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Can Butanol Be the New Ethanol?

Even as the ethanol industry is wobbling over the Environmental Protection Agency’s decision to cut back on the ethanol mandate in 2014, a new candidate has emerged as an additive to gasoline – butanol.

Virgin Airways founder and CEO Richard Branson has announced that his Virgin Green Fund will be cosponsoring a groundbreaking butanol manufacturing plant in Luverne, Minnesota.  “Butanol is the future of renewable fuel,” said Branson, who is already using renewable jet fuel for his airline.  “It’s hugely versatile and can be used to produce gasoline fuel blends, rubbers, solvents, and plastics, which gives us scope to enter a range of markets,” he said in an interview with Bloomberg.

Corn ethanol now dominates the $26 billion gasoline additive market, drawing the glucose content out of 45 percent of the nation’s corn crop (the protein is fed to animals).  Branson’s butanol would use a similar feedstock – corn, sugar cane or cellulosic biomass – but would produce a fuel that has 84 percent of gasoline’s fuel density compared to ethanol’s 66 percent, although ethanol has a higher octane rating.  The implication is that butanol could be mixed at higher blends, giving it almost the same range as gasoline.

Both butanol and ethanol are made through a process that employs yeasts to ferments the glucose from organic material into alcohols.  Methanol, the simplest alcohol, has one carbon joined to a hydroxyl ion while ethanol has two carbons and butanol has four.  Octane, the principal ingredient in gasoline, has eight carbons without the hydroxyl ion.

As far a butanol is concerned, it’s not as if people haven’t tried this before.  Both BP and Royals Dutch Shell have experimented with producing butanol from organic material but have found the process harder than they anticipated.  “There is certainly a potential, but there have been quite considerable problems with the technology,” Clare Wenner, of the London-based Renewable Energy Association, told Bloomberg.  “It’s taking a lot longer than anybody thought years ago.”

Gevo’s plant in Minnesota, for instance, has been running at only two-thirds of its 18 million gallon-a-year capacity because of a contamination in its yeast fermenting facility in September 2012.  Similar instabilities in the microbial-based process have dogged the efforts to break down cellulose into simple molecules.  There operations can often be performed in the laboratory but become much more difficult when moved up to a commercial scale.

Branson is confident these obstacles can be overcome.  He’s already got Silicon Valley investor Vinod Khosla on board in Gevo and Total, the French oil company, has also taken a stake.  Together they have enlisted big ethanol producers such as Big River Resources and Siouxland Ethanol to commit to switching their manufacturing process to butanol.  Butamax Advanced Biofuel, another Minnesota refiner funded by Dupont and BP, is also in the process of retrofitting its ethanol plant to butanol.  Taken together, these facilities would be able replace 1 billion of the 14 billion gallons of ethanol now being produced every year.

Whether this would be enough to make a bigger dent in America’s oil import budget remains to be seen.  The 14 billion gallons of ethanol currently substitutes for 10 percent of our gasoline and about 6 percent of our total oil consumption.  The Environmental Protection Agency has limited ethanol additives to 15 percent of the blend, mainly to protect older cars.  (In Iowa, newer cars are running on an 85 percent blend.)  Now the reduction in the 2014 mandate is making the ethanol industry nervous about overcapacity.  Butanol is less corrosive of engines and the 16 percent blend could give it an edge.

On another front, T. Boone Pickens’ Clean Energy Fuels announced this week that it may turn a profit for the first time since its founding in 1997.  Clean Fuels is concentrating on supplying compressed natural gas for trucks, signing major contracts with Frito-Lay, Proctor & Gamble, United Parcel Service and Ryder.  It is also attempting to set up a series of filling stations on the Interstate Highway System.  The use of CNG requires an entirely new infrastructure, however, rather than the easy substitution of liquid and butanol.

The dark horse here is methanol, which is liquid and fits easily into our present infrastructure but would be synthesized from natural gas.  Somehow, methanol has not attracted the attention of Branson’s biofuels and Pickens’ CNG.     All of these efforts hold promise, however, and would make a huge dent in our annual $350 billion bill for oil imports, which constitutes the bulk of our $450 billion trade deficit.  So good luck to all and may the best fuel win – or all of them, for that matter.

Oil and Natural Gas Prices and the Future of Alternative Fuels

I love Vivaldi’s Four Seasons, especially the music from the spring. I love the optimistic line from the poem by P.B. Shelley, “if winter comes can spring be far behind.”  The unique cold weather, the Midwest, East Coast and even the South, has been facing this year will soon be over and spring will soon be here. Maybe it will be shorter. Perhaps, as many experts indicate, we will experience a longer summer, because of climate change. But flowers will bloom again; lovers will hold hands without gloves outside, kids will play in the park… and natural gas prices will likely come down to more normal levels than currently reflected.

