Archive for category Energy

Ethanol and Natural Gas

UPDATE: And as if on cue, this morning, JJG, Barclays ETF on grains, is up almost 5% this morning.  This is not just a generalized inflation play (meaning this isn’t just about the Fed printing dollars), since GLD and TBT (the bearish bet on the 10-year Treasury) are up, but only about 1%.

Much has been said about the contradictions between the energy policy that President Obama announced today, and how his government has behaved up until this point. But even taken on its own terms, today’s ethanol-and-natural-gas announcement contains enough internal contradictions to make it fall over like a basketball player with his shoes tied together.

The key point here is that ethanol already depends heavily on natural gas. Twice. Directly, as an ingredient in its production. But ethanol is made from corn, and corn – especially when planted in the same fields, year after year – requires a lot of fertilizer. And the key component in ammonia-based fertilizers like anhydrous ammonia, urea, and ammonium nitrate in nitrogen. From natural gas.

When I worked at the brokerage, one of the companies we covered was a fertilizer company (since bought out), based in the heart of the corn belt. We considered it an ethanol play, with the company remaining profitable as long as corn plantings increased and natural gas didn’t get too expensive. Again. Here’s the chart for the wellhead price of US natural gas:

In 2007, during the last burst, corn planting came at the expense of soybeans, which returns nitrogen to the soil. This meant a large increase in the amount of fertilizer necessary. For the last few years, soybean planting has returned to its long-term trendline, and increased corn production appears to have occurred at the expense of winter wheat, which uses a comparable amount of fertilizer:

Up until now, that’s meant that increased corn plantings, inadequate though they may be, haven’t in and of themselves driven up the price of natural gas. This year, however, soybean plantings may be down, as corn nears its postwar high, meaning additional natural gas demand.

All of this is happening even without Obama’s intervention to commandeer even more of our food for fuel. We already push 1/3 (yes, one third) of our corn harvest into ethanol plants rather than kitchen tables, which amounts to about 8% of the world supply of corn. Any additional ethanol subsidies will only make things worse.

Moreover, Obama’s plan does absolutely nothing to increase natural gas production. To do that, he seems satisfied to ride herd on oil and gas companies that already have more than enough incentive to increase production, if only our government would let them. (Sadly, Colorado, between Ken Salazar and Diana DeGette, is playing a disproportionate role in enforcing that dictate.) He does, however, propose all sorts of subsidies to encourage increased natural gas consumption, promising to drive the price up even farther.

To circle back to my original point, this is going to make ethanol unprofitable even with subsidies.  Just for fun, I went back and looked at the gross profit margin for Green Plains (GPRE), a major ethanol producer, and compared it to the natural gas price six months earlier, for the last 8 quarters:

The correlation is an astounding -0.96, which is about as close to metaphysical certainty as you get in statistical analysis.  Those who know something about statistics will say that the outlier increases the correlation, and they would be right.  If we get rid of the outlier, the correlation is still -0.84, and the slope of the line only changes slightly.  If the other points, the ones below 6.00 on the price scale, were clustered together, that would be a problem.  But they lie on a nice line of their own.

Using a very rough model, using the company projections for unit sales over the next year, assuming that interest rates don’t rise and the company doesn’t take on any additional debt, the wellhead price of NG would have to rise to 6.8 to eliminate the company’s pre-tax earnings completely for the next year.  That’s happened twice over last decade, and this administration’s policies will only make it more likely.  Let that happen, or interest rates rise, or both, and see how fast Green Plains decides that it really does need those subsidies – and more – after all.

To the extent that ethanol production can increase, it will help drive up natural gas prices.  To the extent that it can’t, its price will rise, and it will need compete for ever-more-scarce natural gas.

Even if ethanol weren’t already a colossal waste of money and resources, this plan couldn’t be designed any better to make things worse.

In this at least, Obama’s being consistent with the rest of his economic policies.

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Ethanol Changes Tactics

The ethanol industry is changing tactics to keep those universally unpopular subsidies coming.

Today’s ethanol industry can prosper without government incentives, the founder of Green Plains Renewable Energy Inc. said Thursday.

Ethanol has become an integral part of the country’s energy picture, in demand not only from motorists but also from oil refiners who use it to boost the octane of the gasoline they produce, said Todd Becker, president and CEO of Omaha-based Green Plains.

