Boulder, Colorado, the world's first Smart Grid city.

Xcel Energy announced that they have successfully implemented the Ventyx Smart Grid Operations Solution in Boulder, Colorado.

This implementation is the first fully integrated Smart Grid city in the world. The Ventyx Solution will make it possible to convert the data from the Smart Grid into actual information that will assist both utility providers, and consumers alike, in  making energy-related decisions.

Ventyx is the largest private software, data and advisory services provider for the energy industry and Xcel Energy is a major U.S. electricity and natural gas company.

An in-home energy management website is expected to be launched in the near future, which will give all Boulder customers with one of the more than 15,000 new, “smart” meters the ability to review their home energy use.

“The Ventyx Smart Grid Operations solution plays a fundamental role in turning the vision of SmartGridCity into reality by helping us aggregate diverse data from the Smart Grid and make it actionable in our commercial operations,” said Randy Huston, Xcel Energy’s project delivery executive for SmartGridCity.

The Ventyx Smart Grid Solution is a software suite that provides for its users the ability to deliver demand response (DR) programs, distributed energy (DG) management, renewable generation and resource optimization. The software suite is designed to suit both commercial and retail utility operations.

“We can now read customer meters remotely, identify and reduce outages and false power outage calls more quickly,” said Jay Herrmann, Xcel Energy regional vice president. “By cutting the number of times we send crews out to those calls, we can make our crews more productive. Combining those efficiencies while reducing outages will allow us to capture cost-savings more appropriately and benefit our customers.”

Over the last year, the SmartGridCity has seen remarkable growth. SmartGridCity has installed 15,800 smart meters, enabled 45,200 premises with broadband over powerline (BPL), laid 200 miles of fiber, built 95 new interfaces, deployed/integrated more than 20 disparate applications, and performed more than 300 test cases for go-live preparation.

“The Ventyx Smart Grid Operations solution meets a growing need among utilities deploying Smart Grids because it enables them to process and act on complex information from across the entire energy value chain from generation to consumption,” said Ventyx President and Chief Operating Officer Steve Carpenter.

While it seems that ‘cloud computing’ is the next big frontier in information technology, when it comes to energy consumption it’s quite a step back. Right now, teams of researches at Carnegie Mellon University and MIT are working on a new algorithm that is designed to route internet traffic to areas where the cost of energy is lower. This move could possibly save millions of dollars that would normally be spent on massive energy bills.

The two research teams have been working with Akamai, a company that provides distributed computing solutions, to test the new rerouting algorithm and see if it could work well under the normal fluctuation of energy costs across the country. According to Technology Review, the algorithm is capable of calculating the best way to route internet traffic based on the expense of routing traffic further as opposed to how much money would be saved based on cheaper energy prices and then goes with the ‘happy medium’.

The energy cost data was made up of information from 29 major cities in the U.S. over a 39 month period, andthe study also tracked 24 days worth of Akamai’s server activity. based on the data gathered, a company could theoretically save around 40% on their energy costs if the energy use was in proportion with computing amounts.

The study concludes that if the rerouting algorithm were to be instated, companies like Amazon and Google could save millions of dollars in operating costs and also cut energy requirements for the power grid.

Technology Review also reported that a few companies have said that there are still more control and hardware improvements that need to be made to the system before they could make a judgment on the efficiency of rerouting internet traffic. The companies also emphasized that there was also no way to guarantee that energy use could be scaled back beyond just saving money.

Over four hundred stimulus grant proposals have been received by the United States Department of Energy for the purpose of setting up the proposed smart grid system. The DoE is planning to choose which proposals to go with in November, but right now they are still in the process of adding up the total amount of money that has been requested.

According to Todd Arnold, Duke Energy’s senior vice president of smart grids, “What’s critical for industry is we get out of pilots, and start building smart grids.” Currently they are serving about four million Midwest customers.

