Are Subsidies to Oil Companies Ever Justified?

Should We Ever Subsidize an Oil Company?

“Of course not!” might be the immediate reaction of most people. But doesn’t it depend on the objectives you are trying to achieve or the behaviors you wish to influence? Are there no cases in which it would be warranted? What if the end result was a reduction in our fossil fuel consumption?

I think most people would like to see us move away from fossil fuels. But fossil fuels are money-makers for the oil companies, and the cheapest option (strictly in terms of dollars at the pump) for consumers. So how do we wean off of fossil fuels?

Reducing Fossil Fuel Usage

There are really two options. By far the most efficient would be to raise taxes on fossil fuels. I am an American, but have lived in Europe before, and I am back here now. In my opinion Europeans have been far wiser about their policies on fossil fuels than we have been in the U.S. They made them expensive. Does that mean everyone then lives in poverty because they can’t afford gasoline? Far from it. People have adapted. They are attracted to fuel efficient vehicles. They live in smaller houses, closer to their jobs. They embrace mass transit. These are all behaviors that the U.S. has discouraged by keeping fossil fuel taxes low. So, we are energy gluttons, and we maintain this gluttonous habit by ensuring that both major political parties think twice before raising our gas taxes.

Higher fossil fuel taxes would help level the playing field for alternative fuels. Not only does this avoid the potential mistake of trying to forecast and subsidize particular technology winners, but it also discourages alternatives that have high fossil fuel inputs. This is important, because we are now subsidizing some “alternative” options that are essentially 90% recycled fossil fuel. Taxing fossil fuels would strongly penalize those alternatives with high fossil fuel inputs.

However, I think it is unlikely that our political leaders have the will to tackle the tax option. So then we are left with the alternative of subsidizing alternative energy and hoping that one or more sustainable options are developed as a result. We have tried this experiment with corn ethanol for 30 years now. It has been heavily subsidized since the late 1970’s, and today it is still not a viable option without mandates or subsidies. (I know that there are those who truly believe that grain ethanol could survive without the subsidies. I think what we would see is that the industry would collapse like a row of dominoes, which is why the subsidy remains in place).

Renewable Diesel

One option that I have always felt had serious potential as a sustainable option is renewable diesel. Not only is the EROEI of the biodiesel production process superior to that of grain ethanol, but a diesel engine is also much more efficient than a spark-ignition engine (which is where our ethanol supply ends up). And like ethanol, we also subsidize renewable diesel. And there aren’t all that many objections to subsidizing biodiesel; that is until an oil company wants to make it.

Biodiesel, which is strictly defined as alkyl esters made from the transesterification of vegetable oils or animal fats, receives a $1/gallon production subsidy. Biodiesel is produced by reacting the vegetable oil or animal fat with (typically) methanol (which is usually produced from fossil fuels) and a strong caustic. The products are biodiesel and a glycerol by-product that can be difficult to dispose of (it is often simply incinerated). There is also a wastewater discharge, containing “free fatty acids that have a high biochemical oxygen demand, or BOD, that can remove oxygen from water bodies and harm aquatic life.” None of the by-products, however, are classified as hazardous waste.

There are two other forms of renewable, or “green diesel” that aren’t strictly defined as biodiesel. One is obtained via a gasification and subsequent Fischer-Tropsch reaction of biomass. Choren, for instance, uses this process to make their SunDiesel product. The other form involves thermal processes in which animal fats or vegetable oils are heated and sometimes reacted with hydrogen to transform the oils into a diesel product. Such processes for making diesel have been referred to as second-generation biofuel technology. And these second-generation technologies have one big advantage over the first-generation technologies: They can be blended up to 100% with conventional diesel in any weather. The cold weather limitations of alkyl ester biodiesel are well-known.

There was some uncertainty about whether new green diesel technologies met the definition of biodiesel and therefore qualified for the subsidy. So Missouri Representative Roy Blunt, to help a company in his district – Changing World Technologies (CWT) – inserted a provision to make sure that so-called thermal depolymerization processes also received the subsidy. In addition, he helped CWT secure a $5 million grant. While this is money that in hindsight was probably thrown down a black hole because of grossly exaggerated claims on the part of CWT (See my essay TDP: The Next Big Thing), it did set a precedent for expanding the biodiesel subsidy to include processes other than strict alkyl ester biodiesel. In general, I would think that funding second-generation technologies is as important as funding first-generation technologies.

