A Conversation with Vinod Khosla

Introduction and Background In my recent essay Vinod Khosla Debunked, I challenged Mr. Khosla to a written debate on his recent ethanol claims. Mr. Khosla e-mailed me shortly after that essay appeared, and offered to discuss the matter by phone. I wanted to first make sure he understood my objections, so we exchanged several e-mails in which I spelled them out. Finally, he called this morning and we spent about an hour and a half on the phone. There was very little small talk – no chit chat, jokes, or laughter. We got right down to business. I took a lot of notes, and I will try to reproduce the conversation. He encouraged me to report on what we talked about, and even offered to assist me in reproducing the details. He told me some things in confidence, and I think I have my notes flagged in each case so I don’t reveal something he doesn’t want revealed. I will attempt to report this as objectively as I can.

At my disposal, I had his presentation Biofuels: Think Outside the Barrel (10 meg PPT warning), a marked up version of his paper Is Ethanol Controversial?, and a list of talking points I had prepared so I wouldn’t forget to cover any major areas. Here are the talking points I had prepared beforehand. These were merely to help my thought process as we talked, and I didn’t cover them necessarily in this order.

1. Motivation?

  • Is your top priority making money?
  • Or helping society?

    2. Energy balance for ethanol not better than gasoline

  • Think of energy consumed versus energy returned
  • Petroleum input is not consumed
  • Corn inputs are not counted
  • Comparing refinery efficiency versus an energy ratio

    3. If the solution fails, what is the cost?

  • The white paper asked, but never answered this question
  • Wasted time and resources – Peak Oil looms
  • Public loss of credibility
  • Public disillusionment with alternative fuels
  • Lost opportunity – public was not encouraged to conserve
  • Status quo 10 years from now

    4. Cost of ethanol versus gasoline

  • If ethanol is cheaper, why has rack price been higher for 25 years?
  • If ethanol is cheaper, margins are better, and so it should be able to grow quickly without legislation
  • Why do you accuse oil companies of gouging when ethanol has better margins?

    5. Environmental issues with ethanol

  • Topsoil depletion; ramping up corn ethanol encourages this
  • Aquifer depletion
  • Corn growing pushed to marginal lands
  • Herbicide and pesticide runoff; ramping up ethanol will make this worse
  • How is this different than pollution caused by gasoline?

    6. Over-promising technology

  • Nitrogen fixation – Holy Grail of crop science, but very complex problem
  • Cellulosic economics, yields, etc.
  • Can’t bank on these breakthroughs; but should fund research

    7. Subsidies

  • If ethanol is so cheap to make, it doesn’t need subsidies
  • Many so-called oil subsidies don’t benefit the oil companies at all; they benefit consumers

    8. Food versus fuel

  • This is already driving up grain prices
  • Grain stocks being drawn down to record low levels
  • Exports will be reduced to produce ethanol

