Taxing “Windfall Profits” Google

I have a few essays in the queue (including a nifty biodiesel story), but I thought I would comment on an article in today’s Deseret News out of Salt Lake City. The article was entitled “Will U.S. Slap Tax on Big Oil Profits?”. (1) A few excerpts from the article, followed by my comments:

Republican Sen. Arlen Specter said Sunday that the U.S. Congress should consider taxing the “windfall profits” reaped by as a result of surging crude oil prices.

I understand the frustration with high even as rake in record profits. But what is Specter trying to accomplish? Does the good senator believe this will magically bring the price of oil down? Will it cause to open the taps, flooding more oil into the market? Or is the real purpose to punish for making money, so he can boast about it during his reelection bid? Would he stipulate that the money be allocated to somehow reducing our demand for oil, which is the real issue?

Specter, of Pennsylvania, earlier this month introduced legislation to strengthen antitrust enforcement of the oil and natural gas industry to counter the consolidation of production and refining operations. Sen. Byron Dorgan, D-N.D., is proposing a 50 percent excise tax on profits from oil sold at more than $40 a barrel.

Let’s think about that for a moment. A lot of oil is expensive to extract, and only becomes economically viable as oil prices climb higher and higher. As oil prices climb, the incentive to pump more oil increases. If more oil can actually be pumped, it should eventually result in an oversupply situation, and prices will come back down. (This is why the is cyclical). If more oil can’t be pumped, then prices won’t come down.

However, neither situation is helped by slapping a tax on oil over $40 a barrel. In fact, such moves decrease the reward for marginal producers, which may lead them to shut in production. Since foreign producers won’t be paying that tax, what do you think is going to happen? U.S. production will decrease further, imports will increase, and oil prices will remain high. If high oil prices are the objective, then this is a way to accomplish that objective.

“Windfall profits, eliminating the antitrust exemption, considering the excessive concentration of power are all items we ought to be addressing,” Specter said Sunday on CNN’s “Late Edition” program. “Anybody up for election this year ought to be working very hard, taking it very seriously.”

Oh, I bet they are. That’s why they ignore the real reasons for rising oil prices, and aren’t doing anything to address those issues. They are posturing and pandering, trying to make sure they get themselves reelected. The founding fathers would be rolling over in their graves if they saw the level of mediocrity that permeates our government today. Nobody has the guts to stand up and tell the truth.

Sen. Carl Levin, D-Mich., said President Bush should call oil company executives to the White House and tell them he’ll support a new tax on their profits unless they lower prices.

“I’ll bet that the price of gasoline would come down within a matter of days,” Levin said on the CNN program. “We need a windfall profits tax because these profits have been absolutely obscene.”

Wow! Is Levin this uninformed? Does he think oil company executives set the price of oil? Does he not understand that oil is a global commodity, and if China or India are willing to pay more for oil than we are, then that is going to drive the prices up? That’s sort of like asking a company to lower the value of their stock, because you want to buy some, but think it’s too expensive. It’s the price it is because that’s what buyers and sellers in the open market have agreed upon for a value. Oil company executives do not set the price of oil. This only happens in politician’s dreams.

Bush, in California over the weekend to promote his initiative on alternative fuels, said a lack of refining capacity in the United States and the thirst for oil in emerging economies such as China and India are contributing to increased energy costs. He said he recognized the price of gasoline is hurting consumers and warned that the price is likely to go higher.

Like him or hate him, Bush is correct about this. I bet even the good senators would agree with this. So, let’s pose a question. A lack of refining capacity is a problem that is putting a lot of pressure on gasoline prices. Expanding takes lots of capital. If we extract more money from the in the form of punitive taxes, are they likely to spend more money or less money on capital projects? Now, is this likely to make the refining bottleneck better, or worse? Again, if your goal is to have gas shortages and drive the prices even higher, then they are on the right track. Like I have said before, we tried this already and it didn’t work. (2) From a 1990 Congressional Research Service report:

“The windfall profits tax reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the U.S. more dependent upon imported oil.”

This report should be required reading for legislators who think a windfall profits tax is a good idea.

Specter has focused his attention on consolidation and competition. “We have allowed too many companies to get together to reduce competition,” he said.

There were more than 2,600 mergers in the in the 1990s, according to James Wells, director of natural resources and the environment for the Government Accountability Office. A study by the GAO, Congress’ research arm, found that concentration of market power may have added as much as 7 cents to the price of fuel, he said.

As much as 7 cents? I think Senator Specter has identified the culprit. Gasoline prices are “as much as” 7 cents higher than they would be had they stopped those mergers. This is clearly the source of spiraling . If it was “as much as” 7 cents, I wonder what the lower estimate was. It really sounds like Specter is on a wild goose chase.

While politicians pander, I am still waiting for someone in government to have the guts to suggest that a potential solution to this problem is to encourage Americans, somehow, to conserve. I am waiting for someone to explain that cheap oil is not an American birthright, and as long as China and India compete for the same oil, there will be no more “cheap” oil. Of course more expensive oil will enforce conservation eventually. Maybe the politicians are much smarter than I think, and this is part of the plan. If we adopt the policies they are advocating, oil prices will spiral out of control, gas will no longer be affordable, and we will finally start conserving. Maybe there is a method to their apparent madness.

References

1. “Will U.S. Slap Tax on Big Oil Profits?”, Deseret News, April 24, 2006.

