Introduction

I love to read. I particularly enjoy books about energy, sustainability, and the environment. One of the benefits of reviewing books is that I end up getting a lot of free books on these topics. One thing about getting free books, though, is that I have to be careful that it doesn’t impact my objectivity. After all, the publisher or author was nice enough to send me this free book. How do I then approach the matter if I sharply disagree with some aspects of the book?

I am on record as being very skeptical about the ability of algal biodiesel to scale up and contribute significantly toward liquid energy supplies. Mark Edwards, a Professor of Strategic Marketing and Sustainability at Arizona State University recently saw one of my essays, and said that while he agreed with my points that many algal producers have been overly optimistic, he also felt like I had glossed over algae’s potential. He offered to send me a copy of his book Green Algae Strategy: End Oil Imports And Engineer Sustainable Food And Fuel.

The first thing I thought when I saw that title is “Either Mark Edwards is dead wrong, or I am dead wrong.” But I believe it is important to read and understand a wide range of viewpoints, because I just might change my mind. Maybe I am dead wrong. This book won the 2009 IPPY award for the best science book, so there are definitely those who think Mark makes a good case.

Mark Edwards writes that he has three goals:

1. Create Green Independence for America and the world

2. Halt and reverse climate change

3. End American and world hunger

While I can certainly get behind those goals, the devil is always in the details. And I think in the details we are going to run into some very challenging problems. Of course this is something I wouldn’t mind being dead wrong about. In fact, a few years ago I was very optimistic about the possibility of algae to produce large amounts of fuel without utilizing large amounts of good crop land. The prospects for algal fuel certainly sounded too good to be true. But a series of articles and discussions since then has swung me increasingly to the belief that the stories were too good to be true.

My Slide Toward Skepticism

First I read an essay at The Oil Drum called Has the Algae Cavalry Arrived? The essay was mostly based on work done by Krassen Dimitrov, who had gone back to first principles of incoming solar insolation to argue that GreenFuel Technologies was exaggerating their claims. While Dimitrov’s work has been criticized, he does raise a number of important issues. Primarily for me was the issue of just how much renewable diesel could be made from a square meter of area, contrasted with what the overall costs might be. Dimitrov concluded that you could make at best about a gallon of algal oil per square meter per year. However, costs were estimated to be over $100 per square meter. That sounded like a pretty serious, but potentially surmountable problem. (Important to note that in Green Algae Strategy, Mark Edwards also argues that GreenFuel made “some serious mistakes in executing strategy”, and led the industry in “hope and hype”).

Then came a post from John Benemann: Algal Biodiesel: Fact or Fiction? John has been heavily involved in algae studies for many years. In fact, he was the Principal Investigator and main author of the U.S. DOE Aquatic Species Program Close-Out Report. He certainly has some credentials on the topic of algae, and he weighed in to say that the essay described in the previous paragraph was generally correct. John’s position is that the present status of algal biodiesel is nowhere near commercialization, but in 10-15 years commercialization may not be out of the question. But it is far from a sure thing, and it certainly won’t happen soon. (See also John’s recent position paper on the subject: Opportunites and Challenges in Algae Biofuels Production).

Meanwhile, more question marks emerged. De Beers Fuel, having made some pretty far-fetched claims about their ability to deliver algal biodiesel, as well as having sold 27 franchises for algal biodiesel production, turned out to be a scam and collapsed. GreenFuel Technologies finally decided their future was bleak, and they closed down.

Information about the true costs started to become publicly available. While it has long been known that algal biodiesel is currently very expensive to produce, the actual price was only vaguely quantified. Krassen Dimitrov had suggested costs of around $20/gal. The government in British Columbia commissioned a study to look at the prospects, as well as the estimated costs of production. They estimated that the net cost of production per liter for photobioreactors (PBRs) was $24.60 ($93.23 US dollars/gallon), for open raceways it was $14.44 per liter, and for fermentors was $2.58 per liter. (There are some other issues with using fermentation that I won’t get into here). The report also stated that the much-touted carbon sequestration benefits of algae were illusory:

What about the value of sequestered carbon in algae-based biofuels? In short, there isn’t any. Atmospheric carbon is only sequestered for a short time until it’s burned in an engine. Under existing biofuels mandates in most industrialized countries, there will be no opportunity to sell carbon offsets unless fuel production is additional, or beyond such mandates.