    9. Potentially better solutions

  • Carbon tax
  • Solar
  • Wind
  • Biodiesel (esp. algal)
  • Butanol
  • Biomass to electricity
  • Storage system technologies allowing renewable electricity
  • Electric cars (Tesla Roadster as example of feasibility?)
  • Electric rail (Alan’s proposal)
  • General move to electric transportation
  • Emphasize TOD thread
  • I didn’t expect to be able to go through the entire list, as that would have taken quite a while. But surprisingly, I did get through most of the list. I mentioned The Oil Drum several times, and I called his attention to the Vinod Khosla – Give Him Your Ideas thread. I told him he would find a lot of ideas for addressing our energy problems, from people who have put a lot of thought into this very issue. I told him some of the ideas were very good. He said that he does not have a large staff, but he would look through the thread (I also e-mailed him the link). He said he is looking for ideas that are pragmatic. The Conversation Mr. Khosla dominated the early part of the conversation. He approached it in the style of his presentations, in which he argues that this is the right path to take, and that it is feasible. In the early part of the conversation, he said he does not favor biodiesel. We didn’t get into the reasons, but my guess is that he doesn’t think it is scalable, nor an ideal solution for the cars Americans are accustomed to driving (this was a consistent theme). We didn’t discuss algal biodiesel, but from his tenor I believe he would have said it is worth funding, but still more of a research project compared to the current status of cellulosic ethanol. The first thing I asked him was about his motivation: Money, helping society, or some combination? He said his primary motivation is to help society. He said he is very concerned about Global Warming, and thinks our dependence on foreign oil is great cause for concern. I told him that we are approaching this problem from different perspectives: I am approaching this from a Peak Oil perspective and that the clock is ticking. I don’t believe we can afford to spend time and resources pursuing pie-in-the-sky solutions. I said that I wanted to address some specific claims from his presentations. I started off on the energy balance of ethanol versus gasoline. We went back and forth on efficiency versus EROI, but he finally preempted my entire argument by saying he doesn’t even care if the EROI is less than 1, because corn ethanol is merely priming the pump for cellulosic ethanol or butanol (which he favors). In fact, he acknowledged some of my arguments against corn ethanol, but said that corn ethanol is just a transitory solution. I told him that I disagreed with this; that corn ethanol would be around as long as the subsidies were there. He went on to say that the ethanol plants he is building (I didn’t clarify whether these were Pacific Ethanol’s plants) would be similar to the E3 Biofuels closed-loop system. He said the capital costs are 2.5 times as high (because I specifically asked about that) but that the operating costs would be much lower. I told him that I agreed that this should be the model for building grain ethanol plants, but that we would have to see some in operation before we know if they live up to the claims. I challenged the claim he made that Brazil displaced 40% of their petroleum with ethanol. He said he got that number from another presentation, and would be glad to change it if I can show him the data. He said he wants to be sure he has his facts correct. (I will be sending him the raw numbers on Brazil’s energy supply). [Update: He did in fact change that claim in his presentation after I showed him the data]. I challenged him on the oil company bashing. I said that I work for an oil company, yet I care a great deal about the environment and sustainability. I said that when he bashes oil companies, he is bashing a lot of good people with the same broad brush. He said “On this, we will have to disagree.” He went on to defend the bashing by saying it was political. He said he is trying to get the California Clean Alternative Energy Initiative passed, and Big Oil is spending a lot of money to fight him on it. So, he is bashing them in order to get support. Of course, I already knew all of this. I can live with a bashing, as long as it is factual. I told him that it is ludicrous to suggest that Big Oil is gouging when the profit margins on ethanol (or in Silicon Valley) are even higher. He again said that it was just politics. I just don’t agree that stirring up hatred toward a particular group is acceptable politics. I brought up the “food versus fuel” issue, and he said he rejects that argument. He said that someone from Shell had come out and retracted an argument they made on this topic. I hadn’t heard anything about this, and couldn’t comment. But I did indicate that as we continue to ramp up corn ethanol, our corn exports will fall and people in 3rd world countries will go hungry. I told him the stories are already appearing in the media. He said that there is plenty of food in the world, and the problem is often ability to pay. I didn’t gain any ground at all in this argument. He said that he has come out against the ethanol subsidies currently in place, and would like to see those subsidies shifted to biomass subsidies. I told him that would be a tough political sell, and he agreed. He said he has spoken out on the tariff that is slapped on Brazilian ethanol. He thinks eliminating this tariff would lower ethanol prices in the U.S. He also said that he has heard that Brazil is considering taking this issue to the WTO. On this issue, we agree. I spoke of my concern that he is over-promising on cellulosic ethanol. I told him that my fear is that by making these rosy projections, the public will be lulled into complacency, and we don’t have time for that. After all, they think we are going to transition right into cellulosic ethanol after hearing his projections. I told him that I don’t believe his projections are realistic. He countered that they are realistic, and that he has seen a lot of research behind the scenes that is not yet publicly available. He said he has several cellulosic projects under way, and that he is in the business of making judgment calls. He also said there are about 50 projects (maybe it was proposals?) on cellulosic ethanol that are underway. Several times he compared his investments in cellulosic ethanol to his early investments in the Internet or other technologies that paid off despite the scoffers. He has this incredibly naive view that he is dealing with Moore’s Law here. Cellulosic ethanol has behaved nothing like Moore’s Law for the past 30 years, why does he expect it to in the next 30 years? One of his consistent themes was that the solution has to be practical, and it had to fit today’s engines or the auto makers wouldn’t buy in. I told him that I considered this a problem; that the internal combustion engine is very inefficient. He agreed, but said a transition to electric would take time. He said it starts with hybrids, and then you improve the battery technology until the hybrid becomes more and more electric. He said he is investing in battery technology, and thinks this area has even more potential than ethanol. On this, I certainly agree. Then we came to a matter of great disagreement. He said he believes cellulosic ethanol can displace petroleum because petroleum is expensive. But he didn’t give renewable electricity much chance of displacing coal, because coal is too cheap. He said that solar is 3 times the cost of coal-generated electricity, and that we have “an infinite supply of coal.” He said he is more interested in a liquid fuel replacement for petroleum. I, on the other hand, am more interested in moving our means of transport to renewable electric sources. [Update: I noticed recently that he has announced some investments in solar]. We discussed a carbon tax, and we were in agreement that this should be implemented. However, he feels like it will never be politically palatable. I just can’t understand this, and told him so. I think this could be sold to the public. You explain the reason for the tax: That it is designed to reduce demand and prepare us for a future of declining petroleum supplies. You can avoid it being a regressive tax by lowering tax rates or increasing the deductions for low-income taxpayers. There is a way to work this. He replied that it would break down when everyone tried to get the best deal for their own constituents. I just think this is too important an idea not to aggressively pursue it. A carbon tax would begin paying immediate dividends. I told him that we should have done this long ago, and we should have encouraged adoption of diesels like they did in Europe. He replied “What we should have done, or should do, is less important than what we can do.” Areas of Agreement and Disagreement We agreed on the following issues:

