NYTimes weekend round-up

I don't often read the full NYTimes, but I happened to this Sunday, and since I haven't posted in over a month, and it's almost the end of June, and my blogging progress seems eerily paused at 666 posts and 7,777 hits, I figured I'd throw out a few links with brief commentary:

• Insiders Sound Alarm Amid Natural Gas Rush: an interesting article seriously examining the claim that shale gas isn't profitable and is a big bubble. There's certainly some truth to that idea that many shale gas investments aren't making very good returns at $4.30/mmbtu gas; that said, the article would have really benefitted from some actual numbers (even ranges) comparing production costs to current and potential future gas prices. Without those, it's a qualitative discussion of a problem with a largely knowable quantitative answer.
  
  The one thing I did find intriguing (and again, would love to see real numbers on) is the steep decline in productivity of shale gas wells over the first few years. I would assume that since the technology is not new, this performance has been built into business cases for individual wells, but you never know...
  
  There's also a fundamental difference between a gas "bubble" (if there is one) and the typical bubble (e.g. internet) in media parlance, which is that North American gas prices have already crashed. This article would be analogous to calling the internet a bubble in 2003, not 1999, and that limits the usefulness of the analogy.


• Chevy Volt and Future of Electric Cars: A feel-good article from Joe Nocera after he test-drives a Chevy Volt; made me want to try one too. The “it’s like playing a video game that is constantly giving you back your score” comment particularly resonated with me. The lack of that type of feedback is a common motif across consumer energy usage (think about the current opacity of household electric power) and a thematic area for substantial change and impact.


• Power Drain From Cable Boxes: Striking; I had no idea that "some typical home entertainment configurations eating more power than a new refrigerator and even some central air-conditioning systems." Once again, greater feedback in home energy consumption could help move the needle on consumer behavior here.


• Ethanol Production Wastes Corn: Steve Rattner is right, but has nothing new to say

6/30 addendum: A colleague told me that Chevy loses $18,000 per Volt it sells. So we are still a ways away from the economic tipping point.

Ethanol fact(?) of the day

I hadn't heard this before, but a colleague told me today that 2/3 of the corn that goes into ethanol comes out in a form that can be used as animal feed (probably DDGS). If that's true, if we use 30% of our corn crop for ethanol it's more like 10% out of the food system, etc.

Decoupling of oil price and renewables

Geoff Styles has a post titled "Will $100 oil help renewables?", in which he argues the counterintuitive answer that, "no, not that much." Worth reading in full, but since I like to practice synthesis:

Today, gas predominantly sets the marginal price of power generation, and gas prices have decoupled from oil due to abundant shale gas supply. Transport is minimally electrified, so renewable power cannot yet substitute oil in that sphere. And prices for commodity input often rise along with oil, increasing renewable costs (a.k.a. the "receding horizon").

The first, I totally agree with. The second is broadly speaking true, although paths like CNG, gas-to-liquids and coal-to-liquids become economically viable with high oil prices and could re-strengthen the link between transport and electric power (as could increasing EV penetration over the longer term). The third is directionally true, but not absolute (and not entirely causal). Many second-gen biofuels use waste inputs which are not otherwise traded, so higher oil prices are an unmitigated boon for them. The prices of silicon and corn are often correlated with crude, but probably more because of overall economic growth than because crude drives their price. It will be interesting to see if corn starts to price off of its value as ethanol, as it did back in 2008. Not good for food security, if it does.

Watch the crush spread

Trying to chase down cause and effect in energy and resource markets can be frustrating - it is hard to follow a linear path to a new, coherent equilibrium. Take, for example, Geoff Styles' recent line of thought on the impact of Egyptian unrest on renewable energy.

... since the protests started on January 25, and without any actual disruption in oil deliveries, the price of UK Brent crude... has climbed by around $5 per barrel and now trades solidly above $100.

... [Ethanol and biodiesel] stand to gain if oil prices are driven up by factors that don't also push up the prices of the commodities from which they're made [emphasis mine].