Finally, Bryan Wilson, a co-founder of Solix Biofuels, went on record and stated that they could indeed make biofuel from algae, but the cost to do this was $33/gallon.

That preamble is meant to establish that there was quite a lot behind my slide from algae optimist to algae skeptic. But I was looking forward to seeing whether Mark Edwards could push me back toward the optimist camp with his book.

The Book’s Strengths

Let me talk first about what I feel are the book’s strengths. Edwards clearly lays out the challenges we face over our dependence on fossil fuels. He takes on current U.S. biofuel policy in a credible way. He is sufficiently skeptical about the near term prospects for cellulosic ethanol, and is harsh in his assessment of corn ethanol (even more so than I have been). He cites familiar names such as Lester Brown, delves deeply into the challenges of water and soil depletion, and discusses the issue of NPK (nitrogen, phosphorous, and potassium) availability in the future.

On the overall topic of algae, the book is incredibly informative. I had no idea that algae played such an important role in food, medicines, and consumer products (e.g., Aquafresh toothpaste). Edwards discusses many different varieties of algae, and characterizes them according to lipid, protein, or carbohydrate production.

Edwards makes a good case for why it would be a great idea to have algae-based fuels. He emphasizes that the co-products in many cases can improve the overall economics of the process. He lays out all the possible benefits of procuring our fuel from specific waterways as opposed to trading topsoil and fossil aquifers for fuel.

I can say with certainty that this book will come in handy for me in the future as a reference book. (More details at a later date, but I am likely to do some work on algae myself in the not-too-distant future). But what I won’t use this book for is as a “How To” guide. And that’s a good segue into the problems I had with the book.

The Book’s Weaknesses

At times it felt as if this book was written by two people. There was Mark Edwards, the cellulosic ethanol skeptic, accurately reporting on some of the potential problems with commercialization of cellulosic ethanol. Then there was Mark Edwards, the algal biofuel optimist, uncritically presenting seemingly far-fetched claims from any number of would be algae producers.

There was even Mark Edwards the algal fuel skeptic, but I just couldn’t reconcile that person’s views with those of Mark Edwards the optimist. On one hand, Professor Edwards notes that the current estimated costs for algal biodiesel are over $20/gallon. He said that over 75% of the companies who had algal aspirations in the 80’s and 90’s no longer exist. He wrote that the algal fuel industry as a whole has produced less than 100 barrels of product. Then he turns around and writes that within three years the industry will be producing hundreds of millions of gallons. (Based on the 2008 publication date, I guess we can expect a gusher of production next year).

I had a number of specific criticisms as I read the book. First, it was presented throughout the book that algae can be used to produce food and fuel, all while sequestering carbon. I don’t agree with that. Certainly algae take up carbon dioxide and convert it into biomass as they grow. However, unless that biomass is stored away without being consumed, there is no real carbon sequestration. Imagine two different scenarios. In the first scenario, the carbon dioxide from a coal-fired power plant is bubbled through tubes filled with algae. The algae will consume that CO2, preventing the immediate escape into the atmosphere. But what happens if fuel is produced from the algae? The carbon dioxide ends up getting released into the atmosphere. What you can say is that the release was delayed, and (depending on the energy inputs into producing the fuel) potentially more fuel was produced for a given emission of CO2. However, that isn’t carbon sequestration.

Second case, algae are grown utilizing atmospheric CO2. During the growth phase carbon dioxide is indeed removed from the atmosphere. Take that algae and bury it deep in the earth, and carbon is sequestered. Turn it into fuel, and the CO2 taken up during the growth-phase is released back into the atmosphere. This is potentially a greenhouse gas (GHG) neutral process, but there is little potential for sequestration if the goal is to use the algae for fuel. However, this carbon sequestration meme is mentioned many times in the book (and many themes in the book were unnecessarily repetitive).