The First-Generation Recipients Scream Foul

On April 16th, 2007 ConocoPhillips and Tyson Foods announced a collaborative effort to produce green diesel via one of the second-generation technologies. But the National Biodiesel Board, a lobby for the first-generation biodiesel producers, cried foul and issued an incredibly hypocritical news release, which I have dissected:

The Biodiesel Lobby Cries Foul

Their argument was that it was not fair to give an oil company – already making billions in profits – incentives for producing biofuels. They also complained that the White House was directly lobbied on this matter. This issue is discussed at:

ConocoPhillips, Tyson Lobbied White House on Tax Rule

The persistent theme of the article is that the credit was expanded on behalf of ConocoPhillips and Tyson Foods. But it appears to me that a clarification was requested before millions of dollars had been invested in this process. From the EPA’s Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Requirements for 2006 , issued December 30, 2005 we find the following definition of biodiesel:

Biodiesel means a diesel fuel substitute produced from nonpetroleum renewable resources that meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act. It includes biodiesel derived from animal wastes (including poultry fats and poultry wastes) and other waste materials, or biodiesel derived from municipal solid waste and sludges and oils derived from wastewater and the treatment of wastewater.

That definition is certainly not process-specific, but I can understand the desire to get clarification on the rules before the project was announced. The sticking point could be that someone could argue that “biodiesel” has traditionally been the term for the ester product. But the key phrase to me looks like “diesel fuel substitute produced from nonpetroleum renewable resources.” After all, what are we actually trying to achieve with these subsidies? Isn’t the point to encourage movement away from fossil fuels and toward biofuels? Shall we start picking technology winners by funding one renewable “diesel fuel substitute” while denying funding to another?

But some didn’t see it that way at all. What they saw was that an oil company was going to get the same subsidy that biodiesel producers received, and they are quite happy to cut off their nose to spite their face:

Democrats Target Tax Break for ConocoPhillips, Tyson

April 20 (Bloomberg) — Democrats in Congress plan to reverse an Internal Revenue Service ruling that allowed ConocoPhillips and Tyson Foods Inc. to benefit from a tax break for producing alternative energy.

If adopted, the legislation would threaten a joint venture announced this week by ConocoPhillips and Tyson to produce diesel fuel from animal fat. Lawmakers said that the tax credit was intended to benefit new technologies using animal carcasses and other food waste and that the companies pressured Bush administration officials to redefine it.

I almost hate to point out that this is new technology. This particular process came along much later than both traditional biodiesel manufacture and the CWT process that didn’t actually work as advertised yet still got $5 million.

As Jim Mulva pointed out, the project is not profitable without the tax credit and would not go forward otherwise:

ConocoPhillips spokesman Bill Graham said today that remarks by company Chief Executive Officer Jim Mulva earlier in the week sum up the company’s position on the tax cuts. Mulva said that ConocoPhillips and Tyson wouldn’t proceed with the venture if they didn’t qualify for the tax credit, worth $1 per gallon of renewable diesel produced.

“It’s not profitable without the $1 tax credit,” Mulva said April 16 at a news conference in Houston. “It’s very important and significant in going forward at this point in time.”

A Tyson spokesman also weighed in:

Gary Mickelson, a Tyson spokesman, said today that the company hadn’t seen any legislation.

“Denying the tax credit will only serve to limit the expansion and availability of alternative fuels and also damage the ability of livestock farmers and ranchers to participate in the renewable energy business,” Mickelson said in an e-mail, citing support for the IRS ruling by the National Cattlemen’s Beef Association, National Pork Producers Council, National Chicken Council and Texas Cattle Feeders Association.

The article also pointed out the it wasn’t only the biodiesel lobby that was unhappy:

It also angered the American Soybean Association, which fears refiners may begin shipping in less-expensive foreign palm oil to replace U.S. soy oil at the government’s expense.

