US Taxpayers to Increase Backing for Compressed Natural Gas Vehicles

There now appears to be an increasing chance legislation will be enacted in the US by May 2010 increasing support for natural gas as an alternative to oil in transportation.  This could be the most significant energy policy change in the US since the controversial decision a few years ago to provide taxpayer subsidies for crop based fuels.

In the videos attached to the Bloomberg news story US oilman Boone Pickens is quite optimistic about the probability legislation will pass very soon.

US EPA Ethanol Decison Postponed

The US EPA has postponed to mid-2010 any decision to change ethanol limits in the US.  Last week I described why such a decision is anxiously awaited.  (HT/Xavier).

Downey City to Build Transport Future

It is often said that we need a 1960s Apollo Program Moon Shot type effort to meet future transport energy needs.

Coincidentally, the new Tesla electric car may be built in the same city which built the Apollo moon capsules: Downey, California.

Here is a video from ABC News describing the new plant. The AP describes the 7-seater sedan car as the "Model S, which is designed to travel as far as 300 miles on a three- to five-hour charge." Tesla currently produces an ultra-luxury electric 2-seater sports car which costs almost US$110,000. The new sedan is expected to cost around US$57,000. This is still expensive but as with most automotive technologies it tends to start in luxury vehicles before entering the mainstream.

US Ethanol Decision Soon

As I mentioned at the beginning of May there is an oversupply issue with ethanol. Ethanol in the US is alcohol produced mostly from corn. US government mandated minimum ethanol volumes exceed what auto makers say most of their cars can handle. Typically cars can handle 10% ethanol blended with 90% petroleum-based gasoline without any special equipment.

The New York Times is reporting today that the US EPA may raise the US ethanol blend wall from 10% of gasoline to as high as 15% or 20% within the next week. Although such a change would be good for ethanol producers, this additional ethanol would displace petroleum-based gasoline and pressure oil refinery margins lower.

Update: On Tuesday December 1, 2009 the EPA announced it would defer making a decision on changing the US ethanol blend limit until mid-June 2010.

Is the Future of Transport in Niches?

Transport occurs in fairly stable patterns.  People commute to and from work, school and stores each day within a known range of miles and load. However, these stable patterns do not define the vehicles people buy. People tend to buy vehicles which cover a large array of contingencies.  Daily commuter vehicles are more often than not heavier than needed for a daily commute as they are purchased for events such as a once every month journey more than 200 miles with 6 people.  This contingency-link to vehicle purchasing creates a lot of fuel inefficiency.

(source: US Census Bureau)

As transport fuels become more diverse and expensive, powered transportation devices may also become more customized to fill niches.  These niche vehicles will be more efficient as they would just cover the vast majority of daily transport in the most efficienct manner.  Services such as car sharing Zip Car would meet the need for less frequent vehicle uses.

In cities, people tend to use taxis, subways and buses.  Taxis are expensive. Subways and buses, while most often the quickest way around, can be slow and infrequent at the edges of a city.

I was passing a motorcycle store the other day and saw this Ultra Motor A2B electric bicycle which can travel 20 miles at 20 miles per hour between charges.  It is an urban commuting vehicle.  One can pedal if the batteries have been drained.  The vehicle can be stored inside an apartment or an office which is an advantage over gasoline-powered scooters.  I am not endorsing this bike, it is simply interesting that products which would once have been considered gimmicks are now slowly at the edges of becoming more mainstream.

Is Natural Gas the New Oil?

Source: EIA and IEA data.  Chart from Page 7, Fig. 1-3, Oil 101

There have been a number of stories over the past week about the growth potential of natural gas in the US.  The optimism over supply has resulted from the application of a technique which fractures natural gas bearing shale rock. The fracturing process involves pumping fluids at high pressure into wells to break the reservoir rock and permit natural gas to flow which would otherwise never move across the tight formation to the well.

The fracturing ("fracing") of tight shale formations is now being investigated for use in Europe and other areas outside the US.

Estimates as to how much additional natural gas can be extracted using such techniques vary extremely widely. Some say that natural gas could become an increasing alternative transport fuel to liquid hydrocarbons (crude oil) in certain applications and certain regions of the world for several decades. Natural gas may also increasingly displace solid hydrocarbons (coal) as a baseload (running all the time) electrical power generation fuel.

What is certain is that the industry is in a state of flux which could turn the oil and gas industry upside down over the next 10 years.

In fact, there is a now frantic effort bubbling to the surface in the US to try to avert a natural gas crisis due to prolonged oversupply and low prices. The effort is focussing on expanding alternative uses for natural gas and if possible linking natural gas prices to liquid hydrocarbon (crude oil) prices which are expected to trend higher due to global supply constaints.