He blames the lack of progress for algae on lack of funding, which is blamed on corn ethanol. This, he argues, was the politically favorable biofuel that sucked up all the R&D funding (and subsidies). He later writes “If corn ethanol makes sense, the market will reward it without taxpayer monies or protectionist tariffs.” Can’t we say the same about algal fuel? If the potential is so great, money should flood in from investors looking to get in early on a huge growth opportunity.

I don’t recall that the issue of energy return was ever covered in the book. If the energy inputs into the process are too high – as Bryan Wilson of Solix Biofuels recently suggested – then you have a potentially serious issue. How can algae be harvested and processed with minimal energy inputs? One of John Benemann’s comments from his position paper was “At present there are no low-cost harvesting technologies available.” Why? It takes a lot of energy to extract the algae from the water, relative to the BTU content of the algae you are extracting.

I felt that there was some confusion around the usage of specific terminology. For instance, on Page 6 Professor Edwards wrote that oil pressed directly from algae can be used directly in a diesel engine, and this is called green diesel. While plant oils can be used straight in a diesel engine, this product is called straight vegetable oil, or SVO. (Note: Do not attempt to use SVO in a vehicle unless you understand the caveats!) Further, there is a difference between green diesel and biodiesel, but this terminology is used interchangeably in the book. (See my Renewable Diesel Primer for an explanation of the differences between green diesel and biodiesel.) Another misuse of terminology comes on Page 15, where ethanol is called a hydrocarbon.

But those aren’t the biggies for me. The title of the book indicates that it is a strategy book, but I see it more as a series of facts, connected to goals. What is missing is the “how to”, which would be the strategy part. Yet difficult technology challenges were addressed casually. There are numerous instances where there is a presumption that technology will solve a particular problem. The word “might” is used an awful lot in the book. But when you casually dismiss technical challenges, you can effectively argue that the most implausible scenarios are inevitable. Let me give you an example.

Bananas are a very healthy food, and in the U.S. we depend on imports from tropical countries for our banana supplies. Just imagine if we could grow bananas in the Midwest. The soil is fertile. There would be additional options for farmers to make money. New jobs could be created in the domestic banana supply chain. So let’s say I write a book about my Midwest Banana Strategy. I talk at length about the benefits of bananas, and the benefits of growing them in the Midwest. These are facts. I then tie them to my goals: To commercially grow them in the Midwest. The only problem is that unless I am willing to invest in heated greenhouses – at very great expense – my banana goal is going to come to naught. So presently Midwestern bananas are a pipe dream. But if I invoke the wonders of biotech – “there will be a solution that will enable cold-tolerant bananas” – then problem “solved.” And that’s how I felt many problems were dealt with in the book.

There are a series of independent facts, and then we have a black box, and then we have commercial algal biofuel. Solutions are presented as inevitable (”when this happens”) instead of possible (”if this happens”). Sometimes I had flashbacks to The Singularity Is Near, in which author Ray Kurzweil employed this tactic throughout to argue that the near future is so fantastic we can’t even imagine it. It is certainly true that a lot of companies are working on algae. But I would argue that Professor Edwards falls prey to the Vinod Khosla fallacy on cellulosic ethanol: This is simply too important and there are too many companies working on this to fail.

If I hand wave away the challenging problems and presume technology will solve them, then who needs algae for fuel? Hydrogen is waiting to solve all of our problems. Recall all that hydrogen economy business that was all the rage a few years ago? Despite numerous potential benefits, there are multiple very challenging technical issues that keep a hydrogen economy at bay – and will continue to do so for the foreseeable future. But I could still write a book called Hydrogen Economy Strategy if I am willing to brush away those technical issues as temporary.

