Welcome to the Twilight Zone

January 27, 2015

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by Robert E. Kozak* (Advanced Biofuels USA) Imagine if you will a country with two natural resource industries. Both produce high demand products. One is the lowest priced producer on the planet and is able to sustain output from their resource base over a number of years. The other is the highest priced producer on the planet and loses about 60-70% of output from most of its resource base in one year.

Now, further imagine you are a decision maker in that country. Which industry would you back for the future of that country?

Before us is that country. It is the United States.

The first natural resource industry? That would be biofuels, which started with ethanol from corn.

And the second? Petroleum, which is now pumping most of its oil and gas from small geologic pockets using a new technology called fracking.

In the United States the President and his Energy Secretaries, as well as members of Congress, pointed to the jobs created by fracking and promised the American public that fracked oil and gas were the future. The public was told these sources would propel the US economy to new heights by making the country independent of international producers.

Did these leaders say anything about the risk of the high production and financing costs of about $55-$60 a barrel?

Were there any words of caution on how the wells lose on average 60-70% of their production in one year?

Were the risky funding methods used so soon after the Crash of 2008 questioned?

Was information on the risks of fracking liquids or methods for their safe disposal provided?

The leaders stayed silent while approving more government subsides.

As for the biofuel industry? What did US decision makers do? In a bi-partisan effort, with much support from the Obama Administration they:

Removed all subsides from corn ethanol in 2011.

Limited the quantities of biofuels that could qualify for payments under the Renewable Fuel Standard (RFS) in 2013 and 2014.

Refused EPA approval of a high octane/improved-engine-cooling 30% ethanol fuel (Tier 3) in 2013. This mixture would have provided an economical, efficient fuel for turbocharged engines needed to meet the 2022 54.5 mpg fuel economy standard.

And, since 2009 continually reduced advanced biofuel R&D funding while maintaining fracking R&D funding levels.

But yet, in spite of this abandonment by US leaders, the biofuel industry persevered.

US corn ethanol production now exceeds Brazilian sugar cane ethanol production and it’s done at a lower cost. One million gallons of ethanol are produced daily, about 10 million metric tons ($1.5 billion/year) of high protein animal feed are exported annually, and corn sells for under $4.00/bushel which, when adjusted for inflation, is less than 1970 prices. In 2014, cellulosic ethanol, which uses grasses and agricultural residues as feedstock, started commercial production in three new biorefineries while biodiesel production continued to soldier on.

It is now the winter of 2015 in the United States. Look at that gas pump. Gasoline (with 10% ethanol) is $2.00/gallon. The President says this is a good thing – especially for the middle class.

But, look at this steel mill in Lorain, Ohio. It was recently shut down. The men and women who worked there are out of work. It used to make steel pipes for rigs that drilled fracking wells. But those are now shutting down. Since October, 292 rigs, each with fifty workers, have stopped. All of the increases in 2014 oil production have been wiped out and it looks like 50 or so will continue to shut down each week until at least spring.

What happened to this American Dream?

Despite the words of their leaders, the US has discovered it is still part of the international oil market. ISIL (Islamic State of Iraq and the Levant) captured Iraqi and Kurdish oil refineries in the summer of 2014 and began selling the oil at $25/barrel. With this move, unexpected by the US, a new base price was established. While the quantities were small, they provided an opening for the large low cost producers on the Persian Gulf to declare a price war on high price producers. Saudi Arabia openly increased production and prices fell in response to increased supplies of oil that cost less than $10/barrel to extract and process. By October, oil prices were in the $70/barrel range.

The oil minister of the United Arab Emirates, Suhail Al Mazrouei, stated what had to happen next if oil prices were to stabilize, “Those who are producing the most expensive oil — the rationale and the rules of the market say that they should be the first to pull or reduce their production.”

Shutting down those 292 rigs, 18.1% of the October 2014 total of 1609, was the response. But oil prices continued to fall. By January 26^th, a barrel of West Texas crude could be bought for March delivery for less than $46 dollars - or about $4-$14 less than it cost to produce.

Texans have a saying about never bringing a knife to a gun fight. They should also know not to bring the most expensive oil to a price war.

Ladies and Gentlemen, we now have before us the Congress of the United States. Many have just been elected or re-elected with substantial financial help from the petroleum industry and their banking partners. They will need that help again in the 2016 elections, less than twenty-two months away.

Will oil and gas prices be high enough for the petroleum industry and the bankers to continue writing checks?

Or will Congress write legislation to bail out their friends if profits disappear?

Or, will Congress consider the following proposition: Drop support of a risky, low-profit high-risk energy industry and instead see the wisdom of supporting a US renewable fuel industry capable of producing long-term supplies at the lowest cost on the planet.

Stay tuned as we enter the US Capitol. Welcome to the TWILIGHT ZONE!

(With admiration and apologies to the late great Rod Serling.)

READ MORE / MORE (OilPrice.com) and MORE (BBC) and MORE (ThinkProgress.org) and MORE (The Washington Post) and MORE (Huffington Post) and MORE (Reuters) and MORE / MORE (OilPrice.com) and MORE (Bloomberg) and MORE (Wall Street Journal) and MORE (Bloomberg) and MORE (OilPrice.com) and MORE (Reuters)

*Robert E. (Bob) Kozak is the founder of Atlantic Biomass Conversions, Inc., and a co-founder of Advanced Biofuels USA. Having worked for about 40 years in the transportation, energy, environmental, and government relations industries and in enzyme development, he serves as a fuels/engines and policy expert for Advanced Biofuels USA.