The maximum amount of money that is allowed to be requested stands at $200 million for the proposals that were closed on August 6th. Duke Energy put in a request for the full $200 million, and their goal is to take their original plan of having smart meters and automation systems connected to over 1.5 million users in six years, and reduce the time frame to four years. The users in their target area are from Kentucky, Indiana, and Ohio. Duke Energy also has plans to send off another proposal for advanced pilot systems to the tune of $14 million by late August.

A few days ago, Echelon Corp. agreed to purchase just under $16 million Networked Energy Services systems from Duke, which are scheduled for delivery prior to October 2009. According to Echelon, this deal could be the start of what will be sales of its NES systems that push the $150 million mark. Representatives from Duke Energy say that they liked “how [the Echelon system] gets data out of the meter to where we have a collection point on the network. We like their design of their metering infrastructure and the NES system’s handling of data at head end, managing the network and handling updates and applications on the smart meter.”

State officials in Vermont made an announcement on Thursday that the state’s utilities and regulatory agencies are prepared to go ahead with establishing a ’smart grid’, with or without federal funding. Of course, without the extra $66 million, the project will take far longer to get up and running.

Setting up a ’smart grid’ is a daunting task, which requires the installation of specialized electric meters in homes, running fiber optic connections to them, and setting up systems for gathering data from the meters. The idea behind the system is to use the data that is gathered to help reduce both the cost and use of electricity.

One of the potential issues with the new ’smart grid’ is the use of electricity to heat water in homes and provide heating and cooling. These issues have been problematic when formulating a plan to slow the usage of electricity in homes around the state. With emerging technologies, the smart grid would allow homeowners to use power for these things while both reducing carbon dioxide emissions in the generation process and without increasing demand during peak usage times.

The project, which is projected to cost around $133 million, would be completed in approximately three years with the help of federal funding. About half of the cost would be shouldered by the utility companies, with the other half coming from stimulus funds.

According to Mary Powell of Green Mountain Power, customers in Vermont are already up to speed on the savings that they will see from the smart grid. By using the smart meters and tracking usage, a homeowner would be able to adjust their power usage to off-peak times.

Another advantage of the smart grid is that a company can easily integrate renewable power sources into the system and activate them when necessary, unlike nuclear or fossil fuel sources, which run constantly.

According to Fierce Telecom, the FCC has hired Nick Sinai of Polaris Ventures, a former venture capitalist, to be the energy and environmental director as well as establish a National Broadband Task Force, which aims to analyze the United States’ communications system to pave the way for establishing a smart energy grid.

The FCC plans to establish a set of rules for utility providers that will use broadband and wireless technology to gather data on energy consumption.

Meanwhile, Qualcomm and Verizon have agreed on starting a joint venture that aims to facilitate machine-to-machine wireless communication (designated as M2M) and begin establishing the use of smart services in a variety of markets. Although the joint venture hasn’t been given a name yet, the goal is to enable utilities to connect to items such as circuit breakers, sub-station equipment, and transformers and make them more interactive. By 2012, utility companies project that there will be more than 85 million connections around the world.

Verizon and Qualcomm plan to include cloud computing in order to provision devices automatically, monitor power usage, and manage equipment. Some other capabilities planned to be set up include applications that are specific to certain products, new performance monitoring tools, data collection, and OEM white label applications.

The market research firm Frost & Sullivan released a document that will allow building owners to see a list of challenges presented when it comes to automating buildings as well as how automation and IT systems can help owners have more control over energy demand while maximizing the amount of available space and keeping environmental impact to a minimum. The white paper, titled A New Facelift for Existing Buildings,  also serves as a plan for achieving the next level of control networking and information gathering.

Jeff Rubin – the former chief economist at CIBC World Markets – has always struck me as someone who “gets it.” I have seen him do a number of interviews, both on television and in print – and he consistently sounds the alarm on peak oil. He understands very well that cheap oil is the lifeblood of the global economy, yet this is an era that will soon come to an end. His new book – Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization – goes through the peak oil story in a way that I initially thought of as “Kunstleresque“, but I changed my mind as I got deeper into the book.

