal V-neck. His plan for curbing oil’s baleful influence on the world is similarly consistent with his previous career: it involves a technological fix, principally based on managing software, and the power of competition.

He started his software business in 1991 in university housing at Princeton, where his wife was doing her chemistry PhD. He was a supplier to Oracle, now the world’s second-largest software group, and played a critical role in its growth, he says, helping to popularise it for large web databases by providing an easy way to write applications.

“As Oracle took off, my company took off with it,” he says. “They made me wealthy, and I made them successful.”

When he left Quest in 2003, he took on various new businesses and became involved in research into treatments for autism. His daughter was diagnosed as autistic when she was two, and is now going to college, having made progress that he describes as “a miracle.”

He approached the energy sector in the same can-do spirit. One of his new businesses was an online retailer of car accessories, Autoanything.com, and that was where inspiration struck, he says.

“I saw all these people doing all these things to their cars, all these modifications and products, and that you can programme a car, and I thought: ‘Wow. There must be something here.’ And I started researching into car hackingand I thought: ‘Wait a second: a car can do all this? Oh my gosh, how come nobody knows this!’”

The revelation was that cars can run on many different fuels, including petrol, ethanol and methanol, with only minimal modification. In modern cars, fuel management is governed by electronic systems that are easily changed. Converting them so they will happily accept different fuels can be achieved in minutes by plugging in a laptop and adjusting the settings.

While the incentive to switch fuels might seem to have faded, with North American crude production soaring and petrol prices tumbling, any use of oil still helps the producing countries, many of which are unfriendly to the US. Methanol, by contrast, can be produced relatively cheaply from natural gas, which is – for now at least – in abundant supply in the US.

Mr Aronoff’s guiding tenet, however, is that he does not favour one particular fuel or technology over another. He wants consumers to have more choice, including natural gas and electric vehicles, and trusts that competition will make fuel both cheaper and more secure. It is principally environmental regulations and manufacturers’ warranties that stop drivers using a wider range of fuels. Modifying cars in this way is illegal in the US.

So, along with Yossie Hollander, another Israeli software entrepreneur, Mr Aronoff decided to set up a campaign group, the Fuel Freedom Foundation, to fight for changes in regulation.

“We realised that the existing infrastructure was not really geared towards [our interests],” he says. “The environmental movement was really focused on the replacement of coal. On energy security, many people were shouting from the sidelines. But . . . they came from a national security background, so they didn’t have the capacity to create the kind of movement that it would take.”

The marketing aspect, he says, is crucial. The campaign needs a broad base of public support to make politicians pay attention. Two successive administrations, under presidents George W Bush and Barack Obama, have largely ignored flex-fuel vehicles.

“The Bush administration, instead of doing something with the oil that caused our dependence on the Middle East, decided to go there to try to fix the Middle East,” Mr Aronoff says. “They didn’t understand what they were trying to do there. It was a whack-a-mole kind of thing, and when you whack one mole, another always comes out.”

As for the reason for the Obama administration’s reluctance? “I wish I knew. I just don’t understand,” he replies.

“The Obama people are willing to work with us. We talk with them all the time. So they get it. [But] I want action, not just talk.”

To that end, he and Mr Hollander, along with some other supporters have backed a movie, Pump , a lively look at global energy trends. At its centre is a sequence showing how to hack a car to make it “flex-fuel”.

“We’re trying to do what An Inconvenient Truth has done,” Mr Aronoff says. He acknowledges that Pump is unlikely to match the massive success, for a documentary, of Al Gore’s climate change polemic, but even a small fraction of that would be very welcome. “Even if we generate modest success at the box office, the money will be immensely helpful to us in promoting the cause.”

He expects that one day the alternative fuels business will be “a very big deal”. For now, though, the campaign is trying to keep commercial interests out of it, to avoid being “tainted”.

Eventually, he hopes, the car companies and even oil companies will embrace fuel choice. He sees the barriers more as problems of corporate inertia and ignorance than of opposing interests.