2. Glassman, James K., “Windfall Profits” Tax on Oil Companies, Capitalism Magazine, September 26, 2005.


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This Week in Petroleum 10-3-07 Google

I almost never talk about distillates, which are that are heavier than gasoline and are used to make diesel and heating oil. I don’t use heating oil or diesel, so I don’t think about this market too much, but I know that a lot of people do. And for those who do, it’s shaping up to be at a minimum an expensive winter. I had seen this story earlier in the week:

Heating oil prices soar, elderly panic

A warm, summer-like day did nothing to ease the fears of the elderly women who walked into the Brockton senior center earlier this week seeking fuel assistance.

“They are panicking,” said Anne McCormack, the city’s director of elderly affairs.

And, they have reason to panic, say fuel oil dealers who are paying record-high prices and therefore charging record-high prices even before the winter cold sets in. The problem is even worse for those who rely on government fuel assistance programs, administrators say.

“Never in my lifetime,” veteran oil dealer Charlie Dyer of Raynham said about today’s prices. “It’s going to be a very difficult winter for customers, about it.”

And consumers will get no relief, as today the announced a very large surprise drop in distillate inventories:

Oil rebounds to go above $80

In its weekly inventory report, the Energy Information Administration () said crude stocks gained by 1.2 million barrels last week. Analysts were looking for a decline of 400,000 barrels according to Dow Jones.

Gas inventories eased by 100,000 barrels, compared to the 400,000 gain predicted by analysts. Distillates, used to make heating oil and diesel fuel, fell by 1.2 million barrels. Analysts were looking for an increase of 700,000 barrels in distillate supplies.

In the inventory report, said operated at 87.5 percent capacity, falling just shy of expectations.

Some analysts predict crude is set to drop $10 to $15 a barrel over the next couple of months as the fundamentals aren’t there to support $80 oil. Others say $100 a barrel is just around the corner, especially in the event of a surprise disruption in supplies.

So, here’s the score heading into the 4th quarter: remain at record-low levels. Distillate inventories, at 134 million barrels, are 16 million barrels lower than at this time last year (but not terribly low by historical standards). But distillate prices are $0.65/gallon higher than they were a year ago, meaning fuel oil bills are going to be much higher than normal. have fallen over the past couple of months, but are still historically high. I think the big story remains gasoline, and whether we can dig our way out of this hole over the fall and winter. If not, something’s got to give next spring.


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Hillary’s Stupid Energy Plan Google

I had intended for this, my 500th essay on this blog, to be about my recent trip to Choren’s new plant in Germany. But Hillary Clinton has just come out with a plan for high gasoline prices so asinine, it had to be addressed. Note that I have already picked on McCain’s plan, and Obama’s plan isn’t all that different from Hillary’s. In my opinion none of these candidates have demonstrated that they actually have a grasp of the reasons for high oil and .

So, in stark contrast to the proposals I laid out in my previous essay, here is Clinton’s plan, along with some comments from me:

Hillary Clinton’s Plan to Address Soaring Prices at the Pump

Hillary’s plan includes:

Imposing a windfall profits tax on and using the money to suspend the gas tax for the peak summer months;

Closing $7.5 billion in oil and gas loopholes and using the funds to provide assistance for lower-income families to pay their energy and grocery bills;

Cracking down on speculation by energy traders and market manipulation in oil and gas markets that are driving up the price of oil by at least $20 a barrel;

Pressuring to increase oil production, including by filing a WTO complaint against countries

Stopping new additions to the and standing ready to release oil to counter market spikes and reduce volatility.

This plan builds on Hillary’s long-term plan to reduce our dependence on foreign oil and address global warming.

Notice the irony in that last phrase? Let’s lower and address global warming! Hey, I know what else we can do. Let’s eat more, and lose weight. It’s genius.

Let’s pick apart her proposals, and I will tell you why her positions are stupid.

Hillary will impose a windfall profits tax on and use the money to temporarily suspend the 18.4 cent per gallon federal gas tax and the 24.4 cent per gallon diesel tax during the upcoming peak summer driving months. Hillary will ensure that this relief is passed along to consumers by charging the Federal Trade Commission with conducting aggressive oversight. Unlike Senator McCain’s plan, Hillary’s plan will be fully paid for by taking away oil company profits through a windfall profits tax. This will ensure that the Highway Trust Fund is not affected at all by the gas tax suspension, and can continue to support critical repairs and maintenance for our infrastructure and highways.

Why This is Stupid

If Hillary had anyone on her staff who had a clue about energy issues, they would see that are already cut back due to low margins. Historically, low margins are the very reason that underinvestment has taken place in the refining sector. I seem to recall many politicians screaming about this underinvestment last year (even as they argued to confiscate profits which happened to be good in the refining sector last year). Total oil company profits are currently a result of very high oil prices - and most of that is flowing right out of the U.S. So there are a couple of ways this could break, both contrary to Hillary’s expectations.

If the policy could actually be implemented as Hillary outlines it, it ensures that demand remains high through the summer months. It sends a message to consumers that high really aren’t a worry; the government is going to take care of you. Thinking about buying a Prius? No, don’t do that. Because you see, the government is going to do everything possible to ensure that stay low, so you can continue to contribute your carbon emissions and we can continue our dependence on oil.