This is a ridiculous argument, because nothing is stopping conventional biodiesel producers from doing that right now. Of course this sort of protectionism is nothing new in the renewable energy field, as we do the same thing with corn ethanol. We subsidize it, and then penalize much more sustainable Brazilian ethanol with a $0.54/gallon tariff. Except in this case, we are going to discourage the development of an alternative within the U.S. because it will benefit a U.S. oil company.

An article in the Houston Chronicle discussed the economics in a bit more detail:

Jeff Webster, general manager of Tyson’s Renewable Energy Division, noted that the cost of using animal fat as a feedstock is about $2 a gallon, or about $84 a barrel.

That compares with crude oil futures running above $63 a barrel on the New York Mercantile Exchange.

The $1-per-gallon tax credit, however, would bring the feedstock cost for animal fat down to about $1 a gallon, or $42 a barrel.

“In general, the feedstock cost is the big driver of your overall costs, as much as 75 percent of your cost structure,” Webster said.

Asked about the effort to change the interpretation, ConocoPhillips spokesman Bill Graham noted: “With any repeal, you’re changing the economics for the manufacturing of the renewable diesel.

“If it is repealed and maintained for other forms of alternative energy, then what you’re doing is picking and choosing between alternative energies. And we don’t think that’s sound public policy.”

Objections

Most objections that I have seen are generally along the lines of “Why on earth would I want my tax dollars going to a company making billions of dollars a year? They don’t need any subsidies.

Of course that is correct. They don’t need subsidies to continue business as usual. In fact, all that would happen if you removed the so-called indirect subsidies is that we would pay more for gasoline. There would be some demand destruction as a result, so perhaps there would be some impact to the oil companies, but for the most part it would be business as usual.

And there’s the rub. If you want to take that position: “They don’t need my tax money“, then don’t expect them to do things that you think they should do. As someone else wrote to me “It is in their best interest to move into biofuels.” But you see, as far as they are concerned it is not. What is being asked here is for them to enter into a guaranteed money-losing commercial venture. That is a lot different than just funding R&D research, which is being done regardless.

You saw the API conference call transcript. The oil industry, rightly or wrongly, believes that their business will be oil for quite some time. So that leaves two possibilities.

First, what if they are wrong? Well, if they are wrong and they are discouraged from moving into next-generation fuels, then you and I will suffer. It will be peak with no parachute. We will have wasted quite an opportunity to nudge them in the direction of diversifying the fuel supply.

So, what if they are right and there is plenty of oil and gas? Well, they will continue to make oil and gas, consumers will continue to buy it, oil companies will continue to profit, and greenhouse gas emissions will continue to rise. And they will not change their behavior because the status quo is making money, and the shareholders are happy.

So the way I see it, we need to encourage a move away from fossil fuels even if we have to give oil companies the same incentives that we give everyone else. Who will be hurt if we don’t is you and me.

Conclusions

This case is very frustrating to me. It highlights the problems that we are going to have in encouraging oil companies to move toward alternative energy. What is the purpose of these subsidies? Isn’t it to make the alternatives competitive with fossil fuels? So then why should we expect oil companies to expand R&D on alternative fuels if they are going to sell these fuels at a loss? Remember, the current biodiesel producers aren’t losing their $1/gallon tax credit. Farmer Marty Ross, mentioned in The Biodiesel Lobby Cries Foul, is still going to receive his $5.5 million a year in subsidies. Furthermore, he qualifies for various grants and low-interest loans to give him an additional benefit. But biodiesel producers want both a subsidy and a monopoly, and their position endangers us all by discouraging the development of next-generation alternatives.