Some will certainly describe Rubin as a ‘doomer.’ However, by the end of the book I had concluded that there are some significant distinctions between the overall message that Rubin is trying to convey and the message Jim Kunstler conveys in The Long Emergency. Maybe it’s because The Long Emergency really slapped me out of complacency, but I recall being mildly shocked after reading Kunstler. I did not experience that same sense of shock while reading Rubin – but those who are only mildly familiar with peak oil may be.

Rubin covers many familiar themes, such as the domestic cannibalization of exports by energy producers, the need to produce and consume more goods locally, corn ethanol (which he describes as a ‘head fake’), and the overall impact of high oil prices on the global economy. For regular readers, you will find that much of the book is familiar territory, and for a while I was thinking “There is nothing here that I haven’t seen before.” But the book ultimately grew on me, partly because there are two themes that distinguish it from other books I have read about peak oil.

The first involves a discussion of carbon dioxide emissions. In a chapter called “The Other Problem with Fossil Fuels”, Rubin started to make a argument that I have often made: Ultimately it is futile to attempt to regulate carbon emissions, because China is literally bringing several coal-fired power plants online every week. Rubin wrote that between now and 2012, over 500 new coal-fired plants are scheduled to come online – just in China. This was the theme of my essay Why We Will Never Address Global Warming. My belief has been that there really isn’t much that will convince China and other developing countries to cut back on their emissions. While I still think carbon dioxide emissions will continue to rise until we simply run out of fossil fuels, Rubin provided an interesting argument that caused me to think that a different approach might work.

Rubin argues that if we put a price on carbon emissions in the U.S., Canada, Europe, and other developed countries – we can apply a carbon tariff on imports to level the playing field. Rubin states that energy usage per GDP in China is four times that of the U.S. economy. By putting a carbon tariff on Chinese steel, for instance, two things are accomplished. First, the Chinese then have a much greater incentive to become more efficient. Second, domestic energy intensive industries (like steel production) suddenly become much more competitive. The flip-side of course is that it makes energy-intensive products more expensive.

The second theme that distinguishes Rubin’s book is that it is ultimately a hopeful book. About half way through the book, you won’t have that impression. Sometimes when I read books on peak oil, the message is essentially “Abandon all hope; all exits are closed.” I was 116 pages into the book and still thinking that this was standard peak oil fare. But then it started to become apparent that although Rubin sees and understands that this is a very serious and unprecedented challenge, he sees a world emerging with some distinct advantages. He also expects that there will be some technical breakthroughs that we simply can’t anticipate that will likely make our landing into this unfamiliar territory bumpy, but survivable.

Make no mistake, Rubin’s overall message will be sobering to the uninformed. The world Rubin foresees will contain less convenience than today’s world. Gone are fresh fruits and vegetables out of season, cheap Brazilian coffee, and New Zealand mutton. Replacing them will be more expensive, but more locally produced goods. There will be new opportunities and benefits in this changing world. Because of that, I think this book will be important for scaring people into action without causing them to simply abandon hope.

Conclusion

A couple of years ago, I took a road trip from Montana to Texas (described in My Last Long-Distance Car Trip). In that essay – described by some readers as gloomy – I mused about a world in transition. In the concluding chapter of his book, Rubin does the same. He is on a fishing trip in Canada, and he discusses what higher oil prices will mean for 1). The ability of people to fly to remote locations for holidays; 2). The impact on those who depend on those tourist dollars; 3). The future of entire populations in remote areas (much like I did when I drove through Wyoming). While fishing trips to Canada aren’t something most of us can relate to, we can certainly all relate to the idea that expensive energy is going to fundamentally change our lives – and that is the message he conveys.

The last chapter is a melancholy chapter in which Rubin sees an era coming to an end – with huge global implications. He admits that he doesn’t know how this is going to play out, but he thinks that our world is once again going to become a whole lot smaller. And that’s not all bad.