The economics of the fuel industry, combined with new production technology, make ethanol 40 cents a gallon cheaper than gasoline, on average, Becker said. That gives ethanol producers like Green Plains a cost advantage that will outlast the government’s 45 cents-a-gallon tax credit for ethanol-blending companies.

The blenders’ tax credit eventually will end, he said, but should be followed temporarily by incentives that would increase demand for ethanol. Those incentives would encourage gas stations to install equipment to sell high-ethanol fuel and the auto industry to make and sell vehicles that use high-ethanol fuel.

If Mr. Becker thinks ethanol is profitable, then he should be able to borrow against those earnings to build the delivery infrastructure himself.  If gas stations think that ethanol is profitable, they should be able to finance the dispensing equipment.  If I think ethanol is profitable, I’ll lend it to them.

But if they can only make all this happen with government subsidies, then maybe it isn’t really all that profitable after all, and directing resources to it is just more of the massive misdirection of resources that has been part and parcel of trying to grow fuel rather than drill, mine, or capture it.


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Keep On Truckin’

That was one of the less forgettable catch-phrases from the 70s, when the independent trucker seemed to embody what remained of the free spirit of America.  The part, anyway, that was engaged in constructive work rather than the self-indulgent self-destructiveness that came to pass for independence during that decade.

In fact, trucking has become increasingly regulated over the years, so much so that the notion of the independent trucker, gamely staying awake to deliver his load, is a thing of the past.  And with good reason.  These are very large, very dangerous vehicles.  They’re necessary, but they share the road with, and occasionally crush, passenger vehicles a fraction of their size and weight.  As a result of making sure that drivers get a decent amount of rest, the number of fatalities involving heavy trucks, per 100 million miles traveled, was at 2.34 in 2005, down from 6.15 in 1979.  More recent analyses have it falling even farther.  And those same statistics show truck driver fatigue as a factor in only 1.7% of those crashes.  The accident rates continue to decline.

So naturally, what we need is: more rest time!

That’s right.  The government has proposed rules that will require longer rest times, fewer hours on the job, more frequent breaks.  At first, this sounds like something truckers might like.  Until you realize that it’s basically forced idleness, with little marginal benefit to the rest of us using the roads.  Truckers hate sitting around.  They have loads to deliver, and a forced 15-minute break is actually more stressful, because instead of taking the break when the need it, they’re just as likely to be sitting around watching the clock tick until they can get back on the road.

The company that I am currently contracting for, Werner Enterprises, ran a little experiment with one of their more seasoned drivers, asking him to work to the rule for a month to see what would happen.  Turns out that idle trucks aren’t just the Devil’s workshop, they’re also expensive.  Two-day trips stretched into three days, and his income, which is based on miles covered, dropped 6% year-over-year.  Adopted nationwide, these standards would not only play havoc with the many businesses that use just-in-time inventory management, they would amount to a pay cut for the drivers they’re supposed to help.  And in an industry that tends to face driver shortages in good times, anyway, it would require even more drivers, and even more trucks, with all of the overhead that implies, even before they drive their first mile.

This is not an industry that opposes regulation for opposition’s sake.  They ended up supporting, for instance, the stricter rules against cell phone use.  There are signs on many of the tables in the company cafeteria warning truckers against cell phone use, not on the grounds that if they get caught, they’ll lose their commercial license and have to hitchhike back home from Keokuk, but because it’s dangerous.

They object to this brilliant idea, cordoning off I-70 at certain hours, because it would greatly complicate route planning, on a fairly major truck thoroughfare.  (C’mon guys, just widen the road, already.)  In combination with the new rules, mandating stops where it might or might not be possible to stop, it would turn driving that stretch into a nightmare.

Colorado’s own Cory Gardner serves on the House Energy and Commerce Committee, which might be able to exercise some oversight here. (Although, so does Diana DeGette, who’s probably miffed that even after decades of trying, there are still trucks on the road at all.)  Perhaps he can take a look at this.

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Slipshod Reporting on Rare Earths & Solar

The Denver Post this morning reports that a lack of rare earths may be inhibiting the domestic solar cell industry.  How this is so, they never quite describe.  There’s no calculation, for instance, of what percent of a solar panel’s production cost comes from rare earths.  Possibly, this is because rare earths aren’t actually used in the production of solar cells.  According to a DOE study on strategic materials, solar cells use indium, tellurium, gallium, and maybe soon, selenium, none of which is in the lathanide series of rare earths.  A briefing by the Rare Earth Industry Trade Association on the importance of rare earths to green energy applications doesn’t mention solar at all.

