I would be remiss if I didn’t mention the latest attempt to pass a windfall profits tax on oil companies. You know, it isn’t the windfall profits tax itself that bugs me. It is the fact that it wouldn’t be applied consistently across industries, some of which have much higher profit margins. These measures would single out the oil industry for punitive measures, which just reinforces the image that oil companies are manned by people who like kicking puppies and pushing old people down stairs.

I actually spent some time digging around in the legislation to understand how they were defining windfall profits, reasonable profits, and what exactly constitutes “gouging.” You might be surprised (and I explain below). One section actually amends a section on “alcohol, tobacco, and certain other excise taxes” and throws crude oil into that mix. Glad to see that our lawmakers have such regard for the fuel that allows them mobility.

But just about the time I was knee-deep in the legislation, I read that the measure had been blocked:

Senate GOP blocks windfall taxes on Big Oil

The Democratic energy package would have imposed a 25 percent tax on any “unreasonable” profits of the five largest U.S. oil companies, which together made $36 billion during the first three months of the year. It also would have given the government more power to address oil market speculation, opened the way for antitrust actions against countries belonging to the OPEC oil cartel, and made energy price gouging a federal crime.

“Americans are furious about what’s going on,” declared Sen. Byron Dorgan, D-N.D. He said they want Congress to do something about oil company profits and the “orgy of speculation” on oil markets.

So there you have it. Americans are angry. They are paying more than they like for gasoline. Oil companies are making more money than they think is fair. So let’s base our energy policy on spite. Throw in a provision to sue OPEC and force them to abide by U.S. law, mandate a few alternative energy technologies that aren’t commercially viable, tap into our Strategic Petroleum Reserves in a short-sighted attempt to bring prices down – and you begin to understand why U.S. energy policy is dysfunctional. U.S. energy policy can be summed up as “Cheap energy for everyone, and if it isn’t cheap someone shall be punished.”

Other noteworthy comments:

“The oil companies need to know that there is a limit on how much profit they can take in this economy,” said Sen. Richard Durbin of Illinois, the Senate’s No. 2 Democrat, warning that if energy prices are not reined in “we’re going to find ourselves in a deep recession.”

So, Durbin obviously believes that a windfall profits tax is going to bring down oil prices. Maybe we should do that with the solar industry. Prices are still too high at $4.82/watt for solar PV to be competitive with coal. I had never considered that we might pull prices down to <$1.00/watt by slapping a windfall profits tax on solar firms. It's brilliant, and sure to work.

“We are hurting as a country. We’re hurting individually as Americans … and the other side says, `Do nothing. Don’t even debate the issue,’” complained Sen. Charles Schumer, D-N.Y. “Average citizens are scratching their heads and saying, what’s wrong with Washington,” said Schumer.

Heh. I have been asking myself what’s wrong with Schumer for a while now.

“This is a start. It will help lower prices. It will help working families make ends meet,” Democratic Senate Majority Leader Harry Reid said in a vain effort to keep the bill alive. “It is one small step on a long and uphill road to a cleaner, more affordable energy future.” The bill would have ended tax breaks for big oil companies, imposed a new tax on windfall profits and fought price manipulation by OPEC, Reid said.

Of course ole Harry knows a thing or two about windfall profits. But does he really believe that this will lower prices? Why does he think things will be different this time than last time?

Back to the legislation, though, because I think some version of it’s going to eventually pass. So it was of interest to me to wade through the language. You can find the text of the bill here: Consumer-First Energy Act of 2008.

Of particular interest to me was “SEC. 202. DEFINITIONS.” Here’s what I found:

PRICE GOUGING- The term `price gouging’ means the charging of an unconscionably excessive price by a supplier in an affected area.

Hmm. That’s not very helpful. Fortunately, they followed up with a definition of “unconscionably excessive price.”

UNCONSCIONABLY EXCESSIVE PRICE- The term `unconscionably excessive price’ means an average price charged during an energy emergency declared by the President in an area and for a product subject to the declaration, that–

(A)(i)(I) constitutes a gross disparity from the average price at which it was offered for sale in the usual course of the supplier’s business during the 30 days prior to the President’s declaration of an energy emergency; and

(II) grossly exceeds the prices at which the same or similar crude oil, gasoline, petroleum distillates, or biofuel was readily obtainable by purchasers from other suppliers in the same relevant geographic market within the affected area; or

(ii) represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and

(B) is not attributable to increased wholesale or operational costs, including replacement costs, outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, petroleum distillates, or biofuel, and is not attributable to local, regional, national, or international market conditions.

Some interesting tidbits in there. I find that it is very important to properly define terms, especially when debating issues. Here, the legislation defines “unconscionably excessive” with terms like “unfair”, “unconscionable” (isn’t this what we are trying to define?), and “gross disparity.” The courts would have fun with this. “That’s a gross disparity! Gasoline was selling down the street for $0.20/gallon less!”

I also find it interesting that biofuels would have been covered.

So let’s set the stage and play this one out. A hurricane is bearing down on the coast of Texas. There is a run on gasoline, as people hoard. The local 7-Eleven would normally respond to such increased demand by raising prices, and forcing people to decide just how much they really needed the gasoline. But, as a result of the new price gouging provision, they don’t raise prices. They simply run out of gas. That is exactly what would happen. Is that preferable to allowing merchants to raise prices? In that case, those who have a critical need can still get it. Those who don’t can wait. But due to the price gouging stipulation, even if you don’t really need it, you can buy it up and hoard it from those who do.

How about a definition of ‘windfall profit’? This one’s a gem:

For purposes of this chapter, the term `windfall profit’ means the excess of the adjusted taxable income of the applicable taxpayer for the taxable year over the reasonably inflated average profit for such taxable year.

Reasonably Inflated Average Profit- For purposes of this chapter, with respect to any applicable taxpayer, the reasonably inflated average profit for any taxable year is an amount equal to the average of the adjusted taxable income of such taxpayer for taxable years beginning during the 2002-2006 taxable year period (determined without regard to the taxable year with the highest adjusted taxable income in such period) plus 10 percent of such average.

Let me make sure I understand this. You are proposing that a publicly traded company – not a public utility, mind you – has an unreasonable profit if the profit increases by more than 10% from one year to the next? Do you hear that giant sucking sound? It is the enormous flood of money out of the energy sector and into other sectors – where a 40% year on year increase in profits is just peachy. Are you people serious?

I think it is inevitable, though, that we will try this experiment once again. I believe Obama will win the presidency, and he is all for it. I just hope he has the sense to pick a running mate who knows more about energy than he does (Hint: Bill Richardson).

Obama says he would impose oil windfall profits tax

RALEIGH, North Carolina (Reuters) – Democratic presidential candidate Barack Obama said on Monday he would impose a windfall profits tax on U.S. oil companies as he sought political gain from Americans’ pain over high gasoline prices.

“I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills,” the Illinois senator said.

Doesn’t ExxonMobil already pay taxes on their “windfall profits?” Something like $30 billion last year? That windfall belongs to the government, though. I wonder if it is unconscionably excessive?

Of course you are against ethanol. You work for Big Oil.

Is ethanol reducing dependence on foreign oil?

What’s this EROI/EROEI/Energy Return Business?

Is EROEI the Same Thing as the Process Efficiency?

Isn’t the Energy Balance for Corn Ethanol Better than for Gasoline?

Does the Energy Balance/EROEI Matter?

Doesn’t the Ethanol Subsidy Actually Benefit Oil Companies?

Doesn’t Ethanol Usage Create Jobs and Provide Cash for Midwestern Communities?

Do We Have Enough Land to Grow Our Way to Energy Indendence?

If Brazil can do it, why can’t the U.S.?

Can’t Brazil and other tropical countries provide biofuels for the world?

What about the environmental benefits of using ethanol as fuel?

Isn’t ethanol useful as an oxygenate replacement for MTBE?

8/26/07 – Added section on environmental benefits.

8/5/07 – Added to section on the petroleum displacement claims. Building the section on Brazil.

8/4/07 – Updated section on the ethanol subsidy, and who it benefits. Also updated section on ethanol and job creation. Updated section on land requirements.

8/3/07 – Updated section on energy balance, and whether it matters.

I am starting to get a lot of traffic and e-mails off of this Rolling Stone article. A lot of the same questions/criticisms come up again and again, so I am finally being prompted to do something I have been meaning to do for a long time: Write a FAQ, where my position is summed up concisely, and is understandable by anyone. This is a work in progress, so if you can think of something that should be addressed, please speak up. I am going to throw them out there as I do them, and I will clean them up later. I hope to put up one or two new items a day, and if you find errors, I will certainly correct them. This will not be an opinion piece. It is going to be based on facts and numbers.

Of course you are against ethanol. You work for Big Oil.

This one is where opponents tend to go when they are lazy, or have no better arguments to offer. But not only is it an ad hominem argument, it is wrong on 2 counts. First, I have a long track record of being supportive of alternative fuels, I did my graduate school thesis on the subject, and in fact I have done a lot of work in this field. Many people who read this blog can attest to the fact that I have done a lot of pro bono work, on a lot of projects: From biodiesel to biobutanol, right through cellulosic ethanol and yes, even corn ethanol. Furthermore, I am currently involved in a cellulosic ethanol project.

