Think About It
You have probably seen our good buddy Willie Nelson advertising his Texas bio-diesel on television. It is a blend of petroleum based diesel with plant based bio-fuel. But, as Commentator Paul Harvey says: Do you want the “rest of the story”? To me, not surprisingly, it demonstrates the fallacies of believing that worldwide free trade is a win-win for everyone.
The European Union in 2004 was complaining to the World Trade Organization that the US was subsidizing our manufacturers to allow them to compete unfavorably with European manufacturers on our exports to Europe. The WTO agreed and allowed the European Union to impose a 5% import tax on all our exports to them, and increase it 1% per month until we were in compliance. Senators Charles Grassley, (R-IA) and Max Baucus (D-MT) passed the “Jumpstart our Business Strength” (JOBS) Act which repealed the tax subsidy regime and replaced it with a bill that met WTO demands.
Here is a quote from Grassley at the time of passage. “This bill is a good solution. It’s not only the first step toward ending the Euro tax on America’s exports, but it also gives a real shot in the arm to US factories and farmers, at home and abroad. This bill was years in the making. Today’s vote was overdue, but couldn’t have been more welcome. Every day of delay means more sanctions freezing US businesses out of the European markets, and more jobs in danger. I hope the House will soon follow suit with similar legislation. We need to give permanent relief to the nation’s job creators and lift the sanctions burden from our exports.”
Hidden within the Jobs Act, Grassley inserted a “Blender’s Credit” to encourage the production of bio-fuel, which would benefit his corn-farming folks back home. At that time, I suppose, no one suspected what we were going to do to the price of cornbread, grits and cereal. The Act awards a US income tax credit of $1 per gallon on any finished bio-diesel mixture produced, but it does not have to be domestically produced. And here is the kicker. The definition is a mixture containing at least 0.1 per cent (by volume) of petroleum diesel fuel. For example, a mixture of 999 gallons of bio-fuel and 1 gallon of diesel is a bio-diesel mixture.
According to the Christian Science Monitor, a shipload of 9,000,000 gallons of Malaysian bio-fuel, typically made from their palm oil, pulls into a dock in Houston, where a shot of 9,000 gallons of petroleum diesel is blended in. The US importer now qualifies for a US tax credit of $9,000,000. He is also free to export his 9,000,000 gallons for sale to Europe, where European consumer tax credits allow him to sell above US prices. We are now supplying 20% of their bio-diesel. But, here come the Europeans again, complaining to the WTO once more about US unfair trade practices. So, you and I are helping petroleum producers with subsidies on both sides of the pond, while we have to import 80% of our fuel. Is this a great country, or what?
Fortunately, the splash-and-dash scheme has not caught on fully. Estimates are that it cost us a total of only $30 million in 2006. Then the first 4 months of 2007 saw shipments of 60 million gallons, or $60 million. According to the Wall Street Journal of April 1, 2008, it now may be costing as much as $300 million annually. You know what they say: “A million dollars here, a million dollars there, after awhile, it adds up.” But, thank goodness, our ever alert Congress has it on its radar screen. According to an anonymous member of the House Ways and Means Committee, “It’s one of the issues that’s driving closer scrutiny.
Thursday, June 19, 2008
ETHANOL
Think About It
God help us when our Federal government tries to do the same. I wrote recently about Senator Charles Grassley (R-IA) and his Blender’s Tax Credit, hidden in the JOBS ACT to help out the corn growers in his state, and the disastrous side effects. In 2005-6, corn was averaging $2 per bushel. Now, the future’s market for corn is over $7 per bushel. Yet in 2006, the US produced only 10 billion bushels of corn, while last year it was over 13 billion bushels. But because of competition with ethanol production, the National Pork Producers Council reports that the cost to feed a pig to slaughter was $65 least year, compared to $35 the year before. We can look for a price increase of about 7.5% more on milk, pork, beef and chicken because of corn ethanol. As early as 2006, Bush was considering removing ethanol subsidies, but Congress kills the action every year.