    1. Current energy policy needs a dramatic facelift
    2. A carbon tax is a good idea
    3. Brazil is much more efficient at making ethanol than the U.S., and the ethanol tariffs should be lifted
    4. Butanol may be a superior choice to ethanol
    5. Grain ethanol subsidies should be eliminated
    6. There is great potential in researching energy storage devices (e.g. batteries)

    We disagreed on the following issues:

    1. The issues surrounding corn ethanol aren’t significant since it will be a transitory solution
    2. The solution must fit in today’s engines
    3. Bashing oil companies is acceptable to achieve a political goal
    4. Renewable electricity (solar, wind) can’t compete with coal
    5. Cellulosic is scalable within the next 5 years
    6. The consequences of failure to deliver can be very high
    7. Food versus fuel will be a serious issue going forward

    Conclusions I already had a pretty good understanding of where he was coming from, but I have tried to accurately relay his position so that others may understand. This is the least I owe him after he spent that much time talking with me. However, we still have some fundamental areas of disagreement, and my impression is that he is concerned about oil depletion, but not in the way I am concerned. My worry is that over-promising on cellulosic ethanol will prevent us from getting very serious about taking the steps we need to take as a society toward powering down while we still have some choices. I think we need to fund cellulosic ethanol, but until there are a few pilot plants operating, we just don’t know if it will be feasible on a commercial scale. I did have difficulty convincing him that corn ethanol is a bad thing, because his position is that it is merely a jumping off point to something much bigger. He said he wouldn’t be investing in cellulosic if we weren’t producing several billion gallons of corn ethanol. He said that corn ethanol is “priming the pump”, and has shown the feasibility of ethanol as fuel in the U.S. I obviously have not captured the entire conversation, so if you have specific questions about a particular topic I will answer them. It was a worthwhile conversation from my point of view, because I think he understands that there are legitimate concerns from people other than special interests. We agreed to keep in touch as developments unfold.

    23 thoughts on “A Conversation with Vinod Khosla”

    1. Apparently your post just got the oildrum slashdoted.

      So I guess that’s why The Oil Drum is down. One of the guys at Omninerd told me that once one of their essays got Slashdotted, and their server shut down due to the traffic overload.

    2. “But he didn’t give renewable electricity much chance of displacing coal, because coal is too cheap. He said that solar is 3 times the cost of coal-generated electricity”

      What did he think about wind power?

      Was he concerned about global warming?

    3. Nick,

      He said that he supported renewable electricity, but didn’t think it really has a chance to compete with coal. His primary goal was a renewable liquid fuel replacement for petroleum. Yes, he was concerned about Global Warming. I would say that was probably his primary concern.

