Crude oil prices rise on low interest rates.

Crude oil futures gained more than $1 on Wednesday after U.S. Federal Reserve Chairman Ben Bernanke reiterated his commitment to keeping interest rates low in order to encourage lending and growth which would fuel an economic recovery.

Short-term interest rates would remain exceptionally low for “an extended period,” Bernanke said.

The rise in crude oil prices took place despite a larger-than-expected gain in crude inventories reported by the Energy Information Administration today in its weekly report.

U.S. light, sweet crude for April delivery traded up $1.14 to settle at $80.01 a barrel at the close of floor trading on the New York Mercantile Exchange.

“Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year,” Bernanke also noted, “but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time.”

Crude oil supplies gained 3.03 million barrels last week to 337.5 million, the highest level it’s been at since November of last year.

“Right now, because of the recession, there is excess capacity” of crude oil, said U.S. Energy Secretary Steven Chu.

Fuel consumption in the U.S. was up 1.3 percent from a year earlier to 19.1 million barrels a day in the four weeks ended Feb. 19, according to the Energy Department report. Gasoline demand fell 0.3 percent to 8.7 million barrels a day.

The SEC filed suit against principles of World Fuel for insider trading.

The Securities and Exchange Commission charged five men, including current and former World Fuel Services Corp. (WFSC) executives with insider trading.

According to the complaint, Steven Scoppetuolo, Robert S. Tocci, Sarang Ahuja, Richard White and Eric M. Gordon illegally netted over one million dollars in profits traded in securities for stock in the Doral-based company. The action was brought Tuesday in U.S. District Court for the Southern District of Florida.

The SEC alleges that former WFSC CFO Tocci, twice received non-public information about the company’s earnings from his close friend, Scoppetuolo, who was serving as both vice president of commercial operations supply and trading for World Fuel. Tocci then purportedly used the information to purchase put options in the company’s stock and to sell short.

Ahuja, the securities broker for both Scoppetuolo and Tocci, allegedly used insider information to benefit his personal accounts and other customer accounts before both earnings announcements.

The SEC claims to have phone records revealing that in May, 2007 Scoppetuolo called Tocci soon after World Fuel executives decided to put old debts back on their books. Tocci immediately called Ahuja, who quickly began purchasing short positions and puts so that they could benefit from the anticipated drop in the stock’s price.

Scoppetuolo’s attorney, James Sallah, adamantly denied the charges. “[T]he suggestion that he would breach his duty to the company is simply ludicrous,” he said. “Steven talked to Tocci every day for a year. They were best friends. But, as Steven will say, if there was one subject he avoided with Tocci, it was the company.”  Sallah added that the lawsuit is groundless and their clients will defend themselves vigorously.

Attorney Richard Brodsky claims that the SEC lacks sufficient evidence to find WFSC exec Richard White guilty.

White, the company’s vice president of tax, purportedly sold short stock before the earnings statements went public.  White is also accused of tipping Gordon about World Fuel’s potentially imminent stock dip. He, in turn, allegedly used the information to buy put options prior to both earnings announcements, and allegedly tipped two of his friends, who followed suit on taking advantage of the information.

Richard Brodsky, White’s attorney, claims that the SEC is lacking any smoking gun to tie his client to the alleged crimes. “There’s no evidence that my guy tipped Eric Gordon. They were both members at the same golf club, but there’s no e-mail, phone record, paper, nothing,” Brodsky, said.

World Fuel’s general counsel, Alexander Lake, claimed that no charges have been asserted against World Fuel and that the company is cooperating with the SEC.  Scoppetuolo and White have not faced criminal charges, however, they both have been placed on administrative leave.

President Barack Obama is facing pressure from environmental groups and the oil and gas industry on the issue of offshore drilling.

The hot issue of offshore drilling for oil and gas deposits is forcing the Obama Administration to walk a fine line between encouraging economic growth and preserving the environment.

Days after environmentalists conducted an anti-offshore drilling protest in South Beach, Florida labeled “Hands Across the Sand” a new study placed a price tag on acquiescing to their proposed drilling moratorium – a hefty $2.4 trillion. That is the cost that maintaining the status quo will have on the U.S. economy over the next two decades according to a recent study.