But that’s not really how it is likely to pan out. What will happen is that will allocate those taxes to their already struggling refining sector (they don’t produce all that much oil in the U.S.) Then what happens? Percent refinery utilization, which is currently running in the low 80’s (normal for this time of year, when margins are usually better, is upper 80’s or lower 90’s) will fall into the 70’s. Why? Let’s say you run a business, and you are making thin profits on one of the products you sell. Now someone wants to tax it at a higher rate. What do you do? Personally, I would shift my investments into something that offered a higher return. That’s exactly what will do. There will be less incentive to focus on upgrading and maximizing refining capacity.

Next up:

Oil and gasoline markets contain loopholes for traders, and the markets are inadequately policed by regulators under current law. As a result, there is considerable concern that current market prices reflect the influence of speculators and other forces beyond supply and demand. In early April, an Exxon Mobil executive testified under oath before a House committee that the price of oil should be $50 to $55 per barrel based on supply and demand fundamentals.

Why This is Stupid

So now you trust ExxonMobil? Do you believe them all the time, or only when you are trying to make a specific point?

The reason this proposal is stupid is not because there isn’t speculation in the market: There is. The problem is trying to identify how much, how to police it, and most importantly - how to apply those policies world wide. Because haven’t you heard? The oil market isn’t specific to the U.S. We don’t pay higher prices than they pay in Asia because of speculation. If speculation was responsible for $50 of the price as Clinton implies above, shouldn’t we see gross disparities in crude pricing?

How about taking on ? A stupid plan wouldn’t be complete without threatening to bring legal action against in order to force them to lower prices for us:

recently reiterated that it will not even consider increasing crude output until September 2008, even though limited supplies are contributing to record oil prices. Hillary believes we should be taking more aggressive action to address ’s control over global production levels and hold accountable for its decisions. President Bush’s efforts to pressure over the past seven years have been inconsistent and unsuccessful. Hillary supports sending a strong signal to that the era of complacency has ended. Hillary will:

Use the WTO to Challenge ’s Production Quotas - With nine of the thirteen member countries also being members of the WTO, Hillary believes we should use the tools available at the WTO to address ’s refusal to increase production.

Allow Production Decisions to Be Challenged Under U.S. Anti-Trust Law - Currently, countries cannot be challenged under U.S. anti-trust laws, even when they are engaged in coordinated, commercial activity to control the global oil market.

Why This is Stupid

This is probably the stupidest of her proposals. Oh, the can of worms it would open up. Here’s the analogy I have used before. Let’s say Saudi Arabia loves American wood. They love it so much, that their purchases start to drive the price higher. It seems other countries love American wood as well, so supplies are tight. But Saudi feels like they have a God-given right to cheap wood. Therefore, they demand that we increase production of our wood to bring prices back down. They demand that we overproduce our resources in order to meet what they would prefer to pay, because they have grown dependent on our wood. So, they threaten to sue and take us before the world court.

Of course the big difference here is that wood is a renewable resource. When Saudi’s oil is gone, what else do they have? Yet we demand that they produce according to the price we prefer to pay - not necessarily what’s in their own best long-term interest. How self-centered is that? Can’t Hillary recall when the Mideast cut us off from their oil because they didn’t like our policies? Does she think they couldn’t do it again?

Hey, we haven’t pulled the Big Oil card since the first paragraph. You just can’t do that often enough when you are pandering for votes:

Hillary believes that in addition to imposing a windfall profits tax on large , Congress should move immediately to end the approximately $7.5 billion per in tax giveaways and subsidies that we continue to provide to oil and gas companies, despite their record profits. These subsidies are in part a result of the 2005 Energy Bill she voted against. She would use those resources this year to provide assistance to lower-income families who are not only being hit at the gas pump, but with skyrocketing energy and food bills as well.

Why This is Stupid

Similar to her first proposal, Hillary wants to send a message that it isn’t the consumer here that is the problem, it’s those big, bad and their gouging ways. That’s why you are paying higher prices: Greed. She will take that money and return it to the consumers, thus achieving her goal of lowering prices AND fighting global warming. Don’t start that car pool just yet - Hillary is going to refund the extra money you have been paying. No need to worry.

Any why not tap the SPR?

Hillary is calling on President Bush stop taking oil off the market and putting it into the (SPR). The SPR is now 97 percent full, which analysts believe is more than adequate. Continuing to fill it at these high prices exacerbates high oil prices and costs taxpayers money. Hillary also believes that the SPR should be more actively managed to enable releases from the SPR to counter market spikes and reduce volatility.

Why This is Stupid

If the SPR is 97 percent full, why do you need a policy to stop filling it? Won’t that happen pretty quickly anyway? Also, it seems that Hillary (and many others) don’t understand the purpose of the SPR. It is for national emergencies. The fact that I am paying more for gasoline is not a national emergency. A war with Iran that could curtail our imports sharply is more along the lines of what the SPR is for. And if you drain it right now for political purposes, and then you need it for an actual emergency, it wasn’t very strategic, was it?

Using it to try to counter market spikes suggests that you can predict where the market will be in the future - when you need to buy the crude back. The fact is, politicians on both sides have been urging releases from the SPR ever since oil was at $20/bbl. Where would we be now if we had done so? With an empty SPR, and with oil prices still at very high levels.

