Gorilla Sized Opportunity Blindness

On a recent trading day, (Dec. 26, 2014 to be specific) Western Texas Intermediate closed at $59.45 for Feb. 15, 2015 delivery. At the same time, Gasoline for Jan. 15 delivery closed at US$1.51 (and 54/110ths) per gallon (US gallon). Oddly enough, it wasn’t a scary event to me. Just barely less than a year ago, I was working with a volunteer “mentor” we had drawn into a working group who wanted to find financing for a pair of technologies still in the labs of a nearby university. This mentor, clearly a man who was not only wise, but wiser than we gave him credit for being at that time, had insisted that we make calculations based on a wholesale price for raw algae oil, so-called “green crude” at US$1.00 per gallon.

Collectively (and silently, I think) we all groaned, but went to work on mashing the budget into something that would support a wholesale price of just US$1.00 per gallon.

We assembled our pitch, and faced a panel of decision makers. We explained, in simplified terms, how these scientific innovations would change the cost structure in producing algae in general, of the lucrative after markets for the “sludge” of proteins, starches and sugars remaining after separating out the oil, and the specialty oils and chemicals. We admitted that capital costs would be higher than current standard methods of cultivating algae, but that since none of those methods had yet managed to show a profit while our spreadsheet came out in the black not the red ink we contended that it was a worthwhile investment. Economic inadequacy has come to be standard operating procedure in the algae industry aimed at fuel production with a hope for rising oil prices and some ability to implement future cost savings (nutriceuticals being a whole other ball game), we (well, I, since most of the rest of the team were on other continents at the time) stood back and waited to hear, having slain that dragon of uneconomic production, if we had inspired any interest.

Various questions were raised, I gather my answers were less than persuasive, and I thanked them for their attention. Clearly my communications skills needed honing to reach my audience and their wallets, but as if I needed proof, one final blow was delivered as I exited.

It was not a question so much as a comment. I had been talking for half an hour about vast quantities of land, oil and markets, but primarily discussing dollars per gallon (for the algae oil). As I departed one of the panel tossed this at me: “When are you going to be able to compete with $100 per gallon crude?”

Up to that point, no one had spoken of BOE (barrel of oil equivalent) or any similar term for the entire time I was in the room, and it left me stunned. It didn’t register in my brain that he was even talking about the same subject any more. I had just spent a half hour talking about US$1.00 per gallon algae oil wholesale price, and he wanted to know when algae oil could compete with $100/bbl petroleum, which, of course was 42 gallons worth of oil (WTI or otherwise). Somehow I had failed to register with this gentleman that I was already talking in terms of US$42/BOE.

I still blame myself for failing to reach my audience. Clearly it was my fault for not making my assumptions obvious.

But in retrospect, I have to wonder if it was not, at least partially, what is known in psychological circles as “change blindness”. The phrase refers to a tendency we humans have which causes us to believe that we are seeing what we expect to see.   Take a look at this video to see the proof of this psychological premise.

Here’s a different version (yes, it is different)

This gentleman, the one who spoke out, apparently expected to see yet another presentation that did not solve the cost to value problem in cultivation and production of algae oil as a fuel. His perception failed to grasp that we were so far beyond this issue that it was not even a question of petroleum prices being relevant (because oil was, at that time somewhere in the US$100/bbl range). He heard the cost of US$2.5 to 3 million just to get these technologies out of their labs and into demonstration scale operations, yet he simply could not see the “invisible gorilla” (the name is coined from the original “change blindness” demonstration)(in case you didn’t look at the videos, the idea is that you are asked to watch the players in the white shirts, you tend not to see the black shirted players and you almost always fail to see a guy in a gorilla suit wander through the fast paced game of constantly moving players). In this case our “invisible” part was that we had already exceeded the standard he was used to hearing about of $100/bbl. of petroleum. Not merely exceeding it, but exceeding that level by nearly 60% as we began our discussion.

