Olden Days, Golden Days, and Golden Gripes

Did you notice electric car sales plunging? Fuel usage on the rise? Fracking in retreat? Strategics like Exxon, United Airlines, Suntory and Tesoro doubling down? Why $30 oil is your new best friend. C’mon Get Happy.

When US President Theodore Roosevelt remarked in a speech at Provincetown, Massachusetts in August 1907 of his government’s determination “to punish certain malefactors of great wealth,” his gaze drifted over to Henry H. Rogers, the most powerful and senior director of Standard Oil. Roosevelt added that he regarded the battle over the break-up of great financial and industrial trusts as a contest “to determine who shall rule this free country—the people through their governmental agents, or a few ruthless and domineering men.”

Standard Oil the Leviathan! Standard Oil the destroyer of fair commerce! In those days, John D. Rockefeller was described around the turn of the century as “the most hated man in America”.

It might surprise readers to discover that, by 1898, the total production of petroleum in the United States was 152,000 barrels per day. About 15 percent of what the US renewable fuel industry produces today.

Now, exactly why is the pace of petroleum’s expansion is of more than passing historical interest? Because it provides a useful benchmark for the the pace of the development of renewable fuels. So, how fast did petroleum expand production, in comparison to low-carbon renewable fuels?

The chart below illustrates. Here, we’ve charted petroleum compared to low-carbon renewable fuels, starting with the first year that each achieved a production of 10,000 barrels per day (153 million gallons per year).

One thing is clear, renewable fuels are moving fast, by comparison. From 1866 through 1899 (a year when negative attention on the Standard Oil monopoly was reaching a zenith), US production increased from 10,000 barrels per day to 156,000 barrels per day, a factor of 15. By contrast, low-carbon renewable fuels have expanded from 11,000 barrels per day in 1981 to 1,037,000 in 2014, a factor of 99.

What about advanced biofuels?

How fast have advanced biofuels expanded? That is, fuels that reduce greenhouse gas emissions by 50 percent or more? There’s been quite a bit of carping about “fantasy fuels”.

Here’s the chart and the data set, compared to the rise of biofuels as a whole and to the rise of petroleum — again, starting with a comparison point of the first year of reaching 10,000 barrels per day in production capacity, which was 2006 for advanced biofuels.

The data is clear. Advanced biofuels production has grown at a much faster rate than biofuels as a whole, and petroleum. Pro-active public policy is largely to credit.

Golden Gripes

Despite all the growth, renewable fuels producers are in a funk. Ask them, and they mention two gripes as quickly as a howdy-do. We think of them as Golden Gripes because they are supposed to stimulate someone — probably, taxpayers — to shovel some gold into the renewables space to relieve the suffering.

The first gripe: infrastructure

First, a slowdown or reversal of renewable fuel mandates by the US Environmental Protection Agency, which cites a lack of distribution infrastructure — especially, vehicles and pumps that tolerate higher blends of ethanol.

Yet, the so-called ethanol “blend-wall” was talked about for years before the E10 blending saturation point was reached. Though petroleum marketers did little to develop high-blend ethanol infrastructure except where forced to. It could hardly have been expected that petroleum producers would welcome renewable fuels. After all, if railroad companies had followed the path expected of petroleum producers, we’d all be flying Burlington Northern Santa Fe.

Renewable fuel producers look at the landscape of fueling infrastructure and “cried poor” at the prospect of fostering the development of a broad network for E15 or E85 ethanol. 3,000 or so outlets exist, out of more than 100,000 US locations, serving some 15 million flex-fuel vehicles. Had their been a robust network of outlets, and effective pricing, we’ve seen strong evidence of fuel switching and there would have been more.

But no one paid for it, or developed it. Consequently, auto manufacturers weren’t wild about flex-fuel cars, and consumers didn’t go crazy over E85.

Now, you might ask, why should companies like POET build fueling outlets? And we might answer, why did Apple build Apple Stores? Why did Standard Oil build service stations? Our takeaway: no one is going to build the vehicles and pumps for infrastructure-incompatilble renewable fuels, unless industry takes a strong hand in demonstrating the  investment returns for end-user delivery.

The second gripe: low oil prices

For some, low oil prices bring hard times. Mostly, to competitors of renewable fuels.

Low prices have resulted in a catastrophic decline in new oil production in the US, and elsewhere. Fuel-efficient vehicles are not as popular — sales of SUV’s are up after years of decline, and gasoline demand is up.  Electric car demand has dropped substantially.

But rebewable fuels have protections. When Congress wrote the Renewable Fuel Standard, memories of $15 oil killing off alternative energy technology in the 1980s were still fresh. So, protections were built in that, if they are mysterious to investors, could be explained. The ensure market demand and a floor price.

Floor market

The basic mechanism of the RFS is the RIN. As a renewable fuel producer, you hand a free RIN to your customer. That customer activates that RIN by blending renewable fuel. Then, they can retire it, or sell it. In this way, obligated parties pay all RIN costs, but they receive all RIN revenues. Refiners who find ways to distribute fuels above and beyond their own obligations — they can be net RIN sellers. Refiners who don’t find markets — they are RIN buyers. If markets are robust for renewable fuels, there are excessive RIN sellers, and RINs are cheap. If they are constrained, tthe opposite. Eventually, it becomes cheaper to find new markets than buy costly RINs, so markets become less constrained if the RFS is able to operate.

The California Low Carbon Fuel Standard also rewards development of alternative fuels markets. The more than obligated parties develop and sell low-carbon fuels, the less exposure they have to paying for credits.

Floor price

At the same time, Congress established a counter-signal to oil prices. When oil prices fall, the cellulosic waiver credit value rises — creating a price floor for cellulosic fuels. Tax credits for biomass-based diesel offer support for still-nascent diesel-side fuels.

Putting the two together

Time to stop griping. These are golden times. Remember $100 oil? The electric cars, the tight oils, the shrinking gasoline market, the project finance that was impossible to find?

Low energy prices are better for the expansion of renewable fuels, so long as affordable feedstock is available. And, maintaining a positive spread between feedstocks and finished products — the crack spread — is everyday business for a fuel refining industry.

It’s one of the reasons that companies like Valero and Tesoro are making good money right now, on the petroleum side — refiner margins have improved because feedstock prices are falling faster than fuel prices.

But spare a kind thought for…

Renewable chemicals. Not all is well in Bioeconomyland. While many of the organic acid technologies, with their one-step processes and oxygen content, will fare reasonably well against low-price oil, other technologies producing less bio-advantaged molecules will struggle without the protections against low oil prices that biofuels enjoy. And, spare a thought for methane-based technologies as a replacement for petroleum: in February 2013, oil was 4.9X the price of natgas, on a BTU basis. Today, that figure has dropped to 2.5X. Playing the “natural gas” card is not as easy as it was..

The playbook

So, the playbook seems clear for renewables.

1. Establish infrastructure for distributing fuels as fast, or faster, than production is growing. That way, production can grow.

2. Expand feedstock supply faster than demand is growing, so margins are strong.

3. Demonstrate end-to-end technology for sufficient hours of operation before deploying at commercial-scale.

4. Maintain floor price and floor market mechanisms to preclude predatory competition from incumbents, and wait for the favorable side of the commodity cycle.

5. Pray for low energy prices, so long as #2 has been accomplished. $20 oil helps renewable fuels and just about nothing else. $100 oil just brings back all the other market responses that had renewable fuel producers scratching for project finance between 2010 and 2014.