Sure, ethanol has some advantages.  As posters all over Washington indicate, we don’t fund terrorists when we buy ethanol — just good American family farms.  Of course they aren’t really family farms anymore, but large-scale agribusinesses.  And ethanol is renewable, which means we don’t have to worry about “peak ethanol” or the “end of cheap ethanol.”  (Would be nice to see the beginning of cheap ethanol, but that’s another story.)

And, compared to gasoline, ethanol may have a positive effect on the environment — especially by reducing the emission of greenhouse gases.  We say “may have” because the exact impact is a matter of great dispute.  Ethanol is only clearly an environmental winner if it’s refined from waste products (often called “cellulosic ethanol”) rather than from fertilized and managed crops grown specifically for fuel.  And then there’s the whole food versus fuel debate.  Perhaps not relevant here in the U.S., but clearly so in other lands.

This morning’s report spotlights a different area of controversy, however, and that is the cost-effectiveness of the taxpayer subsidies.  You’d think that subsidies put into effect when oil was less than $20 per barrel might need to be re-examined now that oil’s at $75.  And in fact a recent Congressional Budget Office examination caught the eye of Senate Energy Committee Chairman Jeff Bingaman, quoted this morning in E&E as saying that the “blenders tax credit for ethanol should not be ‘reflexively’ extended.”

As E&E put it,  ”Bingaman criticized the 45-cents-per-gallon blenders credit for ethanol, known as the volumetric ethanol excise tax credit, or VEETC. Before deciding to extend the credit, lawmakers should weigh the issue carefully, including its ‘very high cost to taxpayers,’ energy benefits, production mandates and market prices, Bingaman said.”

Why?  Because “CBO found that it costs taxpayers $1.78 to reduce gasoline consumption by 1 gallon using corn ethanol. The cost goes up to $3 per gallon for cellulosic ethanol, which is eligible for a $1.01 per gallon tax credit.

“Altogether, corn ethanol producers receive 73 cents to produce the energy equivalent of 1 gallon of gasoline. Cellulosic ethanol producers receive $1.62 and biodiesel producers receive $1.08.

“‘This report by the nonpartisan Congressional Budget Office provides further evidence that our nation’s biofuels tax incentives might not be appropriately calibrated,’ Bingaman said in a statement.”

Calibration sounds like a pretty good idea.  Is there any reason that taxpayer subsidies appropriate at $12 per barrel oil — a price at which when ethanol can’t compete — should remain in place at $75 oil?  Can’t ethanol producers make money when gasoline sells for $3 a gallon?  If they can’t, and still need the crutch of taxpayer subsidies, maybe it’s time to call a halt to our decades-long effort at “growing our way” to energy independence.  Blindly “groping” our way seems like a better metaphor.

The answer is less certain. Late last year the Gas Exporting Countries Forum (GECF), an organization commonly referred to as the ‘Gas OPEC’, stated that its focus was on “coordinating investment policies to dissuade countries from further flooding the market” – hardly a good signal for gas consuming nations. This came the same year as Chakib Khelil – Algerian Minister for Energy and Mines – declared that “in the long term, we are moving towards a gas-OPEC”.

Pressure intensified at the April 2010 GECF meeting where, faced with an oversupplied liquefied natural gas (LNG) market, Algeria suggested that exporters should reduce supplies to support prices.

This is particularly worrisome given that GECF countries hold a bigger share of world natural gas reserves than OPEC does for oil. Furthermore, most of OPEC member countries are also members of GECF.

However, a relief signal for concerned observers came from Moscow a couple of weeks ago, when Leonid Bokhanovsky – GECF secretary-general – declared that “Turning the Gas Exporting Countries Forum  into an OPEC-style organization for the gas industry would not benefit members”.

Why should we care? In the end, we have vast newly discovered shale gas reserves here in the United States, right? Not quite. While it is true that the domestic shale gas reserves can satisfy domestic demand to a large extent, U.S. gas prices will increasingly be driven by the developing international LNG market, even if our import requirements fall to zero. In other words, the price we will pay for our gas in the medium term will be partly determined abroad.

