Ethanol production up, gasoline demand hits 10-week low
In the US, ethanol production averaged 937,000 barrels per day for the week before last, or 39.35 million gallons daily, up 6,000 b/d from the week before.
In the US, ethanol production averaged 937,000 barrels per day for the week before last, or 39.35 million gallons daily, up 6,000 b/d from the week before.
Since 2009, oil prices have enjoyed a prolonged period of remarkable stability characterized by annualized volatility significantly below its long-term average. And though volatility has ticked up markedly in recent months due to the escalating conflicts in Russia and Iraq, oil prices haven’t risen much above $115 a barrel and have actually declined sharply in recent weeks.
The Chicago Tribune editorial “Repeal renewable fuel standard,” (Aug. 6) was undoubtedly off the mark when it claimed the Renewable Fuel Standard had “flopped” at encouraging the development of advanced biofuels in the United States.
I learned from Art Laffer that government is the 800lb gorilla in the economy and that investors can profit from changes in government policies. But a practitioner has to accept the framework – that government policies drive incentives as much or more than any other single driver. The charts that follow should prove that out. They show how a proposed change to the RFS ethanol mandate drove corn prices down 30% almost instantaneously. Similarly, in 2008, oil prices plunged at the mere suggestion that a moratorium against drilling on the outer continental shelf (OCS) might end.
The federal government has sold more than 400,000 acres in the Gulf of Mexico off the Texas coast for oil and gas exploration and development, an official with the Bureau of Ocean Energy Management said Wednesday.
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.
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.
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.