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This week a study on peak oil by a German military think tank was leaked on the Internet. The document shows that the German government is closely studying the issue of peak oil, and is aware of the potential for serious consequences as oil production declines. The study is reminiscent of the Hirsch Report, commissioned by the U.S. Department of Energy, that warned of the risks posed by peak oil.

Europe's continued reliance on Russian oil and gas supplies may not be secure in the long term, according to the study.

The document warns of the potential for regional shortages, market failures, and a shift in political power toward those capable of exporting oil. This report describes potential outcomes that require planning and preparation. The scenarios outlined in the paper are exactly the kinds of drivers that lead me to advocate for greater regional energy self-sufficiency. The report clearly lays out just how vulnerable Europe will be because of its continuing dependence upon Russia for both oil and gas, and notes that Russia will be in a very strong political bargaining position as a result.

The report can be accessed from the popular German paper Der Spiegel in this story: Bundeswehr-Studie warnt vor dramatischer Ölkrise. The report is so far only available in German, and while Ich spreche ein wenig Deutsch (I speak a little German), I am not fluent enough to capture the essence of the report. (Der Spiegel has summarized the report in English now: Military Study Warns of a Potentially Drastic Oil Crisis).

However, I have a friend who is both fluent in German (his native tongue) and passionate about peak oil outreach. Given a week, I could probably translate the report. My friend (who didn’t want to be identified) did it overnight. Below is his translation of the major points in the report.

Peak Oil

Implications Of Resource Scarcity On (National) Security

Center for German Army Transformation, Group for “Future Studies”

July 2010

1.        Introduction

The focus of the …

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The Saudi Arabia of Ethanol

Iowa is to corn ethanol what Saudi Arabia is to oil. At present Iowa has the capacity to produce 3.5 billion gallons of ethanol per year, which is 26% of the nation’s total (Source). This is of course due to the large amount of corn production in Iowa, enabled by ample rainfall and rich topsoil.

But Iowa differs from Saudi Arabia with respect to energy production in one very important detail: Saudi Arabia satisfies their own energy needs with the oil they produce, and exports the excess. Iowa on the other hand exports the vast majority of the ethanol they produce while importing gasoline as motor fuel.

Gasoline consumption in Iowa is presently around 1.6 billion gallons per year (Source). This is the energy equivalent of 2.4 billion gallons per year of ethanol. Yet amazingly, Iowa does not have an E10 blend mandate that is so common in many other states. Of the 3.5 billion gallons of ethanol Iowa produces each year, only 100 million gallons is consumed in the state (less than 3%!). Perhaps even more amazing is that Iowa — seemingly the best candidate in the U.S. for biofuel self-sufficiency — ranks in the Top 10 consumers of gasoline per capita in the U.S. (Source).

Iowa is a state that by all accounts should be able to satisfy their own liquid fuel needs with ethanol, and still have some left for export. They are perhaps unique in the U.S. in that respect. Instead, petroleum continues to supply over 90% of the motor fuel in Iowa, and virtually all of the fuel used in the farm equipment for growing all of that corn. Something is wrong with this picture.

Why Isn’t Iowa Self-Sufficient?

That is a perplexing question. If ethanol is a real alternative to gasoline, why hasn’t it taken over the marketplace in Iowa? Ethanol should have a greater advantage over gasoline in Iowa than probably in any other state. And in fact, the price spread between gasoline and E85 is consistently higher in Iowa than in other states (Source). The reported price spread …

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I am no economist, but bear with me while I try to explain why I think we are in for a very long and difficult economic period. My thesis for The Long Recession goes something like this: Historically, when oil prices rose quickly and remained high the economy struggled. High oil prices lead to recessions and depressions, because they suck so much money out of the economy. A person whose energy bills go up by $100 or $200 per month has that much less to spend on other things. It is essentially like a tax applied to everyone that uses energy — with a large chunk of the money exiting the U.S. and contributing to our trade deficit.

Historically after a period of high oil prices, people start to modify behaviors, and at the same time producers rush in to take advantage of higher prices. This generally leads to a decline in oil prices and the economy recovers. But I believe this time is different. And if not this cycle, very soon. Because while we are already seeing consumers modify behaviors (U.S. oil demand is creeping back up, but still below the levels of 2 years ago), we aren’t seeing a lot of new oil coming online “to the rescue.” The reason for that is that there just isn’t a lot of new oil to be produced; i.e., the Peak Oil factor. So despite the fact that prices did crash following fast the run-up in 2008, prices quickly recovered back into recession-inducing territory.