But the second reason that this argument is invalid is that the corn ethanol industry is heavily dependent upon fossil fuels for the entire production process. These fossil fuels include gasoline and diesel, but are primarily natural gas embedded in the fertilizer for the corn, and for the distillation energy. Guess who produces this natural gas? Big Oil, and my company in particular, produces a tremendous amount of it. The tripling of natural gas prices since 2002 happened just as we had a dramatic increase in ethanol production. Coincidence? No. And this has been a windfall for Big Oil.

Don’t take my word for it. Here’s the view from Ethanol Producer Magazine:

Diversifying Energy Options

One source tells EPM that when ethanol production reaches 7.5 billion gallons (assuming all of that capacity was fueled by natural gas) demand from the industry could represent a 1.2 percent increase in total U.S. demand for natural gas. That’s a significant rise when you consider that the total increase in natural gas consumption from 2004 to 2005 was only about 1.4 percent. What happens if the ethanol industry goes to the apparent next production plateau at 12 billion gallons per year? Ultimately, increased natural gas use resulting from the ethanol industry’s expansion affects total U.S. demand of fossil energy, helping to keep supplies tight and prices elevated.

That’s right: Corn ethanol is a boon to Big Oil, because it has helped tighten up fossil fuel supplies, which has helped with the price increases – while displacing little to no fossil fuel itself. And I can tell you that a lot of people in the oil industry recognize the irony. A number of oil companies, including my own, have come out and endorsed ethanol. So my arguments against corn ethanol are actually contrary to the official position of my company.

Is ethanol reducing dependence on foreign oil?

There are many claims around these theme. From the Renewable Fuels Association’s (RFA) “Energy Facts”:

FACT: In 2006, the production and use of ethanol in the U.S. reduced oil imports by 170 million barrels, saving $11 billion from being sent to foreign and often hostile countries.

The RFA’s page on industry statistics shows that ethanol production in 2006 was 4.86 billion gallons. This is 116 million barrels. Oil has a BTU value of 138,000 BTUs/gal, versus 76,000 BTUs/gal for ethanol; therefore 116 million barrels of ethanol contain the BTU equivalent of 64 million barrels of oil. (Source: ORNL). The claim then is that 64 million barrels of oil equivalent (BOE) displaced 170 million barrels of oil.

The RFA’s source on that was the consulting firm LECG, where director John M. Urbanchuk has also been quoted:

The production of nearly five billion gallons of ethanol means that the U.S. needed to import 206 million fewer barrels of oil in 2006, valued at $11.2 billion. This is money that stayed in the American economy.

Source: Contribution of the Ethanol Industry to the Economy of the United States in 2006 (PDF download)

While you might expect to find such claims from the ethanol industry, even grander claims are being made by the U.S. Government. From DOE Assistant Secretary Alexander Karsner’s keynote address to the RFA’s National Ethanol Conference in Tucson, Arizona:

Last year, we contributed something on the order of a displacing 500 million barrels of oil, oil that we didn’t have to import from regimes that are hostile to our interest or might leverage energy economics over our future.

Here’s the same claim by Paul Dickerson, Chief Operating Officer at the DOE’s Office of Energy Efficiency and Renewable Energy:

Over 6 billion gallons of ethanol were produced in the United States last year, and we have an additional 5 billion gallons of refining capacity under construction.

That effort means 500 million fewer barrels of oil that we have to import from the Middle East.

That’s from the U.S. Department of Energy. That is the department of the U.S. government that is charged with formulating and carrying out U.S. energy policy. How on earth are people coming up with these numbers? Can 64 million barrels of oil equivalent displace 170 million, 206 million, or even 500 million barrels of oil? And recognize that we haven’t even touched upon the fact that the 64 million barrels is the gross output, and not the net. To get a true displacement number (for just petroleum), we have to subtract out all of the petroleum inputs that went into making those barrels of ethanol.

The way they are coming up with such unreasonable numbers is because they are making some invalid assumptions. They are assuming that since only 1/6th or so of the BTUs embedded in a BTU of ethanol come from oil (the rest are from natural gas or coal), that a barrel of ethanol can actually displace more than 1 barrel of oil. The higher estimates are also completely ignoring the fact that the half of the barrel of oil that doesn’t provide gasoline goes into diesel, jet fuel, heating oil, etc. In these analyses, those are simply unaccounted for. So when that barrel is “displaced”, we just lost a lot of fuel.

But consider this for a moment. Consider if only 1/100th of the inputs into ethanol were from oil. In this case your multiplier is 100 (instead of 6). Do you believe that a barrel of ethanol then displaces 100 barrels of oil? Consider that 1/1,000,000 of the inputs into ethanol were petroleum, and you quickly start to see the sleight of hand employed.

So how much oil can ethanol really displace? No more than the BTUs that are contained in the ethanol. A 1 to 1 BTU replacement is is the best you could get even if the ethanol was free of any energy inputs, and just available for pumping out of a well. That is the maximum theoretical displacement.

Since ethanol is a gasoline replacement, the displacement should be most pronounced if we look at the gasoline demand curve. As ethanol has ramped up exponentially since 2000, one might expect to see this in the gasoline demand curve. Yet there is no obvious inflection on the gasoline demand curve. As shown in the link, as ethanol has ramped up since 2000, not only has gasoline demand increased by 10 billion barrels per year, but there isn’t even any obvious effect from ethanol on the gasoline growth curve. Even as ethanol has ramped up, the data indicate that we have become more dependent upon petroleum.

U.S. dependence on foreign oil is a demand-side problem. It is not going to be fixed by producing more ethanol – false claims about the amount of displacement notwithstanding. And it is not going to be fixed unless we confront the reality of the situation instead of the political spin.

What’s this EROI/EROEI/Energy Return Business?

The EROEI, (Energy Returned on Energy Invested), EROI, and energy return all refer to the same idea. It is the ratio of usable energy returned from a process divided by the energy expended (consumed) in the production process. Or, simply put, if I expend a total of 1 BTU of energy in a process that yields 5 BTUs of energy, the EROEI is 5/1.

This is an area rife with misunderstand and garbled definitions. Depending on where the system boundaries are drawn, one can come up with very different definitions.

Is EROEI the Same Thing as the Process Efficiency?

No, and this is a big source of confusion. The process efficiency refers to the percentage of net energy yielded in the process. In the above example, 1 BTU was expended to produce 5 BTUs. The net energy is then 4 BTUs, and the efficiency of the process is (4/5), which is 0.8 or 80%. An EROEI can be greater than or less than 1. A process efficiency is always going to be less than 1 (i.e., you are always going to use up some of the energy value in the process).

Isn’t the Energy Balance for Corn Ethanol Better than for Gasoline?

I think most people are starting to accept this as a debunked myth. But let’s review the history, because I do still hear this claim occasionally. A few years ago, Michael Wang from Argonne National Labs invented a metric, which was fossil fuel inputs into both the ethanol and gasoline production processes. This metric was neither an EROEI nor an efficiency, it was a hybrid, and has led to a lot of apples and oranges comparisons between gasoline and ethanol.

I have dealt with this claim several times in this blog. I addressed it here in response to a claim from the Minnesota Department of Agriculture (which they seem to have since removed):

In summary, the finished liquid fuel energy yield for fossil fuel dedicated to the production of ethanol is 1.34 but only 0.74 for gasoline. In other words the energy yield of ethanol is (1.34/0.74) or 81 percent greater than the comparable yield for gasoline.

I addressed it here, in response to a letter from a reader in which Michael Wang and Vinod Khosla were both copied, and both got involved in the debate:

If your assessment of the ethanol fuel cycle energy balance (and its comparison with the petroleum fuel cycle energy balance) is right, then not only is Vinod Khosla wrong, but many others of us in the energy community — including the U.S. Department of Energy and Argonne National Laboratory (see attached summary) must also be wrong.

Now I will address it here for the last time. What’s the issue? For Wang’s metric, the inputs aren’t considered in a consistent manner. For instance, the fossil fuel inputs into the ethanol process are burned. Gone. The fossil fuel inputs he is considering for gasoline production includes the barrel of oil that gets turned into liquid fuels. So, he is including only expended fossil fuels in the ethanol case (which is what you want to do for an EROEI) but in the case of gasoline he is also including fossil fuels that were not consumed and are still available as fuel. What Wang has done, by defining his metric as he has, is to measure the EROEI of ethanol – at 1.3, versus the efficiency of gasoline, which according to Wang’s most recent modeling, is 0.8 (from crude in the ground to gasoline in your gas tank). And I can tell you that this is reasonably accurate. But to compare the two different metrics causes the kind of confusion that you might expect.

So, let’s compare EROEI to EROEI and efficiency to efficiency. At an ethanol EROEI of 1.3, that means that burning 1 BTU to produce 1.3 BTUs only results in a net of 0.3. Therefore, the efficiency is 0.3/1.3, or 23%, versus Wang’s estimate of 80% for gasoline. Comparing EROEIs, an 80% efficiency for gasoline means that to produce 1 BTU consumed 0.2 BTUs, for a net of 0.8. The EROEI for gasoline then – the energy return over energy invested – is 1 BTU/0.2 BTUs, or 5/1. This was the source of the claim to that effect in the Rolling Stone article.

In summary:

EROEI of producing ethanol – 1.3/1
EROEI of producing gasoline – 5/1

Efficiency of producing ethanol – 23%
Efficiency of producing gasoline – 80%

Does the Energy Balance/EROEI Matter?