The report, prepared for the National Association of Regulatory Utility Commissioners, also said that without access to the energy resources, foreign imports of crude oil, petroleum products and natural gas would increase by $1.6 trillion over that period. Additionally, the United States is expected to pay the Organization of Petroleum Exporting Countries (OPEC) $607 billion for an extra 4.1 billion barrels of crude, the report said.

“We encourage lawmakers to heed the results of this study and take a closer look at the energy-rich areas in our country that are currently off limits.” said David Parker, president of the American Gas Association. “It’s clear from this report that the status quo on energy production simply won’t suffice.”

Encouragingly, the report claims that the level of untapped domestic oil hidden beneath protected areas has been underestimated by approximately 43 billion barrels. If the report is accurate, there are 229 billion barrels available, enough to support the United States at its current consumption levels for 50 years. Estimations of available natural gas were bumped by 286 trillion cubic feet to 2,034 trillion cubic feet.

Environmentalists however remain skeptical of permitting drilling in any new areas.  Much of the disputed territory received federal protection by statute twenty seven years ago.  During the final year of his presidency, amid a recession that was partially the result of an oil crisis, George W. Bush began easing back restrictions in most U.S. waters beyond the western and central Gulf of Mexico ended in 2008.  The Interior Department is now considering whether to expand exploration in only a small part of the formerly closed areas.

The White House faces pressure from environmental groups who feel the United States should rely less on oil and gas and more on cleaner energy sources like wind and solar. President Obama hinted at his ambivalence on this hot topic in his recent State of the Union address.  While the President pressed for increasing reliance on renewable energy he would not commit to maintaining a moratorium on drilling in areas that have been protected for over two and a half decades.  Quite the contrary, the President preceded his call for profitable green energy by referring to “tough decisions about opening new offshore areas for oil and gas development.” His conflicting remarks left advocates on both sides bewildered.

Perhaps it was the President’s straddling that motivated environmentalists to make a demonstrative protest on Florida’s beaches this past weekend. As part of a statewide show of support to continue banning offshore drilling, protesters created a human chain for the “Hands Across the Sand”.

Promotions for anti-drilling protests began popping up around Florida shortly after the President delivered his first State of the Union of the Address.

“There has been a ban and a moratorium on new offshore drilling for years,” said organizer Andrea Cuccaro. “It’s not going to help us with prices for oil in the near term, and we have a lot of solutions like solar and wind power that are really great solutions that we can give more incentives and tax breaks.”

To environmentalists like Cuccaro, President Obama is reneging on a major element of his campaign platform by not being a steadfastly staunch supporter of the environment.  Despite the fact that drilling would be three miles from the coastline, eco-enthusiasts have concerns about the long term impacts of offshore drilling.  Some Florida politicians are concerned that drilling could threaten the State’s economy by hurting its tourism.

A weakened dollar and renewed tensions over pending sanctions against Iran caused a huge surge in the price of crude oil futures during Tuesday trading in New York.

The U.S. dollar slipped against the euro as the feel in the market was that the European currency had dropped too far in recent weeks in the wake of Greece’s economic problems. When the dollar falters, traders usually pour more of their money into commodity investments.

U.S. Secretary of State Hillary Clinton’s meeting with Saudi Arabia’s King Abdullah in an effort to lobby support from Gulf states and China for sanctions against Iran also heightened tensions in the oil-rich region. Iran is OPEC’s second-largest producer of crude oil.

Crude oil for March delivery rose $2.88 to settle at $77.01 a barrel at the close of floor trading on the New York Mercantile Exchange. Trading was rather light on Tuesday with Asia celebrating the Lunar New Year.

The 4 percent spike was the largest percentage gain since late September.

A top Saudi oil ministry adviser declared his concern that a peak in oil demand had already occurred, or would take place in the next decade, and said that his country, which relies heavily on income from its crude oil exports, is alarmed enough about it to diversify its economy by striving to become a leading alternative energy exporter.