“It’s not like we’re the digital camera and they’re Agfa,” he says. “All these companies that today produce fuels from petroleum can produce fuels from many different things. They have the wherewithal, and they have the financial interest to do it. They only need to wake up.”

Second opinion: The future of energy
“I can’t claim credit for every detail of Eyal Aronoff’s intellectual development,” says Robert Zubrin, early advocate of methanol and other alternative fuels. “But I do know he read my book Energy Victory and was impressed.” Mr Zubrin explains that alternative fuels face a struggle in the US: opposed on the right because of hostility to government mandates, and by regulators because of pollution concerns. But he says the next administration may have to accept the argument for transport fuel choice.

Aronoff’s CV
Born 1963, Israel
Education Graduates in 1990 from Bar Ilan University, Israel, in chemistry and computer science
Career 1991 Starts R*Tech Systems in kitchen of his apartment in Princeton, New Jersey
1996 Merges R*Tech into Quest Software
1999 Quest Software IPO
2003 Leaves Quest Software
2011 Starts Fuel Freedom Foundation
2012 Quest bought by Dell for $2.4bn

Family Married with two children
Interests Energy, particularly alternative fuels and electric cars; neuroscience, in particular therapies for autism; stock markets, particularly algorithmic trading, which he develops for fun; travel, particular Lindblad/ NetGeo expeditions.

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From Philosophy About Truth To The Wisdom Of EPA Models About Emissions

Rereading Alfred North Whitehead, one of my favorite philosophers, provides the context for the current debate over the wisdom of using the EPA’s amended transportation emissions model (Motor Vehicle Emission Simulator, or MOVES) for state-by-state analysis. He once indicated that, “There are no whole truths; all truths are half-truths. It is trying to treat them as whole truths that plays the devil.”

I am uncertain about Whitehead’s skepticism, if treated as an absolute. However, it does give pause when judging the use of an amended MOVES model, based mostly on advocacy research by the nonprofit group, the Coordinating Research Council (CRC). The CRC is funded by the oil industry, through the American Petroleum Institute (API), and auto manufacturers.

CRC was tasked by the EPA with amending MOVES and applying it to measure and determine the impact of vehicular emissions. The model and related CRC analysis was subject to comments in the Federal Register but the structure of the Register mutes easy dialogue over tough, but important, methodological disagreements among experts. Apparently, no refereed panel subjected the CRC’s process or product to critique before the EPA granted both its imperator and sent it out to the states for their use.

I am concerned that if the critics are correct, premature statewide use of the amended MOVES model will mistakenly impede development and use of alternative transitional fuels to replace gasoline, particularly ethanol, and negatively influence related federal, state and local policies and programs concerning the same. If this occurs, because of apparent mistakes in the model (and the data plugged into it), the road to significant use of renewable fuels in the future will be paved with higher costs for consumers, higher levels of pollutants and higher GHG emissions.

With some exceptions, the EPA has been a strong supporter of unbiased, nonpartisan research. Gina McCarthy, its present leader, is an outstanding administrator, like many of her predecessors, like Douglas Costle (I am proud to say that Doug worked with me on urban policy, way, way back in the sixties), Russell Train, Carol Browner, William Reilly, Christine Todd Whitman, Bill Ruckelshaus and Lee Thomas. No axes to grind; no ideological or client bias…only a commitment to help improve the environment for the American people. I feel comfortable that she will listen to the critics of MOVES.

The amended MOVES may well be the best thing since the invention of Swiss cheese. It could well help the nation, its states and its citizens determine the truths or even half-truths (that acknowledge uncertainties) related to gasoline use and alternative replacement fuels. But why the hurry in making it the gold standard for emission and pollutant analysis at the state or, indeed, the federal level, in light of some of the perceived methodological and participatory problems?