Last Friday’s natural gas price according to the NY Times was $5.20 per thousand cubic feet. It was “the first time gas had crossed the symbolic $5 threshold in three and half years, although (and this is important) the current price is still roughly a third of the gas price before the 2008 financial crisis and the surge in domestic production since then.”

Why? Most experts lay the blame primarily on the weather and secondarily on low reserves, a slowdown in drilling, and pipeline inadequacies. The major impact so far has been on heating and electricity costs for many American households, particularly low and moderate income households and the shift of some power plants from natural gas back to coal.

I wouldn’t bet more than two McDonald’s sandwiches on where natural gas prices will be in the long term. But I would bet the sandwiches and perhaps a good conversation with a respected, hopefully clairvoyant, natural gas economist-one who has a track record of being reasonably accurate concerning gas prices- that come cherry blossom time in Washington, the price of natural gas will begin to fall relatively slowly and that by early summer, it will hover between 3.75 to 4.25 per thousand cubic feet.

Natural gas prices over the next decade, aided by growing consensus concerning reasonable fracking regulations as reflected in Colorado’s recent regulatory proposals, and EPA’s soon to be announced regulations, should be sufficiently high to reignite modest drilling passions, improvements in infrastructure and increased supplies at costs sufficient to maintain an advantage for natural gas based fuels when compared to oil based fuels at the pump.

The present relatively low price of oil (Bent Crude $107 a barrel; WTI $97.00 a barrel) and its derivative gasoline ($3.30 a gallon) may impact the cost differential between gasoline and natural gas based fuels. But the impact could go both ways. That is, if the price of oil per barrel continues to fall and translate into lower costs for gasoline, the price differences between natural gas based fuels and gasoline would narrow. Conversely, if the price of oil goes lower than $90 a barrel, its present price, it likely will impede future drilling, particularly in high cost, hard to get at environmentally sensitive areas. This fact combine with renewed economic growth in the U.S., Europe and Asia, as well as continued tension in the Middle East and continued speculation could well result in a return to higher gasoline prices.

Clearly, the relationship between the cost of natural gas based fuels (CNG, ethanol and methanol) and gasoline is a critical variable in determining consumer behavior with respect to conversion of existing cars to flex fuel cars and the purchase of new natural gas cars (Based on the national pilot involving 22 states lead by Governor Hickenlooper(D) and Governor Fallin(R), as well as interviews with carmakers, creation of a deep predictable market for CNG fueled vehicles will bring down the price of such cars and give them competitive status with gasoline fueled vehicles).

The odds are that the lower costs of natural gas based fuels will serve as an incentive to buyers and existing owners to use them. That is, assuming problems related to fuel distribution as well as access and misinformation concerning the affect alternative fuels have on engines are resolved by public, non-profit, academic and private sectors. Maybe I will up my bet!

Altruism Aside, Is Ethanol A Competitive Alternative Fuel?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Can Ethylene Replace Gasoline?

The effort to replace oil-based gasoline in our cars with similar fuels derived from natural gas took a big step forward last week with the announcement that Siluria, a promising start-up, will build a $15-million demonstration plant in Texas

The plant will produce ethylene, the most commonly produced industrial chemical in the world and the feedstock for a whole raft of products in the chemicals and plastics industry. But Siluria, which is not yet a public company, is also planning demonstration plants that will produce gasoline. Initial estimates are that the product could sell at half the price of gasoline derived from oil. If these projections prove to be anywhere close to reality, we could be on a path to a fuel economy that is finally able to cut its dependence on oil.

The idea of producing ethylene from natural gas has been around since the 1980s but achieved little success. Several major oil companies invested millions of dollars in the process but finally gave up on it. Jay Labinger, a Caltech chemist who did much of the initial research, finally wrote a paper in the 1980s warning other researchers that it was a waste of time. He may have given up too soon.

Siluria is a California-based startup that has received much of its funding from Silicon Valley investors who tried to move from computers and the Internet into the energy space over the last decade. So far their success hasn’t been great. In fact Vinod Khosla and other Silicon Valley energy entrepreneurs were the subject of an embarrassing critique on “60 Minutes” only two weeks ago. The Siluria venture, however, may be the gusher that makes up for all the other dry holes.

The 1980s efforts concentrated on heat-activated processes whereby methane is split into carbon and hydrogen and then recombined into the more complex ethylene, which has two double-bonded carbons and four hydrogens. All these efforts proved far too energy-intensive, however, and never became economical.

Siluria has been trying a different approach, seeking catalysts that would facilitate the process at much lower energy levels. Moreover, the company has spurned the more recent approach of trying to design molecules that fit the chemicals just right and gone back to the old shotgun approach where thousands of candidates are tried on a catch-as-catch-can basis.

