Earth Day Week Announcements and Alternative Fuels

Maybe it's merely a coincidence but there was a flurry of announcements pertaining to the alternative fuels business in the days surrounding Earth Day, April 22, which also happens to be my birthday, and, yes, I am old enough to have celebrated the first one, occurring, I believe, in 1970 around the time of the infamous Cambodia incursion—make of that what you will.

Banking on High Gasoline Prices

On April 24, 2008, two days after Earth Day, CIBC, a major Swiss investment bank, delivered a brief report predicting $7 per gallon gasoline in the U.S. by 2012. I happen to think they're right, but I'm not citing the report to support my own views. Rather, I mention it because it is a telling departure from the norm.

The characteristic posture of most major financial institutions is one of unbridled optimism. The securitized debt crisis will soon pass. The declining dollar will swiftly reassert itself. Consumer spending will once again save the economy and drive the markets. And the price gas will stabilize and then decline. Or at the very least, it won't go any higher.

CIBC analysts actually mentioned the words, peak oil. Not once but several times. And those words were not prefaced by the words "crank theory" or "discredited notion" as they would be in the Wall Street Journal or the New York Times. These same analysts also mentioned correctly that oil production has been static for three years, a decidedly ominous sign inasmuch as declining oil production is without historical precedent save in the period of the World Wars.

It's heartening to see the powerful and respected coming round to one's own point of view. Five years ago people used to tell me that I was stark, staring mad when I mentioned the possibility of constrained oil supplies in the future. The orthodox view was that oil production would reach 130 million barrels per day by 2030, fully 50% more than is being produced today, and there would be plenty of oil produced to meet the needs of Asian motorists acquiring their first sets of wheels. Now the Swiss gnomes are saying otherwise.

Other than stating what is now becoming increasingly obvious, the report is something of a disappointment though. The authors do not appear to be real energy guys. They don't seem to know much about unconventional oil or synthetic fuels, and they don't seem to understand peak oil theory either. Their tacit assumption is that the current plateau in production can continue indefinitely, but on the national level our experience has been that once oil or any other natural resource peaks, it soon declines. Finally, the report is not transparent. The analysts give no hint of how they arrived at the figure of $7 per gallon? Is it just an educated guess or is it based on some sort of computational model?

We all know what peak oil means in the larger scheme of things. It means acute economic disruption continuing indefinitely. But what does it mean in terms of the alternative fuels business? It should mean that alternative fuels will become increasingly attractive, but, as we may glean from other recent announcements, it's not so simple as that.

Discrediting Biofuel

Lately I've noted a flood of reports, citations, and opinion pieces on the inadvisability of promoting biofuels for replacing fossil fuels. They all seem to have the phrase "food versus fuels" in the title, and they seek to link the current global food shortages and price spikes to diversion of agricultural output for fuel production. The implication of these many pieces is that the wealthiest nations of the world intend to appropriate the agricultural lands of the poorest nations under the guise of globalization and exploit them for fuel while the masses starve. This is in fact the position enunciated in a widely disseminated piece in the New Statesman by Mark Lynas entitled "How the Rich Starved the World".

So what's the substance to these allegations? There is no question that a lot of corn has been sold to ethanol producers in the United States and in Mexico, and that the presence of a subsidized market for ethanol has enabled fuel producers to bid up the price for the crop and to impact North American food prices in the process. Such market distortions are almost inevitable when one is attempting to foster an industry which operates at a distinct cost disadvantage vis a vis the one that it is intended to displace. But one must keep in mind that the overall volumes of liquid biofuels are still quite small—less than 20 billion gallons per year all told. That's less than world petroleum production for a single week. It should also be understood that only few countries devote any significant portion of arable land to biofuel production, and that nowhere is a fuel crop the principal crop in a given growing region. Furthermore, the production of biofuels from grasses or trees or other plants growing in wilderness areas is simply not occurring on any significant commercial scale at all so that particular assault on the environment is entirely hypothetical at present. One can certainly argue that a ten or twenty fold increase in biofuel production could have dire effects upon world food supplies and the natural environment, but to argue that the biofuel industry is causing famine in developing nations at present is a bit disingenuous. There simply isn't enough land devoted to fuel crops to make a difference—yet.

Still, we're facing a situation where food prices are rising precipitately in many places across the globe, and we're seeing food riots occurring within the poorest nations. There really is a problem even if biofuels don't have all that much to do with it.