Petropolis and the Brazilian Ethanol Subsidy

This past week has been a big one for Brazil. It was announced that the country will host the 2016 Olympics in Rio de Janeiro.  Brazil had already being chosen to host the 2014 soccer World Cup. This was also a week of optimism about Brazil's petroleum sector with large expanded claims about deep offshore oil fields being made.

Although the US is the largest producer of ethanol by volume, ethanol accounts for a larger percentage of Brazil's transport fuel use.  Ethanol is the same alcohol in beverages (don't drink from the fuel pump though as there are many often poisonous additives - see footnote below about the bottle in the picture to the right).

In Brazil, most ethanol is made from sugarcane. In the US most ethanol is produced from corn, which is a less efficient energy-wise and a more expensive process. The US does not have the same Brazilian Amazonian conditions to grow such large sugar volumes.

One of the observations I made during my time here was that ethanol prices are extremely low at Brazilian pumps compared to gasoline.  I wondered: how this could be with twenty year high sugar prices (US24 cents per pound) and moderate petroleum crude prices (US$70 per barrel)?

A little background first:  all gasoline at Brazilian retail stations must by law contain at least 25% ethanol, with the other 75% being petroleum-based gasoline.  This blend is known as E25.  Most Brazilian retail stations have two pumps: one for E25 snf one for ethanol. All gasoline in the US must contain at least 10% ethanol (E10) and it tends to be only in the US midwest corn belt that second pumps offering high (E85) ethanol blends exist.

The US has a 54 US cents per gallon tariff on ethanol imports.  The US tariff is to try to prevent non-US ethanol producers from taking advantage of the hefty 51 US cents per gallon subsidy which ethanol producers in the US receive in order to kick start and scale up US ethanol production.

The US ethanol tariff effectively eliminates the ability of Brazil to export ethanol to the US. Brazil has no import tariff on ethanol.

Brazil has no ethanol subsidy now (it did until the 1990s) and Brazil has called many times for the US to remove its 54 cents per gallon import tariff.

However, in reality Brazil does subsidize ethanol by heavily taxing gasoline.  E25 Gasoline in Brazil is roughly US$5.15 per gallon at the retail pump at the moment (BRL 2.40 per liter).  Ethanol in brazil is currently US$2.95 per gallon (BRL 1.39 per liter).  This equates ethanol to 58% of the cost of E25 gasoline.  Ethanol should be around  of 70% the cost of E25 gasoline based on the mileage it permits.

The high Brazilian tax on E25 gasoline is effectively a clever ethanol subsidy.

You may wonder why everyone in Brazil doesn't switch away from petroleum gasoline to ethanol?  They are, with around 94% of new vehicles sold being flex fuel vehicles capable of burning high ethanol blends.  It tends to be imported luxury vehicles and older non-luxury vehicles which still use E25 gasoline.

(note on the picture above: the bottle contains a mineral water from the Brazilian city of Petropolis, which is named after Pedro, the second and last Brazilian Emperor, rather than petroleum.  I can vouch from my one bottle that the water is tasty and does not contain any hydrocarbons.)

Brazilian Exceptionalism

Brazil is exceptional with its beautiful beaches, vast lush land mass and optimism (sounds like the US). I am currently in the center of the scaled biofuels world and it literally smells sweet - at least for Brazil. That sweet smell is alcohol in the air. The alcohol (ethanol) is being derived from sugar cane which rich rainforest cleared land and climate permits. Ethanol produced from sugar cane is used as a fuel for vehicles here on a scale no other country has ever been capable. No other country can replicate Brazil's unique cleared rainforest climate and soils.

Brazil has also recently discovered a lot of relatively high cost conventional hydrocarbons a ways offshore - although this oil is at least five to ten years away from production.

Brazil is an exception in so many way that one wonders if it should be used as an example. I will be posting some observations over the next few days. The first is how well the economy appears to be doing here. Factories are producing, office workers are optimistic, restaurants and stores are busy, the woes of debt laden developed nations and consumers are far from consideration. Demand is good for everything Brazilian.

Increasing Diversity of Transportation Fuels

As you will know from Oil 101, natural gas has been finding an increased use as an alternative to oil as a transportation fuel in a particular niche: natural gas is particularly suited to urban bus and trucking fleets as vehicles can be refuelled at the same spot each day and the distances vehicles can travel on a single refuelling is slightly more limited than with diesel.

Until relatively recently compressed natural gas (CNG) had been used mostly for buses and other urban people carriers.  Now that natural gas fundamentals have changed such that natural gas prices are extremely low relative to oil, it makes not just environmental sense, but has also become economically sound for private businesses to convert.

