The Petrified Forest, or Who Moved my $80 Oil?

$80 oil. Seems like almost everyone in biofuels wants it, and is scared silly by today’s low-price environment.

Are high prices good for renewable fuels? The hard data actually goes the other way. The Digest investigates.

There’s a persistent theory going around in advanced biofuels circles that what the industry needs is a return to $80 oil.

How goes the theory? Essentially, this would lead to $3+ gasoline and make a number of alternative fuels competitive on price with petroleum. With price-competitiveness would come investment, goes the theory.

We saw this most recently expressed in the demise of Solena Fuels — with British Airways noting that the technology needed $70 oil to be competitive and attract investment. More on that here.

Worth noting that Coskata infamously abandoned biobased feedstocks for natural gas a few years back, because the lower cost feedstock, its management believed, would enable the company to be cost-competitive with fossil fuels — by, more or less, becoming a fossil fuel — and attract investment. More on that here. Then, er, Coskata died.

A number of companies have abandoned cellulosic projects or collapsed in the past 18 months — the exit by BP, the collapse of Abengoa Bioenergy, and the end of Aurora Algae and Cobalt Technologies, to name a few high-profile casualties. Others have re-purposed away from fuels — for example, Sapphire Energy — citing the oil price environment.

So, there’s lots of reasons to believe that the return of high oil prices would do wonders for alternative fuel economics. So many people say so that it is tempting to go with the prevailing group-think. Though The Prize author Dan Yergin thinks the party is over on oil prices, and more on that here.

The only thing is, it’s not true that high prices are better.

What you’re seeing in industry pronouncements on oil prices is a version of Spencer Johnson’s “Who Moved my Cheese?”, which explores the idea of adapting to change, and begins with the example of the rat who learns to navigate a maze in search of a prize, only to find that after negotiating all the complex steps that there is no reward at the end of the journey —  “someone moved my cheese”.

I am supposed to be successful when oil prices skyrocket! Who Moved my Cheese?!!

As we do in Digestville, let’s look at the hard data.

Energy capital investment

What we can see from the following chart is confirmation that fracking and other enhanced oil recovery techniques have uncovered a vast supply of fossil-based hydrocarbons that make economic sense at around $60-$70 per barrel. That’s where investment is going, and where it will generally go should oil prices climb back anywhere near $80, any time soon.

This time series chart makes it perfectly obvious that climbing oil prices — and the arrival of new technology — facilitated a massive investment in fossil fuels just as RFS2 was introduced and was supposed to galvanize investment in cellulosic biofuels.

As it happened, investment in cellulosic fuels languished — not a single new project developer announced a successful cellulosic project between 2010 and 2014 — the ones that ended up deploying had all been originally undertaken in the 2003-2007 period, when oil prices were in fact much lower.

Vehicle investment

As we can see in this chart series based on from US government vehicles sales data, high oil and gasoline prices drive consumers to find alternative vehicles.

Interest in electrics soared in the 2011-14 period, and are crashing under the impact of lower gasoline prices today. In 2013, more than 4 percent of all US car sales were electrics, and the number was growing fast. By 2015, 3% of new vehicle sales were electrics — and the numbers could drop even further as we understand a major surge is on with light-duty trucks and SUVs in Q4.

Gasoline pool

Another data set from the US government, this one relating back to the gasoline pool itself, is below. Owing to the impacts associated with high oil, gasoline consumption fell sharply between 2011 and 2014. There were a variety of reasons. Fewer miles driven, more electrics and natgas vehicles, more efficient engines, and people switching away from low-mileage trucks and SUVs.

However, this year, it’s all changed.

Gasoline usage has spiked to 140 billion gallons, a 4% jump — because all those positives have reversed. At the same time, falling domestic oil exploration numbers have left the US with a rising oil import bill for the first time in quite a number of years.

Energy security and ultra-low priced oil

At $80 oil, there are lots of producers and lots of ways to recover fossil energy. At $10, there’s not much left standing except the Kingdom and ISIS, and energy security and world security become more entangled the lower the prices go. Imagine a world where ISIS is the swing producer in international markets, and you get the idea pretty quickly.

At the same time, all those other fundamentals are still in place with ultra low-priced oil. Rising driving miles per capita, a switch-back to less fuel-efficient vehicles, indifference to electrics.

In short, ultra-low fuel prices take marginal producers off the table and expand fuel demand. It’s an idyllic world, seen from the point of view of the driver and the alternative fuel producer.

So, why are alternative fuel producers suffering with “low oil prices”?

You heard the squawking after the EPA released its Renewable Volume Obligation numbers for 2015 and 2016. Biodiesel producers were generally positive, ethanol producers were mildly negative, advanced biofuels producers were on the whole generally pleased. And cellulosic producers and their trade groups were completely aghast.

Why?

In the end, it comes down to the way the EPA has regulated the sale and use of what are known as cellulosic waiver credits. We’ll have to go back a little in history to explain.