That last bit is critical, and can't be taken for granted. In late 2008 ethanol was clearly the marginal use of corn and corn became priced off of its value in use as ethanol, squeezing margins despite high oil prices. If biofuels come back in a big way, this dynamic is likely to kick in (leading, incidentally, to even higher food prices, not good for most people).

Ethanol subsidies live another year

NOOOOO!!! Despite promising earlier signs, the ethanol tax credit renewal managed to sneak into the tax bill, so it's been extended into 2011 at least. Very disappointing, even though Geoff Styles thinks the subsidy won't last past next year.

Ethanol quote of the day

Historically our government has helped a product compete in one of three ways: subsidize it, protect it from competition, or require its use. We understand that ethanol may be the only product receiving all three forms of support from the U.S. government at this time.

That's 17 senators from both parties, via the WSJ and Environmental Economics.

Even reduced second-gen ethanol targets too high

Speaking of ethanol, despite all of the whinging about the reduction in second-generation ethanol target from 250 million gallons to only 6 million, producers will by their own admission struggle to supply half of that.

As cellulosic refineries across the country are stuck in start-up phase, the U.S. presently has the capacity to refine only "a few million gallons" of that type of ethanol annually, said Matt Hartwig, spokesman for the Renewable Fuel Association industry group.

Not surprising - the "valley of death" between demonstration and commercial scale has not been successfully bridged by anyone to date. The industry complains a lot about lack of sufficient capital, but it seems like more of a chicken and egg problem.

Bipartisan support to end ethanol subsidies?

In today's political climate in the U.S., it's rare to find bipartisan support for anything, let alone an eminently sensible idea like ending subsidies for ethanol. (Not to be confused with cutting the cellulosic ethanol RFS requirement for 2011 by 97%, which is unfortunate but necessary given that we haven't actually figured out yet how to produce cellulosic ethanol economically at scale.) It will be interesting to see how the 42 ethanol state senators push back against this one, but it does seem that the shifting balance toward fiscal conservatism makes it both more likely that subsidies could expire and more difficult for them to be re-established once the do, as NRDC's Nathanael Greene points out in the NY Times article.

I'm not close enough to corn futures markets to know to what extent the expectation of lapsing subsidies is baked in, but I'll be very curious to see how world grain prices react if subsidies are allowed to expire. The discontinuity may give us a crude sort of counterfactual to help answer the persistent question of how much biofuels drive up food prices.

Via Michael Roberts, who's also cheering.

Military goes renewable

From the NY Times, this might work:

Last week, a Marine company from California arrived in the rugged outback of Helmand Province bearing novel equipment: portable solar panels that fold up into boxes; energy-conserving lights; solar tent shields that provide shade and electricity; solar chargers for computers and communications equipment.

The 150 Marines of Company I, Third Battalion, Fifth Marines, will be the first to take renewable technology into a battle zone, where the new equipment will replace diesel and kerosene-based fuels that would ordinarily generate power to run their encampment.

But this is preposterous:

The Air Force will have its entire fleet certified to fly on biofuels by 2011 and has already flown test flights using a 50-50 mix of plant-based biofuel and jet fuel; the Navy took its first delivery of fuel made from algae this summer. Biofuels can in theory be produced wherever the raw materials, like plants, are available, and could ultimately be made near battlefields. [emphasis mine]

So instead of sending truckloads of diesel fuel to a war zone, the military will in the future construct a mini-scale bio-refinery, then plant, grow and harvest a climatically appropriate fuelcrop to fuel its trucks and helicopters?

I wish Company I the best of luck.

More food price volatility drivers

Upon further reflection on Chris Blattman's rare dud, here are a few more (slightly overlapping) potential drivers of food price volatility in the future. Please note that I'm not saying these will definitely cause higher food price volatility in the future, only that it is very easy to believe that they might.

• Biofuels and bioenergy: An additional source of demand growth - potentially very large - that could keep demand at the very edge of supply capacity.