An interesting and well researched story today by Brian Baskin at Dow Jones describes how most beer in New York City is being, or will shortly be, delivered with natural gas powered trucks rather than diesel.

Scale of Replacing Fossil Fuels in Perspective

The physicist David MacKay has written an interesting piece on renewable energy completely replacing fossil fuels. The scale of the challenge is immense - but not insurmountable:

"Today, the average European consumes 120 kilowatt-hours per day. That’s more than double the world average, but lifestyle changes and determined switches to more efficient technologies for transport and heating might enable a modern European quality of life to be enjoyed for an energy cost close to the current world average, perhaps 60 kilowatt-hours per day a person.

What sort of building project is required to deliver that much energy?

For illustration, imagine getting one-third of that energy from wind, one-third from desert solar power and one-third from nuclear power.

If a country with the size and population of Britain — 61 million people — adopted that mix, the land area occupied by wind farms would be nearly 10 percent of the country, or roughly the size of Wales. The area occupied by desert solar power stations — in the case of Britain, they would have to be connected by long-distance power lines — would be five times the size of London. The 50 nuclear power stations required would occupy a more modest 50 square kilometers.

The effort required for a plan like that is very large, but imaginable. Countries that claim to be serious about creating an alternative energy future need to choose a plan, stop arguing and get building." (David MacKay/NYTimes)

This shift toward renewables on such a large scale will only take place if it there is an economic advantage in doing so. This will require a change in the time horizon energy investors seek. For example, most oil and gas investors look to have their initial investment repaid in under 12 years (see the PE ratios of top oil and gas producers).

The repayment time horizon for wind, solar, geothermal, nuclear and other sources of power tends to be much longer than that of fossil fuels.

There are many financial solutions to this timing disadvantage. One solution being used is for the government to step in on behalf of taxpayers and quicken the pace which investors get their money back. Such government spending is unsustainable.

Wind and other renewables have to compete without subsidies if they are to be scaled to the size David MacKay mentions. A shift to renewables on a MacKay scale may have to wait until fossil fuels production declines. Only then will high energy prices provide a sufficiently quick pace for renewable investors.

Fusion: National Ignition Facility

The US$3.5billion US National Ignition Facility (NIF) in California was dedicated last Friday (May 29, 2009). NIF researchers will use the world's strongest lasers to study nuclear fusion.

“If fusion energy works,” he said, “you’ll have, for all intents and purposes, a limitless supply of carbon-free energy that’s not geopolitically sensitive. What more would you want? It’s a game changer.” (NYTimes/Ed Moses)

US DOE Ends its Hydrogen Vehicle Research

(above: Governor Schwarzenegger and his hydrogen-powered Hummer)

The US DOE is halting research on hydrogen fuel cells for cars. Honda, GM and Toyota have announced that despite the government decision they will continue development of hydrogen vehicles. Honda announced it may shift its efforts more toward batteries and plug in hybrids. (Hydrogen as a transport fuel is discussed in Oil 101).

Twist in the US Ethanol Saga

Widespread use of ethanol (an alcohol produced mostly from corn in the US) in gasoline is relatively new to the US. Legislation in the US (EPACT-2005 and EISA-2007) mandates minimum gallon amounts of ethanol to be added to US gasoline. The amount of gallons mandated increases each year.

Most gasoline in the US now contains some ethanol. If you live in the US and look closely at a gasoline pump you will likely see a little notice saying "contains up to 10% ethanol". 10% ethanol and 90% petroleum gasoline is the blend level at which most modern gasoline powered vehicles require no modification (check your vehicle owner's manual).

The minimum mandated gallons of ethanol to be added to gasoline was not a blending percentage issue until US motorists began to buy less gasoline in the recession of 2008 (annual declines in oil consumption are quite rare - the last major declines occurred in the early 1980s). Now gasoline blenders have minimum gallons of ethanol to add to gasoline, but because of the recession these minima may require blending up to 15% ethanol into gasoline.

You may not care about ethanol blend percentages, but you should as the guys who made your car and gas stations are worried.

Automobile manufacturers are expressing concern that their vehicles may not be able to cope with greater than 10% ethanol in gasoline. Retail station owners are also objecting to the higher blend percentages which could damage storage and pump systems.

The US EPA is investigating how to handle the issue and a ruling is expected later this year. The law is clear and so the EPA has to somehow finesse the ethanol into gasoline or hope for a swift recovery and growth in US gasoline demand.