Defying all expectations, the process seems to have worked. Siluria has come up with a catalyst that it says promotes the breakdown and subsequent reassembly of methane at very low energy levels. It has built pilot plants in San Francisco, Menlo Park and Hayward, California and last week announced plans for building a full-scale demonstration plant in La Porte, Texas in conjunction with Braskem, the largest petrochemical manufacturer in South America. If that isn’t proof that Siluria is on to something, what is

The implications of this development are enormous. Natural gas is two to six times more abundant than oil in the world and is now selling at 1/5th the price for an equivalent amount of energy. The traditional tandem pricing of oil and natural gas prices has now been broken and gas is functioning as a completely different commodity, much cheaper.

The difficulty all along has been that natural gas is hard to put into your gas tank. So far efforts have involved compressing natural gas, which means storing it at 3600 pounds per square inch, or liquefying it, which requires temperatures to be lowered to – 260 degrees F. Neither is very practical and would require a whole new auto engine and delivery infrastructure.

Efforts to convert gas into a liquid have concentrated around methanol, which is the simplest alcohol and has been used to power the Indianapolis 500 racing cars since the 1960s. But methanol is the deadly “wood alcohol” of the Prohibition Era and raises fears about poisoning – although gasoline is poisonous, too. The Environmental Protection Agency has never certified methanol for use in auto engines, although an M85 standard has been permitted in California.

Synthesizing gasoline through Siluria’s ethylene-based pathway could solve all these problems. Ed Dineen, CEO of Siluria, says that the gasoline product could sell at half the price of today’s gasoline. With more natural gas being found all the time – and with $1 billion being flared off uselessly around the world each year – any success in turning natural gas into a readily accessible automobile fuel could have a revolutionary impact on our entire economy.

There’s Gold in Them Thar’ Flares

Walter Breidenstein may be the only CEO in America who still answers the company phone himself. If his operation is still something of a shoestring, it’s because he’s spent four years trying to duel with perhaps the most formidable foe in the country, the oil companies.

“I’ve been trying to get into North Dakota for four years to show them there’s a way to make money by stopping flaring,” says the 48-year-old who started his entrepreneurial career at 15 by washing dishes. “The oil companies have done everything they can to keep me out of the state and the bureaucracy has pretty much goes along with them. The companies know that as soon as they acknowledge we’ve got a workable system here, they’d have to buy one of our rigs for every well in the state.”

North Dakota, in case you haven’t heard, has become one of the biggest wasters of natural gas in the world by flaring off $1 billion worth a year while producing carbon emissions equal to 1million automobiles.  But oil is what the drillers are after and, as it was in the early days of the oil industry; gas is regarded pretty much as a nuisance. The result is gas flares that make the whole state look like neighboring Minneapolis from outer space.

The flaring has generated a lot of negative publicity, environmentalists are up in arms and landowners have sued over lost royalties. The big guys are starting to move into the state. The New York Times ran an article this week about new pipeline construction, fertilizer factories and GE’s “CNG in a Box,” which will capture flared gas and sell it asnatural gas.

Breidenstein has a different idea.  “Somewhere around 2000 I started reading about methanol technology and realized it was a very undervalued resource,” he says. “Then I read George Olah’s The Methanol Economy in 2006 and that convinced me.  At Gas Technologies we’ve been trying to put Olah’s vision into practice.”

Gas Technologies has developed a $1.5 million portable unit that captures flared gas and converts it to methanol. “It’s a very accessible device,” says Breidenstein.  “You can move it around on a flatbed truck.”  The company ran a successful demonstration of a smaller unit at a Michigan oil well last fall but still hasn’t been able to break into North Dakota.

“The oil companies’ attitude is that money is no problem as long as they don’t have to spend it,” says Breidenstein.  “I’ve been in the business 25 years and I know where they’re coming from. But the problem is no one is forcing them to deal with flaring. And as long as they can keep throwing that stuff into the atmosphere for free, nobody’s going to look for a solution.”

You’d think with a billion dollars worth of natural gas being burning off into the atmosphere each year, though, there’d be some say to make money off it and that’s what frustrates Breidenstein.

“Our rig costs between $1 and $2 million dollars,” he says.  “But by capturing all the products of flared gas, you can make around $3500 per day.  That puts your payback at around three to four years.  But the oil companies don’t think that way. They won’t look at anything that goes out more than six months.

That puts things in the hands of state regulators and so far they have sided with the oil companies. “By statute, the oil companies are allowed to flare for a year it there’s no solution that’s economical,” says Alison Ritter, public information officer for the North Dakota Department of Mineral Resources.  “There’s nothing we can do to require them to buy from one of these boutique firms. Many oil companies have already committed their gas to pipeline companies and they can’t back out of those contracts.”  Still, the pipelines may not be built for years. “You have to understand, the Bakken Oil Field is 15,000 square miles, the size of West Virginia,” adds Ritter.  “It’s hard to service it all with infrastructure. We’re building pipelines as fast as we can.” Of 40 applications for flaring exemptions submitted this year the state has approved two and denied one, with the other 37 pending.  While they are pending, flaring goes on.