• Stronger links to energy prices: Energy prices have always been linked to agricultural input costs since the most widely used fertilizer (nitrogen) is generally made from natural gas. More recently ethanol has become at times the marginal buyer of corn (Bruce Babcock at CARD did some nice research demonstrating that ethanol was the marginal buyer from late 2007 to mid 2008; I couldn't find a link to the paper, but all you need to do is look at the high correlation between actual corn prices and break-even prices for ethanol production). If this continues - and it may well, particularly when oil prices are high - then volatility in oil prices will be transmitted to food prices more than in the past.


• Speculation: That old bugbear; I personally am more skeptical about this one, as longtime readers will know, but the former head of IFPRI isn't, and objectively I'm no more likely to be right than he is.
  

Update: Michael Roberts responds and reprimands:

Here Chris seems to talking as much about climate science as economics or politics. He has also stepped onto a pet peeve of mine, common among some economists, which is ascribing personal views as truisms stemming from the branch of social sciences in which one specializes. It's not quite as bad as Steven Levitt pontificating about global cooling, but it reeks of that kind of professional arrogance. If you're an academic and are going to start asserting scientific truisms you need to be more specific about the underlying science.

He also points out a few factors not yet on my list, which I'll paraphrase here:

• Globalization is not irreversible: Think about how surprisingly globalized the world became during 1870-1914, only to regress drastically following World War I and the Great Depression.


• Shifts in comparative advantage due to climate change, which Michael is "convinced" of:
  

  That is, [climate change is] going to shift where things are grown. A lot. It's also likely to change global quantities, but that's hard thing to put a finger on (i.e., model convincingly). With that much change going on, we should worry at least a little bit, and probably a whole lot, about how the kind of turmoil these changes will cause. Loss of comparative advantage is just the kind of thing that brings about bad policy response.

• Uncertainty itself can exacerbate market volatility, and uncertainty about the future is high, not just about long-term commodity prices, but also about the direction of the world economy and shifts in agricultural production due to climate change.

Market won't drive clean energy transition

Geoff Styles blogs a recent Science article explaining why the transition to cleaner fuels will take a long time.

Here's a clear and concise explanation from the top science journal in the country on why the transition to alternative energy won't--and can't--be quick, cheap or easy...

That's a crucial point for anyone who sees this energy transition driven not just by concerns about energy security and greenhouse gas emissions, but by notions of clean energy as the next big wealth-creating global trend, akin to the computer revolution. A kilowatt-hour or BTU does the same work, regardless of its source, so unless it can be produced for significantly less than from conventional sources, greener energy offers no productivity gains of the kind that have fueled the global infotech transformation.

Density and intermittency are both large disadvantages that many renewable energy sources must overcome... and even without these disadvantages, the article explains, the transition to current fossil fuels took half a century.

Pursuing renewable energy is a worthwhile goal (neither Geoff nor the author disagree), as is chasing energy efficiency, which is perhaps our most attractive short-term option to balance energy demand and supply. But I also agree that it's prudent to disregard the optimistic claims of those who believe things along the lines of "replacing oil will be the greatest commercial opportunity of our generation." It won't.

Amusing sentences

Biodiesel and soybean industry leaders are urging the U.S. Senate to pass the American Jobs and Closing Tax Loopholes Act, which retroactively extends the biodiesel tax incentive through Dec. 31, 2010.

From Biofuels Business.

Dead zones vs. oil spills

While ethanol producers have been quick to spin the Deepwater Horizon tragedy toward their own advantage, NRDC's Nathanael Greene has a quick rebuttal:

The nitrogen runoff from corn grown all along the Mississippi causes a huge dead zone in the Gulf every summer. As this map shows, the dead zone at least as large as the oil spill and it takes a huge toll on the marine life and region's economy every summer. With about a third of the corn crop going to make corn ethanol, it should be clear that more corn ethanol is not a real solution.

He's referring to this image from the NYT, which makes a side-by-side visual comparison easy; in fact, the hypoxic zone looks considerably larger than the oil spill to date.