In 2007, the US, world’s largest ethanol producer, produced 6.5 trillion gallons of ethanol from corn. The second largest producer by far was Brazil, with 5 trillion gallons made from sugar cane. Third place EU produced only 600 million gallons. Brazil produces much more than they can consume. Yet, we imported only about 189 million gallons from Brazil. They would like to ship us more, but can’t. Why? Because we charge them a 2.5% import tariff, and a secondary duty of 54 cents per gallon; supposedly to offset the blender’s credit given to the US petroleum producers who mix ethanol and petroleum. We don’t charge these tariffs to Israel, or our NAFTA buddies, or the Caribbean islands, because they can’t send us even 100 million gallons. But the US corn growers have a substantial ally in keeping tariffs against Brazil. The US sugar industry, who frowns at the precedent of doing anything to help foreign sugar producers, supports these tariffs.
The cheapest price for E85, which is 85% bio-fuel and 15% petroleum, is about $3.13 per gallon now in Georgia, nearly 25% cheaper than pure gasoline. However, you need a flex-fuel car to burn it. Tried to buy any E85 lately? With a population nearing 9 million, until recently, there were 5 stations in Georgia. I understand Protec Fuel is now opening 12 stations in metro Atlanta. In 2007, corn-growing Iowa, with a population of under 3 million, had 88 stations open. Surprise, surprise!
While ethanol is easier to produce from starch, such as in corn, it can also be produced from cellulose. While we think of cellulose as wood fiber, it is the main component of all plant cell walls, and is the most common organic compound on earth. Ethanol could be produced from corn stalks, rice straw, wood chips, even kudzu. The US Energy Department states that it takes only 0.1 btu’s of fossil energy to produce 1 btu of energy from cellulose for the pump, while it takes 0.74 btu’s to produce 1 btu from corn. The corn is almost not worth the effort. According to the Energy Department, with only modest changes in land use, we could grow 1.3 billion tons of replaceable cellulosic biomass by 2030; enough to replace 30% of our gasoline consumption.
Are the corn growers taking us to the cleaners, or what? The Iogen Corporation of Canada is already producing 1 million gallons of cellulosic ethanol annually from a plant started in 2004. And they have just received a license from Perdue Research Foundation to use genetically enhanced yeast that increases the yield by 40%. Iogen considered a second generation plant in Idaho, but backed away because of lack of support from our Energy Department. I wonder what part Grassley may have played. Whatever happened to US leadership?
While miles per gallon go down slightly with E85, power seems to be greater, because octane is higher. If there are two things Georgia can grow, it’s pine trees and kudzu. Johnny and Saxby, are you listening?
God help us when our Federal government tries to do the same. I wrote recently about Senator Charles Grassley (R-IA) and his Blender’s Tax Credit, hidden in the JOBS ACT to help out the corn growers in his state, and the disastrous side effects. In 2005-6, corn was averaging $2 per bushel. Now, the future’s market for corn is over $7 per bushel. Yet in 2006, the US produced only 10 billion bushels of corn, while last year it was over 13 billion bushels. But because of competition with ethanol production, the National Pork Producers Council reports that the cost to feed a pig to slaughter was $65 least year, compared to $35 the year before. We can look for a price increase of about 7.5% more on milk, pork, beef and chicken because of corn ethanol. As early as 2006, Bush was considering removing ethanol subsidies, but Congress kills the action every year.
In 2007, the US, world’s largest ethanol producer, produced 6.5 trillion gallons of ethanol from corn. The second largest producer by far was Brazil, with 5 trillion gallons made from sugar cane. Third place EU produced only 600 million gallons. Brazil produces much more than they can consume. Yet, we imported only about 189 million gallons from Brazil. They would like to ship us more, but can’t. Why? Because we charge them a 2.5% import tariff, and a secondary duty of 54 cents per gallon; supposedly to offset the blender’s credit given to the US petroleum producers who mix ethanol and petroleum. We don’t charge these tariffs to Israel, or our NAFTA buddies, or the Caribbean islands, because they can’t send us even 100 million gallons. But the US corn growers have a substantial ally in keeping tariffs against Brazil. The US sugar industry, who frowns at the precedent of doing anything to help foreign sugar producers, supports these tariffs.
The cheapest price for E85, which is 85% bio-fuel and 15% petroleum, is about $3.13 per gallon now in Georgia, nearly 25% cheaper than pure gasoline. However, you need a flex-fuel car to burn it. Tried to buy any E85 lately? With a population nearing 9 million, until recently, there were 5 stations in Georgia. I understand Protec Fuel is now opening 12 stations in metro Atlanta. In 2007, corn-growing Iowa, with a population of under 3 million, had 88 stations open. Surprise, surprise!