In the long term, Clinton proposes the following:

Proposals to Reduce our Dependence on Foreign Oil Over the Long-Term

Key elements of that plan include:

Raising fuel efficiency standards (CAFE) to 55 miles per gallon by 2030;

A $150 billion investment in researching, developing, and deploying renewable and alternative energy;

Cutting our foreign oil imports by two-thirds by 2030;

Providing $1.5 billion per year for public transit, an additional $1 billion for intercity rail, and additional funds for congestion reduction, better traffic management and telecommuting;

Providing tax credits and research and development funding for plug-in-hybrid vehicles, which can get up to 100 mpg; and

Conserving fuel in the federal fleet. Hillary will call on all federal government agencies to suspend non-essential travel and other activities that use gasoline or diesel fuel, and encourage employees to carpool, telecommute, and use public transportation to reduce fuel use. And she will direct federal employees to reduce maximum speeds to conserve fuel, with exceptions for law enforcement and other emergency services. Under Hillary’s plan, the agencies will to report to the White House once a month on their energy use and the impact of conservation efforts.

That 3rd one is brilliant: Cut our oil imports by 2/3rds. Why didn’t someone already think of this?

I won’t call those proposals stupid, but they all have something in common: The painless fix. There isn’t a single proposal there that suggests consumers need to cut back (except for the last one, in which government employees are asked to do so). For the average consumer, this all sounds great. They get to continue the status quo, and Hillary is going to see to it that they are not inconvenienced.

This is the kind of shallow political rhetoric that put us where we are in the first place. Two thumbs down for Hillary’s energy plan. Now where’s that president with courage; the one I was looking for in my previous post?


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Book Review: Oil on the Brain Google

Book Review: Oil on the Brain

Oil on the Brain: Petroleum's Long, Strange Trip to Your Tank by Lisa Margonelli

Oil on the Brain Book Review: Oil on the Brain by Lisa Margonelli was recommended by Paul Sankey at the 2009 Energy Information Administration Conference as a book that provided great insight into the . I have had it on my list of books to read, and recently picked it up to read during my travels. I have been traveling a lot lately, and I like to read while I travel, so I knocked it out over the past couple of trips I have taken.

The premise of the book is that a person who doesn’t know much about the sets out to find out what it is really like on the inside. It reminded me in some ways of Crude World Book Review: Oil on the Brain by Peter Maass (which I reviewed here). The biggest difference is that Margonelli was approaching the subject from a pretty basic starting point, and Maass had written quite a bit about the industry when he tackled Crude World.

I guess I never cease to be amazed by what people think the is like, and what it is really like. People seem to think that the is a bunch of guys in a smoke-filled room who conspire to set prices. To be honest, that’s probably the way I viewed the industry when I was growing up. And still, my first reaction to my cable bill going up is “Those greedy cable companies are ripping me off.” The big difference with the cable companies, though, is that their profits aren’t thrust in everyone’s faces at the end of every quarter. Every time oil prices do spike up and show nice profits, people do feel like they have been taken advantage of. But I digress a bit.

For this book, Margonelli embedded herself within various sectors of the . She spent time throughout the supply chain, hanging out at a gas station in California where she found that the owners made more money on candy and soda than they did on gasoline. She spent a day with a tanker truck driver and his dispatcher, and spent time in a refinery and on an oil rig. She even got inside the Strategic Petroleum Reserve, which is typically off limits to visitors. She traveled abroad to Chad, Venezuela, Nigeria, and even Iran to understand the world of oil and what is has meant to these regions.

Here were what I thought were some of Margonelli’s more interesting observations. She spoke a lot about the indirect costs of using oil. In talking about oil spills, she mentioned that her view of an oil spill had always been dominated by the Exxon Valdez. She had never connected these spills to her own fuel usage, but learned that drivers and boaters spill more oil every year than did the Exxon Valdez. The number she cited was 19 million gallons of oil products spilled each year in our waterways by boaters and auto drivers.

She wrote about the notion that are in a conspiracy to set prices. A jobber she spoke with - someone who has to buy fuel from the - said “There are eleven studies which show there isn’t a conspiracy. Chevron, Shell, Exxon - they hate each other. It’s like war daily. For them to collude is insanity, but people believe what they want to believe.”

On that topic, she noted an episode of hypocrisy displayed by Nancy Pelosi. One day in 2006 Pelosi told a group of school children that we hadn’t done enough to reduce our dependence on gasoline, and so demand was high and that’s why the price was high. Then she got in front of the cameras and she cited the conspiracy of big oil and the Republicans working for their interests. But as Margonelli noted, “the myth of conspiracy overwhelms reason, particularly when pump prices and oil company profits are high.” I think the lesson there is “If the talking point is working, keep pushing it.”

She met an old-time wildcatter named Michel Halbouty (now deceased) who complained that the country has not had a coherent energy policy in 30 years. He advocated more promotion of domestic energy exploration, and fears a slow slide into deindustrialization. He noted that the main problem is that “People. Don’t. Care.” As long as they can pull in and fill up, they just don’t care about energy policy.

In China, she met with someone within the government who was involved with energy policy. He noted that it would be a disaster for China to move toward an American way of life, but he says that cars are clearly there to stay in China. On GDP, Margonelli wrote that China requires 4 or 5 times as much energy as Japan per point of GDP. Finally, the minister commented that China needs “a bigger space to survive under U.S. hegemony.” On that point, she also spoke with a European analyst who said that U.S. hegemony is a part of China’s strategy; that if they can get the U.S. to bear the expense of maintaining the energy status quo, they will have the time and resources to retool their economy.