To see why, consider the decision faced by an American shale-gas producer: it can either sell its output domestically or export it to the international market. Assuming the price was higher abroad, we should naturally assume the American producer would sell it there. This arbitrage opportunity (which brings prices together) is brought about by the newly created and heavily underutilized LNG terminal capacity. In 2008 the U.S. imported less than 10 billion cubic meters (bcm) of LNG while the terminal capacity stood at around 120 bcm (it has now grown to over 140bcm).

Or as the MIT report notes: “If a more integrated market evolves, with nations pursuing gas production and trade on an economic basis, there will be rising trade among the current regional markets and the U.S. could become a substantial net importer of LNG in future decades.”

Does this mean that we are hopeless when faced with a potential gas OPEC in the making? Not necessarily, as creating a cartel is not easy. The evidence indicates the present economic conditions, mentioned below, are not quite there for an international gas cartel to be successful. However, the changes that are gradually taking place in the international gas market are making (1) prices more transparent; (2) increasing the incentives to reduce output; and (3) enabling producers to do so as they are less and less bound by long-term contracts. In other words, the ongoing and foreseen market developments increase the ease, and thus likeliness of an international gas cartel being successfully created in the future.

Therefore, policy makers should factor in this possibility when implementing otherwise sound recommendations like MIT’s: “For reasons of both economy and global security, the U.S. should pursue policies that encourage an efficient integrated global gas market with transparency and diversity of supply, and governed by economic considerations.” They ought to be aware that a global, transparent gas market (akin to the oil market) is precisely one in which cartels can flourish, which makes the requirement that it be diverse in its supply sources and governed by economic considerations all the more crucial.

And, speaking of new and different, how about the New York Times’ editorial (http://www.nytimes.com/2010/04/29/opinion/29thurs3.html) urging against overreaction to the Gulf explosion by drilling opponents:

“Federal and oil industry officials are using every tool they have — including underwater robots and controlled burns on the water’s surface — to stanch the flow of oil from last week’s explosion of a drilling rig 50 miles offshore in the Gulf of Mexico. Every hour that passes without success brings Louisiana’s fragile wetlands and estuaries, and the marine life that depends on them, closer to environmental disaster.

“The spill — by far the largest in the history of oil and gas drilling in the gulf — has emboldened opponents of President Obama’s recent decision to open parts of the Atlantic Coast and eastern gulf to oil and gas exploration. It has raised new obstacles to a yet-to-be-introduced Senate energy and climate bill that is expected to include proposals for more offshore drilling.

“The accident certainly provides further evidence of the risks of offshore drilling and is another reason why the country needs to choose where it drills carefully. It also strengthens the case for developing cleaner power sources — the main reason for Interior Secretary Ken Salazar’s welcome decision, announced Wednesday, to approve a wind farm off the Massachusetts coast.

“As nerve-racking and potentially destructive as this spill is, it is not sufficient cause to abandon a broader energy strategy that includes the search for conventional fuels. Some perspective is useful.

“The Gulf of Mexico accounts for one-third of America’s domestic oil production and one-fourth of its natural gas. There are 90 exploratory rigs working there and about 3,500 oil-producing platforms. Despite all of that activity, the federal Minerals Management Service says there have been no major spills — defined as 1,000 barrels or more — in the last 15 years, a period that includes Hurricane Katrina. In that context, the blowout — while tragic and destructive — can be seen as a freak occurrence.

“Industry’s obligation — and the Obama administration’s — is to make sure that this remains an isolated episode.”

“If oil drilling is to be part of this country’s immediate energy future, it must be done responsibly.”

In other news, it may not seem like news when FedEx’s Fred Smith testifies on the Hill, but this time the rock star CEO brought one of his all-new electric trucks. The Memphis Commercial-Appeal (http://www.commercialappeal.com/news/2010/apr/28/fedex-boss-fred-smith-tells-house-members-all-elec/) has more:

“FedEx CEO Frederick W. Smith came to Capitol Hill with an all-electric FedEx truck on Wednesday and told a House energy and commerce subcommittee that electric, grid-enabled vehicles could help wean the U.S. from imported oil.

“Smith was part of a panel on ‘Clean Energy Policies that Reduce Our Dependence on Foreign Oil’ and reprised his oft-stated concern about the national security and other implications of that dependence.

“‘Our problem is that the oil market is not a free market,’ Smith said in an answer to a question by subcommittee chairman Ed Markey, D-Mass. ‘It is managed by OPEC in a manner that, if it were done in the U.S., would be illegal, with supplies withheld and the attempt to set the market price.’