By coincidence, the New York Times this morning ran a piece on why solar panel manufacturers are relocating to China, and it seems that the reason has nothing to do with rare earths, which aren’t mentioned at all, and everything to do with our willingness to take the place of Germany and Spain in directing massive subsidies to the panels’ production.  And in spite of our increasing mandates on so-called renewable energy as a source of electricity, it’s also not clear that we’ll be willing to force utilities to pay the exorbitant rates necessary to make large solar arrays profitable.

That, not the absence of a local rare earth supply, is what’s threatening a domestic solar industry.

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Colorado Misses Out On Another Wave

The Wall Street Journal reports that resource-rich states are recovering quite well from the recession:

Wages of workers in 10 states and the District of Columbia have more than regained ground lost during the recession, with the recovery concentrated in regions benefitting from the commodities boom and federal spending.

Many of the laggards, meanwhile, are states where the housing bust hit hard or where the collapse of the auto industry and other old-line manufacturing pulled down wages during the slump, according to a Commerce Department figures released Friday.

That Colorado is a resource-rich state can hardly be doubted.  We have coal and natural gas in abundance, minor metals like molybdenum, potentially uranium.  While real estate has suffered, we never had the kind of overbuilding seen in Florida, Arizona, or southern California, so we never had the kind of collapse, and manufacturing hasn’t been a mainstay of the Colorado economy for a while.

So why aren’t we recovering?  Why is the state’s unemployment up to 8.8%, with only modest improvements projected (for whatever that’s worth)?  Well it’s true that, unlike DC, northern Virginia, and suburban Maryland, we lack the ability to coerce the rest of the country to pay for our standard of living.  But more importantly, the outgoing Ritter administration and its Democrat allies have waged an ongoing war against the exploitation of our natural resources.

I don’t want to see the state return to the boom-bust cycle that characterizes an economy overwhelmingly dependent on drilling and mining.  But Colorado is clearly suffering from a national policy -seemingly unique in the industrialized world, and reinforced by state government – of refusing to exploit natural resources that our economy actually depends on.

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Colorado Needs Good Jobs…

…not subsidized “green energy jobs.”

Colorado needs to take advantage of its 300 days of sunshine and its good locations for wind energy.  But subsidizing these energies’ end markets – paying people to use them, or forcing electric companies to use them – is going to cost Colorado jobs in any number of ways.

Now, the model for President Obama’s Green Energy strategy, and for Governor Ritter’s “New Energy Economy” is admitting as much, privately (the original Spanish Government report is here).

In any industrialized economy, energy costs far outstrip labor costs, which makes employment much more vulnerable to increases in the price of electricity.  And wind and solar are exceptionally expensive to produce.  Which means that the jobs they create actually significantly reduce employment in those and other industries.

Colorado is lucky in its abundance of clean natural gas and clean coal.  While continuing to help along the research end of solar and wind, we should make full use of our coal and natural gas resources, to get our economy back to full employment.

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Electric Car Network

I wrote about car recharging stations being developed in Israel and being deployed there and in Denmark.  Now, the company, which has secured a $350 million investment led by HSBC, plans to launch a network of charging stations in Israel by next year.  They’ve partnered with a local gas station chain to host the recharging stations, and with Renault to modify their cars to take the electric batteries.  Better Place claims that the batteries have a first-run life of 300-400,000 kilometers (that’s about 180-240,000 miles in real units), and then can be reconditioned to get that amount again on their second run.

New technologies often have the problem of being dependent on parallel developments to work.  In the 1860s and 1870s, railroads weren’t going to build without a population to support; the people couldn’t get there without the railroads, so the government heavily subsidized western track-building.  In this case, it was clear that the recharging stations wouldn’t work without cars to service, and it’s been clear to me for some time that electric cars weren’t going anywhere if they were only good for runs to the supermarket.  Better Place has managed to broker the deals necessary to get the technology moving, and one assumes that Israel’s electrical grid is up to the task.

It’s unclear where the initial R&D funding came from, but the fact is that the market has supported the development of these grids and these cars.  Agassi claims that the cars will be cheaper than the gas equivalents, and cheaper to “refill” per mile than the gas equivalent.  Their range is advertised at 350  miles, which is about what an average tank of gas gets, and about 50 miles farther than my Jeep gets on one tank.  Assuming that the car’s performance is adequate, the market already exists.  It means that I don’t have to believe in anthropogenic global warming or peak oil or anything else to buy one.  I just have to want to save money.

