Price Controls Have Consequences

Two recent events have brought the topic of energy price controls to my mind. The first is in Brazil, where government pressure on Petrobras, the state-owned energy producer, has caused it to continue to hold down prices on gasoline in Brazil for the foreseeable future.  Thanks to governmental pressure, Petrobras has subsidized its gasoline, selling below fair market value, since 2005.  Brazil's government has a strong interest in cooling down inflation and part of that is attempts to hold down the value of the currency, which is already overvalued.  But trying to push against a gas price rise has led to some unintended consequences (gated, unfortunately).

Essentially, cane sugar mills that might otherwise be producing high-value ethanol to sell into the fuels market are now facing a situation where rising fundamental input prices are pushing them out of the market. The price levels of their fundamentals - labor, raw material inputs, and the like - are continuing to rise with inflation, because there is no universe in which government price controls can change the underlying market forces.

In order to remain competitive, ethanol must be sold at a significant discount by volume to gasoline, which has a higher energy content.  Price controls on gasoline have historically cut the profitability of ethanol, and it is now reaching the point where cane ethanol producers cannot sell into their own domestic market because of the artificially low price of the competing product, gasoline.  Perversely, this has caused the Brazilian ethanol market to preferentially export ethanol to the US once again (aided and abetted by the US's renewable fuels standard, and reversing the trend of the last few years) and to overproduce sugar, the price of which isn't being held down by the Brazilian government.

The second bit of news was brought to my attention by the always-informative Geoffrey Styles at his blog Energy Outlook.  Mr. Styles' discussion is more detailed than my own, so I would definitely recommend reading his post.

After the recent election Senator Ron Wyden (D-OR) is now likely to chair the Senate Committee on Energy and Natural Resources.  His views on shale gas exports show a dangerous tendency to protectionism.  Essentially, Senator Wyden is worried that raising the natural gas price in the US by selling LNG onto the world market will harm America more than it will help it.

Senator Wyden's protectionist reasoning is dependent on two assumptions: first, that shale gas production in the US will continue to provide energy at the same cheap price levels we see today, and second, that a low gas price is unambiguously good for America now and in the future.

The first assumption is unambiguously wrong. The shale gas price level is so low that drilling activity has drastically decreased and continuing production is depending on co-production of natural gas liquids - so-called "wet" gas wells.  "Dry" gas fields with little-to-no natural gas liquids have largely remained unexploited this year.  Additionally, Mr. Styles points out one reason that the pricing mechanisms that govern gas production might currently be difficult to discern: that much of the continuing production is due to contractual obligations that require the exploitation of reserves at a set pace independent of market signals.

However, this lack of a price incentive to drill is keenly felt in industry. There is a virtual consensus that price levels must go up to encourage more drilling.  If exports are blocked and contribute significantly to the price remaining low (there is some controversy as to whether exports will play a big part of this), then Senator Wyden will see his policies causing the shale gas revolution to peter out.

Senator Wyden is also wrong to think that low gas pricing is unambiguously good for America in both the short and long term.  In the short term, it is worth remembering that high energy prices are good for the (US-based) producers as well as for consumers. At minimum, keeping the shale gas price artificially low by minimizing exports will amount to a redistribution from resource extraction companies to consumers of those resources, with the results unclear.

In the long term, Senator Wyden may also find that keeping the gas price low hurts some of the very sectors he may be inclined to support.  Renewable energy hopefuls for both electricity and vehicular fuel must now compete against a very cheap, high quality and clean burning substitute that was literally not in contention three years ago.  Senator Wyden will undoubtedly find that holding down the price of natural gas will sound the death knell for a whole host of renewable electricity and renewable fuels projects - maybe even including some in his home state.  We may venture that holding down gas prices now might well lead to a very uphill battle when the gas begins to run out and we have no renewable infrastructure to fall back on.

Price controls create perverse unintended consequences, in the energy world and out.

I don't want to live in the Zuiderzee

Geoengineering is a term for technical measures to change the way the climate works. Most commonly, it's applied to the problem of AGW, with the general hope that all of this expensive transition to low-carbon fuel can be averted for pennies on the gallon of gas to pay for carbon sequestration, sulfur aerosols, water vapor boosters, and the like.