Of course if Gas Technologies were to start receiving orders right now, they’d be hard pressed to produce a half-dozen of them let alone the 500 that the state might require. “We’ve had talks with venture capitalists but if you’re not from Silicon Valley, they’re not interested,” says Breidenstein.  “But we’ve got a business model here and we know it can work.”

At least someone has taken notice. This year Crain’s Detroit Business rated Gas Technologies Number One in the state for innovative technology, ahead of 99 other contenders, including General Motors, Ford, Volkswagen, Whirlpool, Dow Chemical and the University of Michigan.  “Because the Walloon Lake company’s patents are potential game-changers, its patents rank high on the value meter with a score of 156.57 (anything over 100 is considered good),” said the editors.

It may not be long before others start noticing as well.

The Principal Impediment to Alternative Fuels Is – Government Regulation?

In their path-breaking study, “Fuel Choice for American Prosperity,” the Energy Security Council carefully outlines the dilemma that our complete dependence on oil for transportation has created.

“It’s not the oil we import, it’s the price,” was the way they summarized it. As I outlined in a previous post the authors show how OPEC still controls the bulk of the world’s oil reserves and has not increased its output since the 1970s. As a result, even though we have increased domestic production dramatically and cut down on consumption, we are actually paying more for our oil imports than we were ten years ago. Why?  Because, OPEC is still able to manipulate the price to keep it at $100 a barrel. It’s not the black stuff we import that crimps our economy, it’s the price of oil we must accept from a monopolistic cartel.

So what to do?  Do we set up protests outside OPEC’s corporate offices in Vienna?  Do we bring an anti-trust suit in some world forum? People have actually tried such things and gotten nowhere. No, the only way to extricate ourselves from this market is to break the monopoly that oil has on our transportation system. If oil had competitors, it will start acting like any other commodity and respond to supply and demand. The key to breaking the OPEC monopoly, says USESC, is to develop alternative fuels.

When it comes to asking why we have not made more progress in developing alternative fuels, however, USESC has a surprising answer: government regulation. Government regulation? How can that be? I thought the government was doing everything it could to foster alternatives and try to lower our oil imports. Well, as usually happens when the government gets involved in manipulating a market, things quickly get complicated and murky. Here’s what has happened:

CAFE standards. When Congress first started setting corporate fleet average standards, responsibility was given to the Environmental Protection Agency. In retrospect, this was an odd choice, since EPA is more concerned with air pollution than reducing oil consumption. The Department of Energy would have been a more logical choice. This didn’t become visible in the 1980s when pollution concerns centered on the combustion products of sulfur and nitrogen. But now that carbon dioxide and global warming have become the principal concerns, the EPA has subtly changed its emphasis. As USESC points out; “CAFE’s initial energy security centric vision has been blurred by the desire to use the law to promote greenhouse gas emission reduction goals.”

In its latest regulatory effort, for example, the EPA will reward auto companies for introducing alternative fuels by applying a “multiplier” to their corporate fleet average beginning in 2017. Every electric and hydrogen fuel cell vehicles will count as two vehicles in the denominator of the corporate average, phasing down to 1.5 by 2021. For plug-in hybrid electric vehicles (PHEVs) and compressed natural gas vehicles (CNG), the multiplier will be 1.6, phasing down to 1.3.

All this seems fair enough. EVs and FCVs use no gasoline and plug-in hybrids are only partially dependent on oil. The real problem, however, is that flexible-fuel vehicles – cars that are designed to burn ethanol, methanol or gasoline – have only been given credit based on how much E-85 they burn in real-world driving. The auto manufacturers have used this to avoid making improvements in car efficiency. This is regrettable because flexible fuel engines burning either ethanol from homegrown corn or methanol derived from natural gas would be the best say to cut down on imported oil. Both methanol and ethanol are liquids and fit right into our current gas station delivery system. Compressed natural gas and electricity, on the other hand, require a whole new replenishing system. Yet the EPA remains wary of both ethanol and methanol because they produce carbon exhausts. CNG also produces carbon exhausts, of course, and EVs drawing power from coal or natural gas will produce exhausts at the power plant. The EPA has tried to compensate for this by adding upstream carbon releases for EVs and other alternative fuels but it does not do the same for gasoline!  In short, the whole multiplier system is a mess. The EPA would do much better just trying to reduce oil dependence rather than bringing carbon emissions into the equation.