      Incidentally, here is a link to the Slashdot story:

      Vinod Khosla Talks Ethanol

      The Oil Drum is down right now due to the heavy traffic, but the essay is the same one I have hosted here.

    4. “He said that he supported renewable electricity, but didn’t think it really has a chance to compete with coal.”

      hmmm. But, did he mention wind in particular? Solar and wind are in very different places as far as cost effectiveness.

    5. He only mentioned wind in passing. I told him that I favor wind energy here in Montana, because we rank very highly on the wind maps. Wind is something that makes sense for Montana. His response was that he is focused on liquid fuels.

      He specifically mentioned solar as not being competitive with coal, but my impression was that renewable electric is not something he is passionate about (or maybe doesn’t have time for). I told him I would rather see us moving toward electric cars, since you can generate electricity from so many different sources.

    6. A carbon tax has multiple political problems. The level of taxation required to produce behavior change is MUCH, MUCH higher than the level which will produce voter backlash. It would hit the rural poor especially hard — the urban poor travel less and can use mass transit but the urban poor are stuck. To be fair, an income tax rebate would have to vary by geography which is a huge political landmine.

      Ag fuel would almost certainly be exempt, so a carbon tax would become (another!) indirect ethanol subsidy.

    7. “I think we need to fund cellulosic ethanol, but until there are a few pilot plants operating, we just don’t know if it will be feasible on a commercial scale.”

      But there ARE “a few” cellulosic pilot plants already operating or soon to be operating. For example, Canadian company SunOpta, Inc. will finish building a 1.3 million gallon per year wheat straw to ethanol facility THIS FALL for Abengoa Bioenergy in Salamanca, Spain and already has a DOE-funded Pilot Plant operational in York, Nebraska.

      SunOpta recently signed a contract with China Resources Alcohol Corporation for the first cellulosic ethanol plant in China, and has licensed a C5-fermenting yeast from the Dutch company Nedalco for conversion of the hemicellulose fraction of biomass to ethanol, an important step in efficiently utilizing available biomass.

      SunOpta has also been quoted saying they can produce cellulosic ethanol now for as little as $1.40 per gallon at the commercial demonstration plant in Spain.

      So what are we waiting for? It would seem cellulosic ethanol is a viable alternative now, with no need for further “transitional” ethanol from corn starch.

    8. RR, since you think renewables are a viable alternative to coal, what do you see as the answer to intermittency and land-use issues associated with them? And what about nuclear power?

    9. Doug,

      The intermittency issue is a big one. We need to invest in better energy storage systems. There are a number of schemes that work on paper (e.g., using excess solar to electrolyze water to hydrogen and oxygen) but not too many in practice, other than batteries for solar systems. There is a promising development for wind energy storage, that I blogged on not too long ago:

      Compressed Air Energy Storage

      It is not ideal for all locations, but it is an example of what can be done if we invest resources into finding storage solutions.

    10. Thanks, yes, I’m aware of most of the storage schemes. Many are site-specific and won’t scale (pumped hydro and compressed air). All are expensive. Besides batteries, there are ultracapacitors and flywheels. Electrolysis is of course possible, if water is available. All lose a lot of energy going back and forth, especially electrolysis. (Electrolysis is so bad compared to the other options that it really should be considered only if you’re going to use the hydrogen directly, e.g. to replace natural gas in fertilizer production.) Another interesting idea was direct heat storage in a working fluid, implemented in some solar-thermal systems. Overall, though, it seems likely to be very costly to implement, since these systems (especially solar) need large land areas to make a dent in energy demand, and operate at low capacity factors, necessitating a big overbuild to be confident of banking enough power, net of conversion losses. With a capacity factor of 30% and losses of 60%, you’d need an overbuild of roughly 5x actual demand. The no-nukes stance of most activists (including you?) troubles me when I look at numbers like that because barring a breakthrough it virtually guarantees we’ll get most of our energy from coal for the rest of this century.

    11. With regard to the food versus fuel debate – Isn’t the U.S. Government spending billions of dollars every year to farmers so that they will not plant crops on their land? This indicates to me that the U.S. has a huge amount of untapped crop production capacity. Couldn’t this idle farmland be used to increase the production of crops that would mitigate or eliminate the price increases that result rising demand?

