You talk the talk. Do you walk the walk?
— from Stanley Kubrick's Full Metal Jacket
Just as there are imaginary1 "glimmers of hope" in our economy, recent announcements assure us that our dependency on petroleum in transportation is coming to a happy conclusion. I review some of that Good News today. I find that if wishing could make it so, our oil problems are solved. When our society systematically confuses its desire to do the right thing with actually doing the right thing, you know that the Glory Days of a once mighty Empire are gone forever.
In both economic and energy policy, the Obama administration clings to cherished beliefs that have little basis in reality. I hope to make this obvious in my discussion of energy today, but we also see it in their policies toward the banks. The mythology says that if only we inject enough public money into insolvent financial institutions, credit will start flowing again, "toxic" mortgage-backed credit derivative "investments" will recover their value, and we can all go back to where we were in early 2006 before the Housing Bubble collapsed. Even Bank of America's CEO Ken Lewis doesn't believe that.
Let me make a couple comments about our given environment. Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve. Whether that turn is later this year or in the first half of 2010, I'm not going to hazard a guess ... For the rest of the year we look for charge-offs to continue to trend upward. I think it will be at a slower pace than we've experienced.
Focusing on the deteriorating credit situation is only part of the story. The bigger, unresolved problems include America's enormous private debt and the threat of deflation accompanied by rising unemployment. If Paulson or Geithner had simply sent every American family a big check (thus forgiving some of the debt) instead of trying to salvage Citigroup and other banks in their current flawed form, our economy would probably be in better shape than it is now. I am quite sure that most American families would be better off.
Things are equally askew in an oil policy characterized mainly by wishful thinking and lack of funding.
Trains? — Or Bailing Out Goldman Sachs?
Criticizing the Obama administration's trains policy is like shooting fish in a barrel. Almost a week after Glimmers of Hope Day, President Obama talked about his plan for high-speed rail in America.
Our highways are clogged with traffic, costing us $80 billion a year in lost productivity and wasted fuel. Our airports are choked with increased loads ... we're at the mercy of fluctuating gas prices all too often, we pump too many greenhouse gases into the air. What we need then is a smart transportation system equal to the needs of the 21st century, a system that reduces travel times and increases mobility. A system that reduces congestion and boosts productivity. A system that reduces destructive emissions and creates jobs. What we're talking about is a vision for high-speed rail in America.
Obama is right—he is indeed talking about "a vision for high-speed rail in America." Unfortunately for us, a vision of a high-speed rail line is not the same as an actual high-speed rail line. What is the reality behind the rhetoric?
There is not much "new" news here. On top of the $8 billion already committed to upgrades to existing rail lines in the stimulus package, the President will ask for an additional $5 billion over the next five years to identify corridors where high-speed rail lines might be built (Figure 1).
Figure 1 — Possible high-speed rail corridors, named in black text (e.g. the KEYSTONE line in Pennsylvania would link Pittsburgh, my home town, with Philadelphia through Harrisburg, the state capital).
Let's get some the relevant details from IBM hops aboard high-speed rail, which was written a few weeks before High-Speed Rail Vision Day (CNET's Green Tech Blog, March 24, 2009).
IBM on Wednesday plans to announce details of three rail projects outside the U.S. that bring that vision of efficient and convenient rail travel closer to reality. Overall, the projects in China, Taiwan, and the Netherlands show how rail travel can reduce urban congestion and cut down on pollution from transportation, said IBM...
The Federal Railroad Administration is scheduled to publish a strategic plan for spending the $8 billion in the stimulus plan, which is expected to include a vision for high-speed rail corridors. Already, 1.3 billion has been set aside for Amtrak for intercity travel and $450 million to upgrade the safety of existing rail infrastructure.
However, transportation experts point out there are at least 11 proposed high-speed rail corridors in the U.S., each of which would cost billions of dollars to install. A project to build a fast train between northern and southern California alone would cost $45 billion.
If the President had said "we're going to emulate Europe and China, we're going to commit an initial $100 billion with more on the way after that to get these rail lines built," I would have been among the first to stand up and applaud. $100 billion amounts to 58% of the charitable donations the Central Bank and Treasury have made to insurance giant AIG's counter-parties so far.
IBM estimates that $300 billion will be spent worldwide over the next five years to build high-speed rail lines. The United States will spend 4.3% of this total to upgrade existing lines and think really hard about building new ones.
I give you the Goldman Sachs/High-Speed Rail scorecard.
| Goldman Sachs | High-Speed Rail | |
|---|---|---|
| Committed or Spent | 12.9 | 8 |
| Still To Pay | 7.1* | -- |
| Potential Money | ? |
5* |
| Total | 20* | 13* |
The scorecard reads Goldman Sachs 20, High-Speed Rail 13 (with uncertainty indicated by *)
Otherwise, the scorecard reads Goldman Sachs 12.9, High-Speed Rail 8.
