Author Archives: Chad Blevins

About Chad Blevins

Graduate Student, Energy & Earth Resources, University of TX

Gasohol, Take Two (the other white aliphatic-alcohol)

On January 5, 1981, President Jimmy Carter signed Executive Order 12261 – Gasohol in Federal Motor Vehicles. This was intended to increase the use of “gasohol,” which is roughly defined as a gasoline blend with 10% anhydrous ethyl alcohol “derived from biomass.”

Since then, use of ethanol in fuel consumption has risen dramatically:

EIA US Fuel Ethanol COnsumption

EIA: US Fuel Ethanol Consumption since 1981

The reasons for increasing US use of ethanol in motor fuels range from energy independence and national security to reducing the Nation’s CO2 footprint. However, ethanol is not a direct substitute for gasoline, and there are technical challenges that restrict its use. High concentrations of ethanol can be corrosive and volatile, making it impractical to transport via pipeline and limited to use in vehicles that are made with corrosion resistant fuel systems. Further, ethanol contains only about two thirds of the energy content of gasoline.[1]

However, ethanol is not the only aliphatic alcohol we can burn. Butanol is a 4 carbon alcohol (C4H9OH vs ethanol’s C2H6O) that can be made from the same materials currently being used to produce ethanol in the US. BP and Dupont have formed a 50/50 venture to produce butanol (marketed as Butamax) and sell it as the preferred biofuel alternative.[2] Butamax expects to begin commercial production in 2014.

ButanolUnlike ethanol, butanol can be transported using existing fuel pipelines.[3] Also, the current stock of vehicular internal combustion engines could potentially run entirely on butanol, without the need to blend gasoline at all.[3]

Further, while ethanol has around 84K BTUs per gallon, butanol has 105K BTUs per gallon (which is much closer to the ~114K in a gallon of gasoline).[3],[4]

At present, it costs around 25% more to produce a gallon of butanol vs a gallon of ethanol, according to the Butamax CEO.[2] This should not be a cause of concern, because butanol yields 25% more BTUs per gallon. So, butanol currently costs around 2.96 cents per thousand BTU (same as ethanol), and gasoline (at $3.76/gal) is 3.3 cents per thousand BTU.[5],[6]

If Butamax and other producers are able to reduce that cost spread over the cost of ethanol as production scales up, then the price per BTU advantage over gasoline will continue to increase, and as a “drop-in” alternative – butanol may soon be every politician’s darling biofuel of choice.

[1] http://www.eia.gov/energyexplained/index.cfm?page=biofuel_ethanol_use#tab2

[2] http://energy.aol.com/2012/05/01/biofuels-producer-launching-ethanol-replacement

[3] http://peswiki.com/index.php/Directory:Butanol

[4] Gasoline Gallon Equivalent: http://en.wikipedia.org/wiki/Gasoline_gallon_equivalent

[5] AEO2012 EARLY RELEASE OVERVIEW. Table 12. Petroleum Product Prices. http://205.254.135.7/forecasts/aeo/er/tables_ref.cfm

[6] Daily National Average Gasoline Prices Regular Unleaded. http://www.bloomberg.com/quote/3AGSREG:IND

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Cartoon Bears, the Fed and Gasoline

From Gas Prices Explained: http://www.youtube.com/watch?v=40hNSJEKUgo

(aka Blaming “the Bernank”)

I recently came across this video, which explains a particular point of view on what is primarily driving gasoline prices in the US.

The gimmick, as you see, is that this particular theory of what is actually an extremely complicated economic global commodity trade model is explained by a few cartoon bears.

Their logic follows this progression:

1) Gas Stations are not to blame, because prices are up across the country, and that many individual business owners could not collaborate to fix prices.

2a) Lack of supply is not to blame; Supply is “so high” that refiners are exporting.

A very interesting anecdote supporting this assertion is the story of the “Alaskan Explorer.” This oil tanker was stuck with 12 million gallons of Alaskan crude (a quarter of its cargo) that it could not unload at a refinery in Washington, because the onshore storage tanks were at capacity. (from the Houston Chronicle, “U.S. awash in oil, but global demand drives prices,” 27 APR 2012)

There has also been a spate of articles reporting headlines like the following:

Bloomberg writes that to offset weak U.S. demand, refiners exported 439,000 barrels a day more than were imported the year before.”

(from USA Today, “U.S. exported more gasoline than imported last year,” 29 FEB 2012)

2b) Demand is low. Note the significant downward trend starting around 2008.

Note that: “Over the last several years, the refining industry has shut down about 1 million barrels per day of refining capacity aimed at the east coast, the latest of which is the St. Croix Hovensa refinery, closing next month.”

(from USA Today, “Refinery closings could push gasoline prices back to $4,” 28 JAN 2012)

3) Instability in the mid-east is not to blame, because “has there ever not been instability in the mid-east?”

4) It is not “the speculators” because they bet both ways – there are two sides to any trade.

But…

5) The “falling dollar” is to blame. “The price of anything is based as much on what it’s worth as it is on the currency you are using to pay for it.”

At this point, the bears focus on Chairman Bernanke (aka “the Bernank”), and the Federal Reserve. These bears suggest that “the Fed” has been “printing more and more” money to stimulate the economy, leading to a devaluation of the dollar. They note that “the Bernank” claims the Fed is responsible for higher stock prices (as a result of its policies), but that he does not claim responsibility for higher gasoline prices. They then note that gasoline prices and stock prices are generally correlated.