It depends. A society that operates with a high average EROEI is going to look quite a bit different from a society that doesn’t. In the former, a relatively small proportion of the overall economy can be involved in the production of energy which drives the rest of society. But as the EROEI of a society decreases, the energy production of the society must increase. Society becomes more dependent upon energy production. For instance, the world uses 85 million barrels of oil a day. If the EROEI of society is 10/1, then 8.5 million of those barrel equivalents were used to produce the oil. For the sake of this exercise, let’s assume that oil was used to make oil. That leaves us with a net of 76.5 million barrels.

Now, drop the energy return of that same society to a biofuel range of 1.3 to 1. We have to solve two equations here: Net Energy = Energy out – Energy in, and Energy return = Energy out/Energy in. Solving these two equations for a net of 76.5 million barrels of oil means we have to produce a total of 255 million barrels of oil equivalent. In the fossil fuel society, it takes 85 million barrels of total production to sustain it. In the low energy return society that approximates today’s biofuels, it takes 255 million barrels per day to sustain it. That means that if we tried to run the world on low energy return biofuels, we would need to triple the overall energy output over what we produce today.

But what if, in the second case, we could use biomass as our energy source (but not for the first case)? Or what if, in the first case there are lots of other negative externalities that go along with the energy source? Or what if the second case utilizes a very cheap energy source to make a fuel that sells for a much higher value? In reality, EROEI is a part of the overall evaluation, but by itself does not tell you much.

Consider that your goal is merely to make money. You may be able to make lots of money with a process having an EROEI of less than 1. You can take a BTU of coal and use it in an ethanol process to make less than a BTU of ethanol. Considering only your energy inputs, you have increased the $ value of your BTUs by a factor of 10. So, even if you take 1 BTU of coal and convert that into 0.7 BTUs of ethanol, there may be plenty of economic incentive to do it, despite the energy returns.

EROEI matters. Sometimes. And as a part of the overall context.

Doesn’t the Ethanol Subsidy Actually Benefit Oil Companies?

Here’s Vinod Khosla from a story in Wired, Six Ethanol Myths:

Yes, ethanol producers and blenders share in a 51-cent-a-gallon federal credit that costs taxpayers about $2 billion a year. The majority of that accrues to oil companies, not farmers.

Before pondering this too much, consider for a moment just who has lobbied to keep the credit intact. Has it been oil companies? No. Has it been politicians from oil states like Texas and Alaska? No. The groups always arguing in favor of the ethanol tax credit have historically been farm state politicians, ethanol lobbying groups, and corn lobbying groups.

Last year I documented the reaction of Brian Jennings, the executive vice president of the American Coalition for Ethanol, when ExxonMobil (XOM) CEO Rex Tillerson called for an end to the subsidies. Jennings said “it is outrageous for an executive for big oil to actually suggest getting rid of the tax credit for ethanol.” That’s very odd behavior if Big Oil is actually the beneficiary.

But of course as you might guess, Jennings isn’t making the case for Big Oil, because Big Oil isn’t the actual beneficiary. Here’s what’s going on. The blender’s credit does in fact accrue to the purchaser of the ethanol. That’s because the wholesale price of ethanol, at only 67% the energy content of gasoline, historically has been more higher than that of gasoline. (At times ethanol has traded cheaper than gasoline, but never on an average annual basis in the past 27 years. See the chart in this essay). So, without the incentive, it would not be economical for oil companies to purchase ethanol for blending. The blender’s credit has resulted in an artificial inflation of the price that ethanol producers can get for their product, which is why they are defensive about keeping it.

However, I have noted a change in attitude from oil companies lately with respect to this credit. Whereas they were once strongly against it, I think the fact that ethanol is now mandated has some of them changing their tune.Even the American Petroleum Institute has changed their tune. I recently posed the question to API president Red Cavaney on the API’s stance on the subsidy, and he stated that they are agnostic on the issue.

Why the change? Because now, with ethanol mandated, eliminating the credit would mean that oil companies would be forced to pay the true price for ethanol without getting a credit, meaning they will have to pass these costs on. This would result in an increase in the cost of gasoline (consider that this would cause the price of E85, for instance, to rise by 85% of the value of the subsidy – $0.43/gal). This would likely reduce overall product demand. So oil companies may be realizing that with mandated ethanol, they are better off with the credit in place – even if the primary beneficiaries are ethanol interests.

Doesn’t Ethanol Usage Create Jobs and Provide Cash for Midwestern Communities?

Of course it does. But how are jobs created? If we mandated that everyone had to consume a pound of potatoes or a pineapple each week, it would also create jobs and revitalize communities. So why don’t we do this?

We don’t do this because the jobs are created by flowing money out of one region of the country into another. If job creation had no impact on jobs in other regions, we could just enact one mandate after another, forcing us to buy various products until everyone was happily employed. But the economy doesn’t work that way. The jobs that are created in Iowa are a result of money flowing out of the rest of the country.

Paul Rogers, a reporter for the San Jose Mercury News, gives the following account in which he asked Iowa governor Tom Vilsack why the rest of the country should be forced to use ethanol:

“Because it helps farmers from my state expand their markets, Vilsack explained. ‘So I guess you’d support a new federal law to require everybody in Des Moines to buy a computer, to help people in Silicon Valley expand their markets?’ I asked. He didn’t concur.”

That’s a pretty good example of why job creation isn’t free. Forcing people in Iowa to buy computers would result in less money to spend on other things. It is just less obvious with ethanol, because the money is extracted in smaller increments.

Do We Have Enough Land to Grow Our Way to Energy Indendence?

Again, Vinod Khosla from Wired, Six Ethanol Myths, addressing the “myth” that the U.S. doesn’t have the available land:

Former secretary of state George Schultz and ex-CIA director R. James Woolsey estimate that 30 million acres can replace half our gasoline. I estimate that 40 million to 60 million acres can replace our gasoline needs. By taking land now used to grow export crops and instead planting energy crops, it’s feasible to eliminate our need to import oil for gasoline.

Let’s think about that for a minute. Presume that gasoline demand doesn’t grow at all from today’s 140 billion gallons. Now consider that, because ethanol only contains 67% of the energy of gasoline, it’s going to take 210 billion gallons of ethanol. In Khosla’s “worst case”, he would have 210 billion gallons of ethanol being produced on 60 million acres. This would require an ethanol yield of 3500 gallons per acre, around 10 times the current per acre ethanol yields. While you will sometimes hear of ethanol yields of 500 gallons per acre of corn, the nationwide average yield is around 350 gallons per acre.

So, we require an improvement in yields by a factor of 10 if we use corn, or we need something that has a better ethanol yield per acre than corn. But let’s assume for a second that it can be done. Now, here is where the EROEI issue becomes important. That 210 billion gallons of ethanol is the gross amount of ethanol required. But, how much energy is required to produce that much ethanol? At the current EROEI of 1.3 (with animal feed byproducts included), it would take the BTU equivalent of 210 billion/1.3, or 162 billion gallons worth of ethanol just to drive the process. In reality, we are treating animal feed by-products as BTUs that can be burned for transportation. If we were only considering fossil fuel inputs in and ethanol BTUs out, it would take pretty close to 200 billion gallons of ethanol equivalent to drive the process.

So with the generous assumption on by-products, the actual energy production required in this scenario is 210 billion gallons of ethanol, plus 162 billion gallons worth of BTUs to drive the process for a total of 372 billion gallons. Furthermore, you would end up with more animal feed by-product than you know what to do with.

Clearly, it is a stretch to presume we could supply U.S. demand by using corn, which means another biomass source will be required. That technology is not presently commercially available. Furthermore, if/when such a technology does become available, unless the EROEI is much improved we will find ourselves in the position of having to produce almost twice as much energy as we do now, just to have the same amount of net energy at the end of the process.

If Brazil can do it, why can’t the U.S.?

First off, let me state that I think sugarcane ethanol is a good solution for Brazil. Brazil is located in the tropics, and receives far more solar insolation than temperate locations like the U.S. Furthermore, a study commissioned by The Netherlands Agency for Sustainable Development and Innovation concluded that sugarcane ethanol production in Brazil is sustainable. I wrote an essay addressing that situation:

Report: Brazilian Ethanol is Sustainable

So, if Brazil can do it, why can’t the U.S.? I have heard the claim many times that Brazil has shown us the way to a bio-fueled future. I have also addressed the fallacy of these arguments in the following essays:

Lessons from Brazil

Daschle and Khosla Ethanol Propaganda

Letter to CNN on Inaccuracies

For the purpose of this FAQ, I will briefly summarize the issues. First, Brazil still relies on oil for 90% of their transportation needs. Ethanol in fact only serves 10% of the market there. Their “energy independence miracle”, as Mr. Khosla has referred to it, actually happened as a result of a major oil find by Petrobras. The following short report shows the stark contrast between the amount of oil Brazil produces, and the amount of ethanol Brazil produces:

Brazil Achieves Energy Independence Through Increased Domestic Crude Oil Production

So that’s the first issue: The contribution of ethanol has been exaggerated. The second issue is that the per capita oil consumption in Brazil is about 4 barrels per person per year. In the U.S., per capita consumption is about 27 barrels per person per year. Given that Brazil produces a little over 3 barrels per person per year, they have a very small gap to close, and sugarcane ethanol helps close that gap. In the U.S., we produce a lot more oil than does Brazil – around 11 barrels per person per year – but we then have a gap of 16 barrels per person per year to close. In other words, we would need to close a gap of more than 16 times that of Brazil, and do so in a temperate climate.