So why the sudden spike food prices around the world? The explanation has much more to do with the price of fossil fuel than the production of biofuel. High yield agriculture is an energy intensive process requiring heavy consumption of petroleum by farm equipment and by mechanized transport for getting the food to market. It also consumes vast amounts of increasingly expensive natural gas which is used to produce the ammonia based fertilizers upon which modern agriculture depends. Natural gas and petroleum have enabled the world to support a population of several billions of people, and absent these inputs, a sustainable agricultural regime using only naturally occurring organic fertilizers and human and animal labor could probably only feed a couple of billion people which was the entire population of the planet as recently as 1950.
The fact is that without a lot of fossil fuel the cultivation of crops sufficient either to power a modern transportation system or to feed the world is probably unachievable, let alone both. One could, of course, divert biomass to the production of ammonia, but that would reduce both the amount available for food and for fuel. Those who desired an informed discussion of the matter should consult Vaclav Smil's "Feeding the World" which discusses in great technical and scientific detail the plight of farmers in the twenty-first century.

If we had an extremely low cost source of electricity, we could synthesize both ammonia and liquid fuels out of elemental hydrogen and carbon dioxide, but precipitate declines in the cost of grid supplied electricity do not appear to be in the offing. Certainly renewables do not promise cheap electricity, nor does nuclear power based upon current technology.

The growing realization that cultivating biomass for fuel will present the policy maker with a whole host of problems has prompted biofuel advocates to consider fresh approaches. And it is to these that I will turn my attention now.

Announcing the Advanced Biofuels Association

I recently spoke with Joanne Ivancic, the founder and director of the recently formed Advanced Biofuels USA trade association www.advancedbiofuelsusa.org. Ms. Ivanovcic, a professional lobbyist, numbered one such company, Atlantic Biomass, among her clients and perceived that a whole contingent of biofuels developers were not being either recognized or represented.

And surely she is right.

Ethanol and biodiesel both have their trade organizations, but no one is representing manufacturers of petroleum-like synfuels made from biomass, biobutanol and other heavy alcohols derived from biomass, or, for that matter, pyrolysis oil, biogas, bio-based DME, or so-called "green diesel" which is not the same as biodiesel. No organization is actively representing cellulosic ethanol either.

Currently these unconventional biofuels are arousing the interest of investors, spearheaded by Khosla Ventures which specializes in biofuels. They are also, as I mentioned, gaining some endorsement from individuals who have grown disillusioned with corn based ethanol, though many environmentalists distrust all biofuels at this point, a turnabout which has been rather recent, I might add.

Unconventional biofuels in fact face a host of challenges, of which latent environmental opposition is only one, and perhaps the least important. The first problem, and the most significant in my estimation, is the lack of any clearly defined, well organized constituency. Because such biofuels are commonly manufactured from low value feedstocks, often from wastes of various sorts, there is really no industry out there pushing a product to these manufacturers—nothing equivalent to the corn lobby or the soy lobby. There are also no commercial level production facilities, no distribution networks, no established financing practices, no branding or marketing to the end user, and, perhaps worst of all, no enthusiast consumer community. There is also no absolute certainty that these products can compete with fossil fuels even at their currently elevated prices.

A word on environmental opposition: environmentalists are already fairly united in their opposition to various fossil fuel based synfuels such as coal-to-liquids, gas-to-liquids products and shale oil, which we also cover in these pages. The growing opposition to biofuels as well raises some interesting questions. If not biofuel or unconventional fossil fuel, then what? While I detect a slight revival in hydrogen advocacy, the dismal economics of hydrogen fuel cell manufacturing and hydrogen generation make it difficult to argue that either could gain market acceptance today, regardless of the amount of government support. Others appear to favor all-electric cars drawing power from the grid, presumably, a grid provisioned entirely with renewable energy sources, and while this particular vision is certainly not a groundswell as yet, it appears to have legs, as they say.

Here is not the place to discuss the magnitude of the challenges associated with the all electric approach. I am in the process of writing book focusing on that and other crucial energy policy issues, and, in due course, it will be available for download on this Website. The question I would pose here is what immediate effect will these notions have on investment in the larger alternative energy space and secondarily on alternative fuels.