Some history! Relatively recently, the EPA correctly criticized CRC because of its uneven (at best) analytical approach to reviewing the effect of E15 on car engines. Paraphrasing the EPA’s conclusions, the published CRC study reflected a bad sample as well as too small a sample. Its findings, indicating that E15 had an almost uniform negative impact on internal combustion engines didn’t comport with facts.

The CRC’s study of E15 was, pure and simple, advocacy research. CRC reports generally reflect the views of its oil and auto industry funders and results can be predicted early on before their analytical efforts are completed. Some of its reports are better than others. But overall, it is not known for independent unbiased research.

The EPA’s desire for stakeholder involvement in up grading and use of MOVES to measure emissions is laudable. However it seems that the CRC was the primary stakeholder involved on a sustained basis in the effort. No representatives of the replacement fuel industry, no nonpartisan independent nonprofit think tanks, no government-sponsored research groups and no business or environmental advocacy groups were apparently included in the effort. Given the cast of characters (or the lack thereof) in the MOVES’ update, there’s little wonder that the CRC’s approach and subsequently the EPA’s efforts to encourage states to use the amended model have been and, I bet, will be heavily criticized in the months ahead.

Two major, well-respected national energy and environmental organizations, Energy Future Coalition (EFC) and Urban Air Initiative, have asked the EPA to immediately suspend the use of the MOVES with respect to ethanol blends. Both want the CRC/MOVES study and model to be peer reviewed by experts at Oak Ridge National Lab (ORNL), and the National Renewable Energy Lab (NREL). I would add the Argonne National Laboratory because of its role in administering GREET, The Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation Model. Further, both implicitly argue that Congress should not use the CRC study and MOVES until the data and methodological issues are fixed. Indeed, before policy concerning the use of alternative replacement fuels is debated by the administration, Congress and the states both appear to want to be certain that MOVES is able to provide reasonably accurate estimates of emissions and market-related measurements, particularly with respect to ethanol and, as Whitehead would probably say, at least provide half-truths, or, as Dragnet’s Detective Jack Webb often said, “Just the facts, ma’am,” or at least just the half-truths, nothing but at least the half-truths.

What are the key issues upsetting the critics like the EFC and the Urban Air Initiative? Apart from the pedigree of the CRC and the de minimis roles granted other stakeholders than the oil industry, the CRC/MOVES model, reflects match blending instead of splash blending to develop ethanol/gasoline blends. Sounds like two different recipes with different products — and it is. Splash blending is used in most vehicles in the U.S. and generally is perceived as producing less pollution.

Let’s skip the precise formula. It’s complicated and more than you want to know. Just know that according to the letter sent to the EPA by the EFC and Urban Air Quality on Oct. 20th, the use of match blending requires higher boiling points for distillation, and these points, in turn are generally the worst polluting aromatic parts of gasoline. It noted that match blending, as prescribed by the MOVES, results in blaming ethanol for increased emissions rather than the base fuel. There is no regulatory, mechanical or health justification for adding high boiling point hydrocarbons to test fuels for purposes of measuring changes in vehicle tailpipe emissions, when ethanol is part of the fuel mixture. Independent investigations by automakers and other fuel experts confirm that the use of match blending in the study mistakenly attributed increased emission levels to ethanol rather than to the addition of aromatics and other high boiling hydrocarbons, thereby significantly distorting the model’s emission results. A peer-reviewed analysis, which will be published shortly, found that the degradation of emissions which can result is primarily due to the added hydrocarbons, but has often been incorrectly attributed to the ethanol.

The policy issues involved due to the methodological errors are significant. If states and other government entities, as well as fuel supply chain participants, use the model in its present form, they will mistakenly believe that ethanol’s emissions and pollutants are higher than reported in study after study over the past decade. The reported results will be just plain wrong. They will not even be half-truths, but zero truths. Distortions in decision making concerning the wisdom of alternative transitional replacement fuels, particularly ethanol, will occur and generate weaker ethanol markets and opportunities to build a strategic path to renewables. The EPA, rather than encourage use of the study and the model, should pull both back and suggest waiting until refereed review panels finish their work.