Rant on Oil, thanks to the NYT

I know this is a bit off topic for this blog, but did you see the article in the New York Times this weekend called American Energy Policy, Asleep at the Spigot? There were several quotes that made me splurt my coffee onto the paper. Here's two of the gems.

Amazing Quote One: Regarding the current state of oil prices ($145 a barrel today), Chevron CEO David O'Reilly had the following to say:

"We can see how you can get to $100. At $140, I just don’t know how to explain it. We’re surprised."

How's that? The CEO of second largest US-based oil producer doesn't have a clue why his product is trading almost $50 over where he thinks it should be?

I'm going to go out on the limb and figure that Mr. O'Reilly has his finger on most of the market forces that are causing the huge run up in prices: limited refining capacity, increased foreign demand, etc. So when he says that the 50% premium that oil is getting over his expectations strikes me as just a little, uh, peculiar?

It's leading me to think that speculation is playing an ever larger role in the recent price jumps. More people are shoving money into oil to turn a quick dollar through commodity investment. Maybe it's wishful thinking on my part, hoping gas will get cheaper when the oil bubble finnaly bursts...

Amazing Quote Two: From Pete Domenici, ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate:

"Much of what we’re seeing today could have been prevented or ameliorated had we chosen to act differently. It was a bipartisan failure to act."

Pick me up off the floor, a member of the United States Senate showing insight and laying blame at his own feet!

If you want villans in government, then look no further than legendary pols Carl Levin and John Dingell of Michigan. So short sighted are these two charlatans, they actually believed they were helping the US auto industry by preventing changes to CAFE standards when every indicator and measusurement proved that $1.50 per gallon oil was unsustainable. Their collective lack of vision is what's costing their state jobs and tax revenue.

Biofuel Bankrupcies? Shocking!

On Friday, Reuters reported on what everyone paying attention to the alternative fuel market already knew: biofuel markers are succumbing to untenable market conditions:

Soaring corn and soy prices on top of rising construction costs and tight credit markets have pushed about a dozen U.S. biofuel plants to file for bankruptcy protection, experts said.

To this equation you can also add the biblical deluge that the Midwest is currently experiencing and intensifying scrutiny of the biofuel vs. food. End result? A bad situation for biofuels is only going to get worse.

Companies succumbing early include Renova Energy LLC and Ethanex Energy Inc. And while bigger and more diversified players are able to avoid the ax to this point, they're being forced to make adjustments that werre unthinkable a year ago. Case in point: industry bellweather VeraSun will delay the opening of three ethanol plants with a total capacity of 330 million gallons per year.

Hey, Vinod, Make Up Your Mind!

I'm leery of making this blog an ongoing rant against grain-based biofuels such as ethanol. But lately there's been to many things to, well, rant about.

You know Vinod Khosla: started Sun Microsystems, made truckload of money, began VC-ing andm recently, has been making large investments in the biofuel start ups.

A couple of years ago, Mr. Khosla was on the leading endge of a rush of investment into ethanol. Now he might be getting a little defensive about those investments.

VK in October 2006.

"Challenges certainly exist with ethanol, but none are insurmountable, and – with apologies to Al Gore – the convenient truth is that corn ethanol is a crucial first step toward kicking our oil addiction."

VK on May 2008:

"Certain food-based biofuels like biodiesel have always been a bad idea. Others like corn ethanol have served a useful purpose and essentially are obsoleting themselves. We have eight or nine companies producing alternatives to corn ethanol that will be dramatically cheaper. And I just don't see how corn ethanol producers stay in business."

No, it's not a complete sea change. But methinks that one of the fellas behind the Silicon Valley "Green Rush" into new fuels is second guessing a bit...

A.E. (After Ethanol)

So, now what?

As the law of unintended consequences comes into play, the bloom is officially coming off of corn ethanol. A quick recap of some of the big reasons why:

1. Food Riots: Food prices are through the roof all over the world. Food riots in Egypt, Mexico, Haiti, Indonesia, and elsewhere are becoming a regular occurrence. In the US, inflation for food is at its highest rate since the Nixon administration. As a result, diverting a significant portion of the food supply from mouths to fuel tanks is becoming less a philosophical question than an economic one.

2. Net Energy Benefit: Or lack thereof. A growing body of work disputes the net energy benefit of ethanol. Never mind that it can't measure up to gasoline in terms of energy potential. Take into account that it must be trucked (can't distribute it through existing pipelines), and resulting output drops even further.

3. Environmental Disaster: Corn in particular requires intensive amounts of water and pesticides. Record corn prices have driven farmers to plant land that had been set aside for conservation efforts. Any GHG benefit is hotly debated.

4. Political Season Ending: The interminable US primary and presidential election will be drawing to a close in short order, meaning that the naked pandering for corn-belt special interest votes will lessen (though never go away...)

Again: so now what? After all, with the cost of a barrel of oil currently standing at over $118(4/23/08), the need to find alternative sources of energy isn't dissipating. If we assume that corn ethanol is really teetering toward its inevitable collapse, what are the the next options? Who/what are the winners? And losers?

Some initial thoughts:

1. Cellulosic Ethanol Specialists: While still a long way from being practical/affordable, cellulosic ethanol at least removes the corn part of the equation by focusing on sources like waste wood or non-food crops. It's also got some political heft to it, ever since the President's switchgrass reverie. There's also considerable investment capital being spent in this area. Companies to consider: Range Fuels, Verenium, and Iogen.

2. Big Agriculture: Multinationals like ADM and Monsanto are financially positioned to weather the coming corn-ethanol storms, and leverage their growing investments in alternatives like cellulosic ethanol. Buying sprees are probably inevitable.

3. Batteries. Most people agree that the next iteration of the car will not necessarily rely on any one technology (as in gasoline) to power it. There is no silver bullet. One possible exception here is advanced batteries. Each of the fueling sources are enhanced through effective 'range extension devices' (as burdensome a way of saying batteries as can be though of.) Applicability of lithium-ion, advanced lead acid, and other TBD battery technologies will most likely have near universal applicability. Some companies to consider: A123 Systems, EnerDel, Firefly, and Mobius Power (maybe...)

4. Hydrogen: I'm certainly no big fan of hydrogen. But, like it or not, investment $$$ still heads in this direction. It's not likely that this stream of money will expand greatly in the near term (given other priorities), but it will continue.

Zapped

Not to pile on or anything, but... well... I'm piling on.

Not doubt that you've all seen the article in Wired that throws Zap under the (presumably alt fuel powered) bus.

I knew it was bad, but not this bad. I naively figured that the folks at Zap were just idealistic incompetents. Despite my past ranting about the "company", I didn't fully grasp the level of duplicity that masqueraded as a management strategy.

Hopefully, this will be the end of Zap. Eliminating this bunch of charlatans from the conversation about new fuels and vehicle technologies will hopefully allows us to focus on the real innovators and entrepreneurs.