“Talk of oil demand peaking is an alarm to speed up the economic diversification process,” Mohammed al-Sabban said on Monday at the World Economic Forum in the Saudi city of Jeddah. “The challenges facing Saudi Arabia are huge: we need to develop Saudis in order to be innovative, creative, to catch up with the rest of the world.”

More than a quarter of the youth in the country are unemployed, and the kingdom is trying to upgrade their scientific and educational institutions to further their knowledge which will help them expand their economy into other areas.

Al-Sabban also announced that his country will be launching its first carbon capture project by injecting carbon dioxide into the Ghawar oil field, the world’s largest oil field, beginning in 2012.

“The world cannot wait for us before we are forced to adapt to the reality of lower and lower oil revenues,” al-Sabban added.

The theory of “peak oil” is the point where oil extraction has reached its maximum levels and is entering a state of permanent decline. Experts differ on whether most oil producing nations have already reached their peaks in oil extraction, or, as al-Sabaan contends, if crude oil consumption will begin to slow as leading economic nations begin to rely more heavily on alternative and renewable energy sources.

“The world cannot wait," for the Saudis before they are "forced to adapt to the reality of lower and lower oil revenues,” Mohammed al-Sabban warned.

Saudi Arabia is currently extracting 8 million barrels of crude oil per day, with a reserve capacity of 4 million barrels per day more.

Gulf states, which rely on crude oil exports to cover as much as 90 percent of their budgets, need to begin looking into nuclear energy as an alternative, Adnan Shihab-Eldin, a former secretary general of the Organization of the Petroleum Exporting Countries (OPEC) told the audience in Jeddah. He noted that nuclear power would be economically viable even with crude oil prices just above the $40 per barrel range.

The Saudis, as the biggest oil producer in the 12-member organization, are widely considered to be the leader of OPEC and their comments are usually looked at as a sign of what the cartel as a whole is thinking.

Saudi King Abdullah recently launched a solar-power water desalination plant in its efforts to begin looking toward alternative energy. The country provides more than 18% of the world’s production of desalinated water.

Exxon Mobil CEO Rex Tillerson

WASHINGTON —Representatives from Exxon Mobil Corp. and XTO Energy presented evidence to legislators on Wednesday that their companies can avoid damaging the environment or contaminating nearby drinking water supplies while producing natural gas from shale rock.

CEO of Irving-based Exxon Mobil, Rex Tillerson said “We can now find and produce unconventional natural gas supplies miles below the surface in a safe, efficient and environmentally responsible manner.”

Tillerson appeared before the House Energy and Commerce subcommittee hearing that is examining plans by Exxon Mobil, to acquire Fort Worth-based XTO, a pioneer in using hydraulic fracturing to produce natural gas.

Hydraulic fracturing, or “fracking,” is a process whereby gas locked within the shale are released by high pressured fluids injected underground. Despite state regulations governing the process, environmentalists worry it could introduce harmful chemicals into water supplies.

Hydraulic fracturing for releasing natural gas.

Exxon’s proposed acquisition, a $40 billion stock purchase, has an amorphous “out clause”. Tillerson said Exxon Mobil can pull out of the agreement if new federal statutes prohibit hydraulic fracturing or make it “no longer commercial.”

Potential Regulatory Issues

Federal intervention is a legitimate concern. Several bills pending in Congress aim to examine the technique, including a measure by Rep. Diana DeGette, D-Colo., that would require companies to disclose which chemicals are being used in fracking.

As DeGette explains, she wants “to make sure that we aren’t contaminating drinking water with the chemicals that are in the fracking fluid.”

Tillerson worries that new federal regulations would decrease cost efficiency by adding unnecessary compliance costs. He claims that state laws are better adapted to the needs of individual states and their geology. “I’ve never seen a regulation that didn’t add a layer of cost,” Tillerson said. Increased costs could make marginally viable wells economically useless while a complete ban would halt production of natural gas from shale rock, he said.

“Without hydraulic fracturing, the gas that is locked in the shale rock stays locked,” he said. “We’ve drilled through these shales for years.