Costs of converting to alternative fuels: One of the most important steps in developing alternative fuels is converting existing gasoline vehicles to run on other fuels.

In general, there are three types of conversions – switching a gasoline or diesel car to run solely on another fuel (dedicated), changing a vehicles to run on higher alcohol blends (flex fuel), or installing an additional fuel tank so that the vehicles can burn the competing fuel as well (bi-fuel). In American, however, onerous regulations and staggering costs of conversion has deterred consumers.

The study points out that installing a CNG tank in an American car costs $10,000 while the same tank in Europe can be installed for $3,800. The difference is the strength of the tank as dictated by the EPA. Of course we don’t want to be in a situation such as Pakistan where CNG cars are exploding due to poor tank quality.  But even in comparison to other developed countries, U.S. regulatory requirements are excessive. 

Taxing by volume instead of by energy content: The federal and state governments places taxes on gasoline and any other product used to propel trucks and automobiles. The logic here is that the money goes into special highway trusts that maintain the roads. But the tax is imposed by the gallon rather than by energy content. USESC maintains that this is discriminatory because methanol, ethanol and other non-gasoline products have less energy density and therefore require more volume for the same amount of energy. This is a fine point and might be disputed by the oil industry, which would say if ethanol and methanol have less energy content, that is simply their tough luck. Ethanol, on the other hand, has been exempted from the federal highway tax and most state gas taxes, which is what makes it economical to add to gasoline.

The ban on methanol: Finally, although the USESC report does not even mention it, the biggest regulatory impediment to alternative fuels is the EPA’s failure to authorize the use of methanol in gas tanks. Putting anything in your gas tank requires permission from the EPA because of air pollution considerations. Although methanol actually produces less nitrous oxides and less particulate matter than gasoline, the EPA has never given it an OK. Although methanol made from natural gas might be the best alternative for replacing gasoline, it is does not yet have EPA approval.

Changing any and all of these regulations would require a huge concerted effort by some constituency that had a strong material interest in pushing it through Congress. Unfortunately, there is no such group. The natural gas industry is not yet organized around the issue and is more concerned about defending fracking and opening up natural gas exports. T. Boone Pickens is pushing CNG for trucks through his Clean Energy Fuels but there is no similar effort to promote the use of natural gas in cars. The entire farm bloc is behind corn ethanol, of course, which is why it has been so successful. But there is no similar interest promoting methanol, which may be just as good an alternative or better.

Under these circumstances, the best alternative is to persuade the auto manufacturers to produce flex-fuel vehicles that can run on any fuel – natural gas, hydrogen, biodiesel, E85 (85% ethanol) or M85 (85% methanol). The adjustment would not add significantly to the price of a new car and would open up the field to all the competitors attempting to replace gasoline.

Let the best fuel win.

Ford Leads the Way

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

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

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

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

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

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

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

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

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

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

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

Building the Natural Gas Highway: The Journey of Thousands of Miles Begins in Newport Beach