A hypoxic zone is in some ways not as destructive as an oil spill - it will not cripple fragile marshland ecosystems, for example - but the impact on marine life alone is no doubt harmful for the coastal fishing industry that could be (and once was?).

It is not news that corn ethanol is hardly an environmental angel, but it is worth keeping in the public conscience as the Deepwater Horizon leak continues unabated and the inevitable public backlash builds in strength.

Cosan and Shell hook up

From the department of long overdue business news... Cosan and Shell have decided to merge their fuel retail businesses in Brazil in a deal worth $12 billion, and the market liked it:

Shares of Cosan jumped more than 6 percent in Sao Paulo, while Shell rose nearly 1 percent in London.

Cosan, a leading Brazilian sugar conglomerate, also bought Exxon's fuel retail business in Brazil a few years back, surprising industry watchers who expected an oil and gas player to come out atop the bidding. Brazil's energy story is more nuanced than the simple triumph of biofuels, but nevertheless the ascent of a sugar company to prominent status in the country's fuel retail industry is striking and has no analogy worldwide, as far as I know.

The limits of green energy

I heartily agree with Geoff Styles:

In the last year or so the rationale for renewable energy has evolved from emphasizing mainly energy security and climate change to focusing on the creation of "green jobs" and the development of an industry that many perceive as the "next big thing": a new global growth wave along the lines of information technology and telecoms. Unfortunately, neither of these newer justifications withstands serious scrutiny.

Read here for why. Here are my posts on green jobs.

Growing the ethanol market

U.S. ethanol is not cost-competitive abroad, where it competes on an even playing field with Brazilian sugarcane ethanol, so to grow (and reach the RFS mandates) it needs to grow the domestic market:

"Without increasing the blend of ethanol to E15, it will be impossible to achieve the targets set in the Renewable Fuel Standard and there will be no market for cellulosic ethanol," said Jeff Broin, POET chief executive officer. "POET is spending tens of millions of dollars to commercialize the production of ethanol from harvest leftovers but needs E15 to be certain there will be a market for the product."

The clever (but erroneous) framing is that not meeting the ethanol RFS would be the end of the world.

Update: I learn a few things from a comment exchange with Geoff Styles.

R: I recently read Turning Oil Into Salt (which has a lot to like and a lot to dislike - I wrote a rambling review for anyone interested), which would have you believe that the incremental cost of making a car flex-fuel is minimal (in the low hundreds of dollars range above a normal car). If this is true (and I would be interested to hear informed views on whether it is), it would be worth at least looking at the cost/benefit of mandating or incentivizing flex-fuel vehicles, particularly if the alternative to satisfy the ethanol lobby is an E15 ruling that doesn't make economic and/or environmental sense.

Geoff: The Big 3 have already committed to making half their new cars flex-fuel, and with GM and Chrysler beholden to the govt. a 100% target won't be far behind. But even if 100% of all new cars were FFVs starting this year, there would still be many millions of cars vulnerable to damage from higher ethanol blends for many years to come. The problem isn't the FFVs, of which there are already enough to boost E85 sales dramatically. It's making the entire E85 proposition, with its high costs for service station owners and consumers alike more attractive. Does 75% of the energy of gasoline for 86% of its cost sound like a good deal to you?

R: Agree that E15 could be bad for legacy vehicles (I was thinking of FFVs as an alternative demand sink to raising the blending limit to 15%). I think raising the limit would be a bad idea.

And agree that expanding E85 infrastructure will take investment, but the economics of ethanol itself could become attractive enough to justify that investment (and the energy-adjusted price ratio with gasoline has and will continue to fluctuate based on ag supply-demand, crude prices and refining economics).

I don't really like corn ethanol, but if it's a choice between E15 or more FFVs to satisfy the ethanol lobby, the latter sounds more attractive to me.