“If you remove hydraulic fracturing as one of the key enabling technologies, this resource could no longer be recovered.”

Tillerson would support more disclosure of the contents of the chemical cocktails used in fracking — but opposes giving the U.S. Environmental Protection Agency the power to regulate the process.

Exxon contends it was unclear how the EPA would regulate fracking if DeGette’s proposal became law.

Tillerson’s stance on disclosure is not shared by all of his peers. Others in the industry raised concerns about releasing proprietary information if new disclosure requirements are federally regulated.

XTO founder Bob Simpson emphasized that hydraulic fracturing has been used for more than six decades. Only the objective and methodology has changed in recent years. Recently fracking has been combined with horizontal drilling techniques to tap shale discoveries in Texas, Louisiana and Arkansas, and stretching from New York to Tennessee. Energy experts claim that a 100-year supply of natural gas can be recovered in the U.S.

Rep. Gene Green, D-Houston, said he wants “to make sure we don’t throw so many regulatory roadblocks that we can’t have the shale production.”

Market Concerns Arise From Tightening Energy Oligopoly

Congresswoman Doris Matsui (D-California)

Rep. Doris Matsui, D-Calif., cited concerns about corporate concentration in the energy industry.

“Studies have shown that fewer participants in energy can lead to both lower and higher prices for consumers.” Matsui opined “The Exxon Mobil-XTO deal may prompt its peers to move forward similarly, consolidate an already tight oil and gas market and create additional concerns for the regulatory bodies that oversee the oil and gas supply,”

Tillerson refutes Matsui’s claim as he maintains that an Exxon Mobil-XTO collaboration “is unlikely to change the competitive balance.”

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As Royal Dutch Shell and other majors increase their investments in Iraq, some oil market analysts argue that Iraq could export over 12 mb/d (million barrels per day) within a decade, significantly shifting global production closer to 100 mb/d from the present 83.5 mb/d inventory supply. Are Iraqi oil production estimates too ambitious or perhaps, not optimistic enough?

The northern Kurdish-governed territory of Iraq situated between Iran, Turkey, and Arab-Iraq is of particular importance to these expected Iraqi oil production estimates. The Kurdistan Regional Government (KRG) publicly claims to possess oil reserves greater than half the cumulative value of all the oil reserves within the Organization of Economic Cooperation and Development (OECD) community. Kurdish-Iraqi production may reach 250,000 b/d by the middle of this year and up to one mb/d before 2012.

As American forces draw down as a part of the U.S. exit strategy, many oil and gas uncertainties remain. Specifically, the KRG possess few incentives to accurately report proved reserves or encourage oil investment while the U.S. hands over political and military control to the Iraqi people—meaning that Kurdish-Iraq could possess even greater reserves than publicly stated.

Kurdistan Sovereignty over Oil Reserves

When some in the U.S. were encouraging partitioning Iraq several years ago, one could only imagine that the Iraqi-Kurds were not exactly disappointed at the prospect of having sovereign control over the future of their nation, including its oil reserves. Thus, one would be rational to assume that many Iraqi-Kurds had little intention and few incentives to cooperate with the Iraqi Central Government after liberation in 2003 from Saddam Hussein’s control of Kurdish territory Iraq.

After 2003, 7.5 million Iraqi-Kurds immediately secured their own perimeter within Iraq and set up a visa system requiring Arab-Iraqis to obtain permission to enter KRG-governed territory. The KRG then asserted themselves as an autonomous international power by establishing diplomatic channels with a number of countries including the US, UK, Germany, France, Russia, and Italy via consulates and representative offices independent of Baghdad. The KRG simultaneously took control of their oil fields and signed Exploration and Production (E&P) contracts with Hunt Oil, Det Norske Oljeselskap AS, SK Energy, and countless other oil companies to explore, develop, produce, and export oil without intending to share profits with the Iraqi Central Government.