In the epilogue, Margonelli comments that there is no such thing as cheap gas; that there are hidden costs throughout the supply chain. But the population has come to expect cheap gas as a “grand bargain” with the government and the . When the price goes high, they look to the government to punish the so prices will come back down.

One weakness in the book is that it really didn’t address the question of depletion. It seemed to take at face value that oil will continue to be available and business will continue as normal for decades. However, I note that Margonelli was at the ASPO Conference this year (along with Peter Maas; I am sorry I missed that) so she got a heavy dose of peak oil information. Some very interesting comments by her can be found at this story covering the conference.

As one might expect, Margonelli emerged from her experience with a radically different view of how the works. I have to agree with Paul Sankey’s assessment that it does provide great insight into the industry, from a very basic starting point and with a balanced view. As one reviewer pointed out, it could have been titled “The Petro-economy for Dummies”, which is to say it is a book that is easily understood by those with zero knowledge of the industry. This book would be on my short list of books to recommend to people who want to know what the industry is really like.


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This Week in Petroleum 1-24-08 Google

Updated:

Not too much to get excited about. Those reports of some coming down early for turnarounds due to low margins look to be accurate, given the drop in refinery utilization. That would also explain the rise in crude inventories, but typically you start to see coming down as the come offline. Gasoline production did fall, as one would expect as turnaround season begins. However, increased on the back of very strong gasoline import numbers.

The highlights:

Summary of Weekly Petroleum Data for the Week Ending January 18, 2008

U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending January 18, down 91,000 barrels per day from the previous week’s average. operated at 86.5 percent of their operable capacity last week. Gasoline production moved slightly lower compared to the previous week, averaging about 9.0 million barrels per day. Distillate fuel production fell last week, averaging 4.1 million barrels per day.

U.S. averaged about 10.2 million barrels per day last week, down 233,000 barrels per day from the previous week. Over the last four weeks, have averaged nearly 10.1 million barrels per day, or 0.1 million barrels per day more than averaged over the same four-week period last year. Total motor gasoline imports (including both finished gasoline and components) last week averaged 1.2 million barrels per day. Distillate fuel imports averaged 242,000 barrels per day last week.

U.S. commercial (excluding those in the ) rose by 2.3 million barrels compared to the previous week. At 289.4 million barrels, U.S. are in the lower half of the average range for this time of year. Total motor increased by 5.0 million barrels last week, and are above the upper limit of the average range. Distillate fuel inventories declined by 1.3 million barrels, and are near the middle of the average range for this time of year. Propane/propylene inventories decreased by 3.3 million barrels last week. Total commercial petroleum inventories increased by 2.2 million barrels last week, and are in the middle of the average range for this time of year.

Pre-Release Commentary

This week’s inventory report will be delayed until Thursday due to Monday’s holiday. As we move toward spring, inventory levels will be influenced by 1). Spring turnaround season; and 2). The return of summer gasoline blends. Typically, turnaround season doesn’t really kick off until late February to early-March, but a note from the OPIS report that came out on Wednesday stated “Apparently, the 2008 refinery turnaround season has been launched early, particularly at the U.S. Gulf Coast.” In the face of horrible margins, it makes sense to move turnarounds up and take the outages now, as opposed to later when margins should firm up.

If lots of do push up their turnarounds, we will see crude inventories start to build earlier than normal (which may have already started), and will start to be pulled down as they were last spring. have recovered from the record low levels of last year, and are setting in pretty good shape heading into the turnarounds. Whether we reach $4 gasoline is going to depend on the draw down rate, which last spring was very steep.

Back to the OPIS reports, last Friday’s report contained a very interesting story that I have not seen reported in the media. Here is an excerpt:

A couple of traders and on the U.S. West Coast may have found an outlet for the burgeoning gasoline stocks after fixing two ships to sail to Asia or Australia, industry sources said on Friday.

The West Coast gasoline stocks have reached the highest level since February 2006, prompting some traders to look for outlets in the East Coast in a potentially unprecedented move, and, possibly, the Gulf Coast, Asia, Australia or the west coast of Mexico.

As of Thursday, two ships were booked to load gasoline on the West Coast for delivery to Asia or Australia. Pacific Ruby was booked to load at the end of January, and Wang Chi was fixed to load on Feb. 1. These ships are likely to sail to Singapore or China or Australia.

“Those two vessels were booked earlier this week,” a source said. “A few ships were provisionally booked on Thursday for the same voyage, but all those fixtures failed.”

Good Resources

It goes without saying that the inventory reports from the are must reads every week for me. There are several other resources that I utilize on a daily basis to keep up with what’s going on in the world of energy. One is The Oil Drum, where the important headlines are usually captured in the daily Drumbeat. The daily subscriber reports from OPIS are a very valuable source of information on the energy markets, and they often contain information that I never seen in any publicly available sources. The reports also have daily pricing updates for gasoline (and components), distillates, and ethanol. (I see that spot ethanol prices are headed back up, and are once again higher than spot premium gasoline on the West Coast).

