Bioethanol, Gasoline Prices, the U.S. Senate and the Law of Unintended Consequences

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The Senate is debating an energy bill this week that among other things would mandate that the U.S. use 36 billion gallons of ethanol as transport fuel by 2022. This proposal is already having an interesting effect on future oil refinery capacity. The AP reports:

With President Bush calling for a 20 percent drop in gasoline use and the Senate now debating legislation for huge increases in ethanol production, oil companies see growing uncertainty about future gasoline demand and little need to expand refineries or build new ones.

Oil industry executives no longer believe there will be the demand for gasoline over the next decade to warrant the billions of dollars in refinery expansions—as much as 10 percent increase in new refining capacity—they anticipated as recently as a year ago….

With the anticipated growth in biofuels, "you're getting down to needing little or no additional gasoline production" above what is being made today, said Joanne Shore, an analyst for the government's Energy Information Administration.

In 2006, motorists used 143 billion gallons of gasoline, of which 136 billion was produced by U.S. refineries, and the rest imported.

Drevna, the industry lobbyist, said annual demand had been expected to grow to about 161 billion gallons by 2017. But Bush's call to cut gasoline demand by 20 percent—through a combination of fuel efficiency improvements and ethanol—would reduce that demand below what U.S. refineries make today, he said.

"We will end up exporting gasoline," said Drevna.

Asked recently whether Chevron Corp. might build a new refinery, vice chairman Peter Robertson replied, "Why would I invest in a refinery when you're trying to make 20 percent of the gasoline supply ethanol?"

Again, if bioethanol is such a good idea for fueling cars, why does it need to be mandated and/or subsidized? Whole AP story here. Read it and weep.

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  1. That’s cute, because every time there is a price spike at the pumps, Chevron claims that it doesn’t have enough refining capacity to meet current demands, because of the all-powerful environmentalists.

  2. Consequences abound! Don’t forget what ethanol is doing to our National Tequila Reserve!

  3. joe — try RTF post again. Rises and falls in price over the short term are (partly) a function of refinery capacity, or lack thereof, hence why oil producers look to increase it in the long-term. Refineries don’t pop up overnight.

    Now, with a (mandated, artificial) drop in demand, there’s no reason to plan ahead for increased demand. True environmentalists such as yourself would want free markets to test a variety of products. Government is endorsing one (ethanol) that doesn’t have much going for it in terms of efficiency or price.

    But I shouldn’t have to explain all that to a smart guy like you.

  4. I hear a saw hauled out every once in a while about how no one’s built a new refinery in umpty-ump years, and it’s usually trotted to out to suggest some kind of price manipulation.

    My understanding is that refinery capacity is like the capacity of a server room. If you needed 1,000 square feet for a server room back in the seventies and your server requirements now are 1,000 times what they were then, that does not mean you now need 100,000 square feet for your server room. Technology has made it so we can do an awful lot more with a lot less room. …and while refining technology hasn’t scaled quite like processing power, my understanding is that no one has opened a new refinery in umpty-ump years because new refineries just aren’t required. …because technology let’s us get a lot more out of a barrel of crude with a lot less than we used to.

    …but if someone can enlighten me otherwise, I’d appreciate it.

    Here in California, I remember, not so long ago, I think it was Shell, was trying to sell their refinery because the capacity just wasn’t needed. …and they couldn’t find anyone to buy it. At one point, and this was years ago now, regulators were going to sanction Shell if they closed the refinery down. Last I heard, even now, no one knew what to do with all the extra capacity.

  5. The best use for ethanol is drinking it.

  6. If we’re going to use ethanol, we should lift the import restrictions on much cheaper ethanol from Brazil, which has a real ethanol industry based on sugar cane (a far better source) that actually powers most of their autos.

    The problem we have now is something almost no one has mentioned: higher corn prices mean farmers are going to plant a LOT more corn in 2007 – 2008. When the economically ridiculous corn ethanol subsidy finally dies, they are going be hit hard.

  7. When the economically ridiculous corn ethanol subsidy finally dies

    What makes you think farm subsidies are going to die?

  8. “When the economically ridiculous corn ethanol subsidy finally dies. . . .”

    That will never happen. The subsidy is forever.

  9. Tom,
    I think that may be part of it. But also, although no new refineries have been built, existing ones have been added onto. I believe that this is a result of environmental regs that are more permissive when expanding an existing refinery than when building completely new ones.

  10. Sorry, I was presuming common sense would eventually prevail. Silly of me, I know.

    I guess my point is more that once we encourage farmers to start growing these massive ethanol corn crops, it is going to be even harder to end the subsidy. Right now, the main complaint is higher food prices, but people need to think about the market effects of those prices.