Chemistry is a different matter, which is why I favor gasification processes over fermentation processes. But even beyond gasification, I have wondered about chemically processing cellulose in a refinery. I used to have a guy who e-mailed me all the time and told me he had invented a chemical process for reacting cellulose to hexane, which can then be turned into gasoline. If you look at cellulose (there is a graphic of a segment of cellulose at the previous link), you can envision that it could be done. (Whether he had actually done it is a different story).

But the chemistry pathway isn’t limited to fuels. With that preface, I want to thank a reader for bringing this story to my attention. In a recently published story in Applied Catalysis A: General (available online at Science Direct), scientists at Pacific Northwest National Laboratory have reported on a new process for converting cellulose directly into an important chemical building block (e.g., for plastics and fuel):

Single-step conversion of cellulose to 5-hydroxymethylfurfural (HMF), a versatile platform chemical

Now we all know that you can do lots of neat things in the lab that can’t really be done on a larger scale. But this particular process does not appear to be overly complicated. The abstract from the paper explains what they are doing:

Abstract

The ability to use cellulosic biomass as feedstock for the large-scale production of liquid fuels and chemicals depends critically on the development of effective low temperature processes. One promising biomass-derived platform chemical is 5-hydroxymethylfurfural (HMF), which is suitable for alternative polymers or for liquid biofuels. While HMF can currently be made from fructose and glucose, the ability to synthesize HMF directly from raw natural cellulose would remove a major barrier to the development of a sustainable HMF platform. Here we report a single-step catalytic process where cellulose as the feed is rapidly depolymerized and the resulting glucose is converted to HMF under mild conditions. A pair of metal chlorides (CuCl2 and CrCl2) dissolved in 1-ethyl-3-methylimidazolium chloride ([EMIM]Cl) at temperatures of 80–120 °C collectively catalyze the single-step process of converting cellulose to HMF with an unrefined 96% purity among recoverable products (at 55.4 ± 4.0% HMF yield). After extractive separation of HMF from the solvent, the catalytic performance of recovered [EMIM]Cl and the catalysts was maintained in repeated uses. Cellulose depolymerization occurs at a rate that is about one order of magnitude faster than conventional acid-catalyzed hydrolysis. In contrast, single metal chlorides at the same total loading showed considerably less activity under similar conditions.

So they take cellulose and react it with two metal chlorides at 80–120°C for a direct conversion of cellulose into HMF – which can be easily converted to fuel or plastics. I would think then the important considerations would be 1). What happens to the lignin and hemicellulose in the biomass?; and 2). How much energy does it take? The second item is particularly important if fuel is the objective.

While it is too early to tell whether there is a fatal flaw, this one certainly bears watching. It also strengthens my conviction that in the long-run, the right way to process cellulose is chemically.

With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

The U.S. news media has convinced many investors that oil consumption is falling because of the global recession. While that may be true, it’s a disservice to millions of investors because production is declining at a pace that’s actually three times faster.

And that suggests higher oil and gasoline prices in coming months – perhaps as much as 50% – 70% higher, or more – particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

For consumers, the continued economic malaise will mean fewer trips to the store, less-ambitious vacations, and car-pooling to school or work . For businesses, the cutbacks by consumers will clearly translate into canceling trips where conference calls will suffice and using lower-cost shipping alternatives for the decreased sales volumes most U.S. companies will experience.

According to the U.S. Energy Information Administration, oil consumption fell by nearly 50,000 barrels a day throughout 2008. According to the latest figures, the EIA suggests that global oil demand may slump to 83.4 million barrels a day in 2009 – nearly 2.4 million barrels below 2008 consumption levels. On a percentage basis, that’s almost a 3% drop. I have my doubts that we’ll actually see a decline of this magnitude, but if it does occur, it will be the first time ever that consumption has declined for two straight years. That alone is pretty noteworthy in this era of cohesive and powerful global growth.