While there were a number of claims that I thought were presented uncritically, there were also some claims that I found to be very odd. Some examples:

Page 13: As a criticism of using food crops for fuel, he states that massive planting of corn leads to high humidity because the leaves transpire water. This leads to thunderstorms and potentially tornadoes.

That large areas planted in corn can increase the risk of tornadoes is something I have never heard before.

Page 105: Algal biodiesel is carbon neutral because the power needed for producing and processing the algae can come from the methane produced by anaerobic digestion…

That sentence is inaccurate. It is only carbon neutral if the power does come from digestion, not that it can. Based on the above, we could also say that corn ethanol is carbon neutral, because the power for processing can come from methane produced from digestion.

Page 150: When writing that algal fuel mimics fossil fuels without fossilization, he writes “Skipping the fossilization step not only saves 200 million years of pressure and heat, but lowers production costs significantly.”

I can’t really comprehend this one. The reason biofuels have trouble competing with fossil fuels is because nature already did the heavy lifting for the fossil fuels. Nature provided all that heat and pressure for free. Humans have to provide the heat and pressure to process biofuels – at a price. So I would come to the opposite conclusion: Skipping 200 million years of pressure and heat increases production costs significantly.

Page 179: He cites a claim by Aurora Biofuels that their process creates biodiesel with yields 125 times higher and 50% cheaper than current methods.

I am going to presume that this was supposed to read 125% higher and not 125 times higher.

Page 204: “When someone invents a carbon capture filter for vehicle exhaust pipes, there will be a nearly limitless supply of low-cost CO2 for growing algae.”

I don’t even know what to say about that one. It gets back to the issue of energy return. Anything you do here (e.g., compressing the spent CO2 from the vehicle) is going to take energy (and add weight to the vehicle) which is a penalty against the overall energy return of the process.

Conclusion

Let me say that I agree with the goals of Professor Mark Edwards, and that I think his heart is in the right place. I agree that we should spend research dollars on an algal biofuel program. I agree with him that economical algal biofuel could provide substantial benefits. (A good portion of the book was devoted to algae as food, and I didn’t really address that at all in this review). Where I disagree sharply is that solving the technical challenges is inevitable. This is primarily where I found fault with the book.

On the other hand, the book was very informative on the topic of algae. I learned a lot I didn’t know. But at the end of the book, my skepticism had not been swayed because I did not see a real pathway to get from where we are today to vast quantities of commercial algal biofuel. The book failed to make the case that the technical challenges will be solved.

No doubt Professor Edwards will disagree with some of this review. But I am a strong proponent of allowing people to answer criticisms. I therefore extend an open invitation to Professor Edwards. If he wishes to dispute or address any of the points I have raised, I will happily publish his comments.

As I compile my year end list of the biggest energy stories of the year, I have just gotten an e-mail from Platts that is very helpful. As they have done in previous years, they have a survey up so readers can rank the top stories:

Platts wants to know: the biggest oil stories of ‘09

They will publish the results shortly after Christmas. Scanning the list and comparing to my rough draft of the Top 10, I see one story that isn’t currently on my list that I missed: The Valero Foray into Ethanol. Other than that, all of the stories that I have tentatively in my Top 10 are on their list except for two (and I bet people who take the survey will suggest both of them).

I will post my list prior to Christmas, and hope that we don’t see another big year end story like the XOM acquisition of XTO. That is a Top 10 story that came in right at the end of the year. Here is how I ranked the stories Platts had listed, but this was off the top of my head and very subjective. I may decide later on that #3 should really be #8, or that something that didn’t make the list should really be on there. My Top 10 will be a bit different because I have combined some topics that they treated separately.