So, the answer to the question of why the U.S. can’t do “it” just depends on the definition of “it.” If “it” means cutting our oil consumption down to the level of Brazil’s, or for that matter even just cutting it in half (which would still be triple that of Brazil’s), then the U.S. could do “it.” But if “it” simply refers to growing our way to energy independence – as many biofuels proponents have suggested, then Brazil can’t serve as the model for what we wish to do in the U.S. If a dramatic cut in oil consumption is not part of the equation, then the U.S. and Brazil are apples and oranges.

Can’t Brazil and other tropical countries provide biofuels for the world?

What works well for Brazil does not necessarily scale to the rest of the world. As shown in the previous section, Brazil has much lower per capita energy consumption than the U.S. (and the European Union). Scaling up to supply the world with biofuels is already having some undesirable consequences:

Losing Forests to Fuel Cars

The issue is not, as some have suggested, that Brazil is cutting down rain forest to make way for sugarcane plantations. It is a bit more complicated than that.

In the past four decades, more than half of the Cerrado has been transformed by the encroachment of cattle ranchers and soybean farmers. And now another demand is quickly eating into the landscape: sugarcane, the raw material for Brazilian ethanol.

The roots of this transformation lie in the worldwide demand for ethanol, recently boosted by a U.S. Senate bill that would mandate the use of 36 billion gallons of ethanol by 2022, more than six times the capacity of the United States’ 115 ethanol refineries.

In addition, as use of corn-based ethanol grows in the United States, rising prices are influencing American soybean farmers to switch to corn. And as the United States, the world’s largest soybean producer, cuts soybean plantings, buyers are looking to Brazil, the No. 2 soy producer, to expand its production. Brazilian soybean production is already at record levels and is predicted to increase another 4.5 percent this year, according to Abiove, an industry association.

To summarize, the issue is that land in the Cerrado, a tropical savanna with a great deal of biodiversity, is being deforested at a much faster rate than is the Amazon. The expansion of ethanol into the Cerrado is pushing cattle ranchers and soy farmers into unspoiled regions of the Cerrado, and in the case of soy it is pushing soy farmers into the Amazon:

An interview with tropical biologist William F. Laurance

Soy farming is having a huge impact in the Amazon right now, for three reasons. First, industrial soy farmers are themselves clearing a lot of forest. Second, soy farmers are buying up large expanses of cleared land from slash-and-burn farmers and cattle ranchers, and the displaced farmers and ranchers often just move further out into the forest, maintaining a lot of pressure on frontier areas. Finally, the soy farmers are a very powerful political lobby that is pushing for major expansion of roads, highways, river-channelization projects, and other transportation that will criss-cross large expanses of the Amazon. This infrastructure is acting like Pandora’s box–it is opening up the frontier to spontaneous, unplanned colonization and exploitation by ranchers, farmers, hunters, and illegal gold miners.

Brazil already exports ethanol to other parts of the world. In the case of the U.S., this comes despite a $0.54/gallon tariff in place to protect U.S. corn ethanol producers. So, whether or not Brazil can supply more biofuels to the rest of the world is not the key question. In my mind, the key question is “Given the potential for deforestation, do we want them to?”

What about the environmental benefits of using ethanol as fuel?

There are environmental benefits, but also negative environmental consequences from using ethanol as fuel. If the ethanol is produced from industrial corn farms, more negative environmental consequences can be added.

Because of ethanol’s marginal energy balance, there is a marginal reduction in greenhouse gas emissions per distance driven. Researchers have also found that ethanol produces less carbon monoxide when it is burned in an internal combustion engine.

On the other hand, ethanol raises the vapor pressure when blended with gasoline, which causes an increase in smog. In an August 1, 2007 article in the Houston Chronicle (now archived, but available at the following link):

Five questions with Cal Hodge

Q: We’re already using more ethanol in our fuel now, because of the outcry over the fuel component methyl tertiary butyl ether or MTBE and its propensity to foul groundwater. You had warned that replacing MTBE with ethanol could hamper efforts in cities like Houston to improve air quality because of these problems with volatile organic compounds and nitrogen oxides. So has that actually happened?

A: Yes, it has happened. Los Angeles is the cleanest example. They began switching from MTBE to ethanol in 2001. But when they made their major switch in 2003, there was a significant decrease in air quality. They basically stopped making progress toward attainment on EPA’s ozone standards when they switched to ethanol. When using MTBE, with the cars getting cleaner each year, coupled with a very clean fuel, Los Angeles was on a straight-line path toward attaining EPA’s air standards by about 2002 or 2003. Now that they have switched to ethanol, the trend line indicates nonattainment for many years to come.

A 2007 research paper by Stanford University professor Mark Jacobson echoes that claim:

Effects of Ethanol (E85) Versus Gasoline Vehicles on Cancer and Mortality in the United States

In this paper, Professor Jacobson studied the potential impact to air quality as more E85 vehicles hit the roads, and he concluded:

“In sum, due to its similar cancer risk but enhanced ozone health risk in the base emission case, a future fleet of E85 may cause a greater health risk than gasoline. However, because of the uncertainty in future emission regulations, E85 can only be concluded with confidence to cause at least as much damage as future gasoline vehicles.

Because both gasoline and E85 emission controls are likely to improve, it is unclear whether one could provide significantly more emission reduction than the other. In the case of E85, unburned ethanol emissions may provide a regional and global source of acetaldehyde larger than that of direct emissions.”

In addition to the mixed environmental impact of directly burning ethanol as fuel, industrial corn farming has significant negative environmental impacts. From a 2006 paper that evaluated ethanol and biodiesel:

Environmental, economic, and energetic costs and benefits of biodiesel and ethanol biofuels

Both corn and soybean production have negative environmental impacts through movement of agrichemicals, especially nitrogen (N), phosphorus (P), and pesticides from farms to other habitats and aquifers (9). Agricultural N and P are transported by leaching and surface flow to surface, ground, and coastal waters causing eutrophication, loss of biodiversity, and elevated nitrate and nitrite in drinking-water wells. Pesticides can move by similar processes.

The markedly greater releases of N, P, and pesticides from corn, per unit of energy gain, have substantial environmental consequences, including being a major source of the N inputs leading to the ‘‘dead zone’’ in the Gulf of Mexico (11) and to nitrate, nitrite, and pesticide residues in well water. Moreover, pesticides used in corn production tend to be more environmentally harmful and persistent than those used to grow soybeans.

Two additional factors not discussed in the article are 1). Industrial corn farming depletes the topsoil, putting future generations at risk:

Peak Soil: Why cellulosic ethanol, biofuels are unsustainable and a threat to America

Row crops such as corn and soy cause 50 times more soil erosion than sod crops [e.g., hay] or more, because the soil between the rows can wash or blow away. If corn is planted with last year’s corn stalks left on the ground (no-till), erosion is less of a problem, but only about 20% of corn is grown no-till. Soy is usually grown no-till, but insignificant residues to harvest for fuel.

2). Corn farming and subsequent conversion to ethanol consume enormous amounts of fresh water:

Experts Differ About Ethanol-Water Usage

In this article, David Pimentel is the pessimistic expert who claims that when you add in the water required to grow the corn, it takes 1,700 gallons of water per gallon of ethanol produced. The “optimist” in the article, Derrel Martin, an irrigation and water resources engineer, said:

Martin said the question of whether increased corn production and the irrigation it requires will overburden the state’s water supply is an important one that does not yet have a clear answer.

Additional research has been reported by two Colorado researchers:

Biofuels: The Water Problem

In late June, two Colorado scientists, Jan F. Kreider, an engineering professor at the University of Colorado, and Peter S. Curtiss, a Boulder-based engineering consultant, presented their peer-reviewed report, “Comprehensive Evaluation of Impacts from Potential, Future Automotive Fuel Replacements” at a conference sponsored by the American Society of Mechanical Engineers. The two found that producing one gallon of corn ethanol requires the consumption of 170 gallons of water. That figure includes the amount needed for all irrigation and distillation. For comparison, the two scientists estimated that each gallon of gasoline requires just 5 gallons of water. If Kreider and Curtiss are right, the 5 billion gallons of corn ethanol produced in America in 2006 required more water than production of the 140 billion gallons of gasoline the U.S. consumed that year.

Ethanol proponents have largely downplayed the negative environmental impacts of increased ethanol production, while emphasizing the positive impacts. But by ignoring the negatives, all of us, and future generations, are being put at risk.

Isn’t ethanol useful as an oxygenate replacement for MTBE?

The familiar dog and pony show of calling oil company executives to Washington to testify before a pandering congress begins today:

Congress has big questions for Big Oil

WASHINGTON – Big Oil is once again being called on the carpet. Senior executives of the five largest U.S. oil companies were to appear before a congressional committee Tuesday where they were likely to find frustrated lawmakers in no mood for small talk.