The KRG only began to take a real interest in working with the Iraqi Central Government after the U.S. started to focus on stabilizing Iraq, which included the surge as well as encouraging sectarian cooperation and parliamentary coherence. Following the success of the U.S. troop surge in 2007 and the stabilization of Iraqi’s political affairs in 2008, the Iraqi Central Government, now more organized and confident, ruled in June 2009 that all foreign investment oil contracts made directly with the KRG are illegal.

The Iraqi Central Government now takes 83% of all oil export revenue from Kurdish territory. Because the U.S. is drawing down its forces and turning internal conflict matters over to Iraq, the world should expect the KRG to ignore central government authority and revenue-sharing agreements after the U.S. is gone.

Once the Iraqi Central Government is unable to enforce their legal authority over the KRG after the U.S. exits Iraq, the KRG will likely encourage more wildcat drilling, draw soil samples, and collect the data necessary to potentially transition reserve classifications from possible and probable to proved reserves (U.S. Reserve Classification System). The Iraqi-Kurds will then both claim all, or most, of the potential oil profits and potentially increase their commercially recoverable proved reserves estimates.

Geopolitics, Intervention, and Energy Supply Compromises

Some analysts argue that the official establishment of a Kurdistan state could create a domino for anywhere from 21 to 28 million other Kurds to stand up and demand autonomy in Kurdish-dominated regions across the Middle East. Therefore, these analysts argue that Turkey and Iran might take military action to prevent the KRG from asserting autonomy over Kurdish territory in Iraq in order to prevent the dominos from falling. However, it is unlikely Turkey and Iran would undertake such military action for fear of a blowback from Kurds within their own border regions, an outcome that would only emboldened regional Kurdish solidarity. What is more, Turkey and Iran would also be wary of taking responsibility for nation building in Iraq given the very costly U.S. experience. Thus, it is unlikely any outside forces will forcefully intervene in the Kurdish pursuit of sovereign control over northern Iraq.

Moving past the domino fear, economics proves to be the true ruler of Kurdish regional relations. Insofar, Turkey and Iran appear to prioritize investment over fear of this domino theory as both countries continue to send millions of dollars in Foreign Direct Investment (FDI) into Kurdish-Iraq due the neo-liberal nature of the KRG’s economy. In fact, in June 2009, a Turkish oil company investing in Kurdish-Iraq began exporting 40,000 b/d of oil back to Turkey through an agreement with the KRG: an estimated one billion dollars worth of oil per year at $80 per barrel.

In addition to potentially becoming a significant oil import source for Turkey and the rest of the Western world, the KRG also controls strategically located natural gas reserves that could become increasingly valuable to Europe’s diversification strategy. With almost 89% of Iraqi’s natural gas reserves within Kurdish territory—an estimated 2.83 Trillion Cubic Meters (TCM)—the European Union will likely pressure Turkey to work with the KRG—even should it become sovereign—to bring this gas to European consumers.

The KRG may be able to support some of Europe’s greater strategic needs to diversify their gas import sources and supply their fastest growing energy input source—natural gas—over the next two to three decades, particularly due to the increasing use of combined cycle gas turbines to generate electricity. Thus, if the KRG asserts itself as a sovereign country by ignoring Iraqi Central Government authority, Turkey will not cease oil and gas imports from Kurdish-Iraq out of fear of a Kurdish autonomy domino theory, whether this be by dint of personal economic interest or foreign pressure. In fact, such an outcome may induce Turkish leaders to work more closely to resolve internal conflicts with Kurds living in Turkey.

With foreign investment coming into the KRG from all over the world, these nations are sending a subtle message to the KRG: “Our governments prioritize economic development and energy security over politics.” Although regional leaders make speeches discouraging a sovereign Kurdish-Iraq, their investment actions juxtapose their rhetoric, particularly in the case of Turkey. More important than the words in a leader’s speeches are the measurable actions of their government.

Kurdish Nationalism, Oil, and Power

Like Israel after 1945, the KRG have not wasted anytime to ensure they are powerful enough to never be dominated by an occupying culture or military force, including by Arab-Iraqis that once forced on Kurds their language, culture, and rule of law. The Iraqi-Kurds are securing support from the international business community, tapping into economic integration, organizing a loyal and professional military, and developing close ties with liberal nations that prioritize development over ideology.