California still is seen as the state that exports innovation, despite the fact that it has seen some tough economic times of late. In this context, I was pleased to see the recognition granted by the Orange County Register (Nov 6) to the Clean Energy Fuel Corporation, and its efforts to build the Natural Gas Highway. I was even more surprised to find out that the corporate offices were located near my own office. Clearly, the popularity of natural gas and its derivatives, ethanol and methanol, are on the uptake since the President’s State of the Union address indicating the nation’s economy and environment  would benefit if it weaned itself off oil and by implication gasoline. Even before Obama’s speech, there was a growing recognition among many Americans– including environmental and business leaders– that natural gas could become the core of a strategy aimed at reducing greenhouse gas (GHG) and other pollutants, lowering the costs of vehicular fuel, and reducing dependency on oil imports, thus providing funds for investment in the U.S. Clean Energy Fuels Corporation, located in Newport Beach, is making it easier for consumers to access natural gas for their vehicles. According to the story in the Register, it has invested more than $300 million in the last two years on natural gas fuel stations across the nation. Most of the more than 400 stations that they have developed and  offer only compressed natural gas (CNG), a fuel that works better for comparatively short trips ( e.g. buses, taxis, garbage trucks, short hall trucks, local consumers ). Current and future placement of stations will increasingly offer liquid natural gas (LNG). LNG works better than CNG for long distance trips. Are the leaders of the Clean Energy Fuel Corporation nuts?  Maybe they are…but I don’t believe so.  While, the Corporation has yet to turn a profit (apparently after 15 or 16 years), since going public in 2007, their market value is now more than 1 billion dollars. Their phones are ringing. Large retailing companies relying on trucks, long distance trucking companies, bus manufacturers, taxis and bus companies seem to be gravitating toward use of cheaper natural gas as a fuel. But these users and potential users need assurances that natural gas fuel stations will be reasonably accessible. Clean Energy Fuel aims to provide such assurances. Many respected financial analysts believe that the Clean Energy Fuel Corporation is on the cusp of and will benefit financially from the increased acceptance and growth of alternative transportation fuels, particularly natural gas. Assuming both the sizable price gap between oil and natural gas remains and the corresponding price gap between natural gas fuel and gasoline as well as between natural gas and diesel fuel stays relatively large; Clean Energy Fuel Corporation’s future looks bright. Yes, it will have rivals. Shell Oil, according to the Register article, apparently is going to start selling LNG at existing truck stops. Soundings that I have picked up from natural gas leaders, CEOS of businesses dependent on trucking and diverse investors suggest an evolving interest in developing both CNG and LNG fuel stations and the Natural Gas Highway. In this context, 22 states, under the bipartisan leadership of Governor John Hickenlooper (D) of Colorado and Governor Mary Fallin (R) of Oklahoma, have initiated a collaborative project to buy CNG outfitted cars from Detroit to replace old state vehicles, when their time passes. Detroit in turn has promised to develop a less expensive CNG vehicle for the participating states which could ultimately benefit consumers. Given recent projections of the market for natural gas fuel by government and reputable private and nonprofit groups and increased advocacy for alternative fuels by a coalition of environmental, nonprofit and business groups, I wouldn’t bet against Clean Energy Fuel’s future health. My hope, however, is that it and, indeed, its competitors add room for natural gas derivatives such as ethanol and methanol in their planned natural gas stations.  Apart from generating use by owners of flex fuel cars now in existence, their agreement to do so would encourage (the relatively inexpensive and easy) conversion of existing vehicles to flex fuel vehicles. Significantly, EPA has certified the use of E10 in all vehicles, E15 in vehicles after 2001 and E85 in approved flex fuel vehicles. Hopefully, EPA will soon certify methanol as well as approve an expanded list of conversion kits for existing older vehicles. These approvals are possible, if not probable, given the environmental, economic and consumer benefits of alternative fuels and the evolving politics of fuel. Allowing oil companies to sustain the very restrictive rules now governing the vehicular fuel market will continue to prop up America’s dependency on imported oil as well as support relatively high fuel costs and increased environmental degradation.   President and CEO Andrew Littlefair of Clean Energy Fuel indicated, “With cheaper, abundant fuel, a network of stations, [and] redesigned engines …the time for natural gas transportation has arrived.” I would add, the time for natural gas based ethanol and methanol has also arrived. I commend Clean Energy Fuel for its initiative in developing the Natural Gas Highway. The Company, borrowing from President John Kennedy, has begun an important journey of thousands of miles in Newport Beach. Contrary to (and paraphrasing) the poet Robert Frost, hopefully the road they are building will be very well travelled.  Maybe a couple of leisurely  lunches near the ocean in beautiful Newport Beach could convince my colleagues at Clean Energy Fuel  to consider working with producers of natural gas based ethanol and methanol as well as interested states and localities to  extend  the Natural Gas Highway to ethanol and methanol. It would be good for traffic and their bottom line, good for development of related commercial activities and, most important, good for America

If Mother Jones and the Wall Street Journal can agree on this

When Nobel Laureate George Olah wrote his Wall Street Journal op ed recently announcing a new process that can turn coal exhausts into methanol, it reverberated all the way across the political spectrum and into Mother Jones.

 “Can Methanol Save Us All?” says the headline of a story on MJ, written by political blogger Kevin Drum. Although loath to admit he had    been reading the pages of capitalism’s largest broadsheet (he blamed the government shutdown), Drum admitted that he was intrigued. “George Olah and Chris Cox suggest that instead of venting carbon dioxide into the atmosphere, where it causes global warming, we should use it to create methanol,” he wrote.

Olah has been writing about a “methanol economy” for a long time, and he skips over a few issues in this op-ed.  One in particular is cost: it takes electricity to catalyze CO2 and hydrogen into methanol, and it’s not clear how cheap it is to manufacture methanol in places that don’t have abundant, cheap geothermal energy – in other words, most places that aren’t Iceland. There are also some practical issues related to energy density and corrosiveness in existing engines and pipelines. Still, it’s long been an intriguing idea, since in theory it would allow you to use renewable energy like wind or solar to power a facility that creates a liquid fuel that can be used for transportation. You still produce CO2 when you eventually burn that methanol in your car, of course, but the lifecycle production of CO2 would probably b less than it is with conventional fuels.

There are a few things we can cite here to set Drum’s mind at ease. First, methanol made from natural gas is already cost competitive. We don’t have to speculate. There is a sizable industry manufacturing methanol for industrial use from natural gas where it has sold for years at under $1.50 a gallon. That’s a $2.40-per-gallon mileage equivalent for gasoline (before further gains from methanol’s higher octane), making it at least 30 percent cheaper from what you’re now buying at the pump.