That leads me again and again to the question: How do you recover from a recession when oil prices are high and show no sign of abating? We could recover from recession if demand drops a bit more and takes oil prices down. But, what happens when we start to come out of the recession? We use more oil, and if there are supply constraints this will send prices right back into recession country.

Today comes more bad economic news, and like much of the bad economic news makes zero mention of the role of high oil prices:…

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Tom Rooney is President and CEO of SPG Solar, in Novato, California, one of the larger solar integrators in the country.

I am working on yet another project, due at the end of this week. Therefore, I haven’t had a chance to work much on my next essay, which will be about the potential for E85 to push Iowa much closer to energy self-sufficiency. Meanwhile, I have been sent a guest editorial on solar power by Tom Rooney, and this seems like a timely occasion to put it out for readers to chew on.

Tom is the president and CEO of SPG Solar, in Novato, California, one of the larger solar integrators in the country. His commentaries have been in the New York Times, Los Angeles Times, Miami Herald and “hundreds of papers in between.” He has also appeared on C-SPAN and Fox Business News.

Tom chose a provocative title for this essay. I say provocative because I personally consider both liberals and conservatives bad on energy in specific ways, and good in others. I think conservatives tend to overweight the role that domestic drilling can play in pushing the U.S. toward energy independence, and liberals overweight the impact that renewables can play in displacing oil.

While each has its part to play, I think each side broadly tends not to recognize just how deeply dependent we are on petroleum, and in particular imported petroleum. I think both sides would like to tell the Middle East to get lost while we either drill our way to independence if the government would get out of the way (pro-Big Oil), or make a painless switch to renewable energy if Big Oil would just get out of the way (anti-Big Oil). I have criticized both points of view, which is why conservatives have criticized me for being liberal, and liberals have criticized me for being conservative.

I don’t think my energy views are conservative or liberal, but rather I think they are reality-based. If I say that I think coal will become a much more …

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There was a recent article in MIT Technology review called What’s Holding Biofuels Back? There is a relatively simple answer to the question that I will delve into below, but the short answer to “What’s holding biofuels back?” is that we placed unreasonable expectations on them to begin with, and they have simply failed to meet those unreasonable expectations. People would think it was unreasonable if Congress mandated a cure for the common cold within 5 years, but they don’t think twice when Congress mandates the creation of a cellulosic ethanol industry within 5 years. Yet either scenario requires technical breakthroughs that are not assured.

The article notes that the cellulosic ethanol mandate for 2010 in the U.S. was cut by 93.5%, and now the 2011 mandate has been slashed (as I have predicted for several years would be the case):

This year’s mandate was supposed to be 100 million gallons of cellulosic biofuels, but that was reduced to 6.5 million. Last month, the EPA announced that it would lower the requirement in 2011, from 250 million to somewhere between five million and 17.1 million gallons.

The reason?

The EPA is doing this because not enough cellulosic biofuel is being produced to meet the targets. So far, no commercial plants have been built–just some small pilot and demonstration-scale plants.

So they have identified the effect, and then go searching for causes. They quote a number of cellulosic ethanol players who blame the lack of progress on not enough funding or mandates. While it is true that if you throw massive amounts of money at the problem, you could certainly get some cellulosic ethanol facilities off the ground. But before throwing money at a problem, there needs to be a clearly identified path to long-term economic viability that is based on reasonable assumptions.

Unreasonable expectations are at the heart of the mandate-rollback. It was an unreasonable expectation for Congress to believe they could mandate technology. If something is uneconomical today, there are no guarantees that it will be economical tomorrow — even if you pass laws dictating that things must happen. …

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I began to hear rumors about a week ago that Range Fuels had started to produce some methanol from their plant in Soperton, Georgia. This week they announced that they have indeed begun to make some product:

Range Fuels Finally Gets its Cellulosic Plant Running

Georgia — After a two year delay, Range Fuels is producing methanol fuel from its commercial-scale cellulosic ethanol facility in Georgia. The company initially said the plant in Georgia would be producing up to 20 million gallons of fuel in 2008. Then it got pushed back to 2009. It is now finally operating in the second quarter of 2010.