Oil companies are still answerable to their shareholders. They can’t be expected to invest big dollars into product development if they believe they are going to sell the product at a loss. These credits should be open to anyone willing to make the necessary investments. Would you rather see the money flow to the Middle East? Do you want the next generation of fuels to be coal-based, or derived from shale oil? Because this is what will happen if we make it more difficult for oil companies to become involved in alternative fuels. Ask yourself the following questions:

1. Will technologies like this reduce our dependence on foreign oil? Yes.
2. Will this encourage a renewable diesel technology that does not commercially exist? Yes
3. Will this help diversify our fuel supply? Yes.
4. Does this produce a fuel with superior performance characteristics? Yes

That would seem like a slam-dunk. Yet there is one more question to answer, and because of that answer some are willing to forego quite an opportunity to nudge oil companies in a sustainable direction:

5. Will an oil company benefit, just as any other company could benefit? Yes.

I have personally lobbied my company to become more involved in alternative energy, and this attempt to rescind the credit is very upsetting to me. I have skin in the game here, and I want to encourage my company to move into alternative fuels. But rescinding the credit will be a disincentive because I know what the economics look like for these biofuels.

Disclaimer

Of course I do work for “an” oil company. I can’t say which one, although it is relatively easy to figure out with Google. I tell you this because I don’t want there to be any misunderstandings. However, I can’t come right out and name my company, because I am not sanctioned to speak for them. Their position and my position don’t always mesh, so it is important to keep my personal opinions separate from official company statements.

I was conflicted about whether to write this essay, because I don’t want it to look like I am putting my self-interests ahead of good energy policy. And I wouldn’t even touch this one, but I think this is a very important, precedent-setting issue that has major implications on the direction of our energy policy. I asked and received feedback from TOD editors and contributors, and the feedback that I did receive suggested that I should go ahead and post it.

29 thoughts on “Are Subsidies to Oil Companies Ever Justified?”

  1. I agree with you on this specific topic, mostly because from what I understand it’s fuel-from-waste and not a scheme to produce fuel-from-food that hides all of the fossil fuel inputs and promotes bad soil stewardship.

    I think where the public opinion problem is with this in renewable fuels is painted by Norman Rockwell. It’s big business versus small farm or entrepreneur. I think there is a dream that renewable energy can be produced by “the little guy” and the economy will shift back to the Five and Dime from the Walmart, that the family farm will become viable and that city planners will kill the suburb and put back the town square.

    I have watched this happen with software . The monopolistic practices of proprietary software caused a huge community effort to provide an alternative. There isn’t the huge profit to be made in Linux and Open Source as there was in proprietary software, but it is there.

    I think that although consumers will shop at Walmart for the best deals, they feel guilty when the 5 and Dime closes and the hope is that renewables will allow the economy to shift back to the small company.

    I think that the real drive behind the “Peak Oil” crowd and the “Global Warming” crowd isn’t a conflicting viewpoint or well understood. I think there is a subconscious motivation that the large corporation isn’t sustainable and Enron still looms large in the public mind.

  2. I don’t like arbitrary changes in law, and this seems like petty corruption to me.

    That said, two things:

    1) Watch out for the word “waste.” It often does not mean something going to the landfill. What it often means is a “waste product” being diverted from another use.

    Dollars to donuts, there was a renderer or a consumer for that “waste.” It’s even possible that the alternate consumer was more environmentally or energetically efficient.

    2) Zero them out. Having production subsidies is exactly what invites this kind of petty production.

    To make it less arbitrary and less of a whipsaw for farmers and industrialists singing on to the current deal, make it a 5 (or even 10) year ramp down to zero – but _zero_ them out.

    We should allow universities to do some basic research, but we should be straight up with the American people that this is an energy market, and they can’t have it both ways: a free market and government-guaranteed low prices.

    – odograph

  3. Actually it’s even worse, isn’t it?

    We are heading toward a future where government will lead people to believe that they will have “carbon trading” AND “guaranteed low prices.”

    – odograph

  4. It’s big business versus small farm or entrepreneur. I think there is a dream that renewable energy can be produced by “the little guy” and the economy will shift back to the Five and Dime from the Walmart, that the family farm will become viable and that city planners will kill the suburb and put back the town square.

    Very succintly put. That is exactly what is going on. The average Joe on the street would probably love to see oil companies go out of business. But he has no concept of the volume of the biofuels we consume versus the fossil fuels we consume. The difference is well over an order of magnitude. The fact is, oil companies are going to be around. But will they adopt policies to benefit the public? Only if it is in their financial best interest.