The reason I have my doubts about such a steep decline in demand is this: While overall consumption is dropping in such developed economies as the United States, Europe and Australia, it’s being at least partially offset by continued growth in China, the Middle East and Latin America. Because the data produced there is less than transparent, I can’t help but think that analysts are underestimating the growth we’ll be seeing in those markets, where consumption is accelerating strongly. And it’s entirely possible that growth in those markets will outstrip any fall here in the developed world.

Even if the growth in the emerging markets doesn’t quite offset the decline in their developed brethren, analysts seem to be forgetting that oil prices are a function of two variables – consumption and production. And it’s the change in production that’s going to catch a lot of people by surprise.

After a run of record high oil prices punctuated by frantic resources development, we’re now seeing the opposite scenario. The long period of lower than anticipated oil prices following oil’s meteoric rise last year means that the entire industry is no longer making the investments needed to sustain production capacity or actual production.

And not many folks recognize this fact.

For instance, direct project investment in drilling may be down as much as 20%, while the number of drill rigs in operation in America alone has dropped by more than 40%. Various estimates from the EIA and private sources suggest that actual U.S. production may fall by as much as 320,000 barrels a day. While the amount is a matter of debate, the fact that production is declining is not.

More than 20% of total U.S. oil production comes from tiny wells located in remote areas that were marginally profitable producers when crude oil was trading at $100 a barrel. With oil currently at about $61 a barrel, those producers are practically worthless now. So the “mom-and-pop” shops that own them are actually abandoning entire fields and equipment without a moment’s thought.

To be fair, at least part of the drop in demand can be attributed to increased reliance on methanol, ethanol and other types of biofuel, but that’s hard to quantify at the moment because the long period of low oil prices has eroded the economic viability of alternative fuels – at least for now.

The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody’s fancy only 24 months ago. Now we’re seeing Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), StatoilHydro ASA (NYSE ADR: STO) and Petro-Canada USA (NYSE: PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez – the perennial motor mouth and longtime U.S. critic – is eating crow. He’s begrudgingly invited (read that to mean “is begging”) the oil companies whose assets he nationalized only a year ago to “come back” into the market.

He has no choice. Venezuela’s oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country’s hard-to-reach reserves.

Chavez’s Chavez’s government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there’s simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn’t matter whether the decline is prompted by depletion, war, or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on but I think you get the picture.

Now imagine what could happen to oil-and-gasoline prices when normalized demand resumes. Not only will there be less oil in storage, but virtually the entire industry – exploration, production, refining and sales – is going to be caught sitting on its heels when the world needs it to be zooming along in high gear. And that means the companies that make up this industry will have to ramp up again to meet the newly increased consumption demands.

This whole process could take two years – or even longer – to play out.

As for prices, history is replete with examples of what happens when there are major shortages of key commodities.

In the Energy Crisis of 1973-74, for example, I can still remember the numbingly long gas lines and waiting in the car for hours to get a fill-up. My father and grandfather vividly remember that prices quadrupled in a matter of months. I’m sure you do, too.

Only a few years later, in 1979, we got another oil shock when prices quadrupled again. Because it was coupled with stagnant economic growth and virulent inflation (stagflation), this period was an economic disaster for the United States.

For those who had learned from the earlier crisis, however, it was a mondo- profit opportunity.

The same can be said for 2007-2008, when the huge spike in oil prices that I predicted contributed to the bear market in stocks, tight credit and recessionary conditions that led to the current malaise that continues to grip the U.S. economy. As much as anything else, high oil prices contributed to the carnage we’ve seen in the auto-making and airline industries, and to the financial crisis that started here before spanning the globe.
Which brings us full circle.

Many investors will refuse to believe we’ve arrived at this new energy nexus, especially given all the hype we’ve seen surrounding alternative fuels, hybrid vehicles and the new “green” mentality that’s taken hold here in this country. If you listen to some of the real believers, they’ll tell you that we could be living in a petroleum-free Nirvana – as early as tomorrow.