Notes: All figures in billions of dollars. $12.9 was laundered through A.I.G. to Goldman Sachs to pay off credit default swaps at par. An additional $7.1 is probably still owed (and here). Goldman "has never confirmed that figure, but ... has said that its "net exposure to AIG - after collateral it received and hedging it did - was minimal." Perhaps I misunderstand what the word "minimal" means.
I used to think $20 billion or $13 billion was a lot of money, but I don't anymore. In No We Can't? I asked an important question—
What is the biggest impediment in 2009 to mitigating the harmful effects of energy problems in the 21st century? The answer may surprise you—it is insolvent zombie banks and our entrenched FIRE economy (Finance, Insurance, Real Estate).
Now you can easily see what I meant when I wrote that.
In Obama's televised sales pitch, the president referred to clogged highways and airports, lost productivity and greenhouse gases (twice). I suppose we should be grateful for his sole reference to "wasted fuel." There's no sense in his remarks that the United States (in particular) and the world (in general) has an oil depletion problem. Identifying high-speed rail lines we might build rather than actually building them does little to solve that problem, let alone address the other issues Obama cites.
Are we supposed to believe that we need high-speed rail because flying is a nuisance and there's too much traffic on the roads? How does high-speed long distance passenger rail alleviate rush hour traffic in metropolitan areas like Chicago or Los Angeles? It doesn't. The main advantage of long distance high-speed passenger trains is that they substitute for air travel, which lowers our consumption of middle distillates like kerosene-type jet fuels.
Before moving on I want to show you what you're not likely to get any time soon (Figure 2).
Figure 2 — A high-speed train that could service the Keystone corridor in my home state Pennsylvania but very likely won't in the next decade (or beyond).
That disposes of trains. That was way too easy. Let's move on to automobiles and gasoline, where the Department of Energy has adopted an Orwellian approach to fuel problems. Unlike the novel 1984 in which the totalitarian state alters the past, our new liberal leadership is rewriting the future.
Automobiles? — If you tap your ruby red shoes together 3 times...
A preacher commonly takes a chapter of the New Testament and bases his sermon on it. The minister explains the lesson we are supposed to draw from the text. One of our secular bibles in energy matters is the Energy Information Administration's 2009 Annual Energy Outlook (EIA AEO). The Wall Street Journal's sermon on the text is Oil Industry Braces for [a] Drop in [the] U.S. Thirst For Gasoline (April 13, 2009). What's the lesson we're supposed to learn?
Since Henry Ford began mass production of the Model T nearly a century ago, car-loving Americans have gulped ever-increasing volumes of gasoline. A growing number of industry players believe that era is over.
Among those who say U.S. consumption of gasoline has peaked are executives at the world's biggest publicly traded oil company, Exxon Mobil Corp., as well as many private analysts and government energy forecasters...
Exxon believes U.S. fuel demand to keep cars, SUVs and pickups moving will shrink 22% between now and 2030. "We are probably at or very near a peak in terms of light-duty gasoline demand," says Scott Nauman, Exxon's head of energy forecasting.
The lesson is that our gasoline consumption problem has been automagically solved! The Journal's report depends on an insincere expert at Exxon Mobil, which has grown tired of low or risky margins in the refining business, but mostly relies on the EIA to make its case. The experts assure us that gasoline consumption in the United States is past peak and just in case you're feeling a bit skeptical about that, here's the chart that proves it (Figure 3).
Figure 3 — "Refined Tastes" (left from the WSJ) is the winner of our newly inaugurated (but perhaps short-lived) Fantasy Graph of the Month award. The graph is based on the EIA's projection of biofuels production and future gasoline consumption (right).
The Energy Independence and Security Act of 2007 (EISA) specifies the Renewable Fuel Standard (RFS), which requires producers to come up with 36 billion gallons per year of biofuels by 2022. Contributions will be made by corn ethanol, cellulosic ethanol, biomass to liquids (gasification), biodiesel and imports according to the EIA's Figure 72. Imported gallons—from Brazil?—actually exceed the contribution from cellulosic ethanol in 2030, which ought to tell you where that technology stands. The contribution from corn is about the same in 2030 as it is now.
As with baseball's Corn Field of Dreams, we can ask if you mandate biofuels, will they come? But we might also ask do we really need these biofuels? This is where things get interesting.
In a new twist, the 2009 AEO turns former both-feet-on-the-ground realities on their head.
