The Fickle Finger of Fuel Fury: avoided cost, fish oil, Maytag, and biofuels

How do you really value something that takes a bad outcome (high gas prices) and prevents a worse outcome (outrageous gas prices).

Preventative medicine – you never really feel the value, see the value — so how do you measure the benefits of renewable fuels in ways that have meaning to individuals?

If you are of “a certain age” and have, as I have, a friend or relation working in the nutraceutical trade, you might well been advised to start taking fish oil pills in order to reduce the future risk of age-related macular degeneration, the chief cause of vision loss in “the golden years”.

These pills contain high levels of omega-3 fatty acids — and some studies have shown that this can reduce the risk of an onset of AMD. Well, enough studies to get my sister excited about it, and alarm the heck out of me, as someone who reads for a living.

So, we make the investment. At an alarming enough cost to make someone a permanent believer in the power of algae-based nutraceutical economics — I mean, it is possible for a company to lose money that can sell a bottle of fish oil pills that contain, by my count, 108 grams of omega-3s priced at $22.00 a bottle?

Measuring benefits

But we’ll never really know the benefits, for sure. If our eyesight stays intact, we’ll probably credit the 30 cent per day habit. If it falls off slowly, we’ll probably be told that it would have been much worse, otherwise. Studies don’t causally link omega-3s to beter eye health, so far as I can tell. They simply show that people who consume a certain level of fish oils are 50% less likely to have AMD-related vision loss later on. Will we be one of the 50% who benefit, or not?

Sigh, it’s the nature of preventative medicine.

Measuring the economic impact of renewable fuels

The problem of fish oil and omega-3s come to mind — not so much because the Algae’s Grandest Show, the Algae Biomass Summit is next week in Orlando and here in Digestville we are making our plans for all the meet-ups that happen there — but because of a comment we saw this week from the energy economist Phil Verleger, in Petroleum Economics Monthly, that has been getting wide distribution amongst the Digesterati.

Verleger writes:

In 2007, the US Congress passed the Energy Independence and Security Act (EISA), which amended the renewable fuels program to raise the use of ethanol and other renewables as alternatives to petroleum. These fuels have replaced a significant volume of petroleum consumed in the United States. EISA increased the required renewable fuel amount by four hundred thousand barrels per day in 2010 and 2011, five hundred thousand barrels per day in 2012, and nearly seven hundred thousand barrels per day in 2013. The total amount blended into the petroleum mix from 2008 to 2012 was seven hundred million barrels.

Had Congress not raised the renewable fuels requirement, commercial crude oil inventories at the end of August would have dropped to 5.2 million barrels, a level two hundred million barrels lower than at any time since 1990. The lower stocks would almost certainly have pushed prices higher. Crude oil today might easily sell at prices as high as or higher than in 2008. Preliminary econometric tests suggest the price at the end of August would have been $150 per barrel.

The implication for world consumers is clear. As noted in the August 2013 Petroleum Economics Monthly, the US renewable fuels program has cut annual consumer expenditures in 2013 between $700 billion and $2.6 trillion. This translates to consumers paying between $0.50 and $1.50 per gallon less for gasoline.

Now, some background on Verleger. Although he does show up from time to time on the “future of clean energy” talk circuit — he’s a conservative petroleum economist whose primary enthusiasm in recent years has been on the future of frasking-related petroleum. In The Atlantic earlier this year, Verleger commented in an article on methane’s future that fracking is creating “the biggest change in energy in almost 100 years—a revolution.”  In short, no starry-eyed alternative fuels hippie.

So, if consumers are saving $0.50 to $1.50 per gallon on gasoline — well, we can understand the lack of enthusiasm amongst oil company investors — but where’s the consumer support? After all, we’ve probably all seen friends or relations who will drive clear across town to save twenty cents on a gallon of gas.

Fifty cents. A dollar fifty? A gallon. That’s huge. As much as a thousand dollars per year in the hands of the owner of the average car. Why. that’s more than the cost of a vacation. A crazy weekend in Vegas, an early payment on the mortgage.

It even covers the cost of the fish oil supplements. So, where are the bands and bunting, where are the three cheers for renewable fuels.

The problem of preventative medicine

And there’s the problem. It’s fish oil. Which is to say, how do you really value something that takes a bad outcome (high gas prices) and prevents a worse outcome. Preventative medicine – you never really feel the value, see the value.

The fireman that saves your house from burning down — easy to value,. easy to justify, easy to reward. The faceless guy in the county building department, writing fire codes that save countless lives — including the lives of countless firemen — well, how do you rate that value. Is that code preventative of a catastrophic outcome, or just a complete pain that you have to deal with every time you remodel a home and need to upgrade systems to bring them into compliance with the new codes?

So, well may we hail Verleger’s analysis — and we’ve seen others along the same lines, for years, and yet here we find ourselves in a titanic battle over the future of the Renewable Fuel Standard, which the oil industry informs us is “irretrievably broken” and has lined up quite an impressive array of allies in the US House and Senate, enough to cause the renewable fuels lobbies to have absolutely miserable summers trying to fend off an assault on the RFS.

So, you’ll see emails flowing around from the usual suspects to the usual suspects — saying, lookee here, Verleger says that the RFS saves money”. And it will change nothing. Because no one sees the pain at the pump the way that economists do, in terms of “what if” scenarios. They look at prices — say “Ugh”, and then pump away, because, what can you do?

The Fickle Finger of Fuel Fury

Oh, sure, consumers will get riled up in favor of energy independence, when oil prices bite. They may even get active on the internet, or call a Congressman. But, then someone will write an article about the coming boom in energy production, due to fracking (true), which will lower your energy bills (false), and they will relax.

As a thought point — in the years of the fracking revolution, where low-cost natural gas has been replacing coal at an astonishing pace in terms of power generation — have your electricity bills gone down?

So, what do you do about it. How do you make the invisible, visible.

Well, you could learn something from the anti-smoking groups. It’s taken them decades, but they have brought down the average consumption of cigarettes by a considerable amount, and they have done much to prevent the problems of secondary smoke-related cancer by getting bans enacted for smoking in offices, restaurants, bars and hotels. Often, with a storm of protest to contend with.

How did they accomplish it? Ads that make consequences visible, mostly. Horrible images of a frightening future that awaited smokers who paid no heed and failed to kick the habit. Generally, they had some effect on smokers, but they had a heck of an effect on friends and relations. Friends don’t let friends drink and drive, smoke, and so on.

The Maytag gambit

Maytag had a novel way of going about it. How do you make the invisible, visible, when in your case the invisible impact is that your appliances, which cost more, break down less often than the other guy’s?

In their case, they invested “the Maytag repairman” whose sole job was to appear on television, essentially doing nothing (but in a supremely comic way), and demonstrating thereby the value of the premium price of the product. No one called the Maytag repair hotline, so went the advertising themes, and it convinced millions that Maytag was a premium product worth the premium price.

Someone needs to find an equally effective way to dramatize the $5.50 per gallon fuel that no one is buying now, thanks to the RFS. Not expressed in charts and graphs about savings. There are a zillion of those, no one reads them. Power bills are full of them – the ones that comment on the impact of fracking and low-cost gas on your power bills, that you don’t know the answer to, probably.

Ah, the industry needs a Maytag man, and badly, and now.