I've never been much of a fan of geoengineering schemes. Most of the time I can dismiss geoengineering for a variety of technical reasons.  For example, most schemes for sequestering carbon once it's been dispersed from the atmosphere are, I think, dead on arrival, because they are far too expensive to implement due to the mixing energy barrier (in the case of atmospheric scrubbers - it's "simply another chemical engineering process" but the economics will never work out compared to CCS at the source) or due to natural homeostatic mechanisms (for those who think fertilization and bio-sequestration in plants is the answer). They also suck up carbon dioxide or other greenhouse gases independently of the source, which requires an external entity - probably the government - to pay them for their services out of a carbon tax, all of which opens up problems of regulatory capture and government inefficiency. These reasons provide a pretty good blanket justification against all geoengineering ideas of this type.

However, for those schemes that directly mitigate AGW effects, e.g. sulfur aerosols dumped into the air as popularized by Steven Levitt, no matter how many technical justifications you offer it can't change the fact that there are possible technical solutions out there that might offer us a way out through active intervention in the climate. Unfortunately, there are good reasons to go against that approach as well.

Distiller's Grains on the Brain

The always informative Energy Collective has posted this article by Professor Simon Donner of UBC trying to shed light on the media circus around the US corn crop and the food-fuel substitution argument. I like that someone is trying to dispel the myths around this, but unfortunately he falls into the same fallacy of claiming that feed uses for corn are going away that most analysts with little understanding of the corn ethanol value chain continue to emphasize. To support it, he posts this graph:

This is originally derived from another work, I believe, but all data ultimately stems from the USDA feed grains yearbook.  At first glance this appears to tell a compelling story of how the amount of animal feed in the US has declined, while the amount going to sweetener, chemical or direct food use ("other") has remained fairly constant. Since I've repeatedly asserted this but never before posted data on it, consider this the moment where I finally try to prove my claims instead of simply referring obliquely to the data sources.

The unfortunate part of this analysis is that without an understanding of the full ethanol value chain, you cannot tell the whole story. The whole story is that for every bushel of corn consumed, 17/52 by weight becomes distiller's grains, a food supplement for cattle, hogs and chickens. Cattle can consume it exclusively because they're ruminants, and hogs and chickens can consume up to 15% by weight of it in their diet. If you include distiller's grains in the mix, the story starts to support my assertion that the feed picture hasn't changed, at least in terms of quantity.

So let's look at the US feed consumption of corn.

Note that the USDA uses a slightly different calendar system than the financial world due to the growth/harvest cycle; Q1 06/07 corresponds roughly to September - November 2006. It's immediately clear that the feed business has a very cyclical component, with feeding hitting a peak around Sep-Nov each year and hitting a trough in Jun-Aug the following year. I don't know why this happens because I don't know the animal feeding business well enough. What is clear, however, is that each year since 2006 the peaks have been getting lower and the troughs have as well.

This picture changes when you start to include the mass of DDG produced each quarter, which goes exclusively into feed use:

Total Corn and Corn Derivatives Going Into Feed Uses; DDG is included on an equivalent mass basis to corn

Suddenly, the picture has become less clear, though a slight decrease is perhaps detectable. But wait! DDG is more nutritious than corn is, and the USDA last year acknowledged that a pound of DDG can be substituted for 1.22 pounds of corn in most feeding situations. If we take that into account:

Total Corn and Corn Derivatives Going Into Feed Uses; DDG included on an equivalent nutritional basis to corn

Suddenly, there are no discernible trends. At least in the sense of quantity used for feed and food, the food-fuel substitution crowd doesn't have an argument.

However, this is not where the food-fuel substitution argument against corn ethanol is strong. Where it is strong, and why I think it's significant, is in the realm of pricing.


Sources: FGYearbook Table01, Table 04, Table31, link to USDA feed grains yearbook above.

Falling Out of Love with the RFS

Believe it or not, I actually do fun and engaging things at work, so forgive me if posting has been light.