While ethanol is easier to produce from starch, such as in corn, it can also be produced from cellulose. While we think of cellulose as wood fiber, it is the main component of all plant cell walls, and is the most common organic compound on earth. Ethanol could be produced from corn stalks, rice straw, wood chips, even kudzu. The US Energy Department states that it takes only 0.1 btu’s of fossil energy to produce 1 btu of energy from cellulose for the pump, while it takes 0.74 btu’s to produce 1 btu from corn. The corn is almost not worth the effort. According to the Energy Department, with only modest changes in land use, we could grow 1.3 billion tons of replaceable cellulosic biomass by 2030; enough to replace 30% of our gasoline consumption.
Are the corn growers taking us to the cleaners, or what? The Iogen Corporation of Canada is already producing 1 million gallons of cellulosic ethanol annually from a plant started in 2004. And they have just received a license from Perdue Research Foundation to use genetically enhanced yeast that increases the yield by 40%. Iogen considered a second generation plant in Idaho, but backed away because of lack of support from our Energy Department. I wonder what part Grassley may have played. Whatever happened to US leadership?
While miles per gallon go down slightly with E85, power seems to be greater, because octane is higher. If there are two things Georgia can grow, it’s pine trees and kudzu. Johnny and Saxby, are you listening?
OIL DEPLETION
THINK ABOUT IT
If you read the Atlanta Journal, you may have seen recent full page ads paid for by the oil industry, dissecting the internal costs of a gallon of gas; which is now around $4.00 retail. According to the oil industry, they point out that around 73% of the cost of a gallon is for crude oil, the price of which is set by OPEC. This much of the story is true. What remains unsaid is how much of that crude is produced by our domestic oil companies for their own use, in their own production. According to money.cnn.com, our biggest company Exxon, produced around 44% of the oil they sold, and smaller Chevron, produced 48% of the oil they sold. While it is true that it may cost $5-7 per barrel to pump crude, and the government is looking for taxes; that still leaves a big piece for profit…Exxon made over $40 billion last year.
Geologist M. K. Hubbert had predicted US “peak oil” by 1970 over 50 years ago. What he said was that the crude supply was not everlasting and would run out. Truth is, he was right. Our highest internal production was about 1971, just before the last energy crisis. We have been decreasing since, and actually produced less oil domestically in 2006, than we did in 1950. But again, what is unsaid is how little our producers may be trying to increase production, while gaining favorable tax treatment because of it.
As early as 1913, they had convinced the government that oil would probably run out, and that they deserved an oil depletion allowance deduction on taxes amounting to 5% of sales. By 1926, this was increased to 27.5% of production. In 1976, Jimmy Carter managed to restrict this to only independent companies which don’t import or refine oil. But to make up for this, the larger companies were then given an intangible drilling cost deduction, 100% the first year, and tangible drilling cost deduction, split over 7 years.
Listen to a conversation from ExxonMobil’s recent presentation to financial analysts in New York last March. Halfway through the presentation, they flashed a chart showing production flat through 2012. According to Business Week, the first question was, “Why are you not showing any growth in production?” The answer of Chairman Rex Tillerson:
“We don’t start with a volume target and then work backwards,” he said. Instead, his team examines the available investment opportunities, figures out what prices they’ll likely get for that output down the road and places its bets accordingly. “It really goes back to what is an acceptable investment return for us.” Tillerson said. In other words, producing more barrels just to help consumers is not part of the company’s calculations. Apparently that acceptable return is 32% on capital, because that is what they reported last year.
I never thought I would agree with Hillary Clinton on anything, but if our oil companies are not enjoying “windfall profits”, they cannot be enjoyed. It’s time for them to pay the piper. Yes, I know that as individual investors, you and I probably own some oil stocks, but that is beside the point.
Lastly, we should let our political leaders in both parties know we are disgusted with their inattention to this crisis which was predicted 50 years ago by a respected geologist.Had we been working on solving the crisis with determination, it would have been solved years ago, but it seems it takes financial Armageddon to get Washington’s attention.