Back at the time the Energy Security & Independence Act was passed in 2007, Congress was tussling with a real problem. To make up an example, say that the EPA determined that there were 300 million gallons of active cellulosic fuel capacity and intent to produce in 2018 and set a 300 million gallon cellulosic biofuels mandate for 2018. They have to make that determination no later than November 20, 2017.

But say, for example, that some cellulosic producers switched over to making chemicals instead of fuels,or sold their gallons to airlines or other non-obligated parties.

It could leave obligated parties in the RFS with nowhere to obtain mandated fuels. Or, scrambling to compete for limited gallons or competing against high chemical prices to get the required fuels. Prices could skyrocket like bottled water prices after a hurricane.

Accordingly, Congress established the Cellulosic Waiver Credit, so that a producer could buy a credit in lieu of an actual cellulosic biofuels gallon. And generally left it up to the EPA to determine how those would be priced, sold and used.

So, how could you use these credits?

Although not permitted under the rules that EPA set up, here’s a case that’s completely permissible under the EISA legislation.

EPA could have made it possible for producers (or airlines) to provide a free Cellulosic Waiver Credit to Obligated Parties when they sold a gallon of cellulosic jet fuel to an airline. You see, airlines are not obligated parties under RFS, but aviation fuel gallons count as renewable fuels.

In this way, airlines could participate in the cellulosic waiver credit market.

Why does that have value?

The jet fuel example

Right now, January 2017 jet fuel (fossil hydrocarbon) futures are selling for $1.50 per gallon. More on that here.

The cellulosic waiver credit is expected to be priced at $1.93 in 2017. Here’s the chart on that, from Iogen.

Putting those two together, if airlines could benefit from cellulosic waiver credits, they could be paying up to $3.43 to advanced biofuels producers for jet fuel. These fuels would not be affected by the E10 saturation point. And most experts agree you can produce jet fuels from MSW for less than $3.43 per gallon, all in. Fulcrum has weighed in on that.

So, what would you have accomplished? A gallon of renewable fuel produced that does not stress existing infrastructure, has a ready and eager buyer, at a price that buyer can afford today. And, a liquid market in Cellulosic Waiver Credits. After all, jet fuel customers are eager to have cellulosic fuels, and oil companies are eager to avoid them.

Were renewable jet fuel producers to offer $4 fuels to airlines, the airlines would not be able to compete with the standard EPA Cellulosic Waiver Price (it would be cheaper for an obligated party to pay $1.50 for a gallon of fossil jet fuel and $1.93 to the EPA for a cellulosic waiver credit). In this way, obligated parties are protected from price-gouging.

There are other examples

There are other off-road markets where creative use of Cellulosic Waiver Credits could be used to sharply press to establish a market for cellulosic biofuels. For example, a cellulosic fermentation project like DuPont’s, that makes ethanol, could sell that ethanol to a licensee of Byogy, Virent or Vertimass technology to be upgraded to jet fuel.

Since it takes 1.5 – 2 gallons of ethanol to make a gallon of jet fuel, we’d be taking gallons out of the road transport pool, by-passing the infrastructure problem that EPA is concerned over, and providing a financially viable mechanism to facilitate the deployment of cellulosic jet fuels.

Another example.

What if DuPont could sell a discounted cellulosic waiver credit to an obligated party?

Right now, if they charged $1.50 per gallon, that’d be cheaper than buying credits from the EPA. Then, DuPont could sell the fuels directly to a non-obligated fuel distributor, who could blend gallons of E85. Those gallons could be sold at a substantial discount to fossil gasoline, thereby driving E85 and providing an expanded market for renewable fuels.

All of these are examples. There are others, perhaps better. But they illustrate a point.

Who has the power? EPA does. Currently, you can only buy a credit from the government at a fixed price, and only obligated parties can buy them. But that was not required by Congress in the EISA legislation. That’s something established by EPA in rule-making, and can be un-done in rule-making.

The Petrified Forest

Bottom line, renewable fuels are not advantaged by high oil prices, they are advantaged by low oil prices. But only when EPA sets regulations that create a liquid market for cellulosic waiver credits and other mechanisms meant to drive the adoption of renewable fuels.

Right now, we have a petrified forest. A system that was supposed to advantage renewable fuels but in fact mineralizes the marketplace and petrifies every renewable provision. Elements that were designed to facilitate renewable fuels, such as Cellulosic Waiver Credits, in the end do not accomplish their intended goals.

Only EPA and the Obama Administration have the power to demonstrate their commitment to climate solutions — as opposed to the climate posturing that comes from switching coal-fired power to natgas-fired power and talking up a world of electrics when people aren’t buying many and, these days, buying less. Nothing wrong with decarbonizing the power sector, but everyone knows that’s not enough, not even in the adjacent galaxy to enough.

Real solutions require real thinking, not wishing hard for things that aren’t real. The hardest yards to gain in climate are in transportation, and real leaders take on the tough assignments.

High-prices for oil? These are no friends of renewable fuels and ultimately not all that beneficial to the climate, since they advantage the production of even dirtier, less advantaged fossil fuels.

Instead, let’s thank our stars for low-priced oil, but get the market-enabling regulations right — and unPetrify the Petrified Forest.