(Note that ethanol is not widely used as a gasoline additive outside the US and Brazil. Oil 101 describes ethanol in detail)

Transport Observations in Asia

Singapore: Yesterday in Singapore I had an interesting chat with a taxi driver. His taxi runs primarily on CNG (compressed natural gas) but it is bi-fuel in that it can run on gasoline also. The driver said that his main beef with CNG is that the city currently only has 3 public refueling stations. The CNG stations are all located in the west of the city and service hundreds of CNG taxis. Refueling with CNG in Singapore can currently take up to 30 minutes if you are unfortunate enough to run into one of the occasional 25 minute waits in line at a station. A fourth refueling station is being built to meet growing demand.

The vast majority of Singaporean taxis run on regular gasoline and not CNG. CNG was introduced to a portion of the Singaporean cab fleet within the past five years. The driver mentioned that the slightly slower acceleration of a CNG vehicle compared to a gasoline vehicle didn't bother him much. Cruising on highways he observes no discernible performance difference. He said that during the oil price increase in 2008, the cost of CNG was lower than that of gasoline, but that now that oil is $50 per barrel he doesn't think there is much of fuel cost difference.

Oil 101 outlines why CNG is suitable for city taxi and mass transit fleets but is not practical to use as a fuel outside of urban areas. The Singaporean experience shows that CNG service station roll outs can be a challenge even for ultra-well managed urban areas.

Vietnam: I am in the scooter capital of the world today: Ho Chi Minh City (Saigon), Vietnam. Cars are second class vehicles here and I don't see many push bicycles (which is a big change from 10 years ago). I ride a scooter and motorcycle in New York and am familiar with the benefits and hurdles such vehicles face in a city. Scooter owners in Vietnam drive aggressively. You can tell they are used to ruling the road over cars. There is a lot of scooter-pooling. By my estimation over half of the scooters here carry two passengers. It is the rainy season in Vietnam but that doesn't deter scootering. Drivers and passengers sport a vast assortment of ponchos. Beer delivery even takes place, somewhat precariously, on scooters (see the video below I took earlier today).

Vietnam is a still a net oil exporter with very low but rapidly growing per capita oil consumption (approx. 1.5 barrels per person per year compared with around 24 in the US). There is no sense of anyone in Vietnam cutting back on oil consumption as a result of high oil prices and from the level of economic activity here (5%+ yr/yr growth is generally expected in 2009) one doesn't feel we are in the midst of a global recession.

(above: video I took in Ho Chi Minh City, Vietnam this morning)

Electric Vehicles: Solution?

(Oil 101 Pag 7, Fig 1-3, data source: EIA and IEA)

Electric cars have been touted as the next big thing for over 100 years. Current proponents say they are green as they will run on solar and wind energy. They also say that the metals required for batteries are available in sufficient quantities.

Sceptics point out that electric cars simply offer a feel-good factor by shifting the consumption of fossil fuels out of sight (most electricity comes from coal - see chart above) and that solar and wind are not scalable to the level required to offset a meaningful amount of oil. Currently only 2% of electrical power globally is produced from solar, wind and other such fuels.

Still others ask why are we wasting resources producing electric vehicles when a fuel used to generate electrical power, such as natural gas, should itself be used directly in automotive engines. Natural gas is currently successfully used as a fuel by many city bus and taxi fleets around the world.

Alternatively, we could use hydrogen as a store of energy (once the significant kinks have been worked out) and generate the electricity with nuclear power.

We are not short of choices. The real question is if you sum the outcomes of all the choices and their probability of success, do they get us where we want to go? Maybe the easier solution is changing our transportation need itself rather than its fuel?

Gasoline Taxes - The Future of Transport

(The future for many? A photo I took in 2005 near Jaipur, India)

A Simple Alternative to Gasoline Taxes
The reason I am proposing a Vehicle Efficiency Market is that gasoline taxes are not politically viable in the US. Here is a good summary from the New York Times today of the recent failed attempts by several individual US states to raise gasoline taxes.

The Future of Transportation
At the EIA conference in Washington D.C. earlier this week I thought that one of more thought provoking and entertaining presentations was that given by Lee Schipper (Precourt Institute, Stanford University). Here is a site he posts to.

The reason I thought Schipper's comments were so interesting is that he paints a fairly credible picture of the future of transportation by pulling together images from his travels. In a future where we must do more with less, Schipper envisions a world in which transportation involves many people (even in the developed world) riding motorcycles (as in India/China) rather than cars, bus rapid transit (such as the Metrobus in Mexico City and Bogotá's TransMilenio) and more sidewalks (even along highways) ensuring walkable roads.

At the conference, Schipper also made an observation that one of the primary infrastructure gaps discouraging push bicycle transportation is not a lack of cycling lanes, but that there are few safe places to store cycles at office buildings or rail stations.