Platts is another good resource that covers a lot of areas that OPIS doesn’t. Platts also has a blog, The Barrel, that usually covers supply/demand issues (and links back to both TOD and my blog). Finally, Rigzone usually keeps me updated on the latest exploration and discovery news. One source that I have available with my company is a daily news summary from various categories such as Energy, Oil, Alternative Energy, etc. Sometimes I spot a story there that I find particularly interesting, and I link to the original source and write about it. Anyway, just wanted to share some of the resources that I find especially useful.


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Bill Gates’ Ethanol Losses Google

About the same time I was warning last year of an ethanol bubble, Bill Gates was sinking money into Pacific Ethanol (PEIX). In the same essay in which I warned of the bubble, I took a look at Pacific Ethanol, and concluded that the underlying fundamentals of the stock - even with the ethanol mandate - were not good.

Since that time, Pacific Ethanol has fallen from $22.54 down to today’s value of $9.97. Given that Gates’ purchase price was $16.00 a share - and the stock ran up to ultimately around $40 before collapsing - it looked like a shrewd move for a while. And I lost count of how many people - when arguing with me about ethanol - pointed out that Bill Gates and Vinod Khosla were investing in it, and that was good enough for them. After all, who did I think I was to contradict a couple of billionaires on their vision of the future? (Of course, one billionaire - Mark Cuban - did listen).

But the fundamentals were not there. I believe that Gates finds himself in this position - and I don’t believe he has seen the last of his (long-term) losses in this stock - because he had to rely on others to give him direction in his case. He was outside his area of expertise. And while people seem to automatically assume that Bill Gates’ genius in the computer industry somehow translates across other industries, this is not the case. I have said the same about Vinod Khosla - expertise in one area does not transfer to a completely different industry, so you better take his ethanol claims with a very large dose of salt. I believe that he will ultimately lose out in a very big way with his ethanol investments. He may sell into some and make a bit of money now, but if he stays in for the long haul he will not fare very well.

Continuing on this theme, today several ethanol stocks, including Pacific Ethanol, were downgraded by a major brokerage firm:

Ahead of the Bell: Ethanol Downgraded

NEW YORK (Associated Press) - A Friedman Billings Ramsey analyst downgraded three ethanol producers Thursday, slashing his price targets and predicting the industry’s “growing pains” will continue due to small profit margins and oversupply.

Ethanol production margins have dropped to 15 cents per gallon from 75 cents in mid-May, said Eitan Bernstein, as the price of ethanol has dropped. He said prices will stay low through 2008, and reduced his ethanol price estimates for 2007 to 2010.

Bernstein cut his rating on Aventine Renewable Energy Holdings Inc. to “Underperform” from “Outperform,” reducing his price target to $9 per share from $24. The stock closed at $11.68 Wednesday. He downgraded VeraSun Energy Corp. stock to “Market Perform” from “Outperform,” halving his price target to $12 from $24. The stock finished at $12.02 on Wednesday, and was unchanged in premarket trading. The analyst now rates shares of Pacific Ethanol Inc. “Underperform,” down from “Market Perform.” He cut his price target to $8 from $15. Shares ended Wednesday trading at $11.17.

Bernstein’s downgrades come a day after Aventine President and Chief Executive Ronald Miller addressed investors at a Bank of America conference. Miller said the industry is in a very difficult time due to declining margins, and expects conditions to stay hard until 2009.

Shouldn’t that downgrade have come before the stock price crashed? Of course if you have read this blog for long, you know that I have been warning about this for a long time. Here was a warning I gave 6 months ago:

When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980’s.

Looks like Wall Street is finally coming around, although a bit too late for many investors. It may not matter much in the end to a billionaire, but it will to the people who tried to emulate them by following their investment strategy.


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Oil to $250 a Barrel? Google

In case you missed it, there were several stories this week - and of particular note coming from - that suggested that much higher oil prices may be on the way:

Oil Price May Go Up to $250, Warn Experts

Crude prices continue to baffle analysts and pundits. With the $100-era a well established fact in our daily life, there is now a growing chatter within the energy fraternity that $200 a barrel may not be a far fetched idea altogether. Is another global oil shock now gathering pace?

With limited additional supplies, alternative fuel still some decades away and demand far from collapsing, Deutsche Bank is pointing to a “huge risk” that oil prices would continue to rise in the near to mid-term.

“There is a huge risk that the oil price simply continues to escalate until it gets to some level (possibly $250) when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,” Adam Sieminski, Deutsche Bank’s chief energy economist, wrote in a report last Friday.

This is why I am still an oil company investor. I am invested in ConocoPhillips directly, and some others via mutual funds (including Brazil’s Petrobras). I have seen various analyses that suggest the are no longer good investments because they aren’t replacing their reserves. I disagree. As long as oil prices are rising faster than reserves are depleting, they will continue to reap increasing profits (until the government steps in - which I think they will do). This will also give them the cash to get into other energy businesses that look attractive. Who knows, the future may see Shell (for example) as the leading solar power firm in the world.

is suggesting that even $200 oil won’t cause them to boost production by much. I think you can read the writing on the wall there and know that they simply don’t have the production available. While production from has been rising - and Saudi’s production is back up to just over 9.2 million bpd (per the article), just doesn’t have the spare capacity they did a few years ago.


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Amyris is Looking Promising Google

As I have said before, an ideal biofuel would be one that phases out of water, and is therefore much less energy intensive to separate. One of the big energy sinks in ethanol production involves an energy intensive separation of ethanol from water. If ethanol was insoluble it would phase out of solution and could be skimmed off and separated for a fraction of the energy input.