Progress toward meeting the RFS is complicated by slowing growth in U.S. petroleum use through 2030. The push for more fuel-efficient automobiles, which slows the increase in motor gasoline consumption in the reference case, also slows progress toward meeting the RFS, because more efficient gasoline engines and growing penetration of hybrids reduce the demand for ethanol in gasoline fuel blends. A 10-percent limit on ethanol in gasoline for most of the current fleet of passenger vehicles delays further market penetration until more E85-compatible vehicles are in use and the market infrastructure for E85 and other biofuels is expanded to accommodate the distribution and sale of growing volumes.
How could I have missed this? We will have trouble meeting the Renewable Fuels Standard because we'll be using so much less petroleum in the future? Previously, we needed biofuels because we would consume so much more petroleum without them that it would be nearly impossible to get that oil at reasonable prices. Previously, we might have had trouble meeting the Renewable Fuels Standard because corn ethanol is a bad idea and cellulosic ethanol is not ready for prime time.
Now the problem has become reduced future demand for ethanol due to "more efficient gasoline engines and growing penetration of hybrids." Do I detect the guiding hand of Obama's Energy Secretary Steven Chu in the EIA's bizarre but rosy assessment of our future liquid fuels consumption?
The EIA is telling a different story under Dr. Chu than the one they told under Bush's Energy Secretary Samuel Bodman. Here's a representative sample from the 2008 AEO. Contrast these selected passages with the one quoted above.
In the AEO2008 reference case, however, only 32.5 billion gallons of RFS credits are generated in 2022, because cellulosic biofuel production is not expected to increase rapidly enough to provide the credits that would be needed to meet the advanced biofuels requirement. If the available quantities of biofuels are inadequate to meet the initial targets, EISA2007 provides for both the application of waivers and modification of applicable credit volumes...
As a result of the EISA2007 RFS, the biofuel component of motor fuels in the transportation sector is projected to grow substantially, as the fossil fuel content of gasoline and diesel declines from 136 billion gallons (96 percent) in 2006 to 125 billion gallons (83 percent) in 2030 (Figure 89). The biofuel content of all gasoline and E85 consumed in the United States, which totaled about 5.6 billion gallons in 2006, increases to 25.8 billion gallons in 2030. In addition, a smaller increase in biofuel content is projected for diesel fuel, from 0.3 billion gallons in 2006 to 3.8 billion gallons in 2030.
[Whether you believe these numbers is beside the point right now.]
There's no inkling in 2008 that meeting biofuels production goals will be complicated by "slowing growth in U.S. petroleum use." The future sure looks different in Obamaland than the one I remember.
In the real world2 nothing has changed on the ground—when did smaller cars and fuel efficiency (35 average mpg by 2020) become our National Religion? Where are the plug-in hybrids? Sales for gas electric (standard) hybrids have tanked in recent months and may remain low for years to come. Despite these weak measures, dearths and unfavorable indicators, our new Energy Secretary remains fanatical when it comes to efficiency as I discussed in Steven Chu's Energy Miscalculations.
Maybe I've been wrong all along—maybe just believing is enough. Maybe we don't have to actually use less oil now or ever. Maybe all we have to do is imagine we're using less oil.
I like Obama and Chu's simple approach. We don't have to build actual high-speed rail lines if we can't afford to because insolvent Wall Street banks need all our money to keep operating. If our gasoline consumption is going to be declining, maybe we can go slow on biofuels. All we have to do in this happy scenario is close our eyes, clap the heels of our ruby red shoes together three times and repeat to ourselves "there's no place like home, there's no place like home, there's no place like home..."
The Wall Street Journal does include two paragraphs giving a skeptical view of peak gasoline demand in the United States. Oil analyst Tom Kloza, a cold, hard realist who has been watching the oil markets for decades, had this to say—
Skeptics of the notion that gasoline demand has peaked point to a population that is likely to keep growing as Americans have children at roughly the same pace and the flow of immigrants increases. "Anyone who looks at population must think there is going to be some big bird flu if they think we've peaked," says Tom Kloza, chief analyst at Oil Price Information Service, a firm in Wall, N.J., that tracks prices and consumption.
Lower gasoline prices are back after a multiyear spike in prices. That could re-ignite consumers' desire for big, fuel-guzzling SUVs and tolerance of long commutes, especially when the economy strengthens. After the 1979 spike in crude-oil prices, U.S. gasoline consumption dropped for four years, but then rose again when fuel prices plummeted in the mid- to late-1980s.
You could be wrong, Mr. Kloza, about our need for a big Bird Flu epidemic. Maybe in Obamaland the population doesn't grow anymore. Anything is possible in a world like Star Trek where Picard simply says "Engage" or "Make it so." Resistance to Dr. Chu's efficiency dream is futile.
That disposes of automobiles, where government spinmeisters are still dreaming the impossible dream. Let's move on to airplanes.