While Kurdish-Iraq could hold one of the keys to increasing or decreasing the expected Iraqi oil production over the next 10 years, we must remember that asking the Kurds in northern Iraq to remain unified with the rest of Iraq would be like asking Koreans after 1945 to remain unified with their previous Japanese occupiers. Thus, Iraq will not be unified should the Iraqi-Kurds have their day to decide for themselves, and that day may be coming soon.

The issue of incentives for biofuels increasing the demand for grains and thus helping drive up food prices is often called “Food versus Fuel.” There is also an incentive program (Biomass Crop Assistance Program) designed to encourage the use of biomass for heat, power, or biofuels. As is almost always the case, there were unintended consequences:

While it remains unclear whether Congress or the Obama administration will push to revamp the program, even some businesses that should benefit from the subsidy are beginning to question its value.

“It’s not right. It’s not serving any purpose,” said Bob Jordan, president of Jordan Lumber & Supply in North Carolina, even while noting that he might be able to get twice as much money for his mill’s sawdust and shavings under the program.

“The best thing they could do is forget about it. All it’s doing is driving the price of wood up.”

Sounds like “Food versus Fuel” except in this case it is the cost of wood – not food – that is being driven higher. The thing is that there are always trade-offs and always unintended consequences. We have to be wise enough to change policies in cases where the unintended consequences outweigh the benefits. But you have to look at the big picture as well. Were there also unintended benefits? Things like that must be considered.

In this case, I don’t know whether the unintended consequences outweigh the benefits. I think it is too early to know for sure. But in any case, higher cost biomass is something I expect in the future. I made this point in my presentation at the Pacific Rim Summit. If your business model is based on either tipping fees, or just free or very cheap biomass – then I doubt that model is sustainable. I think as more companies attempt to turn biomass into fuel, competition will heat up and free or negative-valued biomass will be a thing of the past.

Therefore, I think the safe bet is to plan for 1). Escalating biomass prices; 2). No government assistance. I have no objections to getting started with government assistance, but if you don’t have a clear plan for operating in a subsidy-free environment, then you may just be wasting taxpayer money up until the point that your business fails because conditions changed (in a way that you should have anticipated).

One of my Top 10 Energy Stories of 2009 involved the actions taken by the EU against U.S. biodiesel producers. U.S. tax dollars had been generously subsidizing biodiesel that was being exported out of the U.S. European producers couldn’t compete against the subsidized imports, so the EU effectively cut off the imports by imposing five-year tariffs on U.S. biodiesel.

This was a big blow to U.S. biodiesel producers, and was one of the factors leading to a disastrous 2009 for U.S. biodiesel production. How disastrous was 2009? Per the National Biodiesel Board (NBB), here are the statistics from the past 6 years of biodiesel production:

2004: 25 million gallons

2005: 75 million gallons

2006: 250 million gallons

2007: 450 million gallons

2008: 700 million gallons

2009: 300-350 million gallons (estimate)

The NBB also reports that domestic biodiesel capacity is now operating at only 15%. There have been a number of stories in the past few days covering these developments:

Bad start to 2010 after ‘rough year’ for entire biofuel industry

A federal tax credit that provided makers of biodiesel $1 for every gallon expired Friday. As a result, some U.S. producers say they will shut down without the government subsidy.

A one-year extension of the biodiesel tax credit was included in a bill that was approved by the U.S. House recently, but it never made it through the Senate.

Politics and Energy Policy

I have often complained about the chaos that political leaders cause with inconsistency on energy policy. I will get into the wisdom of this biodiesel tax credit in a moment, but government policy makers need to send clear, long-term signals so energy producers can plan. This has long been a problem for planning energy projects. Wind and solar developers have lived with this uncertainty for years. It seemed like at the end of every year, there was a tax credit that may or may not be extended. The uncertainty often froze project developers, and created unnecessary delays.