Of course Drum is referring here to Olah’s proposal to manufacture methanol by synthesizing hydrogen and carbon exhausts. This would be a more expensive process. But if it ever happened, the utilities would undoubtedly pay the processors to take the carbon dioxide off their hands, since it would allow them to go on operating their coal plants and using all that cheap black stuff coming out of Wyoming and West Virginia. It’s hard right now to factor up the costs but suffice to say, you would not be limited to geothermal from Iceland to make it happen.

As far as the corrosion issues are concerned, Drum can rest assured as well. It is true that methanol corrodes certain elastomers in current engines. They will have to be replaced with o-rings that can be bought at Office Depot for 50 cents. Any mechanic can perform the procedure for less than $200. Modifying current gasoline engines at the factory to burn methanol is also a surpassingly simple procedure – as opposed to altering an engine to burn liquid natural gas, compressed natural gas or hydrogen, which all require an entirely different assembly costing up to an additional $10,000.

The real rub mentioned by Drum, however, is the implication that if methanol can’t be shown to reduce carbon dioxide emissions in the atmosphere, then there isn’t any sense in doing it. There’s a slight divergence of purpose here that isn’t always clear to people who can agree we ought to be looking for alternative fuels to replace gasoline.

For some people the issue is energy dependence and reducing the unconscionable $400 billion we spend every year on imports. As the United States Energy Security Council pointed out in a recent paper, even though we have reduced imports to only 36 percent of consumption, we are still paying the same amount for oil because OPEC functions as an oligopoly and can limit supplies. As the report concluded, “It’s not the black stuff that we import from the Persian Gulf, it’s the price.”

For other people, however, the amount of money we’re spending on foreign oil – and the international vulnerabilities it creates – is not the issue. The only thing that matters to them is how much carbon dioxide we’re putting into the atmosphere. Global warming is such an overriding concern that it supersedes everything else.

This was made clear in a recent article in Yale Environment 360 by John DeCicco, professor at the University of Michigan’s School of Natural Resources and Environment and former senior fellow for automotive strategies at the Environmental Defense Fund, entitled “Why Pushing Alternative Fuels Makes for Bad Public Policy.”

The article argued against all forms of alternatives – ethanol, compressed natural gas, hydrogen and electric vehicles – on the grounds that none of them will do anything to reduce carbon emissions. “In the case of electric vehicles, an upstream focus means cutting CO2 emissions from power plants,” wrote DeCicco.

Without low-carbon power generation, EVs will have little lasting value. Similarly, for biofuels such as ethanol, any potential climate benefit is entirely upstream on land where feedstocks are grown. Biofuels have no benefit downstream, where used as motor fuels, because their tailpipe CO2 emissions differ only trivially from those of gasoline.

Instead, DeCicco argued that environmentally conscious individuals should concentrate on cleaning up power plants while support for alternative fuels should be limited to research and development.

By the time the power sector is clean enough and battery costs fall enough for EVs to cut carbon at a significant scale, self-driving cars and wireless charging will probably render today’s electric vehicle technologies obsolete. Accelerating power sector cleanup is far more important than plugging in the car fleet.

All this short-changes the clear advantages that can come from reducing our huge trade deficit and replacing oil with homegrown natural gas. The less money we spend on imports, the more we will have for making environmental improvements and investing in complex technology such as carbon capture that can reduce carbon emissions.

In addition, DeCicco may be being too pessimistic about alternative fuels’ potential for reducing carbon emissions. As The New York Times reported in a recent story about natural gas cars, “According to the Energy Department’s website, natural gas vehicles have smaller carbon footprints than gasoline or diesel automobiles, even when taking into account the natural gas production process, which releases carbon-rich methane into the atmosphere. Mercedes-Benz says its E200, which can run on either gasoline or natural gas, emits 20 percent less carbon on compressed natural gas than it does on gasoline.” Besides, if the source of emissions can be switched from a million tailpipes to one power plant, it’s a lot easier to apply new technology.

Mother Jones and The Wall Street Journal have much more in common than they may realize. One way or another, it would benefit everyone if we could reduce our dependency on foreign oil.

 

It’s not the oil we import that makes us vulnerable, it’s the price

The United States Energy Security Council has written a brilliant report explaining why neither increased production nor improved conservation will solve our oil problems or free us from dependence on world events.

The Council numbers 32 luminaries from across the political spectrum, including such diverse figures as former National Security Advisors Hon. Robert McFarlane and Hon. William P. Clark, former Secretary of State Hon. George P. Shultz, Gen. Wesley Clark, T. Boone Pickens and former Sen. Gary Hart. The study, “Fuel Choice for American Prosperity,” was published this month.