“In his 11-page written statement, Smith referred to a 2009 RAND Corporation study that placed the cost of defending the U.S. foreign oil supply routes at between $67.5 billion and $83 billion each year.”

“Of FedEx’s 70,000-vehicle fleet, 19 are all-electric and 300 are hybrids, he said. The all-electric vehicles aren’t currently cost-effective, but as the cost of lithium batteries decreases, they could be within five years, he said.

“In his written testimony, Smith asked the subcommittee to consider the plan from the Electrification Coalition to make a maximum $120 billion investment, mainly through tax credits, to get 7 million grid-enabled vehicles on the road by 2018. It would not just reduce dependence on foreign oil but would also create jobs and improve the trade deficit, he wrote.”

And in probably the biggest news of the week, Senator Lindsey Graham (R-SC) walked away, at least for the time being, from the bipartisan climate legislation he has been working on with Senators John Kerry (D-MA) and Joseph Lieberman (I-CT), because—according to Graham—because Senator Majority Harry Reid said the Senate would tackle immigration before energy.  Over the course of the week, Graham has stated that he does think there is still a chance for climate to move forward this year, and Kerry and Lieberman have kept the momentum going by sending their draft to the EPA for analysis. 

As Senator Reid has pointed out, the climate and energy bills are further along in the process than immigration; there is no immigration bill, even in draft form, yet.  Reid stated during an immigration press conference this week that “There’s probably nobody in the House or the Senate who believes more in doing something about our environment, which is under attack.  We need to do comprehensive energy legislation as soon as we can.” 

Comprehensive energy legislation does need to be done as soon as possible.  As we head into the summer driving season and as gas prices continue their move upward, the future that has been talked about is almost here … now.  KGL may or may not be dead but the discussion should not be allowed to hinge on one piece of legislation.  Our country’s energy and economic security are important issues that cannot continue to languish due to partisan politics.  The future is now, but if we don’t address our critical energy issues it may become far more uncertain.

Oh . . . .  the trouble we get into when we talk about raising gas taxes.

So I am not going to suggest that we increase gas taxes, even though thoughtful people on the left (here) and right (here, here) have stated that we should.

I am just going to share some recent observations that relate to gas taxes.

Some people talk of increasing the gas tax (here) by 50 cents (here, here), a dollar or more per gallon (here, here), in an effort to affect oil consumption.   Others talk about raising it by a more modest amount, less than a quarter, so that it had the same purchasing power that it had when it was last raided in 1993, thereby helping to maintain the viability of the highway trust fund, into which most federal gas taxes are deposited and which pays for federal highway projects (here, here).

I’m talking about something much smaller.

Federal funding for energy programs has been at an all time high over the past fifteen months, but that is entirely related to the stimulus bill that provided about $36 billion for energy related projects.  But that is nearly all obligated, if not yet out the door, and then we will revert to the funding provided in annual appropriations that we have become accustomed to over time.  For FY 2010, Congress appropriated $4.235 billion for energy programs (energy efficiency and renewable energy, fossil energy, nuclear energy and electricity deliverability and reliability).  For FY 2011, the President requested $4.214 billion for those same programs.

A nickel gas tax could raise $6 billion a year, and more than double funding for energy related research, development, demonstration, and deployment projects in the Department’s energy program offices.

It is true that such a tax would have some effect on prices at the pump.  But, more interestingly, the fact that the size of such a tax would be inconsequential to consumers can be demonstrated in that it is far less than the variance in gasoline prices that the average driver probably sees in the course of their regular driving patterns.

In other words, the cost of the tax is less than drivers voluntarily choose to pay on a daily basis by driving past gas stations with less expensive gas and choosing to fill their tanks at stations with more expensive gas.

To test this hypothesis, on two recent days, a weekend day on which I was running my children to their activities and running errands, and the next day, a Monday on which I undertook my regular commute, I photographed the price of gasoline at every gasoline station I passed.  These were not out of the way hidden gas stations, but accessible stations on major roads in Montgomery County, Maryland (population 950,000) and Washington DC, including Maryland Route 355 (Rockville Pike), and Wisconsin and Connecticut Avenues, in both northwest Washington DC and Maryland.  As can be seen below, the price for 87 octane unleaded ranged from a low of $2.79 to a high of $3.26, a difference of 47 cents.  I passed all of these stations while driving 55 miles over two days, and could easily pass each one of them between 5 and 6 times while on a single tank of gas.  I could have chosen to stop at any station to fill my tank.  And, there is no reason to believe that my experience is different than most other urban/suburban drivers on the road.