The same has long been true in the oil and gas industry. One of the reasons that it has been difficult to get a gas pipeline built in Alaska was government refusal to commit to long-term tax rates. Imagine that you are contemplating spending $26 billion on a gas pipeline, but the government can’t tell you what your tax rate is going to be. If my state income tax doubles, I can move to another state. But it isn’t like you can pick that pipeline up and move it, so it is important that you know that the government can’t double the tax rate in the event of a budget shortfall.

A different kind of government interference – a tendency to attempt to pick technology winners – resulted in cancellation of what I believe was a promising 2nd generation renewable diesel process. I documented the saga in several posts, but the gist was that because an oil company was involved – my former employer ConocoPhillips – Congress voted to specifically deny the biodiesel tax credit for a process that was both more efficient and more cost-effective than conventional biodiesel production.

By killing the credit, COP was placed at a $42/bbl disadvantage relative to biodiesel producers who received the credit, and thus COP decided to cancel the project. I documented that sorry saga here. I also explained the differences between ‘green diesel’ and biodiesel here.

Where to Now?

So where to go from here? We now have a classic dilemma created by the government. Through government fiat, an industry was created. Investments were made and infrastructure was put in place. The problem is that the particular industry that sprang up had little hope of ever really competing without the subsidy. The reasons are alluded to in the link above:

“By the time you buy the feedstock and the chemicals to produce the fuel, you have more money in it than you get for the fuel without the tax credit,” Francis said. “We won’t be producing any without the tax credit.”

I have long believed that there is no future for 1st generation biodiesel. I wrote in an August 2007 essay: “I have said it before, and I reiterate: Biodiesel’s days are numbered.” Note that the year after I wrote that the U.S. biodiesel industry had their best year ever. But the handwriting was on the wall for very fundamental reasons, and the prediction I made in 2007 is playing out now.

There are multiple problems that will make it difficult for biodiesel to ever compete without subsidies. In a nutshell the key problem is that the feedstock costs are linked to fossil fuel prices. The feedstock is generally a vegetable oil and methanol – an alcohol typically produced from natural gas. A second big problem is that biodiesel is an inferior fuel to hydrocarbon diesel (especially in cold weather). Further, the by-product of the biodiesel process is glycerin, which has limited value (especially at the volumes produced when biodiesel production is ramped up).

But this story is worse than simply a fuel that can’t compete. As evidenced by the opposition of the NBB to the extension of the tax credit for COP’s 2nd generation process, 1st generation biodiesel isn’t even a bridge to 2nd generation biodiesel – it is a barrier. Not only is biodiesel chemically different, but 1st generation producers have pulled out the stops to protect themselves against 2nd generation competition. So now we have a 1st generation industry that was already in trouble even with the subsidies that it was receiving, and a 2nd generation industry that could have been much further along were it not for 1st generation interference (which was aided by Congress).

If instead of picking technology winners, Congress had simply raised fossil fuel taxes, we wouldn’t be in this dilemma. With the high level of embedded fossil fuels, biodiesel would have been unable to compete and an industry with no future would not have been created by the government. Green diesel, on the other hand, would start to look a lot better because of the lower level of fossil fuel inputs (particularly for gasification), and we might find plants starting up to produce green diesel from both hydrocracking vegetable oils (the COP process I described) and gasification of biomass (e.g., the Choren process).

What I expect to happen is that Congress will eventually extend the credit, and it will be applied retroactively. But there are no guarantees, so producers are once again left with uncertainty. What should happen – in my opinion – is announcement of a phaseout schedule. I wouldn’t simply eliminate the tax credit cold turkey. That would be a blow to producers who invested on good faith that government support would be continued. But they also need to receive a message that this tax credit will be phased out over the next 3-5 years. At that point, prospective investors will be fairly warned that projects whose economics hinge on continued government subsidies are to be avoided.

This, by the way, is the sort of metric I try to apply to projects. I am looking for projects that can be viable without government support and can operate with low/no fossil fuel inputs. The first item means that governments have much less ability to wreck my project by withholding support, and the latter means that the project should become more attractive in the higher oil price environment that I expect.