    Cheers, Robert

  5. Dollars to donuts, there was a renderer or a consumer for that “waste.”

    Yeah, probably Krispy Kreme. 🙂

    Zero them out. Having production subsidies is exactly what invites this kind of petty production.

    I agree completely with that, but I would not only get rid of the subsidies, I would also raise taxes on fossil fuels. Then, they can all compete on an equal basis. If we had that system in place, this would be a non-issue.

    Cheers, Robert

  6. http://www.biofuelwatch.org.uk/

    http://www.monbiot.com/archives/2004/11/23/feeding-cars-not-people/

    http://www.monbiot.com/archives/2007/03/27/a-lethal-solution/

    We need a five-year freeze on biofuels, before they wreck the planet.

    By George Monbiot. Published in the Guardian 27th March 2007.

    Robert

    When I read these articles I could weep.

    This is perhaps a European problem, not an American one.

    But there is no doubt biodiesel in particular could destroy the planet.

    Recycling animal fats is OK, maybe growing soybeans in Europe and America, but the reality is biodiesel is going to destroy our planet as surely as anything.

    About 2/9ths (ie 2 billion out of 9 billion) tonnes of emitted carbon on the planet come from land use changes, agriculture etc.

    The leading climate destabiliser right now (besides coal-fired power stations) is rainforest deforestation.

    Most of the world’s rainforests have less than 30 years before they will be entirely destroyed.

    Clearly there is the biodiversity loss (consider the world’s leading insecticide came from trees in the Amazon– pyrethrins).

    But the impact on the world CO2 cycle is potentially huge. The Congo Rainforest alone holds 60 times as much CO2 as the UK produces in a year. And the UK is the world’s 6th or 7th largest greenhouse gas producer.

    (it turns out temperate forests aren’t a great carbon sink. For the last 100 years or so, places like New England have been reforesting, sucking up CO2. *but* a mature temperate forest emits CO2. So most of the natural, forest based, CO2 absorption comes from tropical rainforests)

    The European biodiesel requirement is driving demand for palm oil, and that is driving the Malaysians and Indonesians to cut rainforest on Borneo, and build palm oil plantations.

    The whole thing is an unsustainable environmental disaster, and a classic example (like corn ethanol) of clean politics and dirty environment.

    I sometimes think the human race doesn’t deserve to survive the next 100 years.

    Valuethinker

  7. Here’s a fossil fuel saving method that doesn’t require any increased work and in fact saves a person time (and loads o’ money): a new style pressure cooker. Pressure cookers cut the energy used for cooking by about 70% on average as they cook food two to ten times faster than ordinary cooking methods. The energy savings add up from these types of “low tech” solutions. Well designed new pressure cookers, being perfectly safe, aren’t like the ones of years past. Unlike microwave cooked food, pressure-cooked meals taste superb, and a pressure cooker cooks food in a fraction of the time compared to a slow cooker.

  8. In general, I would think that funding second-generation technologies is as important as funding first-generation technologies.
    I beg to disagree, Robert! I would say that funding second-generation technologies is far more important than funding first-generation technologies.

    I would propose a $0.50/gal penalty on any alternative energy that involves the use of foodgrade or virgin feedstock, assuming it was practical.

    The time has come to separate bad agricultural policy from good energy policy…

  9. I have worked more in electrical but the subsidy issues are often similar, and I have more than once found myself trying to explain one important, rude fact of life to enviros and other naifs:

    We can either make the bastards rich for doing the right thing, or we can let the bastards keep on getting rich doing the wrong thing. You choose.

    I think that pretty much sums up your article here.

    Clawing back the money from the rich bastards is a topic for another day, and probably best accomplished through taxes rather than through the energy system.

  10. Of course, Bloomberg conveniently fails to mention that James Woolsey is listed on CWT’s website as a “supporter”.

    I got something via e-mail that was quite interesting. In addition to the Woolsey angle, it pointed out a CWT document in which they admitted that the individual steps of the process have all been developed in the refining industry, and that the two core processes – hydrotreating and delayed coking – are mainstays of the refining business. So, CWT “hijacked” these technologies for their process, are receiving grants and subsidies for doing so, and now complain that COP and Tyson have “hijacked” their subsidy. The hypocrisy here is amazing.