1. Prices (basis WTI) comes roaring back to the $80 level after almost hitting $30
2. Full-year decline in demand heads toward biggest drop since 1981
3. Natural gas-crude spread in US blows out to unprecedented levels
4. Refinery woes: Valero shuts Delaware City , Sunoco shuts Eagle Point, Repsol shuts Cartegena, Japan cutbacks underway (RR: related to Reliance news)
5. Valero makes big foray into ethanol with multiple ethanol plant purchases; Sunoco follows on smaller scale
6. EU slaps duties on US sales of biodiesel into Europe
7. OPEC holds to its 24.845 million b/d ceiling all year
8. US EPA rules greenhouses gases are a threat to public health, plans on using authority to regulate them
9. ExxonMobil gets into bidding war with Chinese, others over Ghana stake (RR: more for what it signals for the future).
10. Exxon buys XTO for $41 billion

I have mentioned here before the town halls being conducted by Shell and ConocoPhillips that are designed to capture the concerns of the American public on energy issues. I think these tours are important, because I believe the public is terribly uninformed on energy matters. These tours open up the opportunity for dialogue, which is a critical component of formulating sound energy policy.

Each year my company conducts an opinion survey in which all employees are asked to give their views on the direction of the company. In 2005, I made an argument that we needed to dedicate more resources toward sustainable options, because we want to be an energy company, not an oil company. In 2006, after watching the public become incredibly hostile over sharply higher oil and gas prices, I argued that we really needed to get out there and dialogue with the public about what we do. While I have no pretensions that my single voice made much difference in the overall scheme, I am pleased to see that company policies have been consistent with my preferences.

Shell is on a 91-city tour (see an article on one of Shell’s stops here). ConocoPhillips’ latest stop was in Macon, Georgia:

Oil company faces skeptical questions

Officials with oil company ConocoPhillips fielded barbed questions from a mostly skeptical audience at a public forum on energy the company sponsored Thursday.

To be honest, that’s just the way I like it. Skepticism is good, but too often based on misinformation.

Many in the audience challenged the company’s dedication to alternative energy. Linda Smyth, president of the Middle Georgia Clean Cities Coalition, angrily informed ConocoPhillips executives that the many new producers of biodiesel and ethanol in Georgia believe big oil companies are trying to drive them out of business. Half a dozen biofuel refineries have been announced for Middle Georgia in the last year.

Many are exporting their product to other countries instead of selling it in Georgia because oil companies won’t allow alternative fuel to be sold at their fueling stations, she said. “I think that’s a crime,” Smyth said. “Big Oil should be buying every drop…. Where are the alternative fuel pumps?”

This is where I would have had a very difficult time holding my tongue. Instead of giving a very politically correct answer:

“It’s not in our interest or that of the country to try to drive anybody out of business,” said Bob Ridge, vice president of health, safety and environment for ConocoPhillips, adding that he’d share these concerns with other company leaders.

I would have tended toward “Oh? Companies in the U.S. are exporting alternative fuels to other countries? That wouldn’t seem to make much economic sense, given that they would lose their subsidy on these volumes. Can you give me specific details, because I know that we are still importing significant amounts of biofuels? My understanding, which is in fact a claim made by the Renewable Fuels Association, is that the production of all domestic ethanol was absorbed into the U.S. market.”

In fact, I believe Linda Smyth is completely full of it. I think I will e-mail her and ask her for details, as I have never heard this claim. (I have now e-mailed her after a reader located her e-mail address). Perhaps she should also do the math and figure out how much E85 – the fuel that she is talking about when she refers to “alternative fuel pumps” – is available for supplying these pumps. I bet if ethanol producers – who would stand to gain by installing these pumps – would foot the bill then that would really help accelerate adoption. My understanding is that a typical service station owner can’t count on enough E85 supply (or demand) to warrant paying for the pumps. Having the ethanol producers pay for them would put the economic onus on them.

It is these sorts of claims, made in a public forum and picked up and reported by newspapers, that give the public a false impression. While these tours should encourage dialogue, they should also confront misinformation.

He listed two main reasons for the company’s “Conversations on Energy” tour: Its need to seek partnerships and ideas on non-traditional energy, and its need to rebuild trust with consumers. “We surveyed Americans one and a half years ago, and learned our industry’s credibility was at the very bottom, below that of Big Tobacco,” Ridge said.