Geoff: R,
When you put it that way, I agree, though the old saw about horses and water comes to mind. There are sufficient FFVs on the road already to absorb 10x the E85 currently sold. Understanding why they're not buying more of it could be key to figuring out how to make it work on a mass-market level. Is it a critical mass issue on either infrastructure or vehicles, or do consumers just not like the value proposition and attributes?

R: I hadn't realized there were already so many FFVs in the U.S. - sounds like that can't be a constraint now. Do you have any idea how much ethanol E85-equipped stations sell? That might shed some light on whether the issue is midstream infrastructure vs. poor value proposition.

Update 2: ... in which my poor reading skills and attention to detail are exposed:

Geoff: R,
The figure is cited and linked in the posting.

R: So it is :) Good stuff.

Turning Oil Into Salt (5): Alcohol as fuel

Given the low incremental cost of making vehicles flex-fuel, the key barrier to the liquid fuels half of the Open Fuel Standard aspiration is sourcing the non-oil-based fuel itself. The authors focus on two in particular, methanol and ethanol.

Their section on methanol is OK, but I still have questions around the feedstock. The throwaway line on biomass that “The raw material is plentiful, and most of the biomass products are currently discarded” is facile and unhelpful, as anyone familiar with the economics of biomass-to-power will know (the upshot is, not many plants are being built in the U.S. because the feedstock isn’t free and thus the economics aren’t great). Coal-to-liquids and gas-to-liquids technology is indeed fairly mature, but the current cost is not great and the GHG emissions (particularly for CTL) are terrible. And while the U.S. has abundant coal, their argument on gas sourcing is inconsistent, as I mentioned before.

Their section on ethanol is way off, and the worst part of the entire book. They correctly rail against ethanol tariffs, but become apologists for ethanol subsidies, calculating the absurd claim that $6 billion in ethanol subsidies reduced the world price of oil in 2008 by enough to save the U.S. alone $60 billion on fuel imports (“ten times the subsidy”). They misleadingly quote the energy requirements of gasoline vs ethanol:

The amount of fossil fuel in mega joules needed to make one mega joule of gasoline is 1.19 versus 0.77 for corn ethanol and 0.10 for cellulosic ethanol.

(That 1.19 includes the mega joule of energy from combusting the gasoline, which is why the wording is misleading.)

Even more flawed, though, is their thinking on the “food vs. fuels myth”:

How could that drastic increase in the price of food commodities from fish to rice possibly be attributed to ethanol? Nobody was growing corn in rice paddies or making biofuels out of fish.

Yikes. Agricultural commodities are largely fungible, like oil, from both the supply and demand sides. Increased corn cultivation reduces the land available to grow other cereals like wheat, and higher prices affect the prices of substitutes like rice as consumers shift their consumption patterns in response. Farmed fish are often fed corn, as are industrially-raised cattle, pigs and poultry, which are meat substitutes for fish. Ethanol is certainly not responsible for all of the rise in food prices, but the most credible estimates link it to ~30% of the rise in grain prices (more for corn and less for wheat and rice.

This lack of understanding infects their analysis of CO2 emissions from indirect land use change and deforestation. Yes, Brazilian sugarcane is not grown near the Amazon, but it displaces commercial soy and corn farming, which in turn displaces lower-value farming and ranching activities and pushes them further into the Amazon. Throughout the world, increasing food production in response to higher prices often means extension onto marginal land (which in turn is often forest). Yes, this effect is hard to measure precisely, but that does not mean it doesn’t exist.

Finally, like many others, they take a rich-world-centric view of food price increases (“farm commodity prices have almost no effect on the retail consumers”). Yes in America, but in poorer countries where food purchases account for >50% of income and raw commodities make up >65% of end food prices, that is not the case – food price rises have a huge negative impact on nourishment, nutrition and overall welfare, which is not something to be casually ignored.

Turning Oil Into Salt (4): Selective thinking on fungibility

The authors recognize that:

Oil is a globally traded, fungible commodity, so stifling U.S. purchases from the Persian Gulf and buying from other regions like Africa would just mean that someone else would buy more from the Persian Gulf with no impact on price and availability, certainly not on oil’s status as a strategic commodity.