While I personally would like that, too, it’s a misleading argument if for no other reason than there are millions of consumer items we use – from plastic bags to makeup – still created using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum, and even the most aggressive estimates suggest that it will take the world decades to shift away from them.

We’re in much the same situation when it comes to hybrid vehicles. There isn’t a mass-produced electric vehicle available today that could offset the coming rise in recovery-driven demand for oil and gasoline. There’s a strong effort underway, but I’m not aware of a single company ready to field the solution in cost-affordable quantities by 2010 – which is when most analysts say a recovering economy will stoke demand for oil.

Of course, U.S. President Barack Obama’s much-lauded efficiency and greenhouse-gas-standards mandate will help significantly, but that’s like bolting the barn door after the horses have run for the fields. The irony of watching auto executives “applaud” his press conference was almost too much to watch with a straight face. But that’s a story for another time.

The bottom line is this: Our society will be highly dependent on oil for many years to come and investors should plan accordingly.

If governments around the world really want to get serious, they could collectively work to eliminate the fuel subsidies that are part of the price paid for gasoline in Asia or sugarcane ethanol in Brazil. We could also stop our own energy pork barreling. But given the complete lack of transparency that surrounds this issue – not to mention the influence wielded by vested industry interests, and the scores of well-paid lobbyists that patrol the halls of power in our nation’s capital – I don’t think we’ll see any big changes anytime soon.

So I’m left with one inescapable conclusion, at least in the intermediate term. Every investor needs to have at least some sort of energy strategy – preferably one that includes a range of drillers, producers and suppliers to cover the spectrum from wellhead to consumer.

That way, we can profit from an increase in energy prices that we can only hope rise fast enough to jump-start the oil industry’s production arm but not so fast that it snuffs out the badly needed economic recovery.

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "Golden Age of Wealth Creation" The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

Stricter mpg rules may be boon for automakers

By issuing rules aimed at sharply boosting vehicle gasoline mileage and slashing greenhouse gas emissions, experts say the Obama plan is just what carmakers need given the prospect of higher gas prices and worries about global warming.

Automakers, in fact, reversed decades of opposition to stricter mileage standards by supporting the administration’s new rules — likely spurred in part by the industry’s heavy reliance on bailout money from U.S. taxpayers. Auto executives, for their part, said they like the plan’s unified approach to rulemaking.

The plan’s 30 percent boost in fuel economy would translate into a 35.5 mile per gallon average for cars and light trucks in 2016, four years earlier than the existing law called for. New passenger cars sold here would need to average 39 mpg, up from the current 27.5 mpg. Light trucks, which include pickups and sport-utility vehicles, would need to average 30 mpg, up from 23.

So what could possibly be wrong with that? The problem I have with it is that it mandates that automakers build vehicles that people are not demanding. There are very fuel efficient cars available right now. In fact, that’s about all you see in Europe, and you can certainly get them in the U.S. Why is the demand high in Europe? High fuel prices. People demand fuel efficient cars when fuel prices are high, as we saw last summer when SUV sales plummeted and hybrids were flying off of the car lots. Europe doesn’t have to mandate that they are built; the demand is there. This was the thrust of my argument in 2007, and CNN has picked up on that theme as well:

Gas prices: The key to fuel economy

The Obama administration estimates these rules will add about $600 to the cost of a car. That’s on top of an estimated $700 added by changes to fuel economy rules that have already been enacted. All this may keep consumers from buying a new car, some say.

Also with fuel prices still low, consumers may want larger vehicles, but these will never be as efficient as small cars. Without soaring gas prices pushing drivers to conserve, it will be difficult for makers of larger vehicles to meet the administration’s efficiency goals.

“You could achieve the standards today with ultralight, really small cars,” said Jeremy Anwl, chief executive of the automotive Web site Edmunds.com, “but how many people are really going to buy those?”

“They’re continuing to focus on the wrong program,” said Todd Turner, an analyst with Car Concepts Automotive Research.

