The U.S. Defense Department has come out with a comprehensive report on the impact of climate change on America’s military. According to The Washington Post’s story on the report, “Drastic weather, rising seas and changing storm patterns could become ‘threat multipliers’ for the United States, vastly complicating security challenges faced by American forces …” Read the full report here.
The ‘60s and early ‘70s were exhilarating at times and depressing at other times. America seemed angry and divided about the Vietnam War, the struggle over civil rights and equal rights for women. Many of those who were against the war and supported civil rights for minorities and equal rights for women were passionate about their views and saw themselves as change agents in an America that they viewed as perfectible but not perfect. They debated, they marched, they shouted, they irritated, and they (at times) exceeded legal boundaries. Some even took personal risks by becoming Freedom Riders in the south. By the early ‘70s, they had made a positive difference. They had become legends in their own time, capped off by Woodstock — an exotic, culture-changing, music rebellion concert. America would never again be the same!
I ask myself why the effort to break up the oil industry’s monopoly at the gas pump has won intellectual interest among some, but not the passion and the emotion of the ‘60s. No one is riding in a vehicle column through the nation, stopping at gas stations to plead for an opportunity for consumers to choose among alternative or replacement fuels. No one is shouting en masse about the extensive environmental harm and economic loss caused by our reliance on gasoline. Very few are concerned with the widening income gap and increasing poverty in America. Where is the concern about the negative impact that gas prices have on the purchasing power of the poor?
Surprisingly, very few Americans seem worried that most of the wars we are fighting either overtly or covertly involve (to some degree) our or our allies’ dependence on oil and, sometimes, lead to our becoming allied with some unsavory folks. I keep remembering a relatively recent conversation I had with a special services soldier who quite clearly indicated that he and his colleagues believed the U.S. was in Iraq not because of the quest for democracy or freedom, but because of the West’s need for oil. He indicated that it was b.s. — all this talk about building democracy. Whether it’s Iraq, Syria, or Egypt, Americans themselves are having growing doubts about why we have been, are now, or might be in the future, involved in Middle Eastern wars. Many, if not most, hope that their kids are not the first in and the last out.
What is it going to take to stimulate the adrenaline of Americans when it comes to the oil industry’s ability to limit competition at the gas pump through price management, franchise agreements, and political muscle in Congress? I suspect the draft helped energize the public’s antipathy toward the Vietnam War, but for the most part, the anti-Vietnam movement secured the intense support of only a minority of Americans. Indeed, polls at the time indicated that both the women’s and the civil rights movements also had less than majority support. Yet, in all three instances, the overlapping minorities among the population wielded a big political voice, bigger than their numbers.
Why? I suspect media-savvy, bright, and committed leadership had much to do with it. Further, they were helped by the tragic assassinations of President Kennedy; his brother, U.S. Attorney General Robert Kennedy; and Martin Luther King, Jr. Growing public distrust of politicians caused by the gap between the facts on the ground and press releases concerning Vietnam increased the willingness of the American public to support the marchers. Polls began to shift on the war, civil rights, and equality for women. All three issues won increasing numbers and granted legitimacy to efforts to end the war and to assist the “have nots” and the “have less” among us. Given the federal budget authorizations and appropriations, an argument could be made that the halcyon days of the Great Society actually occurred during the first years of President Nixon. This is not heresy. Look at the budget details from 1965 through the early ‘70s.
Can we replicate the passion associated with the Vietnam War, civil rights and women’s rights movements and focus it on more democracy and freedom for consumers concerning choice of fuels? Probably not! The issues involved are difficult to grasp for the public. It is unlikely that families will sit down at the dinner table and stimulate conversation on the benefits and costs of replacement fuels or flex-fuel vehicles. Americans are not going to “March on Exxon” as they did on the Pentagon or gather at the National Mall in D.C. in the hundreds of thousands as they did for civil rights.