  11. The law of unintended consequences reigns supreme.

  12. Republican Energy Policy – Massive corrupt government give-away to oil companies

    Democrat Energy Policy – Massive corrupt government give-away to corporate farms.

  13. Here’s a bit about the Shell Plant…

    http://feinstein.senate.gov/04Releases/shell-refinery.htm

    …they were gonna close it rather than sell it. (’cause they couldn’t find a buyer.)

    They were actually able to sell it…

    http://www.bizjournals.com/eastbay/stories/2005/01/10/daily5.html

  14. In the 1980s, Blumenthal said at a recent hearing, refiners were producing at 77.6 percent of their capacity, “which allowed for easy increases in production to address shortages. In the 1990s, as the industry closed refineries, … (that figure) rose to 91.4 percent, leaving little room for expansion to cover supply shortfalls.”

    Does anyone have time to drive to Greenwich and give Dick a quick kick in the balls? It’s the biggest thing I regret not doing while I lived there.

    Dick, you f*cking idiot, increasing refinery capacity usage is a GOOD thing. Economies of scale, you meathead.

  15. I got no problem with them not making more refineries, I just want a way to make transportation to and from work cheaper. It’s just a little ridiculous that I’m spending over ten percent of my take home pay on gas!

  16. It’s just a little ridiculous that I’m spending over ten percent of my take home pay on gas!

    Ridiculous to me is when you want to buy gas and there isn’t any. Ridiculous to me is when people talk about shortages, but there’s enough for everyone who wants to buy.

    …High prices to me are merely “annoying.”

  17. imo Peak Oil is behind all this.

    the US oil production peaked in the 70s, and has fallen every year since – oil is not limitless, and does anyone think we would import more and more oil every year if we had a choice? nope. many experts feel we have already hit the top of the bell curve with oil, and the only place to go is down. Enter.. ethanol and a host of other ‘energy saving’ articles, ideas, etc.

    look it up. it explains why suddenly all politicians are pushing ethanol from both sides. its not all about subsidies, its about the world running out of oil…

  18. Ken Shultz,
    Well, all we have to do is convince congress to pass a law that locks in the price of gas at say, $1.50 a gallon. It will both eliminate your “annoying” problem and give you a “ridiculous” one in it’s place. Everybody looses!!

  19. It’s just a little ridiculous that I’m spending over ten percent of my take home pay on gas!

    No, what’s “ridiculous” is that you’re perfectly willing to spend 10% of your income on petroleum, while you sit there and complain about how “ridiculous” it is. I live 4 minutes from my office. A tank of gas ($37) lasts me 3 weeks or so. That’s my choice.

    As long as people are willing to spend 10% of their income on gasoline, the market would be stupid not to charge that much for it. This is a market, not a bloody charity event.

  20. “Again, if bioethanol is such a good idea for fueling cars, why does it need to be mandated and/or subsidized?”

    Not that I think bioethanol is a good idea for auto fuel, but that statement is easily answered anyway: externalities.

  21. I have full confidence in a centrally planned economy.

  22. “Again, if bioethanol is such a good idea for fueling cars, why does it need to be mandated and/or subsidized?”

    Not that I think bioethanol is a good idea for auto fuel, but that statement is easily answered anyway: externalities.

    Not to mention the massive subsidies (direct and indirect) given to its prime competitor, oil.

  23. I don’t see it as any one company’s problem that refining capacity. The problem is building a new refinery is almost as complicated as building a nuclear plant, so why go through the hassle if the long term profitability is not there.

    People think gasoline is a right that must sold as cheaply as possible. covering the bare minimums of actual cost and nothing else. I tell you, thats bullshit and people should get off their fat asses and come up with better
    solutions rather than whine to government.

    (Note: People refers to actual fat ass dumbshits that either don’t want to understand basic economics or think they’re in some way special that they can defy the invisible hand)

  24. Ethanol needs subsidies to better disguise the still-obvious fact that it could never compete in a free marketplace with hemp derived fuels. Since hemp can be farmed on marginal land and corn requires good soil, I suppose this causes distortions besides the obvious tax and spend drugwar distortions…
    JMR

  25. “”you’re getting down to needing little or no additional gasoline production” above what is being made today, said Joanne Shore, an analyst for the government’s Energy Information Administration.”

    Methinks that Joanne is going to look a tad bit silly in about ten years or so.