    12. The no-nukes stance of most activists (including you?) troubles me when I look at numbers like that because barring a breakthrough it virtually guarantees we’ll get most of our energy from coal for the rest of this century.

      I realized that I didn’t answer your nuclear power question. I have nothing at all against nuclear power, and I agree with you that we will need it. In fact, I have said many times that the NIMBY problem will go away as soon as we start suffering more frequent blackouts.

    13. doggydogworld wrote: A carbon tax has multiple political problems. The level of taxation required to produce behavior change is MUCH, MUCH higher than the level which will produce voter backlash.

      People would need to be sold on the benefits, and it would need to be tuned so that it was at least close to revenue neutral. This would require leadership at the national level, a quality that is presently nonexistent.

      It would hit the rural poor especially hard — the urban poor travel less and can use mass transit but the urban poor are stuck.

      It might hit the suburbs even worse. But if it hits rural people harder, maybe it’s time for them to suck it up. They are already subsidized nine ways to Sunday, (water, power, mail, grazing rights, crop subsidies…) Considering what rugged individualists they’re supposed to be, they seem more like Welfare Queens to me sometimes.

      To be fair, an income tax rebate would have to vary by geography which is a huge political landmine.

      I think it would be sufficient to subsidize the poor regardless of location. The non-driving poor would win in such a scheme, but in the grand scheme of things, that’s not such a disaster.

      ps: Robert, thanks for the Khosla interview. That is a real service.

    14. Hi Guys,

      Re. Oil Peak, I have a question, that seems to fit in this forum…

      I recently heard abt this Fischer-Tropsch technology where you can produce diesel or gasoline from coal, and was surprised I never even heard of this before, even though it’s been in industrial use since WW2.

      The info I got was that you can produce a barrel of “ultra-clean” diesel/gasoline for ca US$35, and South-Africa already used it for decades during the Apartheid oil blockade, to produce the bulk of their tranportation fuels. Also, using this method, US has enough coal-reserves to meet current demands of transportation fuels for more than 2 centuries.

      From the above data, this seems like the obvious Oil Peak solution for the to me, but are they correct?

      What is your input on this?

      What are the drawbacks?
      The energy balance I have no info about — do you know how good/bad it is?

    15. Barron’s magazine is out today, and with a rather critical piece on ethanol from corn (Mr. Khosla’s “solution”) titled ‘The Corn Conundrum’
      http://online.barrons.com/public/article/SB115473726554127607-Z0aqTzshYopyAcR7cKdW0tcPvxI_20060906.html?mod=9_0002_b_free_features

      Some key quotes:

      “Unfortunately, before ethanol refiners can reach that goal, they might reach the limits of the country’s corn supply. America’s entire corn crop would satisfy just 12% of gasoline consumption, leaving no corn to feed livestock and humans. So there just won’t be enough corn for corn ethanol to grow from a fuel additive into a large-scale substitute for fossil fuel. Crop years vary, too. Dry weather this year in the Corn Belt has already worried some commodity traders.

      The competition between fuel and food will play itself out in corn prices. Higher corn prices will be great for growers, if not for the hungry people in countries like Egypt who depend on U.S. corn exports. But more expensive corn would surely narrow the record margins that ethanol refiners now enjoy and the generous valuations of their shares.”

      “ADM didn’t respond to Barron’s requests for an interview.”

      “Throughout the ethanol industry’s quarter-century gestation, some scientists doubted whether using ethanol even helped the environment, after accounting for fossil fuels used in ethanol’s production. The latest accounting seems to have settled that debate in favor of biofuels. In the July 25 issue of the Proceedings of the National Academy of Sciences, a team of Minnesota-based researchers concluded that ethanol yields 25% more energy than the fossil fuels used to produce it. What’s more, the making and consuming of ethanol produces 12% less greenhouse-gas emissions than gasoline.

      The real risk from all these planned ethanol plants is that they’ll use up vast quantities of corn. America’s entire corn and soy crop could supply fuel volumes equal to just 12% of gasoline demand and 6% of diesel demand, notes a University of Minnesota ecology professor, David Tilman, an author of the July 25 Proceedings article. That’s not a full accounting, however. Netting out the fossil fuel used to produce those biofuels, the nation would actually be trimming less than 3% from its fossil-fuel consumption.