The term “silent majority” has been used without a hard and sustained predictable meaning in the last four or five decades. It’s a phrase that needs amplification and definition today. It could become the missing public change agent concerning replacement fuels. Coalition building among supportive pro-environmentalists, businesses, consumers, and anti-poverty groups could lead to the development of multitasked, innovative, and interactive national education program with a broad reach (e.g., town meetings, the newspaper and website articles, webinars, Twitter, movies, YouTube, etc.). Its success could convert a now-silent majority or near majority into a thoughtful, articulate majority focused on breaking up the monopoly at the pump. Success would be reflected in poll numbers supportive of federal, state, and local leaders who are willing to push for open fuel markets and increased FFVs. There would be a coalition of the willing; that is, an increasing number of Americans who would provide backbone to public policymakers who, in turn, would commit to challenging the oil companies’ understandable desire to sustain restricted fuel markets and the status quo favoring gasoline over environmentally better, safer, and cheaper replacement fuels. Their support would be conveyed through voting, and the use of innovative communication technology, rather than marching. The results would be illustrated by new, important, expanded democratically made choices by you and me, regarding fuel and vehicles — and maybe a new Woodstock composed of music celebrating America’s new freedoms. I didn’t go to the last one, but will go to the next one celebrating expanded choice for consumers, a healthier economy, and an improved environment.
The decision isn’t scheduled until June but already opposing sides are converging on Washington, trying to pressure the Environmental Protection Agency over the 2014 Renewable Fuel Standard for ethanol.
Last week almost 100 members of the American Coalition for Ethanol descended on the nation’s capital for its annual “Biofuels Beltway March,” buttonholing 170 lawmakers and staffers from 45 states. The object was to send a message to EPA Administrators Gina McCarthy to up the ante on how many billions of gallons the oil refining industry will be required to purchase this year.
The ethanol program is currently in turmoil. The latest problem is rail bottlenecks that have slowed shipments and created supply shortages over the winter months. Record-breaking cold and four-foot snow pack have been partly responsible but the rail lines are also becoming overcrowded. With all that oil gushing down from the Bakken and Canadian crude now finding its way into tank cars as the Obama Administration postpones its decision over the Keystone Pipeline, ethanol is getting tangled in traffic. .
“Ethanol for April delivery sold for about $3.02 a gallon on the Chico Board of Trade, an 81 percent increase over the low price during the past 12 months of $1.67 a gallon reached in November,” reported the Omaha World-Herald last Friday “This weeks settlement price of $2.98 a gallon was the highest since July 2011.” With only so much storage capacity, some ethanol refineries have been forced to shut down until the next train arrives to carry off the inventory. As ethanol becomes mainstream, it is becoming more and more subject to market events beyond its control.
But the big decision will be EPA’s ruling in June. In accord with the 2008 Renewable Fuel Act, Administrator McCarthy must set a “floor” for amount of ethanol refiners will have to incorporate into their blends during 2014. The program ran into trouble last year when the 13.8 billion gallon requirement pushed ethanol beyond the 10 percent “blend wall” where the auto companies will not honor warrantees in older cars. Refiners were forced to purchase compensating Renewable Identification Numbers (RINs), which exploded in value from pennies to $1.30 per gallon, forcing up the price of gasoline. Contrary to expectations, gasoline consumption has actually declined over the last six years, from 142 billion gallons in 2008 to 134 billion in 2013 as a result of mileage improvements plus the lingering effects of the recession. Last November McCarthy proposed reducing the 2014 from 14.4 billion gallons to 13 billion. The industry has been crying “foul” ever since.
But there are other ways to fight back. Last week in Crookson, gas stations were offering Minnesota drivers 85 cents off a gallon for filling up with E-85, the blend of 85 percent ethanol that many see as the real solution to the blend-wall problem. “We want the public to understand there are different ratios of gasoline and ethanol and how they can save you money,” Greg LeBlac, of the Polk County Corn Growers, told the Fargo Valley News.
At the annual meeting of the American Fuel and Petroleum Manufacturers (APFM) in Orlando last week, Anna Temple, product manager at WoodMac, made the case that the industry should forego efforts to raise the blend wall from 10 to 15 percent and instead shoot for the moon, leapfrogging all the way to E-85, where ethanol essentially replaces gasoline completely. (The 15 percent only ensures starts in cold weather.)
“E-15 is a non-starter in terms of market share,” Temple told her audience, as reported by John Kingston’s in Platts. http://blogs.platts.com/2014/03/25/eight-fillups/ She argued the incremental battle would absorb vast amounts of political capital yet still not be enough to absorb the 15-billion-gallon target for 2021. Instead, Temple pointed to the growing fleet of flex-fuel vehicles that now numbers around 15 million, headed for 25 million in 2021 or 10 percent of the nation’s 250-million-car fleet.