  26. “imo Peak Oil is behind all this.

    the US oil production peaked in the 70s, and has fallen every year since – oil is not limitless, and does anyone think we would import more and more oil every year if we had a choice? … look it up. it explains why suddenly all politicians are pushing ethanol from both sides. its not all about subsidies, its about the world running out of oil…”

    No, Peak Oil is the sort of claptrap that statist environmentalists trot out to further their agenda. There’s a huge supply of fossil fuels out there — as the supply of cheap, readily extracted oil dwindles, the prices have risen and we’ve started extracting the next tier of available energy. There’s tar sands in Canada, deep sea reserves, the ANWR reserves, and massive U.S. reserves of coal which can be turned into electricity to power electric cars, among other sources of energy.

    The prices for gas reflect a combination of environmentalist/NIMBY interference with refinery building, the slow transition to more expensive means of oil extraction, the brain-dead tariffs on imported ethanol, etc.

    The sky isn’t effing falling. If supplies temporarily fall short, rising prices cause conservation and exploitation of new resources. Politicians are pushing ethanol to pander to various statist special interests. Trust the Law of Supply and Demand rather than politicians if you want solutions.

  27. The massive environmental destruction caused by these biofuel alternatives to “dirty” petroleum is a wonder to behold.

    What about the land?

    The hype over biofuels in the U.S. and Europe has had wide-ranging effects perhaps not envisioned by the environmental advocates who promote their use. Throughout tropical countries like Indonesia, Malaysia, Brazil, and Colombia, rainforests and grasslands are being cleared … to make biodiesel, a product that is then marketed halfway across the world as a “green” fuel.

  28. People like to mention externalities when discussing petroleum consumption.

    They generally ignore two things when they do this.

    1. The enormous improvements in quality of life, standard of living, and overall wellbeing petroleum energy has provided.

    If the impact of petroleum is to be fairly evaluated one must look at the many, many benefits petroleum provides to humanity.

    2. They ignore the externalities of the “clean energy technolgy” the government is pushing.

    To date the technology the government has pushed / mandated has consisted primarily of:

    A. Environmentally destructive and ineffective programs like ethanol and other biofuels

    B. Potentially environmentally destructive, definitely view shed wrecking, and ineffective programs like windpower.

    The vaunted “clean” technology people want to use to replace petroleum is for the most part not clean and not environmentally friendly.

  29. Well, the good news is that with all the corn harvested in the US being used to make ethanol, there won’t be any left over to make the devil’s own sweetener.

  30. Again, if bioethanol is such a good idea for fueling cars, why does it need to be mandated and/or subsidized?

    “If ______ is such a good idea for _______, why does it need to be mandated or subsidized?” is a good summation of my feelings on the government.

  31. “Ethanol needs subsidies to better disguise the still-obvious fact that it could never compete in a free marketplace with hemp derived fuels. Since hemp can be farmed on marginal land and corn requires good soil, I suppose this causes distortions besides the obvious tax and spend drugwar distortions…
    JMR”

    Fuckin’ Hippie

  32. “Not to mention the massive subsidies (direct and indirect) given to its prime competitor, oil.”

    Bingo!

    It’s hard enough to compete with something that comes out of the ground in the form something you have to grow has to be processed into. …much worse when what comes out of the ground is subsidized.

    …I’m not a fan of the idea that Iraq was all about oil, but I doubt bio-diesel from algae would require much in the way of foreign troop deployments.

  33. I’m not a fan of the idea that Iraq was all about oil, but I doubt bio-diesel from algae would require much in the way of foreign troop deployments.

    Please replace ‘require’ with ‘rationalize’ or ‘excuse’ or the like.

    Nothing about the oil trade requires US military involvement. In fact, US military involvement almost certainly raises the price of oil to US consumers while making its supply less certain.

  34. First, ethanol burns so much less efficiently than gasoline, that we wind up burning more oil in its production, than the equivalent mileage we get out of the finished product.

    Secondly, there’s no way we can grow enough fuel crops to meet our unlimited-driving standard, unless we grow less food.

    Thirdly, you’re burning food! No, No, *NO!*

    The answer to oil-dependency is not to find a substitute for gasoline. We simply have to phase out the internal-combustion engine. The car must cease to be the American birthright.

  35. PS: Interestingly, that’s also the answer to global heating.

    So there.

  36. The answer to oil-dependency is not to find a substitute for gasoline. We simply have to phase out the internal-combustion engine. The car must cease to be the American birthright.

    Good luck. You’re right on everything but the last sentence. Clean-burning coal, plus nuclear power, plus as-yet undeveloped battery technology for electric cars is a better bet.

    Plus, electric cars will most likely always have the advantage of being safer, considering top-speed limitations.

  37. 36 billion gallons of ethanol? How will we get there? Devoting all the US corn crop to ethanol production? Cutting down the rest of the Amazon rainforest?