    Cheers, RR

  11. But there is no doubt biodiesel in particular could destroy the planet.

    I am starting to come around to that particular point of view. But I think something like the Choren process has long-term sustainable potential. I can foresee the day that we produce fuel via dedicated energy crops from the Choren process. We certainly won’t be able to replace our current fossil fuel usage, but we should be able to make a dent.

    Cheers, Robert

  12. We can either make the bastards rich for doing the right thing, or we can let the bastards keep on getting rich doing the wrong thing. You choose.

    I think that pretty much sums up your article here.

    Clawing back the money from the rich bastards is a topic for another day, and probably best accomplished through taxes rather than through the energy system.

    Well put on all points. And I particularly agree with your last paragraph, but I would like to see that done by directly taxing fossil fuels.

    Cheers, RR

  13. Robert, I must confess that I’m surprised by your enthusiasm for subsidies for biodiesel. Surely these must be subject to the cost-effectiveness test as well as any other? In the case of subsidies for biodiesel in Switzerland (study to be released in a few weeks), for example, we estimate the cost per CO2-equivalent tonne avoided is at least CHF 600 (380 euros), against a price on the European Climate Exchange of less than 20 euros.

    Perhaps there is some environmental justification for subsidizing the transesterfication of “waste” oils and fats, and tallow, into biodiesel, but (as Odograph points out) even most of these already have alternative markets. Few if any fast-food chains simply dispose of their waste cooking oil down the drain anymore.

    As for biodiesel from virgin oils, on this side of the Atlantic, as you have no doubt have noticed, the EU (or at least the western part of it) will soon be running up against the limit of its ability to grow more rapeseed for energy. That means importing either vegetable oils or biofuels from elsewhere. While that creates an opportunity for developing-country producers, not everybody is happy about that (as Valuethinker well documents). But Europeans should not be smug about the environmental performance of their own industry: the growing of rapeseed (canola) requires large amounts of fertilizers and pesticides.

    On the other side of the Atlantic, the subsidies for biofiesel made from oil pressed from soybeans — one of the least productive oilseeds grown in large quantities — are at the ludicrous level: around $1.50 per U.S. gallon if one takes into account state as well as federal subsidies. Yet the industry wants to exend the federal subsidy or make it permanent!

    Even those subsidies have not been enough to overcome the greater profitability of corn for ethanol, however — hence the expected 11% decline in soybean acres this year.

    So, who’s making up the difference? In part, producers in the Amazon. The Amazon may not be suitable for growing sugar cane, but it sure is for soybeans.

    I know your first-best policy recommendation is to directly tax fossil fuels. Please, stick with that line. Asserting that “there aren’t all that many objections to subsidizing biodiesel” without reference to the level of subsidy you advocate is not helpful.

  14. Clawing back the money from the rich bastards is a topic for another day, and probably best accomplished through taxes rather than through the energy system.

    I think that if no one talks about zeroing production subsidies we will continue our bizarre course:

    We’ll subsidize combustible fuels with one hand, while subsidizing greenhouse gas reductions with the other.

    Maybe that would work if we were rich enough … but for a debt laden society, I don’t think so.

    – odograph

  15. Robert, I must confess that I’m surprised by your enthusiasm for subsidies for biodiesel.

    Ron, you misunderstand. I am no fan of this subsidy system. I think it is ludicrous, and a completely inefficient way of doing things. But I think long-term a model like Choren’s has a chance of being successful. Should we encourage this kind of R&D? Absolutely. We are going to need some liquid fuel options.

    My irritation over this deal is that at least the COP/Tyson deal involves a waste stream (albeit currently utilized). So what the opponents here are saying is that it is OK for subsidies for the people who use methanol and dedicated oil crops to make ester biodiesel, and it is OK when a new company uses a refining process, but we don’t want to encourage the oil companies to become involved. In fact, we want to make it a disincentive. I can see them learning from this animal fat option, and maybe coming up with something better. But they never will if they are told that their presence is not wanted.

    Cheers, Robert

  16. Thanks for the clarification, Robert. May I rephrase what I think you mean to say: “there aren’t all that many objections to subsidizing SOME RESEARCH, DEVELOPMENT AND DEMONSTRATION FOR biodiesel.”