This is the sort of model that companies like LS9 and Virent have adopted. They are using microorganisms to produce longer-chain that not only are much easier to separate from water, but also have higher energy density. I have commented in the past that this is ‘Holy Grail’ stuff, but also would be technically challenging. But I think companies pursuing this line of research have a real shot at being ultimately successful.

Add Amyris to the list of companies competing for the Holy Grail. They also have a twist to their business plan that should give them an advantage over their competitors. Amyris has been mentioned on this blog a couple of times previously, but not in the same kind of detail as LS9. This post will rectify that by highlighting what they are doing.

First, what are they doing? In their own words:

Amyris technology makes it possible to alter the metabolic pathways of microorganisms such as yeasts, creating living factories that produce with practical applications. While reading, writing, and analyzing the DNA of microbes once took years, Amyris can now reprogram microorganisms and test our ability to produce desired in days to weeks. Our proprietary technology transforms plant-based feedstocks, such as sugarcane, into 50,000 different isoprenoids – used in a wide variety of energy, pharmaceutical, and chemical applications.

So you have heard similar claims before. However, they are quite a bit farther along than many would-be biofuel companies. They just announced the ‘opening’ (I presume that means they aren’t starting up just yet) of their first pilot plant in Emeryville, California:

Amyris Opens Pilot Plant to Produce Renewable Diesel Fuel

California Facility Marks Step in Developing and Commercializing Viable Alternative to Petroleum Fuels

EMERYVILLE, Calif. – November 12, 2008 – Amyris Biotechnologies, Inc. today announced that it has opened its first pilot plant producing No Compromise™ renewable diesel fuel. The pilot plant, which was ompleted in September, is an important milestone for Amyris towards its goal of developing and commercializing its sustainable, hydrocarbon‐based fuel, which it expects to bring to market in 2010.

The plant serves as a technical gateway to commercialization in Brazil and other manufacturing locations. It will demonstrate Amyris’ technology in scaled down process equipment that is representative of full ommercial scale operations; generate essential engineering data for designing Amyris’ full scale plants; and produce product samples for performance testing.

Amyris’ diesel is characterized as a No Compromise™ fuel because it is designed to be a scalable, low‐cost enewable fuel with performance attributes that equal or exceed those of petroleum‐sourced fuels and urrently available biofuels.

Other attributes innclude:

• Superior environmental performance: Preliminary analyses show that Amyris diesel fuel has virtually no sulfur and signifiantly reduced NOx, particulate, carbon monoxide and hydrocarbon exhaust emissions relative to petroleum‐sourced diesel fuel.

• High blending rates: Because Amyris renewable diesel contains many of the properties of petroleum diesel, Amyris can blend the fuel at high levels ‐‐ up to 50 pecent ‐‐ compared with 10‐20 percent for conventional biodiesel and ethanol.

• Compatibility with existing infrastructure: Unlike many commercially available biofuels, Amyris expects to distribute its renewable diesel through the existing fuel distribution and storage infrastructure, thus speeding time to market while minimizing costs.

• Adaptive: Amyris can produce its fuels from a broad range of feedstock including sugar cane and cellulosic biomass. It is starting with Brazilian sugar cane because it provides the most environmentally sound, economical, and scalable source of energy available today.

“This new diesel fuel has all the characteristics to make an important contribution toward solving our global transportation energy and climate crisis,” said John Melo, chief executive officer of Amyris. “The opening of ur pilot plant is a significant business marker for us, taking us one step closer to bringing our diesel fuel to market.”

In parallel with this effort, Amyris will open a larger pilot plant in Campinas, Brazil in the spring of 2009 here it will finalize processes for Brazilian operations; transfer the technology to manufacturing sites in Brazil; and provide ongoing support for optimizing production in Brazil.

Earlier this year, Amyris established Amyris‐Crystalsev Biofuels, a Brazilian venture in partnership with Crystalsev, one of Brazil’s largest ethanol distributors and marketers, to work with Brazilian sugarcane mills and fuel producers to scale up production of Amyris diesel fuel. SantelisaVale, the second‐largest ethanol nd sugar producer in Brazil has committed two million tons of sugar cane crushing capacity for the initial roduction of Amyris diesel, including its flagship Santelisa mill.

Amyris’ proprietary synthetic biology platform enables Amyris scientists to engineer microorganisms such as yeast so that they can transform sugar into 50,000 different used in a wide variety of energy, pharmaceutical, and chemical applications. Amyris is working on the development and commercialization of everal of these to provide a range of renewable products, including diesel fuel, jet fuel and specialty chemicals.

The platform has already proven successful through the development of a strain of yeast to enable the production of a precursor to artemisinin, a key ingredient in anti‐malarial drugs, at significantly lower cost than can be achieved with conventional technologies. This technology was developed as a not‐for‐profit initiative, and has been transferred to sanofi‐aventis.

About Amyris

Amyris is applying a proprietary synthetic biology platform to create No Compromise™ products ‐‐ low cost renewable fuels and chemicals that are intended to be environmentally friendly, compatible with the existing infrastructure, and have performance attributes comparable to petroleum‐based fuels. Amyris has also developed a technology to produce a second supply of an anti‐malarial drug. Founded in 2003, Amyris has raised over $120 million in equity funding to‐date, including investments from Khosla Ventures, Kleiner Perkins Caufield and Byers, TPG Biotech, and DAG Ventures. Amyris has over 200 employees and facilities in meryville, California; Chicago, Illinois; and Campinas, Brazil. More information about Amyris is available at http://www.amyris.com/.