“If U.S. drivers poured about 200,000 barrels-per-day of E-85 into their flex fuel cars in 2021, that would take care of about 17 percent of the scheduled ethanol mandate,” Temple said. “It would only require that flex-fuel owners fill a 15-gallon tank eight times a year.” The remainder would be absorbed in the 10 percent blend and ethanol producers would not have to cut output.
Platts’ Kingston checked the math and found that even this goal would leave ethanol consumption slightly above the blend wall at 10.5 percent. “Still, the very modest number of eight fill-ups per flex fuel vehicles per year makes the whole blend wall issue seems a lot less daunting,” he confessed.
Of the 15 million people who own flex-fuel vehicles, of course, many don’t even realize it. (The yellow gas cap or a rear-end decal are the giveaway.) But the number of gas stations offering E-85 pumps is rising. The Energy Information Administration now estimates the number at 2,500 with most of the growth taking place outside the Midwestern homeland. California and New York each have more than 80 stations apiece.
The problem of rail bottlenecks can probably be solved by increasing the number of E-85 outlets and flex-fuel vehicles to bring supplies closer to the place of consumption. Still, the industry would probably be happy to have a bigger renewable fuel mandate as well.
During the late 1980s, I had the good fortune, thanks to the Rockefeller Foundation, to lead and facilitate an Aspen Global Forum between Russian and U.S. leaders in Sochi; the site of the present Olympics. The subject was economic development in the then already fragmenting, Soviet Union.
Sochi was beautiful but back then was a relatively small resort city for vacationing Russian nomenklatura. I have three memorable funny stories (at least for me) related to Sochi. I will try linking them, for better or worse, with the need for alternative fuels.
Getting to Sochi at the time provided a unique experience. The U.S. delegation which included a former U.S. Senator, several Wall Street titans, the editor of a major national newspaper, leading members of the Denver business community and myself (I was a Dean at the University of Colorado at the time) were told when we arrived at the Moscow airport in a snowstorm, we had to fly out of Moscow’s second smaller airport. We all dutifully were taken by shuttle, very slowly given the snow, to what seemed like an old, a very old facility. We quickly boarded what appeared to be a jet plane on its last legs. It was late at night and the snow was still blowing strong. The plane’s seats were broken and the bathrooms didn’t work. The cabin crew was nice but spoke only in difficult to understand broken English. Not an auspicious start to the trip. Two members of our delegation asked the pilot for 10 minutes to go into the terminal (an exaggeration of the term) to buy two or three bottles of vodka to give us courage and calm our nerves. They did get permission. It turned into a fun flight.
After we checked into the Intourist Hotel in Sochi, we all went to bed. One of the members of our delegation was a smart, tough, but very funny reporter and op-ed writer for the Rocky Mountain News. She came down the next morning and indicated most of her winter clothes were stolen from the room, while she was sleeping. I went up to the Manager of the hotel and told him what had happened. He was dutifully contrite. Every day while we were there, the reporter received a nice gift of new winter clothing to wear in the snow. At the end of the week, I thanked him and said, next time, have them take my clothes! He laughed. I was serious!
The Russian delegation hosted us in the summer home of an apparently famous Russian oligarch, whose name I forget, about 100 or so miles from Sochi. They took us there in big Army helicopters. We flew over and between the mountains and valleys of the Caucasus. The mountains were covered with much snow and looked gorgeous. One of the Russian guides opened the door so we could get a closer view. A big mistake! A member of the U.S. delegation, a well-known war experienced woman journalist, based I believe at the time in D.C, shouted close the f….n door. “I have covered many wars and been shot at. I survived. I don’t want to go down in a helicopter. We can look at the snow through a window.” She was right. At that point the helicopter seemed tilted at a significant angle to please us. We all were a bit scared but didn’t want to hurt our Russian hosts. She had no such fear. The door was closed.
If anything, except fuzzy memories, ties these stories together, it’s the snow and the mountains and a thought about building a coalition around alternative and renewable fuels to save the beauty of both and to the jobs they provide both up and down stream.
Based on the over 50 degree temperatures in Sochi during the current Olympics and the lack of abundant snow, The New York Times indicated that Daniel Scott, a professor of global change and tourism at the University of Waterloo in Ontario, was stimulated to project the future of winter sports. He noted that with a rise of global temperature possible by 2100 of 7 degrees Fahrenheit, there might not be many snowy regions left to hold the Winter Olympics. He concluded “that of the 19 cities that have hosted the Winter Olympics, as few as 10 might be cold enough by midcentury to host them again. By 2100 the number will shrink to six.”