The question for the USA, as always, is where we’re going to get the electricity from.  If individuals want to recharge their batteries, they’ll probably do so overnight, which means baseload capacity that wind and solar can’t provide.  So hopefully, those of us who want to see both nuclear and electric cars can persuade both ends to make it easier for the middle.



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Electric Cars – Stop ‘n’ Swap

It should be clear that the appropriate analogy to the filling station isn’t the recharging station, it’s the battery-swapping station, along the lines of a propane refill.  Now, an Israeli is trying to make this work in Israel and in Denmark:

Better Place proposes building a network of curbside charging stations where owners can top off their vehicle batteries. Agassi’s idea generated $300 million in venture capital and sparked international interest: Cities in Israel and Denmark hope to have the first robotic change stations running in 2011, and the company aspires to expand operations to Australia, Canada, Hawaii and California in 2012. In late September, Better Place signed a deal with Renault-Nissan to put 100,000 electric vehicles on the road in Israel and Denmark by 2016.

I’ve always believed that the only way we’re going to get Americans into electric cars is to extend their range.  Especially out west, where I live, it’s virtually impossible to imagine driving  your car for 100 miles, and then stopping for a few hours to recharge.  That might work for in-city commutes, but too many of us routinely make business or pleasure trips of well over 100 miles, and some even have commutes that long.

If this idea can work in high-density, short-trip areas like Israel and Europe, it ought to be able to substitute in Utah, Nevada, and Arizona.  It’ll be interesting to see what kind of business model he comes up with.  I’d suspect that franchising would be the fastest way to expand, with the quality control issue here being the quality of the battery, and making sure that the station owners weren’t under-charging the batteries.

As with any technology, this isn’t going to happen overnight.  You’d still want batteries that could make it 300 miles or so, a typical tank of gas.  The barriers to entry – read: capital investment – for swapping stations and cars alike remain high.  And, of course, barring nuclear plants, massive numbers of electric cars are going to mean hot summers and cold winters for a lot of people.

But this is clearly the operational model that can work.

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The Very Expensive “New Energy Economy”

There are times when one wonders whether or not the writers for the Denver Post actually read the Denver Post. Then, there are times when one wonders whether is would make any difference if the did.

On October 14, the Post carried an AP story noting that the new German government, a coalition between the Christian Democrats – Mark Steyn’s right of left of right of center party – and the Free Democrats, who actually permit themselves the luxury of promoting free markets now and again, would be cutting Germany’s legendary solar subsidies, which the country had maintained for about two decades. Apprently, subsidizing expensive energy doesn’t look so good during a recession, and Germany is willing to forego the expensive green jobs that such industry creates:

Investors expected Germany to cut back on solar subsidies this year as the recession sapped demand and tightened government budgets, said Benedict Pang, an analyst with Caris and Company in San Francisco.

“During the downturn, the wheels started to come off” in Germany, Pang said. “A lot of solar companies have weaned themselves off of that market.”

Germany has guaranteed renewable energy generators fixed payments for the power they produce to encourage the production of solar panels and several of the world’s leading producers of the technology are based here.

A week and a half later, Bloomberg reported that the Germans had done just that:

Chancellor Angela Merkel’s new junior partner in government, the pro-business Free Democrats, approved a four-year coalition program that points Germany toward tax cuts and a reprieve for nuclear energy….

Separately, the government will seek talks with solar-energy industry on possible “adjustments” to avoid “excessive subsidies,” according to the coalition draft.

So naturally, it was a source of much rejoicing when the German company, SMA, no longer able to make money on its home turf, shifted production to Colorado, bringing with it its prize of 300 jobs, at a cost of a mere $12,000/job to the Colorado taxpayer.

Now, that’s not as much as the colossal $240,000 per job – plus the added cost of the actual electricity – that Germany’s worked itself up to. And the so-called “green jobs” trap has been largely responsible for the depth and intractability of Spain’s contractiion during the global recession. Of course, they’re paying about $600,000 a job, so we’ve still got a ways to go to match that.

These jobs are incredibly expensive, as Colorado is about to find out, and apparently don’t survive the end of subsidies.

Let’s just hope that those interim committees take note of why Colorado beat out other US states:

[Colorado Office of Economic Development and International Trade’s Pete] Roskop said other states were throwing more money for incentives at the company, but Colorado had lower costs for items such as corporate taxes and worker’s compensation insurance.

Then, there are the times when one wonders whether some people ever read the business pages at all.

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