The really interesting aspect of their business model is the Brazil angle. The U.S. currently has an import tariff on Brazilian ethanol. However, that tariff does not cover other biofuels coming from Brazil. By utilizing low-cost Brazilian sugar to make their biofuel, they stand a good chance of meeting their cost projects. Further, by making diesel - which is looking to be in tighter demand than gasoline for years to come - they are getting into a market with much better profit margins than ethanol has.

This, and some other highlights from a Greentech Media story:

Amyris: We’re Better Than Biodiesel, Ethanol or Gas

Amyris, for instance, will be able to produce a form of diesel that it will sell at the wholesale level for $2 a gallon or less, or around the same price as conventional fossil diesel, said CEO John Melo.

“It will be around the same price as regular petrol diesel, but it will produce 80 percent less greenhouse gases, provide a 10 percent reduction in NOx (nitrogen gases) and provide the same or better performance,” Melo said. “And with zero sulfur.”

The company’s jet fuel, which will replace kerosene-based fuels, will produce 90 percent fewer greenhouse gases than the regular stuff without denting performance or mileage, he said.

The big test for Amyris will arrive in about two years. The company has created joint ventures in Brazil to create biorefineries on sugar plantations where genetically engineered yeast will feast on freshly harvested sugar. The resulting fuel will then be loaded onto ships and brought to the U.S. By 2010, Amyris hopes to be producing 200 million gallons a year out of its first plant and erecting more plants.

Melo also pointed out that because Amyris isn’t producing ethanol (an alcohol) in Brazil but a hydrocarbon (a molecule includes hydrogen and carbons), the ethanol tariff on Brazilian ethanol doesn’t apply.

Promising stuff. To me it looks like they have a good chance of being successful.

Footnote: As is the case with LS9 and Virent, there is no Amyris stock that one can buy. It is a privately held venture.


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Gas Boycotts and Gas Prices Google

Gas Boycotts

You have probably gotten the e-mails. “Don’t buy gas on Wednesday of next week and force the to lower prices.” Or, “Boycott Shell this week, ExxonMobil next week, etc.” Sometimes I explain to people why these schemes won’t work, but most of the time I just delete them. But MSNBC took time out today to address the issue:

Why one-day gasoline ‘boycott’ won’t work

But suppose that, through some magical force of nature, you managed to shut down every gasoline-powered vehicle and device for one day. Let’s look at how much money would be involved and what would happen to it:

Based on current demand of about 386 million gallons a day, at $3 a gallon, the total value of gasoline sold daily in the U.S. comes to almost $1.2 billion. But that’s the total retail value — the pot of money that’s divvied up along a chain of , pipeline operators, , wholesalers, truckers and retailers. Let’s follow the chain and see who gets to keep what.

It’s a pretty good read, and goes into the details of where the money ends up along the supply chain (which should demonstrate quite clearly that you aren’t being gouged). Now, if you really want prices to come down, make your boycott permanent. If everyone can reduce their actual consumption by 10%, and not just for 1 day, that would bring about downward pressure on prices.

Set Record

I have been beating this drum for weeks. In fact, I would have to check, but I may have been warning about this for months. If you have been watching the gasoline inventory data, which I discuss every week when the releases the numbers, you could see this coming: Record low are going to drive record high . And according to another MSNBC story, we have reached that point:

Average pump price hits record $3.07 a gallon

CAMARILLO, Calif. - Gasoline prices have surged to a record nationwide average of $3.07 per gallon, nearly 20 cents higher than two weeks earlier, analyst Trilby Lundberg said Sunday.

The previous record was $3.03 per gallon on Aug. 11, 2006.

Rising prices have reduced demand, but it is still running ahead of last year’s numbers. Where are we headed from here? Depends on inventories. But you knew I would say that. I haven’t seen any predictions yet for this week, and I am not going to make any (though with prices still going up, I have to believe demand is going to taper off below last year’s numbers). Anyway, we will know in 48 hours.


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2009 EIA Energy Conference Google

Sorry for the long in posts, but I haven’t had much Internet access this week. Now I am freshly arrived back in the U.S., so I thought I would just quickly touch base.

The 2009 EIA Energy Conference is scheduled for April 7th and 8th, and I have been invited to be on a panel session called Energy and the Media. Lots of familiar names will be speaking; at least familiar to me. I have mentioned Paul Sankey from Deutsche Bank here a couple of times. I have spoken with Steve Mufson from the Washington Post on energy issues, and he will be on the panel with me. Of course former TWIP author and friend of R-Squared Doug MacIntyre will be there, and I look forward to finally meeting him.

I can’t imagine that the RFA’s chief lobbyist Bob Dinneen is going to be happy that they have invited an “energy blogger” to participate, given that he finds us such an “unsavory lot.” Maybe he can set his ad hominems aside for long enough to answer some serious questions during his panel session Renewable Energy in the Transportation and Power Sectors. That may be asking a bit much from someone who is paid $300,000 a year to say nice things about the ethanol industry - and nasty things about those who are critical of ethanol policies.

Anyway, the conference is free, so if you happen to be in the area, be sure to drop by.


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