Planes? — Microbes Save The Day (Again)...
I'm sure that Dr. Chu believes that oil from blue-green algae, once it has been properly synthesized in the lab, will be powering our transportation in the beautiful post-carbon world to come. But whereas our Energy Secretary says that 4th generation biofuels are still a research project, some intrepid entrepreneurs are trying to make that dream a reality today. How's it going?
Biofuels expert Robert Rapier called my attention to a real current price attached to producing oil from algae. At almost $33/gallon, it's not a bargain yet for the airline industry.
You can grow algae with carbon dioxide and sunlight, but that doesn't mean it's free...
Algae biofuel startup Solix, for instance, can produce biofuel from algae right now, but it costs about $32.81 a gallon, said Bryan Wilson, a co-founder of the company and a professor at Colorado State University. The production cost is high because of the energy required to circulate gases and other materials inside the photo bioreactors where the algae grow. It also takes energy to dry out the biomass, and Solix uses far less water than other companies (see Cutting the Cost of Making Algae by 90%).
By exploiting waste heat at adjacent utilities [like coal-fired plants] ... the price can probably be brought down to $5.50 a gallon (see Will Waste Heat Be Bigger Than Solar?). By selling the proteins and other byproducts from the algae for pet food, the price can be brought to $3.50 a gallon in the near term.
But that's still the equivalent of $150 a barrel of oil. "We were excited in July [when oil was approaching that level]," he joked. "But we knew it wasn't sustainable."
It's only in phase II of Solix's business plan that it will be able to drop production costs to $3.30 to $1.57 a gallon, or around $60 to $80 a barrel. Solix has set a goal of cutting the cost of making algae by 90 percent.
Phase II? $1.57 to $3.30 a gallon? I suppose it must be possible because it's in the business plan. And we're going to be getting some dog food out of the deal too!
Cleantech reports that Amyris Biotechnologies is "making progress" too.
Emeryville, Calif.-based Amyris Biotechnologies today opened its first of two pilot plants to produce bio-based diesel from sugarcane...
Unlike traditional biodiesel from lipids and fatty acids, Amyris uses synthetic biology to reprogram microbes, or "bugs," to function as living factories for the environmentally-friendly production of high-value chemicals. The end result is a hydrocarbon that Amyris said is designed to closely resemble components in current gasoline, diesel and jet fuel...
A biofuel for jet engines is expected to be in commercial production by 2012 or 2013, Melo said, citing the additional requirements for that market (see Game-changing day for jet biofuels)...
Amyris plans to use the cheapest nonfood feedstock available, which for now means sugarcane, Melo said. The company could also use algae for its biodiesel—much like Solazyme, LiveFuels, GreenFuel Technologies and many others—but Melo said he thinks algae-based biodiesel is still 5 to 10 years from commercial-scale economics
[Amyris' target is 206 million gallons annually in their Brazilian commercial plant.]
And here's a new, exciting item Yeast and bacterium turned into gasoline factory published just this week (New Scientist, April 20, 2009). On average, our oil depletion problem has been solved by engineered microbes about once a week every week over the last 2 years.
Will somebody please wake me up when 1 million gallons of jet fuel from algae or some other biosource can be produced for less than $5/gallon each and every day?
Final Thought
I was talking to the guy on the stool next to me at my local watering hole the other day. I was reading and marking up the Wall Street Journal article cited above as I drank my customary glass(es) of Pinot Grigio. I showed him the Fantasy Graph (Figure 1) and told him that I was skeptical that the future would look like that. And he said to me—I'm paraphrasing here—something like the following:
The only thing I know about the future is that it won't take care of itself. You've got to worry about it. If you don't, if you pretend everything's going to be OK, you're setting yourself up for some massive screw-ups down the road.
[To which I replied: Exactly right!]
I can only hope that our energy "thought leaders" will one day have the common sense of a random barfly in Pittsburgh.
Contact the author at dave.aspo@gmail.com
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Notes
1. I took the title of this column from the great John Hughes movie. The "glimmers of hope" refer to the 2nd derivative of growth (Globe & Mail, April 17, 2009).
Before a shrinking economy rebounds, the pace of decline must slow.
Economists call it the "second derivative," a bit of calculus they are using a lot these days as they search for the bottom of the biggest global recession since the Second World War.
A spate of economic data yesterday suggested that mathematical moment has arrived.
In the United States, for example, a government report yesterday showed that new claims for unemployment benefits decreased by 53,000 to 610,000 last week, the lowest level since January.
2. For those who say the days of the Light Truck/SUV are over, look at this graph.
There was substantial rise in light truck sales in the period circled when 1) oil prices had declined 2) the economy hadn't melted down yet.
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