Of the 960,000 winter sports industry jobs are supported by winter sports in the U.S. 27,000 have already been lost because of lack of snow, according to a recent NRDC report. More will be gone next season if snow fall totals continue to decline.
If we can easily check the box on one or more of the following: concern for the health of the economy, concern for the environment, concern for the quality of our water supply and the availability of water, concern for the future of the ski industry and winter sports off and on mountains, then even if we don’t ski, and even if greenhouse gas is not a top priority for some , we should be able to foster a strong coalition between environmentalists, business, nonprofits, natural gas and renewable fuel advocates. Its mandate would be to work on speeding up use of alternative natural gas based transitional fuels and helping place electric cars on a faster and cleaner track to market acceptance. The strategy is not perfect by any stretch of the imagination but it will at least get the country started on a path that will reduce harmful environmental impacts of gasoline including significant GHG emissions and other pollutants. It may also help slow down the browning of our mountain areas and the closure of winter resorts and the manufacturing and retail sectors that serve them.
America needs a good dose of pragmatism and probability curves to guide its fuel policies. Advocates of natural gas based fuels and renewables should be able to coalesce around the President’s agenda with respect to weaning the nation off gasoline (one of the biggest carbon emitters) and gasoline only vehicles.
Assuming electric utilities continue to switch from coal to cleaner natural gas; scholars suggest that electric cars will be of help in reducing total carbon emissions. But EV’s are not yet ready for prime time for most low, moderate and middle class households, in light of the relatively low mileage secured on a single battery charge, the absence of retail distributers, the small vehicle size and price. When they are, let the competition begin, remembering all the while that real change in emissions and reduction of pollutants, will come after the conversion of large numbers of existing cars to flex fuel vehicles and their ability to use natural gas based fuels. Back to Sochi and indeed to the mountains throughout America, when we are asked every Christmas whether there is a Santa Claus, lets us be able to look up at magnificent snow-capped mountains and collectively say, yes there is a Santa Claus and then sing loudly, Let it snow, Let it snow, Let it snow.
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.
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
Hold the presses, stop the cable and network news shows, break away from Twitter, and forget for a moment about Facebook… Why? Read the latest wire from The Associated Press! Many European nations, including Great Britain, have signed a multibillion dollar long term contract for Russian natural gas. The signing was accompanied by a decision by the European Community to integrate Russia into the community’s governance– NATO officials expressed anger and disappointment. Great Britain’s ambassador to America gently, but affirmatively, responded to the New York Time’s question concerning “what does this do to America and Great Britain’s special relationship? Well, it isn’t so special anymore.” She went on, “the world is evolving and Europe, as well as Great Britain, is evolving also. . . The alliance, and indeed NATO, is a relic of the past. I am sorry but that’s just how it is!”
Please don’t respond like many in America did to the late 1930s broadcast of H.G. Well’s War of the Worlds, narrated by Orson Wells. Don’t fear! don’t run out to the street! No deal with Russia for natural gas has yet been signed, NATO is still intact. The European Commission and European Union are still alive, if not well, given the economic problems plaguing many of its members and the continent as well as Great Britain.
While not factual, my flight into hyperbole and negative fantasy could become a reality sometime in the future. What got me thinking about the possibilities was an interesting article in the Oct. 31 Financial Times (coincidentally, on Halloween) by Paolo Scaroni, Chief Executive of Eni, Europe’s largest natural gas dealer.
Scaroni’s thoughts were not offered to trick or treat us. They were meant to make us think seriously about opportunity costing and risk analysis sure to be undertaken by European countries because of their increased need for natural gas and other energy sources.
Scaroni suggests that Europe’s present energy policies and related energy costs impede economic growth, and do not reduce Greenhouse Gas (GHG) emissions. Of note, he indicates that “the problem is that we have so far failed to grasp the implications of the U.S. shale revolution for Europe. Thanks to the rapid increase in efficient non-conventional gas production, U.S. companies pay about $3.50 per million British Thermal Units (BTUs) for their natural gas…That is about a third of what Europeans pay. “
Apart from high gas feedstock costs, Europeans also pay a hefty set of charges to sustain incentives to invest in renewables. As a result, Europe’s electricity is “twice as expensive as America’s” and gives the U.S. a clear competitive advantage with investors around the world, including investors from Europe. Why invest, build or expand in Europe if your company is energy intensive? The U.S. has the Red Sox, Lady Gaga, Madonna and, most importantly, relatively cheap natural gas fuel.