      Realistically, what will happen is that corn prices will rise. That’s wonderful for farm families and should help reduce government farm subsidies. But unless gasoline prices continue their steep rise, tight corn supplies will clamp down on the huge crush spreads that started the stampede to invest in ethanol refineries. Corn already makes up half the cost of goods sold for an ethanol plant. According to the Washington-based World Resources Institute, the price of corn would rise at least 17% if ethanol production reached 10% of U.S. gasoline consumption.

      To increase corn supply, farmers will have to shift substantial acreage from other crops or significantly boost corn yields. It’s not likely there will ever be enough corn to fuel many E-85 vehicles. And for that matter, ethanol gets only two-thirds the mileage of gasoline, so consumers may balk at paying comparable prices.”

    16. FYI, Mr. Khosla is working on an essay that I will post as soon as he is finished with it. He attempts to address some of the criticisms I have of his proposals. I have seen a first draft, and it should provoke a lively debate.

      The Barron’s link above got cut off. Here is the link to the story:
      The Corn Conundrum

      I have noted with interest that Pacific Ethanol, a stock that I criticized pretty strongly in my recent essay for Financial Sense, is down almost 30% since I wrote that story. I think people are figuring out that a lot of these ethanol stocks are living off of hype.

    17. Robert, do you have any info on the theoretical limit of plant efficiency in capturing solar energy?

      I read that corn is 1-2% efficient. I calculate that if plants are 1% efficient, that you need about 90M acres to fuel all 210M light vehicles in the US. My calculations: 210M vehicles x 12k miles/yr x 2,500 whrs/mile (10% of prius efficiency) = 6,300 terawatt hours. 6,300 twhrs / 18 kwhrs/yr/sqmeter (at 1% efficiency) = 350,000M sq meter. 350,000M SM / 2.5M sqm/sq mile = 140,000 sq miles, or 89,600,000 acres.

      This suggests two things. First, of course, you’d do better burning the corn for electricity, where you might get 40% efficiency, instead of 10-20%. But, more importantly, it suggests that using farmland to power light vehicles is.

      Are my calculations ok?

    18. R**2 — two quick questions.

      1. A million bbl per day are off the table now (Nigeria and Alaska), and more could go if Venezuela or the Middle East get screwy. Wouldn’t it be nice if we didn’t have to completely depend on either foreign political stability, or people doing the O&M they’re supposedly getting paid for doing, to keep prices below $3/gal. ?

      2. Don’t you think it would influence the world market if The Biggest Customer found a way to diminish its reliance on the market by 40 or even 20 percent ?

      Regards,

      Mel Lanoma

    19. But, more importantly, it suggests that using farmland to power light vehicles is feasible.

      Nick,

      I suspect a couple of problems with your calculations. I don’t think 1-2% efficiency is typical for photosynthesis, but I think your calculations would represent the energy value of the entire plant. I have some numbers somewhere on the theoretical maximum efficiency of photosynthesis.

      Ethanol production used 14% of the corn crop in 2005. If the entire 2005 corn crop was converted into ethanol, this would have produced 27.9 billion gallons of ethanol. But this is only the BTU equivalent of 16 billion gallons of crude oil (about 390 million barrels). This equals less than 10% of our current oil imports, but these are only the gross barrels displaced. This is the upper limit for how much oil could currently be displaced by corn ethanol, if the energy inputs into the process were all free, or were supplied by fuel sources (like coal) that can’t be used as transportation fuel, AND we used the entire corn crop. But of course it took fossil fuel BTUs to produce the corn, so the net displacement would only be about 3% for turning the entire corn crop into ethanol.

    20. Wouldn’t it be nice if we didn’t have to completely depend on either foreign political stability, or people doing the O&M they’re supposedly getting paid for doing, to keep prices below $3/gal. ?

      Mel,

      It would be nice, but it’s a pipe dream to think that ethanol can do it. The only way to reduce our demand by 20-40% will be via conservation. There is always the possibility of a cellulosic biomass breakthrough, but until then ethanol is simply a boondoggle.

      FYI, Mr. Khosla and I spent another hour on the phone last night. I will be posting an essay by him tomorrow.

    Comments are closed.