If you read the Atlanta Journal, you may have seen recent full page ads paid for by the oil industry, dissecting the internal costs of a gallon of gas; which is now around $4.00 retail. According to the oil industry, they point out that around 73% of the cost of a gallon is for crude oil, the price of which is set by OPEC. This much of the story is true. What remains unsaid is how much of that crude is produced by our domestic oil companies for their own use, in their own production. According to money.cnn.com, our biggest company Exxon, produced around 44% of the oil they sold, and smaller Chevron, produced 48% of the oil they sold. While it is true that it may cost $5-7 per barrel to pump crude, and the government is looking for taxes; that still leaves a big piece for profit…Exxon made over $40 billion last year.
Geologist M. K. Hubbert had predicted US “peak oil” by 1970 over 50 years ago. What he said was that the crude supply was not everlasting and would run out. Truth is, he was right. Our highest internal production was about 1971, just before the last energy crisis. We have been decreasing since, and actually produced less oil domestically in 2006, than we did in 1950. But again, what is unsaid is how little our producers may be trying to increase production, while gaining favorable tax treatment because of it.
As early as 1913, they had convinced the government that oil would probably run out, and that they deserved an oil depletion allowance deduction on taxes amounting to 5% of sales. By 1926, this was increased to 27.5% of production. In 1976, Jimmy Carter managed to restrict this to only independent companies which don’t import or refine oil. But to make up for this, the larger companies were then given an intangible drilling cost deduction, 100% the first year, and tangible drilling cost deduction, split over 7 years.
Listen to a conversation from ExxonMobil’s recent presentation to financial analysts in New York last March. Halfway through the presentation, they flashed a chart showing production flat through 2012. According to Business Week, the first question was, “Why are you not showing any growth in production?” The answer of Chairman Rex Tillerson:
“We don’t start with a volume target and then work backwards,” he said. Instead, his team examines the available investment opportunities, figures out what prices they’ll likely get for that output down the road and places its bets accordingly. “It really goes back to what is an acceptable investment return for us.” Tillerson said. In other words, producing more barrels just to help consumers is not part of the company’s calculations. Apparently that acceptable return is 32% on capital, because that is what they reported last year.
I never thought I would agree with Hillary Clinton on anything, but if our oil companies are not enjoying “windfall profits”, they cannot be enjoyed. It’s time for them to pay the piper. Yes, I know that as individual investors, you and I probably own some oil stocks, but that is beside the point.
Lastly, we should let our political leaders in both parties know we are disgusted with their inattention to this crisis which was predicted 50 years ago by a respected geologist.Had we been working on solving the crisis with determination, it would have been solved years ago, but it seems it takes financial Armageddon to get Washington’s attention.
OIL RESERVES
Think About It
Aggravated that the price of gasoline is running around $3.50 per gallon and an average fill-up is above $50? The threat of a global recession brought crude oil down from $100, to about $90 a barrel for a while, but the dollar’s collapse has pushed it back to $117. However, we need to realize the problem is much greater than just price gouging by producers. The United States needs to invest more money in becoming energy independent, and less on trying to establish democracies around the world.
In the 70’s, when our Alaska slope oil was discovered, we had 39 billion barrels of US oil reserve un-pumped, but by 2006, we were down to 21 billion barrels of reserve. In 1970, we produced an annual total of 3.5 billion barrels; while in 2006, we produced a total of only 1.8 billion barrels; so in 36 years, our internal production went down by 50%. At the same time our consumption went up to 7.3 billion barrels annually. The net difference, 5.5 billion barrels annually, was imported. We seemed to have a policy of wanting to sit on our oil, as long as we could buy worldwide. Apparently someone had conjectured that the world barrel price would never surpass the $30-$50 range. It costs us something like $10 a barrel to pump oil out of the ground. According to the US Department of Energy, our 2007 oil consumption was predicted to be 20.9 million barrels per day, while production would fall to 5.1 million barrels per day. That means our consumption is now 4 times our production, and yet we still have only about 12 years of known domestic reserve production left under our soil. What then? While protecting the environment, which we can do, it is extremely essential we start to drill in the Arctic National Wildlife Refuge, and in all known US coastal resources.
But even that is not enough to achieve long time independence. Fortunately, the US has the largest known concentration of oil shale in the world, 2.5 trillion potential barrels, enough to meet our current internal demands for 110 years. Unfortunately, oil from shale currently must be produced by methods other than drilling and pumping, and is much more expensive. There is current research being done on using carbon dioxide, of which we produce too much, as a catalyst to release the oil more efficiently. Also being studied is a method of freezing a donut ring in the earth, within which steam is pumped under high pressure, helping release the oil with less danger to the environment. It is called In-situ conversion process, or ICP. If we direct the time, money and talent to this project that we invested in a moon landing, instead of a new moon landing, we could probably succeed within 10 years, as we did before.