Oh, that sounds serious. I wonder if those lawmakers have some solutions in mind? Let’s see, the last two times this happened – following Hurricane Katrina (oil prices were at $60) and then again in May 2006 (oil prices had risen to $75) – what exactly was accomplished? Well, a lot of fuel was wasted by flying all of these guys to Washington at taxpayer expense. Time was wasted. And oil prices have risen to over $100. Sooner or later congress is going to figure out that prices are rising for reasons other than a Big Oil conspiracy.

“These companies are defending billions of federal subsidies … while reaping over a hundred billion dollars in profits in just the last year alone,” complained Rep. Edward Markey, D-Mass., in previewing the hearing.

The lawmakers were scheduled to hear from top executives of Exxon Mobil Corp., Shell Oil Co., BP America Inc., Chevron Corp. and ConocoPhillips, which together earned about $123 billion last year because of soaring oil and gasoline prices.

Markey, chairman of the Select Committee on Energy Independence and Global Warming, said he wants to know why, with such profits, the oil industry is steadfastly fighting to keep $18 billion in tax breaks, stretched over 10 years.

Leave it to demagogue Markey to characterize a tax deduction as a subsidy. When you pay your taxes, but get deductions for your mortgage interest, for instance, do you consider this a subsidy? You are paying taxes, and get a break equivalent to a small fraction of your tax bill, but that’s a subsidy. It’s the same concept. And contrary to popular belief that this is an “oil industry tax break”, it is actually a tax deduction that was made available to all manufacturers. These manufacturers include industries with much higher profit margins than the oil industry sees.

What Markey and the panderers want to do is to insert language that says something like “Tax deduction for manufacturers – unless you happen to be an oil company.” They wish to single out one industry for punishment – and I think their reasons are clear: This will be popular with a public whose energy IQ is in the single digits.

I don’t see this as all that different from the moves Chavez has made. Rules were put in place. Projects in the oil industry take many years to complete. Projects were begun based on the rules that were in place, and now there is the threat of a rule change that would impact upon project economics. That’s what Chavez did: He changed the rules in the middle of a game that takes years to complete.

What kind of message does it send when we change our energy policy every couple of years? And I don’t say that only with respect to oil companies. Wind and solar companies see credits expire and then they are renewed. The credit for hybrids expires, and then is renewed on a whim. Long-range planning becomes very difficult if you have frequent, unanticipated rule changes. The only constant seems to be that we will subsidize ethanol consistently, as we have been doing now for almost 30 years. That is one tax credit that has never lapsed, and in my opinion will be in place for the next 30 years.

Consumer organization Oil Watchdog has admitted to accepting money from Chevron. This is odd behavior for an organization that has been fiercely critical of universities and museums that accept donations from oil companies.

Oil Watchdog staff member John Simpson, after having accepted the contribution from Chevron, defended his actions by claiming he gave the money to a friend. Simpson also argued that Chevron didn’t really need the money anyway. Following this admission, Simpson made a plea for more funding from readers. Must be tough times for Oil Watchdog’s trial lawyer backers.

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* Note: When reporting on Oil Watchdog’s misdeeds, I will try keep to the journalistic standards they have set. The only difference is, unlike Oil Watchdog’s reporting, what I reported above is actually true. Maybe misleading, but true.

Update: They now have a news release on the teleconference: Democratic Governors Discuss America’s Energy Future. You can download the audio of the 30-minute teleconference at the bottom of the news release.

Today (6-22-06) the Democratic Governors Association (DGA) hosted a conference call on energy policy. Michigan Gov. Jennifer Granholm and Oregon Gov. Ted Kulongoski hosted the call, and listeners were able to submit questions beforehand. They answered 4 questions, including the one that I submitted.

Overall, it was a mixed bag. Gov. Granholm came across like a politician, offering solutions, but also out to score political points. Gov. Kulongoski sounded sincere, really focused on conservation, and did not attempt to score political points. It felt almost like a “good cop, bad cop” routine from my perspective.

I took notes, but hopefully they will make the transcript or a recording available. Gov. Granholm went first. Her “left hook” was “oil companies are bad”. Her “right cross” was “ethanol is good”. She went for the left hook most of the time. Here was the gist of her comments:

Fuel prices are too high, and oil companies are making too much money. She wants legislation to cap profits. She claimed that oil companies are not investing in alternative energy technologies (this is not true, but maybe they aren’t investing in the ones she wants them to invest in). She made a passing remark at conservation, but didn’t sound too passionate about it. She piled on oil companies again and really vilified them. (My concern before-hand was that this would be the tenor of the call). She really pushed ethanol, and she said Michigan needs a huge number of ethanol plants. She thinks we need more E85 pumps, and complained that the oil companies have not been eager to embrace them. Near the end of her opening statement, she reiterated that oil companies are not eager to cap profits. (What sector is eager to cap profits?)

At this point, I was thinking that America really needs a new political party. But they then went to Gov. Kulongoski. He really focused on the conservation angle, and he came across as less political, and more focused on finding solutions than in scoring points. He discussed what Oregon is working on. He has established targets for government agencies, and in 4 years wants all government agencies to run off of 100% renewable electricity. He said the state is making large investments into alternative electricity – wave, geothermal, wind, solar. He also noted that Oregon has no coal or oil deposits, which is one driver in their push for sustainability. He did mention biofuels, and also seemed to think ethanol will play a big part. He said he drives an E85 vehicle.

They then went to the Q&A. We were allowed to submit questions prior to the call, and they selected four questions to answer. I don’t like this format, because it lends itself to easy political posturing. Question 1 reaffirmed my fears.

Question 1 from Pittsburgh: “Why have oil company profits gone up as gasoline has gone up?” Of course Gov. Granholm took this one, as it was another opportunity to score political points by attacking oil companies. Her answer: Because they aren’t regulated, and they can get away with it. Says we need to regulate oil companies like public utilities. She said that profits are too high, and that we need to restrict profit margins. (I hope she understands the difference between a profit, and a profit margin).

Question 2: I already had a favorable impression of Governor Kulongoski, but he chose to answer question 2 from “Robert in Billings, Montana.” That’s me. They omitted part of my question, so here is the complete question I submitted:

I am a chemical engineer in the oil industry. One of the things that I, and many others, have been bothered by is the level of political pandering that has accompanied the present energy crisis. The Republicans say a solution is to drill in ANWR. Some Democrats say the solution is ethanol (not a chance), or they merely grandstand and point fingers at oil companies. I believe the root problem is our reluctance to embrace conservation, and unless this is addressed all other solutions are doomed. Who among you has the courage to get tough on this politically sensitive issue? And how will you address it?

And here is what they read and answered:

I believe the root problem is our reluctance to embrace conservation, and unless this is addressed all other solutions are doomed. Who among you has the courage to get tough on this politically sensitive issue? And how will you address it?

Gov. Kulongoski: “Robert is absolutely correct”, and he sounded like he meant it. He went on to describe some of Oregon’s conservation measures – such as increasing standards for appliances. He said we must learn to live sustainably. He said that he believed the state, and not the federal government, would lead on this issue. He said state governments must lead by example, and concluded with “Again, Robert is correct. We must look at ourselves in the mirror and decide that we must change our behavior.” Gov. Kulongoski scored big points with me.

Question 3, from Michigan: Do you support PHEVs, solar, wind, etc? Gov. Granholm: Absolutely! She talked about giving personal property tax breaks to alternative energy providers, and said she was sitting in her hybrid as she was answering the question.

Question 4, from Oregon: How do you get the private sector to buy into alternatives? Gov. Kulongoski: He explained how Oregon moved to sustainable forestry practices, and said they must do the same for energy. He also mentioned the importance of combating global warming. Again, I thought he sounded passionate and sincere.

That’s my assessment. If you listened in and heard something different, or think I missed any important points, let me know. I was much more impressed with Gov. Kulongoski than with Gov. Granholm, even before he answered my question. I guess the one thing that struck me as ironic is that Gov. Granholm’s “cheap fuel for everyone” routine is at complete odds with Gov. Kulongoski “we must conserve” routine.

RR

Updated: 9/29/07

When I read the following quote, I immediately thought of the recent Business Week article claiming that availability – which they claimed is being hampered by oil companies – is the primary reason E-85 is not taking hold.

I don’t buy E-85 for my flex fuel Ranger even though it is readily available around here with all the ethanol plants. It’s because the price is never less than 80% of the price of E-10. I get 80% of the mileage with E-85 that I get with E-10.

The above quote comes from a devoted ethanol advocate and corn farmer, who frequently posts at The Oil Drum. If he isn’t willing to spend extra money on E-85, then can you really expect the general public to do so? Price is a much clearer explanation than Business Week’s conspiracy theories for why E-85 is not more popular. Price matters.

In addition to gasoline and diesel, AAA has started tracking E85 pricing. Their report is published each day at:

Daily Fuel Gauge Report

Not only do they publish the price of E85, but they also publish a BTU-adjusted price, which is actually a gasoline equivalent price. This price can be used to compare actual per mile fuel costs. AAA explains:

The BTU-adjusted price of E-85 is the nationwide average price of E-85 adjusted to reflect the lower energy content as expressed in British Thermal Units – and hence miles per gallon – available in a gallon of E-85 as compared to the same volume of conventional gasoline. The BTU-adjusted price calculated by OPIS and AAA is not an actual retail average price paid by consumers. It is calculated and displayed as part of AAA’s Fuel Gauge Report because according to the Energy Information Administration E-85 delivers approximately 25 percent fewer BTUs by volume than conventional gasoline. Because “flexible fuel” vehicles can operate on conventional fuel and E-85, the BTU-adjusted price of E-85 is essential to understanding the cost implications of each fuel choice for consumers.