It is true that in this interview, Chairman Bernanke says “the purpose of the monetary policy easing is not to increase stock prices per say, the purpose is to strengthen the US economy, put people back to work and create price stability, but the way monetary policy always works is through interest rates and asset prices. […] So, yes, I do think that by taking these securities out of the market and pushing investors into alternative assets, we have led to higher stock prices and lower stock market volatility.”

from: http://youtu.be/_-Jkgaehkwo

 

 

Is it true that stock prices and gasoline prices are highly correlated? Yes. The correlation between the S&P500 and Gasoline (“Conventional Gasoline: U.S. Gulf Coast, Regular”) (compared daily prices from January 4 2010 through May 1 2012) is a respectable 0.87.

Gasoline Data from: http://research.stlouisfed.org/fred2/graph/?s[1][id]=DGASUSGULF

S&P500 Data from: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

So, does this mean the cartoon bears are correct?

Not necessarily. Note that over the same time period, the correlation between gasoline prices and the value of the dollar (measured as the exchange rate against the Euro) was only 0.44 (U.S. / Euro Foreign Exchange Rate (DEXUSEU)).

US/EU Exchange data: http://research.stlouisfed.org/fred2/graph/?s[1][id]=DEXUSEU

But, then again, maybe the US and the EU policies are too closely related, and currency exchange rates between the two may not capture changes in the value of the US currency against the global market for petroleum based products.

Comparing the exchange rate between the US and the Aussie dollar (U.S. / Australia Foreign Exchange Rate (DEXUSAL)) against the price of gasoline in the US suggests that the bears may be on to something.

The correlation, again over the same time period, is 0.88… which is an even stronger correlation than that between the S&P500 and gasoline prices.

US/AUS Exchange data: http://research.stlouisfed.org/fred2/graph/?s[1][id]=DEXUSAL

So,  maybe we can learn a thing or two from a cartoon bears. I wonder what their stance is on honey-based biofuels…

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New EIA Report Asks: What if the US Exported More LNG?

In a report recently released by the EIA, the Office of Energy Analysis (OEA) takes a stab at answering a question that was formally asked by the Department of Energy’s Office of Fossil Energy back in August 2011: What would be the “impact of increased domestic natural gas demand, as exports?”

OEA’s analysis considered four different scenarios consisting of a slow (1 Bcf/d/yr) or rapid (3 Bcf/d/yr) rate of “phasing-in” increased exports, and a low (6 Bcf/d) or high (12 Bcf/d) ultimate expected rate of export.[1]

As one might expect, their results suggest that increased exports of natural gas (as liquefied natural gas, or LNG) would lead to upward pressure on domestic gas prices. This, in turn, would result in increased domestic production, and (to a lesser degree) upward pressure on electricity prices. The level of the impact on power generation would partly be a function of the difference between the rate of the increase in exports, and the rate of the increase in production.[1]

This upward tick in natural gas production could reverse a recent trend that has seen companies moving away from dry gas plays. As an example, Chesapeake Energy just announced plans to  reduce the number of its operating dry gas rigs by ~68%,  a result of the currently low natural gas prices.[2]

The current state of affairs in the domestic natural gas markets is significantly different than it was just a few years ago, prior to the rapid adoption of hydraulic fracturing and horizontal drilling, and prior to the recession. Several LNG regassification import terminals were permitted, financed, and built based on the expectation that the US would remain a net importer of natural gas for the foreseeable future.[3][4]

Now, several of those import facilities are going through a similar process to get liquefaction facilities in place that will enable the exports being considered in this EIA report. Cheniere Energy is doing just this. The company has plans to construct a liquefaction facility at its Sabine Pass LNG import facility, which will have approximately a 2.6 Bcf/d export capacity. The company has already initiated FERC, NEPA and DOE permitting procedures and expects the facility to begin operations as early as 2015. They are also considering plans to construct an additional 1.8 Bcf/d export facility in Corpus Christi.[5] 

However, it is still not certain that companies like Cheniere Energy will be able to recognize a return on their investment with these export facilities. Just as the adoption of new drilling technologies reduced the need for US LNG imports, the spread of those technologies to other parts of the world may also reduce the US opportunity to export.

Very importantly, the authors of this EIA report note that the National Energy Modeling System (NEMS) used for their projections “is not a world energy model and does not address the interaction between the potential for additional U.S. natural gas exports and developments in world natural gas markets.”[1]


End Notes:

[1] EIA Report, “Effect of Increased Natural Gas Exports on Domestic Energy Markets,” Dated 19 January 2012: http://www.eia.gov/analysis/requests/fe/pdf/fe_lng.pdf

[2] O&GJ, Chesapeake dry rig count cut: http://www.ogj.com/articles/2012/01/chesapeake-cuts-operated-dry-gas-drilling-rig-count.html

[3] FERC: Approved & Proposed (Potential) North American LNG Import/Export Terminals: http://ferc.gov/industries/gas/indus-act/lng.asp

[4] Market Watch, LNG Exports: http://www.marketwatch.com/story/shale-gas-opens-door-to-us-lng-exports-2011-12-05

[5] Market Watch, Cheniere: http://www.marketwatch.com/story/cheniere-plans-second-us-lng-export-terminal-2011-12-16

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