The notion that drivers cannot pay a 5 cent a gallon gas tax seems absurd when it is clear that such a small tax would fall well within the variance of prices within a normal driving cycle.  If drivers are willing to pay $2.99 or $3.19 or more instead of $2.79, with the money going to the oil companies, they certainly can pay an extra nickel to help solve our energy problems.

Perhaps the most interesting part of my observations was at the intersection of Rockville Pike and Nicholson Lane in Rockville, Maryland, where there are two Exxon stations across the street from each other.  The station on the northbound side of the road had prices 10 cents lower than the station across the road.  I stopped at the station with the higher prices and asked twelve drivers paying the extra dime a gallon a variation on the age old question “why didn’t the driver cross the road.”  In each and every instance, they said that it was too much trouble to make a left hand turn to cross the road.

 If drivers are willing to pay an extra dime a gallon to not have to make two left hand turns, they certainly cold pay a nickel to help enhance our nation’s energy security.

I am not a fool, so I am not going to suggest that we raise the gas tax, just a little bit, and dedicate the funds to enhancing our nation’s energy security.

But I am going to ask, why not?

This week, oil reached $87 a barrel.  It’s been a slow climb, unlike the sharp spike of 2008, but people are beginning to notice.  It’s costing more and more to fill up our gas tanks every day, and less than two months from now, the summer driving season kicks in, offering the potential for even higher prices.

All the talk about backroom deals aside, nothing motivates Washington like angry constituents.  And high gas prices can make for quite a few of those.

What does it mean for the flood of competing energy and climate bills all fighting for oxygen in Washington?  First, it increases the chances that something is going to happen.  As we have often pointed out, energy security legislation already offers more than a few political benefits to Democrats and Republicans alike.  Add in a high-price environment, and it will become more and more difficult for Congress to head home to elections without being able to point to some kind of energy accomplishment.

Second, it may increase the chances of an energy-only bill, as opposed to one combined with climate.  This is not as easy a call to make, especially since the administration and many members of the majority in Congress are still strongly committed to climate legislation (White House energy and climate advisor Carol Browner said just this week “Every now and then, you’ll talk of maybe an energy-only bill. We think that would be unfortunate.”)  But the argument goes something like this: energy security is a genuinely bipartisan issue.  Though there are disagreements about many details—and they’re not all small details—there is widespread agreement that something must be done about the dangers posed by oil dependence.  There is far less of a consensus around climate change.  And if high prices create even more pressure for action, it is not hard to see Congress setting aside the partisan debate for another time in favor of a potentially impressive bipartisan accomplishment on standalone energy security legislation.

There are many, many different energy and climate proposals currently in some form of drafting or consideration in Washington.  This is ultimately a good sign—as predicted, now that health care is behind us, energy is moving to a high priority, which is exactly where it should be.  But with each passing week, the water gets more muddied.  High prices will add some clarity and some urgency. Unfortunately, they will do so at the cost of harm to our economy and our pocketbooks.  Yet another reason to act swiftly.

This site blogged yesterday about OPEC’s decision to fix prices at $80 per barrel of oil.  This morning’s WaPo piece by Steven Mufson (“OPEC will hold oil prices, production steady — for now” http://www.washingtonpost.com/wp-dyn/content/article/2010/03/17/AR2010031704084.html) is so well done that the topic deserves a second look.  As usual, Mufson’s piece raises some food for thought.  Excerpts from Mufson’s words and quotes are below; ours, both less eloquent and less temperate, are in italics.

Mufson begins:  Is $80-a-barrel oil the new $60? 

And it wasn’t long ago that we were wondering what great new technologies would be enabled when oil hit $25/barrel, remember?  In a few years, will $100 be the new $80?