This is one of their multiple (and good) arguments against the “Cheney plan” of diversifying America’s oil imports to non-OPEC countries.

Unfortunately, they don’t extend this level of understanding to their analysis of agriculture and biofuels:

How could that drastic increase in the price of food commodities from fish to rice possibly be attributed to ethanol? Nobody was growing corn in rice paddies or making biofuels out of fish.

Yikes. Agricultural commodities are largely fungible from both the supply and demand sides. Increased corn cultivation reduces the land available to grow other cereals like wheat, and higher prices affect the prices of substitutes like rice as consumers shift their consumption patterns in response. Farmed fish are often fed corn, as are industrially-raised cattle, pigs and poultry, which are meat substitutes for fish. Ethanol is certainly not responsible for all of the rise in food prices, but the most credible estimates link it to ~30% of the rise in grain prices (more for corn and less for wheat and rice).

Not only are the crops themselves fungible commodities, some of the resources required for production are fungible and, like oil, fundamentally scarce (think arable land and water). Like diversifying away from Middle Eastern oil, diversifying into biofuels is no free lunch.

Turning Oil Into Salt (2): Fuel choice via the Open Fuel Standard

The heart Turning Oil Into Salt’s thesis is the idea fuel choice via the Open Fuel Standard (OFS). This basically means turning car engines into flexible platforms that can use a wide variety of energy sources, incentivizing competition and reducing the strategic predominance of oil. One attraction is that it avoids the picking winners syndrome/game that seldom ends well.

One major pillar is flex-fuel vehicles, a la Brazil. I didn’t realize it cost only $100/car, for corrosion-resistant fuel line and a different fuel sensor, to make a car flex-fuel, and if this is true I think the argument for flex-fuel vehicles is strong (although of course consumers will be the ultimate arbiters). The authors’ other push is for flex-fuel vehicles to be certified for a wide range of alcohols (e.g. methanol, their favorite case study), which certainly makes sense if it is similarly inexpensive (is it?).

The other pillar is electric vehicles – unsurprisingly – but more specifically plug-in hybrid electric vehicles (PHEVs), to overcome the issue of limited range which plagues pure EVs. This is also not a new idea, but for me it gains new life in the context of a broader push for an Open Fuel Standard.

Flex-fuel PHEVs could get 500 mpgg (miles per gallons of gasoline, as the authors say) – note that this is not a measure of energy efficiency, but rather of lessening strategic dependence on oil. That said, it is also easy to see this resulting in higher systemic efficiency (using braking energy and charging on off-peak hours) and lower GHG emissions (if electricity generation is clean and if biofuels are environmentally friendly).

The other tiny obstacle, of course, is making flex-fuel PHEVs economical. More on this here.

300 well-chosen words on food

At the NYT Room for Debate on "Can biotech cure world hunger?", this is Michael Roberts:

• I don't think biotech crops are evil and could be a big help, especially in developing nations. But I think we'd be naive to think these will solve all the world's food problems going forward. Maybe they will but they probably won't.


• Good development policy, whatever that may be, is surely good food policy. In many ways food is too cheap relative to income in rich countries and too expensive relative to income in poor countries. Both problems are solved if incomes are more equal. Figuring out good development policy is, err..., much harder...


• I think a meat tax makes a lot of sense. Taxing meat would help to keep staple grains cheap and plentiful, which would help the poorest food-importing countries and probably improve health outcomes in rich countries. Some economists would probably cry foul. They might claim lump-sum transfers of cash would be a better way to deal with the underlying distributional issue. The problem is effective transfers to especially poor countries are very difficult. (Consider why those countries are poor in the first place.) Also, given our semi-public health care systems in rich countries, there could be negative externalities from meat consumption.


• Stop ethanol subsidies. These look really silly.


• Then there is that other externality we might want to tax or cap (CO2).