But he insisted this isn’t a spin tour. The company deliberately chooses cities that are not in major media markets (avoiding, for example, Atlanta) and plans to essentially create a “to-do” list based on the feedback it hears, he said.

While acknowledging that ConocoPhillips is a “huge fossil-fuel based company,” Ridge said it wants to become “an energy company” with potentially a very different portfolio in 30 to 50 years. For starters, it has doubled its research and development funding and is starting some alternative fuel pilot projects, including a partnership with Tyson Foods to use animal fats to make fuel.

There was another bit of controversy:

Some questioners asked how the energy industry contributes to global warming. Ridge noted that ConocoPhillips has taken an unprecedented step among oil companies in asking for federal regulation of greenhouse gas emissions.

But panelists did not all agree. George Israel, former Macon mayor and president of the Georgia Chamber of Commerce, said he is not convinced human activity causes global warming. On behalf of the state’s business community, he also voiced opposition to government mandates for cleaner fuel, recent fuel efficiency mandates proposed for trucks by 2020, and taxes on oil companies to pay for accelerated alternative energy research.

I hope that these tours have a positive impact. But the turnout in this case wasn’t particularly good:

With less than 100 people, turnout for the forum was lower than average. Many of ConocoPhillips’ other town hall meetings reached more than 200 people. Chris Talley, public relations consultant for ConocoPhillips, said invitations were mailed to the homes of 25,000 Macon-area voters; in addition, 14 local organizations spread the word among their members.

One wonders if a public that is more interested in World Wrestling than in facing up to the energy challenges in front of us will wake up in time to avert a crisis.

From yesterday’s OPIS:

It has been a tough year for biodiesel markets as well as for biodiesel producers. Plants are struggling to break even against high feedstock costs including near-record high soy oil prices. That has made an issue of liquidity as many producers shut down for extended periods or run well below capacity. A number of new plant projects have also been taken off the table.

The result is biodiesel production will grow this year, but industry sources expect it will not see the fantastic growth rates of previous years. Some biodiesel sources expect that only about 300 million gal may end up being produced this year – that would still be up around 33% against last year but far less than capacity and still just a tiny fraction of conventional diesel output.

I expect to see similar trends for ethanol, as high corn prices and overbuilding of ethanol plants squeeze producers on both ends.

I am scheduled to deliver two presentations at this year’s ASPO conference in Sacramento. You can see the agenda overview here. I will be speaking on the EIA, IEA and CERA on the 21st, and then I have a presentation on biofuels scheduled for the 23rd.

For the first talk, the draft of my slides is heavily slanted toward the EIA. I will discuss what they do well (in my opinion they are the best source of energy data around) and what they historically haven’t done so well (forecast). I will also devote some space to This Week in Petroleum.

For the biofuels talk, my slides are roughed out. Below is the outline. If you think I missed something important, let me know. I only have about 20 minutes, so I will be limited to 20-30 slides. I want to cover a lot of ground, which means I can’t delve too deeply.

Here is the outline of what I have prepared. Comments or suggestions are welcome:

Stacking up the contenders

•Ethanol
- Crop-based (corn, sugarcane)
- Cellulosic and Lignocellulosic (gasification)
•Diesel
- Biodiesel
- Green diesel (hydrocracked, Fischer-Tropsch)
•Miscellaneous
- LS9
- DME
- Butanol

Can we emulate Brazil?

•The truth about Brazil
•The truth about the U.S.
•Those pesky differences

Separating fact from fiction

•Anything Into Oil
•Algae to biodiesel
•Ethanol for $1/gal

How Politicians Screw Things Up

Solutions

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 oil companies as a result of surging crude oil prices.

I understand the frustration with high gas prices even as oil companies 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 OPEC to open the taps, flooding more oil into the market? Or is the real purpose to punish oil companies 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 oil industry 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 refineries takes lots of capital. If we extract more money from the oil companies 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 oil industry 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 oil industry 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 gas prices. 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.