One trend we're seeing in alternative energy today with a bearing on this issue is an interest in what is known as concentrating solar power, a family of technologies which I always believed had a future. Concentrating solar electrical generators use sunlight to heat a working fluid, such as water, helium, or molten salt, and then use that to drive an engine that turns an electrical generator. They produce alternating current at a steady voltage and thus fit much better into the electrical grid than do wind turbines. Basically, you're substituting sunlight for coal or natural gas.

This technology is actually pretty well proven, but has not been economical in the past. Today several commercial projects are under construction in the U.S. and elsewhere, and there are those who see this technology furnishing an abundant renewable source of energy for electric vehicles.

I wouldn't count on that. I think the technology is viable if expensive, but the land use factor is no better than for wind, meaning that one has to devote enormous amounts of vacant land to high capacity generating plants. The thinking is that they could simply be consigned to deserts in the Southwest, but then you're faced with the problem of building a lot of new transmission capacity at millions of dollars per mile. Who's going to pay for it? Surely not the Federal Government. The Chinese aren't buying any more bonds, you can't raise taxes, and of course someone has to find the money to invade and occupy Iran.

But the real problem with concentrating solar, or any solar for that matter, is that the generating plant cannot be operated continuously. Almost any combination of solar and wind leaves you with a problem of obtaining baseline power, and, if you rule out nuclear and fossil fuels, you're left with either biofuel fired power plants or hydrogen plants, neither of which appears economically feasible on a large scale.

But feasibility has little to do with whether any particular alternative energy technology play will win favor with investors. How feasible was hydrogen in the opening years of this decade when billions were invested in it and over ten thousand hydrogen generation and fuel cell companies attempted to play in the nonexistent hydrogen economy? How feasible is corn based ethanol today? Feasibility is simply not a requirement for an investment bubble. I think that concentrating solar will have its day in the sun, so to speak, and that in due course investment dollars will move elsewhere. If the industry is fortunate, some companies may succeed in establishing themselves at a level where continuous cash infusions are not necessary for survival.

As for advanced biofuels, I believe that pyrolysis oil may be the next big push. Some of the processes appear to have fairly favorable economics, and one is not limited as to feedstock—indeed one can use low grade coal as well as biomass. There has also been a lot of activity in this area, with over a dozen companies springing up just in the last year, one of which has just gotten a funding round from Khosla Ventures. Furthermore, pyrolysis oil can be produced with fairly low carbon emissions. I'll be covering this area extensively in upcoming issues.

A Major Announcement Regarding Methane Hydrates

Methane is another area I'm going to be examining in the near future. Here I will mention a press release from the Japanese government claiming successful extraction of methane from clathrate deposits in the Siberian permafrost over a period of several days—in other words, continuous production.

Methane hydrates consist of methane, essentially, natural gas, trapped in a cage of water molecules called a clathrate (other gases such as CO2 can be contained in this manner as well). Methane hydrates form under conditions of low temperature and high pressure and they are highly unstable. Either heat or a reduction of pressure will release the gas.

Methane hydrates are superabundant, and may contain more energy than all of the other fossil fuel resources on the planet—if they indeed constitute a true fossil fuel, which is debatable. They are found on the tundra, primarily in Siberia rather than in the New World arctic regions, but the largest deposits reside at moderate depths along the continental shelves.

Researchers have attempted to release the methane from the clathrate by a number of means: injecting the deposits with glycol or methanol, or, alternately with hot water, or by building containers above the deposits and pumping them out so that ambient pressure adjacent to the methane hydrate is reduced and the gas is thereby induced to migrate into the container. All three methods work, but only the last appears even marginally economically feasible. This appears to be the method used by the Japanese researchers.

This success does not mean that Japan will begin harvesting methane from hydrates tomorrow or the day after. Japan's own deposits of methane hydrates are located deep underwater, and underwater recovery is considered much more difficult. The operation in Siberia was merely an experiment permitted by the Russian government which is also interested in harvesting gas hydrates. So, as a matter of fact, are the governments of India and Korea, and both have sponsored serious research programs in this area.

This will bear watching. If Japan is ultimately successful in exploiting its own methane hydrate resources, then others, including U.S. oil and gas companies, will converge on the last best hope of the fossil fuel industry. There is a huge market for natural gas in its native form, and the economics for producing liquid fuels from natural gas are well proven. If methane hydrate extraction techniques can be perfected, clathrates will likely be the next big natural resource play.

There are, however, many dangers attendant upon developing the resources, and opposition is already forming to prevent further development. As I say, this will bear watching.