An item of discussion around the office lately has been the current drought in the American Midwest.  This drought is likely to push wholesale prices of corn to levels that have never been seen before in the US. Jim Hilker of Michigan State University has a good overview here. The upshot of this is that there have never been more voices calling for the repeal of the Renewable Fuels Standard (RFS).

As usual, most of the political storm has left people swimming in misconceptions. For one thing, the magnitude of the American drought is often couched in relative terms or in absolute differences. For context, the 2012/2013 corn crop season is still expected by the USDA to be the 8th largest US corn harvest in history, easily beating out those at the start of the last decade. Despite the hit to yields, corn in the US will still be cheaper than almost anywhere else in the world, unrelated sweet corn prices will of course stay decoupled from field corn, and meat price increases may be delayed due to the early slaughter of many livestock herds in anticipation of higher prices. But the drought has now put agricultural and energy policy directly in the public's eyes, for better or for worse.

I figure it's now an appropriate time to ramble on a bit about the RFS, who's challenging it and why, whether or not it's good policy, and what ought to be done about it in the end.

Alien Space Bats Chemistry

I recently made the mistake of visiting an alternate history forum. For me, what-if discussions with other nerds are something that makes time evaporate more quickly than nail polish remover. Even so, one particular discussion intrigued me enough that I decided to think about it in detail.

The scenario went something along the lines of this: suddenly, Alien Space Bats limit the power that can be outputted from gas expansions, and prevent the use and application of electricity while still retaining such natural phenomena as lightning. This is a contention similar to the premise behind S.M. Stirling's Emberverse, which is probably why it was being discussed. I like that series, if it isn't obvious.

Naturally, in such a world the level of technology would essentially be plunged back to the high middle ages, with an admixture of modern ideas such as germ theory, chemistry, and precision engineering. One thing that kept bothering me, though, was that people kept making outlandish claims about what chemistry would work in such an environment. Duty calls.

I'll spare you the discussion of what in particular was wrong with these claims. I will, however, bring one up because it makes for an interesting discussion of the dependency of much of the modern chemical industry on a few select feedstocks and processes.

The claim I want to discuss is that with modern knowledge but a high middle age level of technology, warfare would make heavy use of  chemical agents, such as the relatively simple WWI gases chemical mustard, chlorine, or phosgene. For reference, the molecules phosgene and sulfur mustard look like the following:

That either of these would be producible in a no-electricity environment is trivially untrue because there is an important component missing. Without knowledge or means to conduct electricity, large parts of the historical chemical industry become impossible. Put simply, one needs electrochemistry - using electrical currents to run reduction-oxidation (redox) reactions in reverse. At its simplest, this means the chlor-alkali process, for producing elemental chlorine, for example. Theoretically, once chlorine was obtained, one might be able to make phosgene by burning charcoal in chlorine and air. However, without the ability to send current between an anode and a cathode, you cannot make chlorine, thus both chlorine and phosgene chemical warfare is impossible.

Sulfur mustard is still more impossible because it's a sulfur organochlorine. Sulfur presents a problem, because getting sulfur from the Claus process via sour oil and gas is obviously not going to work. Barring the literal gathering of brimstone from active volcanos and hot springs, the only practical way to get sulfur is to roast pyrite. It's a fairly common mineral, but obtaining elemental sulfur requires roasting in an evacuated chamber. Let's not even go into the requirement for ethylene.

Either way, it seems that people's understanding of chemistry doesn't realize quite how fundamentally some of our chemistry processes depend on innovations from the late 19th and early 20th centuries like the harnessing of electrical currents. Chlor-alkali for mass production of strong base replaced millennia of producing via destructive dry distillation of minerals. Similarly, the wide availability of almost all halogen gases is almost entirely due to electrochemistry. Hydrocarbon building blocks used for precision syntheses, like ethylene, are due to the invention of catalysts and materials that can run at very high temperatures. Prior to small building-block chemicals from petroleum, people had to depend on heavy molecules from coal tar, glycerin from soap, or natural chemicals like turpentine or rosin. Take that away, and chemistry gets a lot more challenging and, well, medieval.