That approach is reported to center on a utility-only cap and trade system, with other non-refinery, industrial sources phased into the system over time and then a separate “linked fee” system for refineries.  In discussing the shift from “economy-wide cap and trade” to this new approach, reporter Darren Samuelsohn quotes an American Univeristy professor dispensing some wisdom on the play:

“Matt Nisbet, a professor of communications at American University, sees an opportunity for better public debate in the wake of Graham’s comments declaring the end to the broad cap-and-trade approach.

“I think what’s happening politically is we’re moving from a very narrow limited focus on just one option,” he said.

In the past, the longtime focus among politicians and reporters was on cap and trade alone, squeezing out other options like a carbon tax or a cap-and-dividend approach.

“Most of the discussion is not on substance, but rather political viability and the game or jockeying in order to win support,” Nisbet said.”

Now in general, if you’re looking at the CLEAR Act approach offered by Senators Cantwell and Collins or the carbon tax concept floated recently, this time by Senator Murkowski, then yes, those are options beyond traditional cap and trade.  The former is a pretty clear cap and dividend, with trading limited to fuel producers.  And the latter is, of course, both cap-free and trade-free.

But to say that starting with utilities and then phasing in other emitters (except refineries) is some radical departure from Waxman-Markey or Kerry-Boxer is a bit more spin than substance.  Those bills actually do start with utilities first and then phase in, albeit quickly, other industrial sources.  The chief difference in the talked-about plan is in the treatment of refineries.  Under Waxman-Markey, refineries would be subject to a cap and receive some small measure of allowances — a much smaller share than utilities.  Under the pending proposal — at least as described in the press — refineries would not be subject to a cap but instead pay a fee that the government would use to buy allowances.

That has the benefit of clarity and, from a refinery perspective, protection against volatility in the allowance market.  The extent to which a linked fee could accomplish the dual purposes of being refunded to consumers and pay market price for allowances is unclear — but then clarity at this pre-legislative draft stage would be unusual.  Stay tuned.

Last week, new evidence was added to the melee, with the release at the Royal Society in London of the latest report from the UK Industry Task-Force on Peak Oil and Energy Security (ITPOES), a group of six companies spanning a range of business sectors.

The report, titled “The Oil Crunch – a wake-up call for the UK economy”, forecasts that “peak oil” is close at hand, if it has not already been reached, and that “the UK must not be caught out by the oil crunch in the same way it was with the credit crunch.” After examining global oil reserves and extraction rates, the report finds that peak production rate will likely occur in the next decade, and possibly within five years at no more than 92 million barrels per day (mmbd). The highest extraction rate in history was 87 mmbd in July 2008. The primary arguments for extraction rates falling after 2011-13 are the lack of giant field discoveries, high exploration costs with relatively low yields, OPEC overstatement of reserves, and general underinvestment in the industry.

The coalition members are Richard Branson, founder of Virgin Group, Ian Marchant, CEO of Scottish and Southern Energy, Brian Souter, CEO of Stagecoach Group, Philip Dilly, Chairman of Arup , and Jeremy Leggett, Chairman of Solarcentury.

The prospect of a peak and then a rapid fall in production rates in the 2015 timeframe, just as demand from China and India ramps up, is indeed a frightening prospect for both the United Kingdom and the United States. However, the evidence is controversial, with other industry experts, such as Michael Lynch at MIT, arguing that peak oil is nothing more than a Malthusian myth. Daniel Yergin, Chairman of IHS Cambridge Energy Research Associates, points out that political peak oil, when above-ground carbon constraints and energy security concerns combine to reduce oil demand, is far more likely than geological peak oil.

Historically, oil companies have provided comforting assurances that there is plenty of oil for the next fifty years or so. BP maintains there is plenty of oil to last at least until 2040, and the “peak” will be a demand-driven one sometime after 2020.  However, over the past few years a number of CEOs have discussed the possibility of peak oil. The CEO of Petrobras stated in January, 2009, that oil supply will peak in 2010, and the Total CEO believes that oil supply will never reach beyond 89 mmbd.

The International Energy Agency, on whom many governments and companies rely for their baseline forecasts, has steadily revised down its oil supply forecasts. In 2005 they predicted a possible 120 mmbd of oil supply in 2030, a figure that was reduced to 116 mmbd and then 105 mmbd in 2008. Yet some researchers, such as a Swedish group at Uppsala University, suggest that it is impossible to get anywhere near 105 mmbd, and in fact argue that oil has already peaked and will likely be around 75 mmbd in 2030.