The report wades right in, pointing out that even though our domestic production has increased and imports are declining, we are still paying as much or more for imported oil than we did in the past. The report states, “Since 2003 United States domestic oil production has risen sharply to the point the International Energy Agency projects that the United States is well on the way to surpassing Saudi Arabia and Russia as the world’s top oil producer by 2017. Additionally fuel efficiency of cars and truck is at an all-time high. As a result of these efforts, U.S. imports of petroleum and its products declined to under 36% of America’s consumption down from some 60% in 2005.”

Good news, right? Well, unfortunately not so fast. The report adds, “None of this has had any noticeable downward pressure on global oil prices. Over the past decade the price of crude quadrupled; the value of America’s foreign oil expenditures doubled and the share of oil imports in the overall trade deficit grew from one third to about 5%. Most importantly, the price of a gallon of regular gasoline has doubled. Despite the slowdown in demand, in 2012 American motorists paid more for fuel than in any other year before.”

How can it be that all this wonderful effort at improving production still has not made a dent in what Americans pay to fill up their cars? The problem, the study says, is that OPEC still has enough monopolistic market leverage to keep the price of oil where it wants. “While non-OPEC supply has been increasing and while the world economy is growing by leaps and bounds, OPEC, which holds some three quarters of the world’s economically recoverable oil reserves and has the lowest per barrel discovery and lifting costs in the world, has failed to increase its production capacity on par with the rise in global demand. Over the past four decades, world GDP grew fourteen-fold; the number of cars quadrupled,; global crude consumption doubled. Yet OPEC today produces about 30 million barrels of oil a day (MBD) – the same as it produced forty years ago.”

This means that even though we’re doing very well in ramping up supply and reducing demand, the overall distribution of reserves around the world still weighs so heavily against us that we’re basically spinning our wheels as far as what we pay for oil is concerned. The Council sums it up succinctly: “What the U.S. imports from the Persian Gulf is the price of oil much more so than the black liquid itself.”

So, what can we do? The Council says we have to change our thinking and come up with an altogether new approach: “If we are to achieve true energy security and insulate ourselves from countries that whether by design or by inertia effectively use oil as a economic weapon against us and our allies, America must adopt a new paradigm – one that places oil in competition with other energy commodities in the sector from which its strategic importance stems: the transportation fuel market.”

In other words, quite simply, we have to find something else to run our cars. “Although this may appear to be a daunting task, our country — and the globe — is abundant in energy resources that are cost-competitive with petroleum.”

In fact, there are numerous alternatives available. We have natural gas that can be used in a variety of ways, we have biofuels and we have electricity; all of which exist in abundant supply. What prevents us from using many of these alternatives is a regulatory regime and political inertia that prevents them from being employed. “Cutting into oil’s transportation fuel dominance has only been a peripheral political objective over the past forty years with inconsistent support or anemic funding from one Administration to the next. Competing technologies and fuels to the internal combustion engine and to gasoline and diesel have often been viewed as political pet projects by the opposing party. . . . What we must do is relatively simple: level the playing field and end the decades-old regulatory advantage that petroleum fuels have enjoyed in the transportation fuel market. By pursuing a free market-oriented policy that has as its primary objective a competitive market in which fuels made from various energy commodities can be arbitraged against petroleum fuels, the United States can lead the world in placing the best price damper of them all – competition – on oil.”

The Council is particularly critical of the “multiplier” system that has allowed the Environmental Protection Agency to become the arbiter of which alternative vehicles win favorable regulatory approval. The Corporate Average Fuel Efficiency (CAFE) standards have now been set so high — 54.5 mpg by 2025 — that no one realistically expects them to be achieved. But automakers can win “multipliers” by manufacturing alternative-fuel vehicles that are counted as more than one car, thus lowering the fleet average. The value of this multiplier, however, is determined solely by the EPA.

But as the study points out, the EPA has a conflicting mandate. On the one hand, it is supposed to be cutting gasoline consumption but on the other it is concerned with cutting pollution and carbon emissions. (Just why the EPA and not the Department of Energy is administering the CAFE program is a question worth asking.) So the EPA tends to favor cars that do not necessarily improve energy consumption, but cut emissions. Thus, it awards a two times multiplier to electric vehicles and fuel cell cars by only 1.3 times for plug-in hybrids and compressed natural gas. Meanwhile, flex-fuel vehicles, which could do most for reducing oil consumption, get no multiplier at all.

The Energy Security Council has many other good recommendations to make as well. I’ll deal with them at length in a later column. But for now, the takeaway is this: Greater production and improved efficiency will only get us so far. The real key to lowering gas prices and freeing ourselves from foreign dependence is to develop alternatives to the gasoline-powered engine.