It is of interest to note these BTU-adjusted E85 prices. Despite the fact that ethanol prices (and margins) have collapsed, and gasoline prices remain high, the adjusted E85 price remains higher than that of gasoline. Yesterday’s prices show regular at $2.81, E85 at $2.33, and the BTU-adjusted price of E85 at $3.07. I think ethanol prices will begin to recover as the mandated ethanol levels increase and as the industry goes through a shakeout, so the E85 price gap is not likely to significantly improve.

Is it really a mystery why gas station owners aren’t rushing out to install more E85 pumps? If the demand is there, the pumps will come.

I have come across a couple of articles in the past few days that really left me shaking my head. One praises Hugo Chavez as a hero, and the other blasts oil companies for their multi-million dollar gifts to higher education. These people definitely see the world through a very different set of lenses than I do.

Hugo Chavez: Hero of the People

There are extremists on both ends of the political spectrum. For every Ann Coulter on the Right, there is a Wayne Madsen on the Left: Both are just as out of touch as they can possibly be. I have found that I can’t communicate with either sort of extremist, because they are generally entrenched in their views and impervious to any reasoning that challenges them. First up we have Madsen praising Hugo Chavez:

Better Than Bush’s Let-Them-Eat-Cake

Source: The Augusta Chronicle
Publication date: 2007-03-19

By Wayne Madsen

WASHINGTON – Venezuela’s President Hugo Chavez and American President Bush could not be further opposites. While Bush, an oil family scion, incoherently blathers on about the problems of highly priced gasoline and heating oil, his oil industry friends rack up obscene profits.

Meanwhile, Chavez, the champion of his country’s poor, delivers on his promises by providing deeply discounted home-heating oil, through Venezuela’s state-owned Citgo, to low-income Americans.

It should be clear to all thinking Americans that Chavez delivers and Bush does not.

Take that, Chavez critics. You aren’t “thinking Americans.”

THE BUSH-CHENEY oil cartel finds it reprehensible that poor people receive a 40 percent discount on their heating oil. For them, it is outrageous that such a program might eat into the grotesque profits of their oil industry pals.

What is monstrous is that Bush and Dick Cheney would sit idly by as America’s poor and elderly freeze to death in their homes because they cannot pay for luxuriously-priced home-heating oil.

Yes, “luxuriously-priced home-heating oil.” The current spot price is $1.67 a gallon, much lower than the apparently even more “luxuriously-priced” items like milk and bottled water. This is the problem with extremism. In his rabid state, Madsen takes complete leave of his senses and makes these preposterous claims.

Words can’t describe the level of cluelessness exhibited here. First, why can Chavez even provide deeply discounted heating oil? Because his country invited oil companies in to do business, they invested billions of dollars developing Venezuela’s oil fields, and now Chavez is saying “I’ll take that.” What Chavez hasn’t figured out yet – or maybe he is starting to as oil production continues to decline in his country – is that regardless of whether your oil industry is being run by private companies, or by the government, it takes major capital expenditures to keep it going.

So, can Chavez under-invest in the industry while diverting money to his pet causes? He can for a while, but you can see the results. Despite having enormous oil reserves, he and his cronies are running Venezuela’s oil industry right into the ground. His generosity to the poor has only been possible because he had a goose that laid golden eggs because they constantly reinvested money back into the business. Once he kills the goose, where is he going to get the money to continue his programs? I guess he could invite the oil companies back in and try to repeat the cycle, but I think they will be a bit more cautious next time around.

Big Oil’s Reprehensible Philanthropy

Next, the FTCR is in the news again. I could probably do a regular column on them. As far as I can tell, their mission statement seems to be “Slam oil companies and issue a press release every time we do.” I honestly can’t see that they serve any function besides self-promotion. They put out one misinformed press release after another, but now they have come up with perhaps the most disturbing Big Oil story ever:

ConocoPhillips Tries To Buy Into “Big Oil U” In Greenwash Campaign

SANTA MONICA, Calif., March 20 /PRNewswire-USNewswire/ — ConocoPhillips, with a $6 million gift to the University of Oklahoma’s School of Geology and Geophysics, is the latest oil giant seeking to buy respectability by capitalizing on the name of a well-known university, the Foundation for Taxpayer and Consumer Rights (FTCR) said today.

Why that’s disgusting! An oil company with Oklahoma roots giving money to an Oklahoma institution of higher learning! Despicable. Of course if the FTCR wasn’t quite so clueless, they might recognize that oil companies have a long history of giving to higher education, and in fact most oil companies have a dedicated budget for philanthropic causes. But I don’t expect the FTCR to know that, nor to mention it if they did, since it doesn’t support their mission statement. It seems that this is all new news to the FTCR, and they felt compelled to spin it as bad news by claiming that Big Oil is suddenly trying to buy respectability.

“Big Oil, an industry that has made billions at the expense of the environment, is trying to clean up its deservedly dirty image by associating with well-known universities,” said John M. Simpson, consumer advocate with FTCR. “Independent academic activities are too important to let them be sold to Big Oil companies that want to greenwash their image.”

Just to show the rank hypocrisy within the FTCR, remember that these are the guys calling for sub-$2.00 gasoline. Let’s see, guys. Will cheap gas make environmental problems better or worse? If they had their way and got what they wanted, we would consume much more gasoline than we currently consume. Would that be good or bad, fellows? Take your time.

If you don’t like oil companies and think they are polluting the environment, then what do you think you are doing when you drive a car or fly on an airplane? Are they doing the polluting, or are you? Don’t be a hypocrite. Make a stand against pollution by giving up your petroleum-based fuels, plastics, paints, medicines, fertilizers, clothing, etc.

“For a paltry $6 million, Conoco gets naming rights to the school and an industry friendly professor to spout their warped view of the world in an academic environment. We call on the regents to reject this deal,” said Simpson.

So, these companies have a “deservedly dirty image” and a “warped view of the world”, they have “made billions at the expense of the environment” and are now “seeking to buy respectability” with their “paltry $6 million.” Gosh, at least these guys aren’t biased in their viewpoints. I wonder how many of them drive cars and fly on airlines?

Stanford University’s Global Climate and Energy Program receives $100 million from ExxonMobil. The oil giant has recently launched an advertising campaign touting its involvement with the university. Movie producer Steve Bing, a Stanford alumnus, was so appalled by the campaign that he canceled a $2 million pledge to the school.

So Stanford netted $98 million dollars after Bing pouted and went home. I think Stanford can live with that deal.

Meanwhile, UC Berkeley is negotiating a $500 million deal with BP to create the Energy Biosciences Institute on campus.

No way! I also heard that when they aren’t destroying the world by funding higher education, they spend their time torturing puppies.

“Big Oil has an image problem,” said Simpson. “We simply cannot allow them to fix it by turning our respected colleges and universities into ‘Big Oil U’.”

Now isn’t this what you really meant? “Big Oil has an image problem. We simply cannot allow them to fix it because our mission is to perpetuate it.”

Perhaps if the FTCR had done their homework, they might have come across this article:

Okla. Univ. Receives $6M Gift From ConocoPhillips

Source:Journal Record – Oklahoma City
Publication date: 2007-03-16

Frank Phillips of Bartlesville and E.W. Marland of Ponca City – two Oklahoma oil industry pioneers – were among the first private donors to the University of Oklahoma.

Phillips and his brother started Phillips Petroleum and Marland founded Marland Oil, which merged with Continental Oil Co. – Conoco – in 1929. Phillips Petroleum and Conoco merged in 2002.

On Thursday, the company now known as ConocoPhillips and based in Houston continued the tradition of providing financial support to OU with a $6 million contribution allocated to the School of Geology and Geophysics.

Total gifts and pledges to OU from ConocoPhillips now total $33 million, said David L. Boren, OU president.

The FTCR press release closes with this whopper:

The nonpartisan, nonprofit Foundation for Taxpayer and Consumer Rights (FTCR) is a leading consumer watchdog group.

Non-partisan? Non-partisan?!! I wonder what definition of non-partisan they are using? When every article that they write about oil companies is riddled with adjectives like “deservedly dirty image” and a “warped view of the world”, they show how much credibility they have by claiming that they are “non-partisan.”

And if that story wasn’t bad enough, this one will really make the FTCR’s blood boil:

ConocoPhillips Contributes $1 Million To Memorial Hermann Life Flight

HOUSTON, Mar. 20, 2007 – ConocoPhillips announced today its contribution of $1 million to Memorial Hermann Life Flight to help with the purchase of six new helicopters that will provide enhanced emergency care to the community.

“Since its inception in 1976, Memorial Hermann’s Life Flight has brought hope to thousands of patients who have required emergency medical care and transportation,” said Phil Frederickson, executive vice president, ConocoPhillips. “By replacing the existing four helicopters and adding two new helicopters, Life Flight will be able to reach many more people who have life-threatening medical conditions.”

They should set up a hotline for consumers to call in and turn in oil companies every time they commit philanthropy. If they like, I can get them a hundred more stories like these. They can issue a scathing press release in response to each story.