For some impressive graphics, see here.

Regardless of whether it is due to above-ground or below-ground forces, we are likely headed for increasingly high and volatile prices, particularly as costly unconventional and deep water oil from overseas form a greater share of consumption.

The peaking of prices in the summer of 2008 did yield a revision in the EPA’s MY 2008 actual value compared to pre-model year production volume projections, which had suggested a fleet-wide average of 20.8 mpg rather than the actual 21.0 mpg. On the bright side, since 2004 (the lowest fuel economy by model year since 1980) fuel economy has improved 9 percent. Yet the graph below suggests that the improvement since 2004, especially considering the record high prices that have come and gone since 2003, is not terribly impressive.

Adjusted Fuel Economy by Model Year (Annual)

Between 1990 and 2004, fleet fuel economy by model year steadily declined. Yet during that period technology improving engine efficiency raced ahead. One reason is that the SUV market share (which includes many crossover vehicles) increased from 6 percent of new light-duty vehicles to 30 percent between MY 1990 and 2005. The explosion in SUV’s is part of a larger trend: increasing weight AND performance.

While engine efficiency constantly increased between 1987 and 2004, that technology innovation was used to add gadgets, like navigation systems and air conditioning, as well as to improve performance. Making cars more comfortable, commodious and gadget-ridden requires more heft. Improving performance means reducing the time it takes to accelerate, which means larger engines. Together, these two forces drive down fuel economy. Since technology has improved, the outcome has simply been only slight decreases in fuel efficiency. In the graph below, the time it takes to accelerate from 0 to 60 mph has fallen from more than 14 seconds to 9.5 seconds, while weight has increased from around 3,200 pounds to 4,200 pounds.

Weight and Performance (Annual)

The lesson of this year’s EPA fuel economy trends report is about the dangers of oil price volatility. Because gas prices are as likely to drop as to rise at any given moment, high prices are assumed to be ephemeral and do not affect consumer behavior. In the absence of very high (and politically unpalatable) fuel taxes, we must rely on fuel economy regulation and support for alternative technologies, like plug-in electric vehicles.

E&E correctly points out that the “driving force behind the need to postpone the next highway bill is that lawmakers have yet to find a way to pay for what is expected to be a substantial increase in federal infrastructure investment.”

E&E helpfully points out that ”there is near universal consensus among transportation experts that increasing the gas tax is necessary in the short-term to pay for both road maintenance and new construction projects.”  That’s true, but the real issue is that with increasing market share from biofuels (exempt from the tax), hybridization, and the looming promise of full-on electrification, the idea of funding our infrastructure with a tax on gasoline is growing increasingly outdated.

The real issue is that transportation infrastructure needs to be paid for more directly by the users of that infrastructure.  The gas tax was an imperfect proxy for such a user-fee, and as technology and public policy advance, the gas tax is better suited for either discouraging fuel use and our consequent dependence on foreign oil (as in most of the rest of the developed world) or as a revenue stream for R&D into domestic, sustainable alternatives, or both.

Nonetheless, in the short-term there are few alternatives to the gas tax — other than the old favorite of borrowing from our children and grandchildren via deficit spending.  So a near-term, perhaps indexed increase  in the tax as a transition to other user pay mechanisms that more equitably distribute costs among all users is worth exploring.

 Here’s where a few profiles in courage are needed, but sorely lacking.  Back to E&E:

“But very few lawmakers have been willing to even float the idea for fear of the political consequences.”

Leave it to long-time budget hawk Senator George Voinovich to be ” one of the few lawmakers to vocally call for the tax hike, arguing the public is more willing to face the reality than the politicians.”

“Most people in the House and the Senate are all worried about a vote on an increase in the gas tax,” Voinovich said. “They are, and you can’t do it without that, there just aren’t any other [short-term funding] alternatives.”

Senator Voinovich will be sorely missed when he leaves office after the 2010 elections.  Let’s give him the nearly last word, describing his conversations with Republican leadership on the issue:  “I’ve said to them that it is time that we did something on behalf of our country and stop playing politics and stop worrying if we are going to elect more Republicans the next time around, and if we can take a shot at the other side by saying they are voting for tax increases.” 

More adult leadership like that on this and many other issues would be welcome.