    Otherwise, I agree with you that it is hypocritical of people to criticize the COP/Tyson deal just because it involves big companies. (I mean what is ADM if not a big company?) It is further proof that production-linked biofuel subsidies are just farm subsidies wrapped in the battle flag of energy independence.

  17. Few if any fast-food chains simply dispose of their waste cooking oil down the drain anymore. That’s usually because they are not allowed to do so. Do they have alternative markets?

    Not according to CNN-Money: Instead, many people fuel up by forming a relationship with a local restaurant, which leaves its old cooking oil out back in 5-gallon jugs for the user to collect. (Restaurants usually have to pay to get rid of this oil, so proprietors are often happy to do so.)

  18. It is further proof that production-linked biofuel subsidies are just farm subsidies wrapped in the battle flag of energy independence.

    Well said!

  19. rohar1 is certainly correct in identifying one of the factors behind the anti-oil-company sentiment: It’s the big = bad mentality, more or less.

    But I think there are other reasons that oil companies in particular get a bad rap. Among other things, they have a reputation for colluding with foreign governments to suppress indigenous resistance to oil development. For example:
    http://tinyurl.com/2v49oa
    http://tinyurl.com/2eznor
    http://tinyurl.com/2byx7n

  20. Just a few minutes ago, I checked the Site Meter and there were 2 visitors from the U.S. Senate, one the USDA, one from the U.S. Army, and state government agencies in both Iowa and Wisconsin were reading this article.

    I captured a picture showing the Senate visits. I will have to post it tomorrow. When I see things like that, I feel like my voice is actually being heard.

    Cheers, Robert

  21. Excellent post and great questions on the conference call. One further thought on the big vs. small aspect of this: who honestly believes that biofuels will remain as “mom and pop” enterprises, if they are successful? As it is, ADM, arguably the largest biofuels company–among many other things–is already the size of some of the smaller oil majors, pre-consolidation. This is one big business, albeit with the Norman Rockwell image rohar1 mentioned, going after another for a piece of its emormous profit pool.

  22. the cost of using animal fat as a feedstock is about $2 a gallon, or about $84 a barrel.

    That compares with crude oil futures running above $63 a barrel on the New York Mercantile Exchange.

    “In general, the feedstock cost is the big driver of your overall costs, as much as 75 percent of your cost structure,” Webster said.

    So animal fat is $63/bbl (75% of $84) and oil is $63/bbl. Wonderful.

    –doggydogworld

  23. Well, to the extent that pigfat or whatever is turned into something that competes with a barrel of oil, why would you expect that it would be sold for less than the barrel of oil it’s displacing would be? So long as demand is such that all barrels are sold, they sure won’t be sold for less …

  24. Rob,

    I really like your analysis on this, and it quite eloquently states the case why this whole fiasco is so dumb. Oil companies make their profits by (wait for it) selling oil. You were absolutely correct when you said that they need incentives to change their behavior, or they simply won’t.

    I think everyone should read “The Innovator’s Dilemma” by Clayton Christianson. In it, he posits that CEOs and managers of companies don’t actually make the decisions about the technology their company invests in–it’s the customers and the shareholders. If a CEO does not maximize profits for their shareholders, and invests in something neat, where he could’ve invested it in something more lucrative, he will be canned. Christianson also delineates between sustaining innovations and disruptive innovations, and why established companies have an advantage with sustaining innovations (just about every commodity, such as fossil fuels, and the transition to bio-fuels is a sustaining innovation). In short, we need the oil companies to buy in or they will win–unless we want a state-run economy.

    I disagree with your comments about raising taxes though. I lived in Germany for three years and was not impressed. I think the system is a little more inequal than you portrayed it. Moreover, the tax money would be an irresistable temptation for politicians to squander it. So…we stipulate that they have to use those taxes for alternative energy development. Then kiss all the current tax money going to energy projects goodbye and watch them squander that money instead (i.e. a shell game). Eventually, they will dip into these funds as well, since they make the rules about where the money goes in the first place, and earlier rules they made about dedicating this tax money to a special purpose can just as easily be changed.