I have been engaged in an e-mail exchange with a journalist overseas who is writing an article on gasoline pricing in the U.S. I don’t want to give anything away, so I won’t be any more specific than that. However, I do want to share a couple of responses that I sent regarding some questions of price-gouging. In one response, I commented on the writings of Tim Hamilton and Jamie Court at the FTCR. I have documented their cluelessness in a previous essay:

Another Uninformed Consumer Watchdog

This time, I was asked about this particular document by Court and Hamilton:

Low gasoline inventories set the stage for $4 at the pump in 2006

Their claim is that oil companies are engineering price spikes by purposely keeping inventories low. I am really stunned at the level of ignorance displayed here. I looked back at some of their earlier writings, and they were advocating steps that we need to take to keep gasoline under $2.00 a gallon. Do they really think cheap fuel is a good thing? Apparently they do, which tells me they haven’t thought through the implications. I guess they don’t understand that low gasoline prices will simply enable us to run through our fossil fuel endowment at the maximum possible rate.

First, they seem to think that oil companies exist primarily to serve the public’s desire for cheap gasoline. However, oil companies exist to make a profit, and have a responsibility to their shareholders. Court and Hamilton also criticize the oil companies for their profits, even though oil company profit margins are about average for all industries.

What they did get right is that inventory levels do dictate pricing. However, the suggestion that oil companies are purposely keeping inventories low in order to maximize profits is ludicrous. Lack of refining capacity required to meet the (too) strong U.S. demand is a serious issue. Just look at refinery utilization, which is a number that is publicly available at the Energy Information Administration. Prior to Hurricane Katrina, utilization was running at 95%, which is close to the maximum possible level. (Some capacity is always offline for maintenance). Following the hurricane, some very large refineries were knocked offline and utilization dropped to about 85%. However, those refineries that were unaffected were still running just as hard as they could. Fall maintenance was postponed in order to supply needed product to the market. By spring, that deferred maintenance had to be completed, and this again reduced capacity. (Spring is a very popular time for maintenance, because summer demand hasn’t yet picked up, and the weather is usually cooperative.)

However, let’s assume for a minute that refinery capacity is not an issue. What if we could make as much gasoline as we wanted? Would we run with completely full inventories? Do you know of any business that runs with grossly excess inventories? If we maintain a 100,000 barrel gasoline tank 95% full all of the time, instead of 75% full all of the time, there are 20,000 barrels of product constantly in inventory that exist merely as additional cost to the company. Those 20,000 barrels represent oil that was purchased, but is just setting there earning no dollars. The only reason for maintaining extremely high inventories would be to make sure the public is never inconvenienced, and is always able to purchase cheap fuel, regardless of the costs to the oil companies.

Even thought on rare occasions it might be nice if the tank was 95% full, that additional 20,000 barrels is an added cost on all other occasions. Businesses do not manage inventories in the way that Hamilton and Court believe they should. When there is a hurricane in the Gulf of Mexico, businesses quickly run out of flashlights and bottled water. Does this mean that all Gulf Coast businesses should stock twice as much inventory at all times, just in case a hurricane hits? It would not be profitable to tie up that much money in inventory, in anticipation of an event that will only take place on a multi-year cycle (for a given location).

I would point out that a recent report by the California Energy Commission refutes the outrageous claims of Court and Hamilton. Taken from a recent OPIS report:

Parts of California’s high profile report on the huge gas price spikes in the state last spring read like a re-run of some past probes.

The report, by the California Energy Commission, puts down refinery outages leading to a supply squeeze, coupled with a surge in exports, as the key factors behind record high prices in the state this year.

The lengthy report cites a stunning number of planned outage days at California refineries in the first six months of 2006 compared with same period last year – 175 vs. 58. Most of the unplanned outages, comparing the same periods, lasted twice as long this year.

Also, it found port congestion a factor, as well as high additives costs and the introduction of the new ultra-low-sulfur diesel fuel (ULSD).

It dismisses the notion held by some that pump prices dashed to $3.33/gal because refiners practiced price gouging (dubbed goug-onomics by some consumer groups).

Refiner group WSPA cheered the CEC’s findings saying that they confirm its assertions that market condition is behind the price volatility this year.

Not surprisingly, the FTCR cried foul:

The Foundation For Taxpayer & Consumer Rights, an industry watchdog, called the CEC’s findings a “whitewash.”

“Oil companies are ripping off Californians in exactly the same way electricity profiteers did by artificially shorting the market,” snapped FTCR President Jamie Court.

I guess they can’t handle the truth, which is that market forces dictate prices. In conclusion, it is clear that Court and Hamilton know nothing about running a business, nor do they understand basic economics. They project their views as to how oil companies should be run, and then criticize them for not running in this way. However, if oil companies operated as they believe they should, shareholders would flee the company, profits would plummet, and new capital for capacity expansions would be hard to come by.

The pandering, that is. First up, the presidential candidates take turns accusing each other of not having a plan for high gas prices, which the accuser of course has a neat solution for that will be painless for the public:

Obama presses on gas prices, Clinton highlights energy bill

INDIANAPOLIS – Democrat Barack Obama on Friday blamed high gasoline prices on Washington and a political establishment, including his rivals for the presidency, that he says hasn’t stood up to oil companies.

Barack, that’s incredibly naive. Why are gas prices high everywhere else? This problem isn’t limited to the U.S., you know. By implying that standing up to “Big Oil” would have made a difference, you show yourself as either incredibly naive, or you are pandering.

“So what have we got to show for all that experience?” Obama asked. “Gas that’s approaching $4 a gallon.”

You should get out more. By world standards, that’s still pretty cheap. I suppose all of those foreign governments are also incompetent for letting prices get out of hand?

Clinton, who is challenging him for the Democratic presidential nomination, derided his promise to take on special interests.

“When it came time to stand up against the oil companies, to stand against Dick Cheney’s energy bill, my opponent voted for it and I voted against it,” the New York senator said at a rally at Indiana University in Bloomington. “And that bill had billions of dollars in giveaways to the oil companies. It was the best bill that the energy companies could buy.”

Ugh!

The 2005 energy bill actually raised taxes on the oil and gas industry by about 300 million over 11 years, according to the Congressional Research Service.

Please don’t insert random facts into the story that would contradict the pandering.

“I’ve been a strong supporter of ethanol,” Obama said, noting that demand for the corn used to make ethanol is driving up food prices. “Corn-based ethanol is a transitional technology.”

At least we know where to point fingers, then.

Obama’s speech came after Sen. John McCain, the Republican Obama hopes to challenge in the fall, proposed suspending the federal gas tax for the summer driving season. Clinton supports the idea; Obama does not.

Score one for Obama.

Republican Party official and McCain adviser Carly Fiorina disputed Obama’s argument that the average motorist would benefit little from a suspension of the gas tax.

“I think it demonstrates that he doesn’t understand what hardworking Americans are going through,” she told reporters.

I have already addressed this very stupid idea: John McCain’s Bad Idea

In the speech, Obama called for a windfall profits tax on oil companies, with the money used to help consumers pay utility bills. He also said middle-class tax breaks he’s proposed would help families with energy costs.

Can he not see the problem here? How is this ultimately that much different from McCain’s proposal?

“But the truth is, there is no easy answer to our energy crisis — and we need a president who is going to be straight with us about that,” Obama said, a reference to his oft-stated contention that Clinton hasn’t been upfront with voters.

At least he is correct that there is no easy answer. He is correct that we need a president who is going to be straight with us. Sadly, it would appear that none of the candidates are going to do that.

But it doesn’t stop there. We have Nancy Pelosi using Earth Day to attack high gas prices:

Pelosi to Bush on Gas Prices: We Cannot Wait to Act

I respectfully ask you again to work with the Congress to allow the Justice Department to pursue oil cartel price-fixing, allow the Federal Trade Commission (FTC) the authority to investigate and punish price gougers, end taxpayer subsidies to Big Oil and invest those funds in renewable American energy. Lastly, your Administration must use the authority given to it by the Congress to end market manipulation. We cannot wait to act in the face of these prices increases.

Nancy, you may want to consult a history book to see how many times the FTC has done these investigations at taxpayer expense, and what they have found each time.

And the stupidity of this proposal from Pelosi’s letter is just stunning:

The No Oil Producing and Exporting Cartels (NOPEC) Act – H.R. 2264

This legislation enables the Department of Justice to take legal action against foreign nations for participating in oil cartels that drive up oil prices globally and in the United States. It does so by exempting OPEC and other nations from the provisions of the Foreign Sovereign Immunities Act when acting in a commercial capacity; by making clear that the so-called “Act of State” doctrine does not prevent courts from ruling on antitrust charges brought against foreign governments; and by authorizing the Department of Justice to bring lawsuits in U.S. courts against cartel members. This bill passed the House 345-72. You have threatened to veto this legislation.

Yes, let’s sue OPEC because they won’t sell us oil at the price we want to pay. Then maybe they will countersue because we are charging them too much for corn. Or perhaps they will just say “You know what? We just aren’t going to sell you oil any more.”

Our politicians are pathetic. They offer false solutions to problems they don’t understand. They could put us on the right path, but it would require courage. Yet the phrase “courageous politician” would appear to be an oxymoron.