Our good neighbor, Canada, which is actually our major single source of petroleum imports, (6.5 billion barrels annually) has one of the largest world deposits of oil sand (tarry sand), 265 billion barrels. Canada, our ally, and Venezuela, our antagonist, each control about 1/3 of the world supply of oil sands. Oil sand is much less expensive to convert that oil shale. To put it into perspective, Canada now ranks 3rd in worldwide oil production, and has 174 billion barrels of recoverable oil in oil sands, while Saudi Arabia has only 260 billion barrels of traditional crude oil reserve.
What is Congress’ solution? In December, they passed legislation mandating that auto manufacturers increase their Corporate Average Fuel Economy (CAFÉ) standards to 35 mpg by 2020. This means that the average mileage of all the cars they offer must be 35 mpg. Don’t you wish you could solve all your own problems by ordering some one else to engineer a quick fix? It is high time that we citizens educate ourselves to our nation’s problems and demand that our Congress address them with a righteous determination to solve them proficiently.
Aggravated that the price of gasoline is running around $3.50 per gallon and an average fill-up is above $50? The threat of a global recession brought crude oil down from $100, to about $90 a barrel for a while, but the dollar’s collapse has pushed it back to $117. However, we need to realize the problem is much greater than just price gouging by producers. The United States needs to invest more money in becoming energy independent, and less on trying to establish democracies around the world.
In the 70’s, when our Alaska slope oil was discovered, we had 39 billion barrels of US oil reserve un-pumped, but by 2006, we were down to 21 billion barrels of reserve. In 1970, we produced an annual total of 3.5 billion barrels; while in 2006, we produced a total of only 1.8 billion barrels; so in 36 years, our internal production went down by 50%. At the same time our consumption went up to 7.3 billion barrels annually. The net difference, 5.5 billion barrels annually, was imported. We seemed to have a policy of wanting to sit on our oil, as long as we could buy worldwide. Apparently someone had conjectured that the world barrel price would never surpass the $30-$50 range. It costs us something like $10 a barrel to pump oil out of the ground. According to the US Department of Energy, our 2007 oil consumption was predicted to be 20.9 million barrels per day, while production would fall to 5.1 million barrels per day. That means our consumption is now 4 times our production, and yet we still have only about 12 years of known domestic reserve production left under our soil. What then? While protecting the environment, which we can do, it is extremely essential we start to drill in the Arctic National Wildlife Refuge, and in all known US coastal resources.
But even that is not enough to achieve long time independence. Fortunately, the US has the largest known concentration of oil shale in the world, 2.5 trillion potential barrels, enough to meet our current internal demands for 110 years. Unfortunately, oil from shale currently must be produced by methods other than drilling and pumping, and is much more expensive. There is current research being done on using carbon dioxide, of which we produce too much, as a catalyst to release the oil more efficiently. Also being studied is a method of freezing a donut ring in the earth, within which steam is pumped under high pressure, helping release the oil with less danger to the environment. It is called In-situ conversion process, or ICP. If we direct the time, money and talent to this project that we invested in a moon landing, instead of a new moon landing, we could probably succeed within 10 years, as we did before.
Our good neighbor, Canada, which is actually our major single source of petroleum imports, (6.5 billion barrels annually) has one of the largest world deposits of oil sand (tarry sand), 265 billion barrels. Canada, our ally, and Venezuela, our antagonist, each control about 1/3 of the world supply of oil sands. Oil sand is much less expensive to convert that oil shale. To put it into perspective, Canada now ranks 3rd in worldwide oil production, and has 174 billion barrels of recoverable oil in oil sands, while Saudi Arabia has only 260 billion barrels of traditional crude oil reserve.
What is Congress’ solution? In December, they passed legislation mandating that auto manufacturers increase their Corporate Average Fuel Economy (CAFÉ) standards to 35 mpg by 2020. This means that the average mileage of all the cars they offer must be 35 mpg. Don’t you wish you could solve all your own problems by ordering some one else to engineer a quick fix? It is high time that we citizens educate ourselves to our nation’s problems and demand that our Congress address them with a righteous determination to solve them proficiently.
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