That doesn’t mean that initial government support isn’t often helpful, but unless the underlying economics are sound then government support is a crutch I will never be able to throw away. In my opinion this is the case for most U.S. biodiesel producers, which helps explain why industry capacity is presently at 15%.

Disclosures

I want to make two very clear disclosures. First is that as noted, I worked for ConocoPhillips, and I was very pleased at the efforts we were making to commercialize green diesel. The fact that the government caused the project to be aborted by favoring one technology over another was a bitter pill to swallow. Again, I favor projects that are viable without government subsidies, but in this particular case the competing projects did get the subsidies.

Second, as I announced previously I now work for the company that owns the majority of Choren. I came to work for this company because I believe gasification has a long-term future, and I had written favorable articles long before this job opportunity arose. I have, however, had some suggest potential bias toward green diesel because of my link to Choren. What I say to those who might feel that way is the bias toward green diesel was because of my assessment of the technology. That is what led to my link to Choren, not vice-versa.

I have a project on my desk right now to look at avenues of disposal for sewage sludge in a specific location. There are lots of things you can do with sewage sludge, but it is obviously dependent on a number of factors. There are places where farmers spread it on their fields, there are places where it is incinerated, and there are places that it is land-filled. And there are other options beyond that.

In order to utilize sludge for energy, the water content is obviously critical. Too much water, and any energy you create from the sludge is lost due to the need to dry the sludge. So what I really needed in this specific case was a method of drying that could help generate net energy from the project.

Obviously you could just spread the sludge out in a sunny location, but there are many problems with that. One good rainstorm can ruin a week’s worth of drying and create a brown river to the nearest waterway. Further, as the outside layers dry, the drying slows down unless the sludge is constantly mixed.

I thought that this particular situation could benefit from a solar dryer. I am familiar with solar kilns and solar ovens, so why not a solar sludge dryer? I envisioned a system like a greenhouse that allows the sludge to dry, but also ventilates and removes the moisture. Several of the functions would need to be automated if this has any hope of being economical.

So I thought “Hmm, I wonder if anyone has invented such a system.” Since about 98% of anything that I ever think of has already been invented, I Googled it. Turns out that there are lots of solar sludge dryers to choose from, but one in particular caught my eye. Enter the German robot pig:

German robot pig the star of sludge drying plants

A group of young, up-and-coming German scientists in the late 1990s founded a company that today is the world leader in solar sludge drying. The star of the environmentally friendly drying process is an unusual pig that works all day without food or complaint.

What would a machine look like if it lived in the mud? Well, probably like a pig. Some 12 years ago, Tilo Conrad, together with two of his fellow students from the University of Hohenheim, built the first electrical pig, pioneering a device that is now being used as a solution to waste disposal problems throughout the world.

The stainless steel pigs, which in a sense resemble big beetles, are an important part of a larger solar drying process was patented by Thermo-System GmbH, a company Conrad founded in 1997 in Filderstadt.

Today, nearly 200 mechanical pigs do what normal pigs do: wallow in and shuffle through the mud — only these pigs do it to reduce sewer sludge disposal costs and protect the environment. Conventional drying processes use non-renewable energy, but Thermo-System’s process harvests solar power to dry the mud. It spreads the wet sewage sludge into sheds that are similar to greenhouses and puts the pigs to work.

In the sheds, the sludge absorbs heat from the solar rays and an innovative ventilation system keeps the air inside the shed warm and dry. The electrical pig, which is a fully automated robot complete with stainless steel mixing tools, tills and aerates the microbiologically active sludge, thereby accelerating the drying process. The whole system is fully automatic, uses very little energy and can be easily maintained.

Alas, another invention that someone thought of 10 years before I did. But this system really has many of the characteristics that I am looking for. Whether the economics pan out is still entirely unclear. The company does have an impressive project portfolio, though, having already built over 100 sludge-drying plants worldwide.

But one doesn’t get a chance to work with an army of German robot pigs every day, so I will continue to investigate and maybe this works out. Besides, that sounds so much more interesting than “I am working on sewage sludge.”