As the previous post indicated, we in the U.S. have a pretty low energy IQ. One of the reasons is that energy stories are often reported in a very biased or uninformed manner, which tends to distort public viewpoints. For instance, you may think those evil oil companies are wrecking the world. You are entitled to your opinion, and admittedly the oil industry has done plenty to help forge those sorts of views.

However, in the U.S. we take an especially negative view of the oil industry relative to the rest of the world. Why? Odds are that your opinion has been shaped by stories like the examples in this essay. Make no mistake: Your views are carefully nurtured and cultured by various groups with agendas, often by publishing stories full of misinformation. (Full disclosure: I am attempting to influence your viewpoint here, but I am going to do so by pointing out shenanigans).

Here is a perfect example of a story in which words and examples were carefully chosen to convey a very specific (negative) viewpoint:

Big oil companies, little investment in renewable energy

The Center for American Progress released a new report analyzing 2008 oil company profits and lack of investment in renewable energy, even while the companies spend millions of dollars on ad campaigns touting their emphasis on renewable energy.

Note the wording. There was a “lack of investment” in renewable energy, while they spent “millions of dollars” on ad campaigns. The problem with that line – as you will see – is that the “lack of investment” is in the billions, which dwarfs the millions spent on the ad campaigns. But I suppose “billions spent on renewable energy and millions spent on ad campaigns” doesn’t convey the desired negative impression as does “4% spent on renewable energy and millions on ad campaigns.” The first phrase would likely elicit a response of “Uh, OK.” The second one on the other hand? “Why that’s outrageous! Those misers!”

These kinds of stories also inevitably fail to note that the ‘miserly’ oil companies paid several hundred billion dollars in taxes as a result of those profits (if the stories mention taxes at all, it’s that the oil companies aren’t paying their ‘fair share’). According to the Tax Foundation, oil companies have paid out some $2.2 trillion in taxes over the past 25 years – far more than they earned over that time period. But such a misleading picture tends to get painted, that many may think this MoveOn.org petition is rational:

Stop subsidies for Big Oil

Think oil companies should pay their fair share of taxes? So does President Obama. In his budget, the President has proposed cutting billions of dollars in special subsidies and tax loopholes for oil and gas companies.

Just what is a fair share? Will it only be a fair share when oil companies are funding the entire U.S. government? But back to the initial article:

It should come as no surprise that last year’s record high oil prices also led to near record profits for big oil companies.

No, we were bombarded with headlines about it all the time. It should come as no surprise at all. So someone should tell this guy, who thinks it is a secret:

Obama braces for big oil backlash

Little known fact: While most every other industry was falling to pieces last year, the oil industry posted record profits. ExxonMobil alone made $45 billion. So Obama, in his attempt to bolster the sinking U.S. economy, is likely not feeling too much sympathy for the industry as he goes after the clearly unnecessary tax credits the industry currently enjoys.

Another example of a highly misleading article (which actually led me to the MoveOn.org petition). Important to note once again that while other industries were falling to pieces and requiring multi-billion dollar bailouts, the oil industry was making big profits and paying big taxes; taxes in part which enabled those bailouts. But let’s continue to dissect the initial article:

Despite their soaring earnings, the big five companies were very stingy with investments in renewable and low-carbon energy technologies and fuels that would reduce oil dependence.

Media tracking group TNS Media Intelligence reported that $52.5 million was spent in the first quarter of 2008 along by the oil industry on greenwashing advertisements that boast about investments in wind and solar power or efficiency.

In fact, a CAP analysis of their investments reveals that the big five oil companies invested just an average of 4 percent of their total 2008 profits in renewable and alternative energy ventures.

So, let’s have fun with math. According to the story, 4 percent of total 2008 profits was spent on renewable and alternative energy. That amounts to $4 billion, which the writer considers “very stingy.” $52.5 million spent on advertising – which is only 0.0525% of 2008 profits – amounts to a “smokescreen PR campaign.” Just once I would like to see one of these articles stick in a line like “In fairness, spending on their tax bills amounted to 250% of total 2008 profits.”

What planet do these people live on? Oh, right. The planet where oil companies are run by psychotic madmen and profits go to a select few executives and insiders who conspire in smoke-filled rooms. The planet where novices ‘know’ that the industry should invest their profits into ventures that aren’t their core business, and which would likely cause their profits to vanish (potentially leading to a bailout scenario!) These people live in a cartoon world, but the problem is that most of the population lives there.

Voters have been conditioned to hate Big Oil, as Robert Bryce points out in:

Exxon, Big Oil Profits Evil Only Until You Weigh Their Tax Bills

Bryce notes:

While it’s unlikely that the general public’s attitude toward Big Oil will ever be changed, the public should recognize that Exxon’s profits have come along with an enormous tax bill and that those tax payments are helping governments all over the world stay solvent. According to the company’s income statement, the amount of taxes it paid in 2008 was 2.5 times as much as its net profit.

In 2008, Exxon’s tax bill averaged about $318 million per day. And it paid those taxes at the very same time that the whiz kids on Wall Street, the geniuses at AIG, and the mavens at Freddie Mac and Fannie Mae, were begging Uncle Sam for multibillion-dollar life preservers in order to prevent financial chaos. Exxon made huge profits—and paid record taxes—at the very same time that the U.S. financial system was undergoing near-fatal convulsions brought about by excessive speculation, uncontained greed, and a basic failure to provide goods and services needed by the overall economy. How many Americans really need credit default swaps or collateralized debt obligations? Now compare that number with the tens of millions of Americans who absolutely must have gasoline every day.

What about the original article at the Center for American Progress (CAP)? Funny story on CAP. I was invited to D.C. a few years ago for an energy conference, and I happened to be acquainted with the Director of Environmental Policy at CAP (which is a liberal think tank). I was invited to drop by and talk to CAP about the oil industry. Even though I expected a hostile audience, I was looking forward to it, because I thought I might be able to address some gross misconceptions. But at the last moment, my company decided that it wasn’t a good idea for me to make the trip as oil prices were at all time highs and they were worried that I might find myself in an awkward situation with the media. But, back to the original CAP article:

Big Oil Misers

That certainly looks like a balanced title from an organization that describes itself as “non-partisan.” The strategy in the article is the same as the earlier article: Use a percentage to downplay the multi-billion dollar investments in renewable energy, and then quote the advertising money in “millions” to make it appear that more was spent on advertising than on renewable energy. But why must a truly non-partisan organization spin like this? Shouldn’t a balanced article mention the monumental tax bill that has been used in part to bail out other industries?

Worse, there are blatant falsehoods in the article itself. After noting that the American Petroleum Institute claimed that “most people support putting more of America’s oil and natural gas to work”, the CAP article claims:

And API’s assertion that “most people” support more oil and gas drilling is misleading at best. An NBC/Wall Street Journal poll asked “When it comes to addressing our energy problems, which one of the following do you think should receive the most emphasis?” (italics used for emphasis). Six of 10 respondents favored “developing alternative energy sources.”

Misleading at best? Hmm. Let’s have a look at the poll, shall we? On Page 26, we see Question 35:

I’m going to read you several steps that could be taken to ease America’s energy problems. For each one, tell me whether you think this is a step in the right direction, a step in the wrong direction, or if you do not have an opinion either way. And do you think this will accomplish a great deal or just a little in dealing with America’s energy needs?

How did people answer? While 92% felt that developing alternative energy sources would either accomplish a great deal or at least a little, 63% said the same about expanding areas for drilling for oil off the coast of the United States. Where I come from, 63% is “most people” and there is nothing misleading about the API making that claim. It is quite disingenuous, though, for CAP to suggest that API’s statement was misleading. CAP is either spinning or they didn’t read the survey very carefully. They have interpreted the question “Do you support this?” – which is the question API commented upon – as “Do you support this as your number 1 priority?” The ‘misleading at best’ charge aptly applies to CAP in this case.

I wish there wasn’t such an antagonistic relationship between the oil industry and Democrats. There is too much at stake. Historically, Republicans are more supportive of the oil industry, and in turn the oil industry overwhelmingly supports Republican candidates. (Or it may be the other way around; the oil industry supports Republicans who in turn support the industry). On the other hand Democrats (except for those in oil-producing areas) are generally hostile to the oil industry, which ensures that not much money from the oil industry will go to support the Democratic party (although Diane Feinstein has reportedly received $100,000 from the oil industry in the past decade).

My view that Big Oil and Democrats should find common ground has nothing to do with wanting to make nice with a new administration. My views are based on the belief that any intermediate success at achieving some level of energy independence must involve a large contribution from oil and gas. I think it goes without saying that oil and gas provide the overwhelming majority of our transportation fuel, and that they are forecast to provide the overwhelming majority for decades to come.

The problem is of course that some naively think they can marginalize the oil industry with punitive taxes, and alternatives will step up and fill the void. (To be clear, I also don’t subscribe to Newt Gingrich’s viewpoint that encouraging the development of shale oil will lead to energy independence). What will happen in reality is that punitive measures will discourage domestic production, which will quicken the pace of shifting our supply to imports. It is ironic that Steven Chu doesn’t seem to feel the need to work with our domestic oil industry, but warns OPEC not to cut production, and then is pleased when they don’t. I believe the blind spot in the present administration over the need to support our domestic producers will simply mean that future energy secretaries are even more beholden to OPEC.

This might change if we could have a more balanced discussion on our energy policy. However, I am keeping expectations pretty low. I have learned to do this when the topic is energy.