    I think a better proposal are some of the ones outlined by Amory Lovins in “Winning the Oil End Game”. I don’t subscribe to all of his ideas, but his tax incentives for fuels and fuel efficient vehicles were very interesting.

  25. Oil companies make their profits by (wait for it) selling oil. You were absolutely correct when you said that they need incentives to change their behavior, or they simply won’t.
    More and more of the oil remaining oil reserves are getting nationalized by petro-authoritarians (as Friedman calls them). So, oil companies would be wise to start looking at alternative feedstocks. This is pure self-interest (gotta love the free market). When oil eventually hits the $150/bbl mark, schemes like this would look quite profitable, even without subsidies. The question is: Would politicians have the good sense to leave the free market to itself at that point?

  26. I disagree with your comments about raising taxes though. I lived in Germany for three years and was not impressed. I think the system is a little more inequal than you portrayed it. Moreover, the tax money would be an irresistable temptation for politicians to squander it.

    No doubt about the last point. But I have lived in Germany as well. Did you see any slums there? Trailer parks? In fact, high gas prices don’t have nearly the impact over there because people have planned their lives knowing that gasoline will be expensive. If you lived in Germany, you know what the cars on the autobahn looked like: small and fuel-efficient. And if you drive a fuel-efficient car a short distance to work, high gas prices don’t have a major impact on your budget.

    Cheers, Robert

  27. Robert

    Actually Germany is in something of a mess. High unemployment, high taxes discouraging investment.

    And they nearly had a revolution when it was proposed that there be speed limits on the Autobahn.

    German cars tend to be fast, high horsepower, ‘driver’s cars’. They don’t like sluggish American style SUVs, but that’s because they are ‘American’ and they have such a lousy driving feel and ride.

    But those BMWs and Mercs (and the Opels GM makes) are all fast machines, with high CO2/km travelled.

    Germany’s civic infrastructure is to be admired. They bombed our cities, and we replaced them with remarkably ugly grey concrete. We flattened their cities in retaliation, and they rebuilt them, most are quite attractive.

    And they have trams (streetcars), parks, etc. Many German cities are quite amenable to bicycling etc.

    But Germany is no paragon of energy virtue (except perhaps compared to the US), and they are phasing out their nuclear plants, to buy more coal fired electricity from heavily subsidised lignite coal plants in East Germany or Slovakia. (lignite is the worst form of coal from a CO2 point of view)

    I admire what they are doing in wind and solar, but an increasing share of their electricity comes from coal.

    I have very favourable impressions of their healthcare system compared to the American one.

    Valuethinker

  28. Rob,

    No, I didn’t see slums or trailer parks in Germany, but the majority of people seemed to live in “efficient” little apartments, and car ownership seemed to be much less than here in the US for better or for worse. The reason they don’t have slums and trailer parks is due to the socialist nature of their economy, and if you have a job, you are paying very high taxes to ensure nobody lives in a slum or trailer park. Moreover, as the other guy pointed out, unemployment is very high, and their GDP per capita is spiraling downward. They are also having similar problems integrating immigrants/guest workers who will never be citizens (mainly Turks). I don’t mean to criticize the Germans, they just value a few things differently than Americans do. I rarely saw Germans jaywalk for example. There may not be a speed limit on the Autobahn, but there are TONS of other rules that Americans would NEVER accept, such as speed cameras (recently shot down here), and fines for giving rude gestures. They actually have a sign that shows each gesture and the base cost for being accused of giving it to another motorist.

    On the plus side, they depend on automobiles less and have their living environments oriented around walking–being able to walk to the market to buy your food for example.

    In short, I definitely got the impression that Germany raised the bar a few demographic levels above the minimum US motorist. On the good side, they somewhat obviated the need for someone to get a car by ensuring people could live without them in their city layouts. On the flip side, their tax and economic structure seems to have made the car an impractical luxury for the lowest tiers of German society. Meanwhile, here in the US, cars are almost a necessity to live, and you are truly a second class citizen if you cannot drive, and even if that were not true, the public nearly perceives car ownership as a God-given right.

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