Bingo. The problem with this is that the end result may very well result in better fuel efficiency, but it will be an inefficient process. By making cars that aren’t in demand, you may increase the price of the larger cars (e.g. SUVs) that are in demand. This may shift demand to smaller cars. But this could be accomplished by my proposal to exchange higher fuel taxes for reduced income taxes.

I think that’s reality. But in the alternate reality where technology is magically mandated to fix problems, we get thinkers like this:

Obama’s fuel home run

America finally has a smart leader, not a good old boy from Texas and his sidekick who were in the hip pockets of the Saudis and oil interests at home and abroad. Yesterday’s announcement of dramatically enhanced fuel efficiency standards on vehicles recognizes that environmental, economic, trade and foreign policies converge and can be addressed all at once.

I think these sorts of stories are incredibly naive. I suspect everyone is for higher fuel efficiency. What these sorts of proposals suggest is that it is a painless fix. Detroit will bear the costs, while consumers can continue to drive their Lincoln Navigator, only now it will get 30 miles per gallon instead of 14. Somehow, this magic wave of the wand is going to do this, and Obama is a genius for recognizing it.

Heck, if it is that easy, I don’t understand why he didn’t mandate that all vehicles achieve 100 mpg. For that matter, I still can’t understand why we don’t mandate a cure for cancer.

Today Pacific Ethanol (PEIX), one of the companies that I have tracked the longest, declared bankruptcy for Pacific Ethanol, Inc. This is not bankruptcy for the entire company, but it is bankruptcy for the ethanol plants themselves, which apparently leaves the marketing branches (Kinergy Marketing LLC and Pacific Ag. Products LLC) intact. I state that as a matter of fact, not with any smug satisfaction.* I recognize the people who work at these plants are hard-working people with families to support, and I don’t delight at seeing anyone out of work. As I told someone recently (in fact, we were talking about Pacific Ethanol and Coskata) “This is never personal. I am just stating my opinions.” With that preface, I offer my sincere condolences to all the people impacted by this development.

It was in July 2006, in the wake of a very positive article on investing in ethanol that I wrote an article for Financial Sense that suggested that ethanol stocks were overvalued. I focused on Pacific Ethanol, stating that I would “take a look at Pacific Ethanol to show why I think the underlying fundamentals make it a very risky investment.” Here was the problem as I saw it in a nutshell:

Another factor working against Pacific Ethanol’s success is the ability to secure cheap corn supplies for their plant. According to http://www.ethanol.org/FAQs.htm [RR: This link and the next one are both now dead], an important factor to consider when building an ethanol plant is proximity to corn. Local grain supplies, preferably within 50 miles of the plant, are important for keeping costs down. Yet California produces little corn. In recent years, California’s corn crop amounted to barely over 1% of the corn crop in Iowa (http://www.corn.org/web/uscprod.htm). This makes it likely that PEIX will have to import corn from out of state, driving up production costs. It will probably be cheaper for a producer to produce ethanol in the Corn Belt, and then ship the ethanol to California than it would be to ship the corn there and produce it locally. There is a reason that California is not a hotbed of ethanol activity, despite the fact that Californians consume ethanol. It’s too far from the corn, so it is more cost effective to ship in finished ethanol.

I just never thought they were going to be able to compete with the guys in the Midwest. When you ship all that corn from Iowa, you are shipping all of the waste products and all of the water as well. You end up with byproducts in greater quantities than the local markets can absorb. It always made more sense to me to produce ethanol in Iowa, feed the byproducts to cattle in the area, and ship the finished ethanol to California. To me, that was going to be the low cost producer for ethanol in California (with the possible exception of ethanol from Brazil).

On top of the geographical problem, the sector as a whole has been in big trouble as too many producers joined the party. While PEIX was at one time fairly well-capitalized, they were ultimately unable to withstand the problems plaguing the sector in general. My prediction is that the plants will end up being auctioned off as the Verasun assets were.

* OK, maybe a tiny bit of satisfaction toward people who suggested that since Bill Gates had invested in PEIX, I must be an idiot for criticizing it.