Now, of course, the opposite might have been true. If this person, with the apparently negative view toward “algae as fuel” economic viability within the foreseeable future had noticed the figures his reaction might have been quite different. If he had noticed that the gallons produced number and the dollars of gross revenue were the same, down to the penny, he might have fallen out of his chair laughing at the impossibility that he would have (or could have) perceived as completely implausible in the first place. For that matter, I am not claiming here that the technological improvements we expected to achieve through these (still) lab level innovations would, of a certainty, produce $1.00/gallon algae oil, but those were the claims (numerically cumulative) of the creators of these technologies in improved cost efficiencies. As university researchers and professors, we believed they knew better than we did about the impacts their technologies would have. We took them at (roughly) face value with the assumption that the “getting them out of the lab” process could only improve on their efficiency if the researchers had been a little too optimistic over their own creations. We could have been wrong about that.

On the other hand, for these investors, the degree of technological readiness was the factor upon which they were not willing to gamble. They were the wrong people to approach with this high risk proposition. Somewhere, out there, the right people will be found. I do hope that it will be before some lesser technological route becomes the “industry standard” way of creating fuels whether from algae or some other renewable source(s), and that some locked-in-mind-set once again will fail to see the gorilla.

For instance, I think that T. Boon Pickens has a marvelous idea about short term, bridging technology that can significantly reduce the amounts of fossil carbon that go into the atmosphere from diesel powered trucks by converting them to run on compressed natural gas (a really minor change to the engines, and substituting high pressure fuel tanks). Natural gas is still fossil source carbon, however it burns cleaner than coal (Boon also wants power plants to burn natural gas) or gasoline or diesel, but nevertheless, it is still fossil carbon. But once we have “converted” the latest and greatest trucks to running on compressed natural gas (Boon’s idea), the change of that infrastructure to something new, or something old, like 100% biodiesel that is entirely non-fossil carbon (a step up from natural gas, to be sure) which really would only take motor makers getting around to realizing that lots of engines are already running on 100% biodiesel with no ill effects except the manufacturers no longer warranty their performance (and how many diesel engines are still under manufacturers’ warranty among all the millions of them on the road today?) which, given the lumbering pace toward change in current infrastructure just to accommodate biodiesel next to the pumps dispensing conventional diesel, gives you some idea of how difficult it is to transition to any new technology. So, despite Boon’s idea being a pretty good one, I would hate to see it become the de facto standard that blocks transition to a new algae based 100% non-fossil carbon source, a truly renewable set of fuels. Which, by the way, are not limited to the biodiesel conversion process, but can be readily made into drop-in compatible gasoline, diesel fuel and jet fuel, too.

Please, don’t let $60/bbl WTI or $1.50/gal of bulk wholesale gasoline cloud your vision so that you don’t see the opportunities that this pricing challenge presents. There are certainly global political ramifications to low oil prices and those dynamics can change very rapidly. The impetus for renewable fuels waned quickly as prices “normalized” after the first “oil crisis” that happened during President Carter’s administration in the US. In this instance, “normalized” pricing from today’s cheap oil is, in the longer term, more likely to be back toward the $100+ range or higher. Even if the world and the market doesn’t remember that the food value in algae still exceeds its value as “green crude”, pure algae oil might substitute for corn oil in salad dressings. Used that way it would have twice the value it would replacing petroleum. Feeding the world is no less significant a need than fueling it, even if climate change may make fuel a more urgent problem at the moment.
Let’s not allow short term economic conditions to cause gorilla sized opportunity blindness. It has been my observation that the answers already exist in the labs of the scientists, we just have to help them provide proof that they solve the problems of economic renewable fuels.

By: Stafford “Doc” Williamson. He is a long time developer of technology for renewable fuels, holds a patent for an algae cultivation enhancing device, and is a writer and former columnist for several online news sites, as well as CTO for Source Integration, and President of a couple of his own companies.