Because natural gas in the U.S. now crowds out coal, Europe gets a lot of its surplus coal for power plants. So while natural gas use has declined, it is increasingly hostage to dirty U.S. coal- sort of a negative equilibrium for our friends on the other side of the Atlantic. Rising carbon emissions from coal have come close to netting out the carbon benefits from investment in renewables, natural gas and the economic downturn.
What are Europe’s generally intelligent public and private sector leaders to do? Sounds obvious! Increase imports of shale gas from the U.S.! No, says Scaroni. By the time transport costs are added and subject to liquefaction in the U.S. for shipping and regasification for use in Europe, shale gas exported from the U.S. is twice as expensive as gas in the U.S. While likely a bit exaggerated, the author indicates that buying U.S. natural gas would be economically disastrous.
It is also not a good political move. Besides the costs for U.S. natural gas, many Europeans still view the U.S. as “that” upstart nation, once defined by old Europe as the “colonies.” Heck, it was only near 325 years ago; it’s too early to pay reparations.
Scaroni thinks the answer is to explore home grown shale oil assets and nuclear energy, as well as increasing the efficiency of conventional fuels. To secure the first two, however, will be tough given the opposition of environmentalists and people who would like to keep Europe just as it is. Further, high density wall to wall development throughout Europe and Great Britain creates even more fear concerning despoiling the remaining open space and breeds an intense “not in my neighborhood” attitude in many areas. Efficiency is praised by most, because it is often used devoid of real meaning in political rhetoric. Who can be against it, until specifics and likely mandates, costs, and its impact are put on the table?
Scaroni, realizing the obstacles to lowering the costs of gas to U.S. benchmark prices, suggests strengthening commercial and political ties with Russia and perhaps other traditional non U.S. energy partners. Reading between the lines of the author’s words, he seems to be saying, “let’s milk Russia for all the comparably inexpensive gas we can get.” WOW! Communist! Reprobate! Misanthrope! No. Probably just a good analyst and business person.
Without access to NSA data or James Bond, I still almost can hear the buzz at the Pentagon and State Department. I can see the dour faces at NATO offices in Brussels. I can visualize the depression in the EC and EU. Sure, Russia may soon find a welcome mat in Europe. Its entrance price will be relatively cheap natural gas. New alliances, new travel patterns for diplomats, better food in Russia in the future, new political fun and games as well as new problems for the U.S.
Russia’s natural gas exports to Europe are likely to increase, but Russia’s natural gas dominance is probably not around the corner. The West can take a deep breath. Use of fracking, governed by strong environmental regulations, likely will increase and result in expanded natural gas supplies in Europe and Great Britain. While exports from Russia will increase, they will reflect a measured increase at least in the short term.
Russian exports to Europe and Great Britain will not have a major impact on the U.S. We can manage any uncertain political changes and the European price of natural gas will not have a major effect on the U.S. price of the same.
What’s the U.S. going to do with its natural gas? While LNG exports from the U.S. may increase to Great Britain and Europe (as well as Asia), the increase will be moderate, given the continued absence of sufficient port capacity, the cost and the slow pace of government approvals. Pressure, in light of predicted surpluses and the advocacy of alternative fuel supporters, may help open up the almost monopolistic U.S. vehicular fuel markets and increase natural gas demand.
Natural gas prices in the U.S. will remain subject by and large to U.S. production and related costs, as well as regional market behavior and investor speculation. Contrary to oil, natural gas produced in the U.S. likely will not play a major role for at least the next several years in global markets
Is this good for U.S. and U.S. consumers? On balance, yes. The gap between demand and production as well as production potential will remain visible. ROI in natural gas wells and rigs will probably be sufficient to secure modest production increases. Natural gas prices will likely go up over time but remain well under the price of oil when both are converted to vehicular fuels. Assuming positive government rule-making and the increased use of natural gas derivatives, ethanol and methanol as alternative transitional vehicular fuels, consumers at the pump will benefit from the continued differential and the U.S. will benefit security-wise as well as environmentally and economically.