  38. Hi jf:

    I’ll allow for that possibility, but I respectfully maintain that it’s a slim one. Here’s why:

    . Replacing coal for oil, as Obama’s currently proposing (surprise, surprise; he’s from a coal state) just substitutes one finite, exhaustible fossil-fuel for another, and at best it only postpones the same crisis. Do we really wanna pass *another* looming catastrophe to the kids?

    . Coal-to-liquids technology yields a fuel that pumps *twice* as much carbon into the atmosphere as gasoline!

    I’d like to know, why nobody’s getting hot on human-powered technologies? Why not?

    . A crank generator can recharge your cell phone, or a portable radio, in a couple of minutes.

    . A foot-pedaled crank can deliver household wattage enough to power all the elective appliances, leaving a household solar or wind-gen to just do the life support (like refrigeration and AC).

    . Human-powered vehicles can now do 25-30 mph on the flat, with minimal strain on a novice rider. Why the heck can’t we get American car manufacturers in on this?

    The point is, I’m not advocating we all go Amish; far from it. I think life post-oil could be productive and even fun. Certainly healthier.

  39. Alan,

    I’m just saying that electricity is going to be the gasoline of the second half of the 21st century. Although, it might not be a bad idea to create “Flintstone” cars that allow for human power to augment/replace electric power.

    The one inescapable fact, that I think we will both agree on, is that the future of the car is going to be very expensive.

    Now, I must go back to the zen of watching the video from the ISS. I never knew of this tonight, but watching the world revolve beneath the ISS (or watching the ISS orbit the world, take your pick), is somewhat relaxing.

    And the shots of Atlantis docked with the ISS are pretty cool.

  40. Alan,

    When I bought my last new car gas was 89 cents a gallon for premium- that was 8 years ago.
    It wouldn’t take much for the price to drop down close to that again- just a fall in demand.

    Jimmy Carter thought we would run out in the 80s.
    Coal and oil are “finite” but for that matter so is our sun.

    PL,

    “When the economically ridiculous corn ethanol subsidy finally dies. . . .”

    Well Fred Thompson has a history of opposition to ethanol subsidies.

  41. A crank generator can recharge your cell phone, or a portable radio, in a couple of minutes.

    The next time my cell phone starts running down I am going to CALL YOU Alan, because you will be my savior. And I will make you healthier, and allow you to have more fun, all in one move.

    A foot-pedaled crank can deliver household wattage enough to power all the elective appliances, leaving a household solar or wind-gen to just do the life support (like refrigeration and AC).

    Yes, and scientists have almost figured out perpetual motion. In fact, they’ll probably have it figured out before you can finish pedaling the battery in my cell back up to full charge.

  42. Well, it’s not as if the alleged fattest-nation-on-earth can’t use a workout. 🙂

    And how were you planning on calling me with a dead cell?

  43. And then you’re gonna get really really fat.

    Ah ha ha ha ha!

  44. I’m gonna call you when I see that the battery is low. See, I have a firm grasp of the obvious.

    You, on the other hand, are simply going to end up fat.

  45. jf,

    What do you mean that “electricity is the gasoline ofthe future.” I don’t understand you.

  46. Saudi Arabia has been demanding for more than ten years that we build more refineries. We haven’t, nor will we, but will expand the current ones. We are importing gas as it is. Not gonna build one anywhere in NC. Where are they going to one?

  47. Re: The idea that a refinery scales like a computer server room:

    As a chemical engineer (although not in the petrochemical industry) I can tell you this is quite incorrect. While there are some efficiencies that can be gained by increasing equipment availability and reliability, chemical processing equipment is designed for very specific flow rate ranges and reaction rates.

    While it might be physically possible to push a higher flow rate through a production train, the reactors and separators are designed for optimum operation at certain flow ranges. Increasing the flow is not a simple matter of installing a bigger pump. The time an average given molecule spends inside a reactor is called the mean residence time. This residence time is very important in determining the extent of the chemical reaction, so one cannot simply force more material through the same reactor.

    Additionally, energy input and cooling requirements need to be considered. If additional energy input is required to make more of a particular chemical, say gasoline, one might have to build a whole new steam plant. If cooling is the problem, new chillers and/or cooling towers would be needed to handle the increased waste heat loads associated with increased production.

    Increases in production come with advances in catalysts and separation technologies, with larger vessels and/or more production trains, and with new processes, all of which require extensive capital investments to implement.

  48. I envision some sort of Planet of the Corn coming from all of this.

  49. Weren’t the events of Children of the Corn precipitated by the use of corn for ethanol rather than feed and fodder as He Who Walks Behind the Rows intended?

  50. > Genghis: “See, I have a firm grasp of the obvious.”

    But not humor, evidently. How sad. :/

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