The delay is not out of the ordinary for cellulosic ethanol producers. Because of the technical and financial problems companies have been facing, the Environmental Protection Agency scaled back its 2010 mandate for cellulosic fuels from 100 million gallons to 6.5 million gallons.

Let me first extend my congratulations to Range, and let’s hope that the start-up proceeds smoothly. Generally when trying to start up something for which there are not a lot of existing facilities, the learning curve can be bumpy because you have to figure it out as you go along. So do not be surprised to see that they are up and down a lot as they work out the kinks (not that those sorts of things make the news).

Oddly enough, a few people have e-mailed me with this news to claim that this vindicates Range from the criticisms I set forth in Broken Promises from Range Fuels. I don’t want to use this post to rain on their parade, but given these misconceptions let’s have a look at what I have said.

First, nobody ever doubted that Range could take biomass, gasify it, and produce methanol. That technology has literally existed in some form since 1923. And nobody doubts that they can make some ethanol in the same way. Again, very old technology, just not cost-effective. Range has their own particular version of the technology, but nevertheless there is nothing fundamentally new in their approach.

So that’s the first point that should be …

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In my recent post Thoughts on an Ethanol Pipeline, I described what I feel would be a more rational approach to ethanol policy than some of the policies that have been pursued over the years. This gist is that the Midwest currently produces about 95% of the ethanol in the U.S. (12.5 billion gallons), but they export 70% of that ethanol out of the Midwest. At the same time, they import gasoline that is the energy equivalent of 37 billion gallons per year of ethanol.

It would seem to be a more sensible energy policy to utilize ethanol production closer to the source of production — especially given that the motor fuel demand in the Midwest is far greater than the volume of ethanol produced there. Many readers agreed, and following that essay, they provided a number of excellent comments. I drew on those comments in my latest essay for Forbes: The Midwest Should Use Its Own Ethanol.

Here I want to continue to develop policy recommendations around this theme. Reader Paul Nash came up with a specific plan, which I share below (here is the link to the original comments).

The Rationale for a Policy Change

• The industry wants a pipeline to support a greater market on the east coast.
• This market will likely only grow by either raising the blend mandate, or exporting ethanol
• From a national energy use point of view, it is much better to have the ethanol being used near to where it is produced (Midwest).
• Presently, this is only happening to the extent required by the blend mandate – there is relatively little E85 usage.
• Other than raising the blend mandate, the only real way to grow ethanol use is by E85.
• Many/most flex fuel drivers (today) do not run on E85 because it is either hard to find and/or there is little financial benefit to doing so.
• Some new flex fuel vehicles are optimized for E85, and their drivers will get a financial benefit, but they will only be a small portion of the market.

Specific Recommendations

…

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Signs of Recovery

While it will only be with years of hindsight that we can determine the total environmental impact of the Macondo blowout in the Gulf of Mexico, there are encouraging signs that the environmental devastation will be less severe than many had feared. Today a reader sent me this encouraging story:

Oil spill area coming back to life

More than a dozen scientists interviewed by The Associated Press say the marsh here and across the Louisiana coast is healing itself, giving them hope delicate wetlands might weather the worst offshore spill in US history better than they had feared.

Some marshland could be lost, but the amount appears to be small compared with what the coast loses every year through human development.

Irving A. Mendelssohn, a coastal plant ecologist at Louisiana State University, said the wetlands data so far is good news for fishermen who depend on the ecosystem to produce shrimp, menhaden and other seafood.

“My gut feeling, based on what I have seen, based on the recovery people have observed, I doubt that the impact to the wetlands is going to create a significant problem for our coastal fisheries,” Mendelssohn said.

Good news indeed, but let us not let our guard down. Just because the worst case may have been avoided doesn’t mean the risk of a worst case isn’t still there. The industry will need to remain diligent in identifying and addressing root causes, and in coming up with better response plans. (I previously noted the $1 billion investment in a containment system to mitigate against this possibility in the future: New Oil Spill Containment System to Protect Gulf of Mexico Planned by Major Oil Companies).

Signs of Higher Prices

On the other hand, I have maintained from the beginning that beyond the environmental impact, there would be a very real impact on future oil supplies as a result of this incident. The International Energy Agency has now estimated that the loss in 2011 may be 100,000 barrels per day:

IEA Raises Gulf of Mexico Output Loss to 100,000 Barrels a Day

Aug. 11 (Bloomberg) — The International Energy

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