Anything but oil
– John Kemp is a Reuters columnist. The views expressed are his own —
As OPEC ministers meet in Angola this week, they can congratulate themselves on a brilliant piece of market management.
Quick decision-making and aggressive output cuts over the last 18 months have stabilised prices at their highest level in real terms since the early 1980s. And this despite the deepest recession since World War Two.
The cartel has had plenty of help. Cheap liquidity from central banks has helped finance inventories, while continued enthusiasm from the investment community has encouraged the market to look past weak short term fundamentals and concentrate on the possibility of renewed price increases in future.
Ministers, led by Saudi Arabia’s Ali Naimi, can claim a large share of the credit: delivering timely and reasonably effective output cuts, limiting the stock build, and giving investors a reason to remain bullish.
But the body faces bigger problems as an “anything but oil” agenda swells with developed countries pursuing green agendas and seeking to insulate themselves from volatile markets.
Fears about the availability and environmental costs of combusting refined products have forged an unlikely alliance between the national-security right and environmental left around that agenda. It prioritises the use of other fuels (gas, coal, electricity, nuclear, renewables and biofuels) and new technologies (solar, liquefaction, carbon capture and storage) in preference to oil.
Biofuels run into trouble
– John Kemp is a Reuters columnist. The opinions expressed are his own – Despite a promising start, the U.S. experiment with renewable fuels is facing a serious challenge next year. Falling gasoline consumption, lower pump prices and contradictions within the federal government program are intensifying existing pressures on ethanol distillers and farmers already struggling to cope with over-capacity and collapsing margins.
ETHANOL ENTHUSIASM
Between 2000 and 2007, production of fuel ethanol quadrupled from 1.6 billion to 6.5 billion gallons, and the industry is on course to distill a record 9.3 billion gallons in 2008.
Ethanol production is not really economic at oil prices below about $60-70 per barrel (prices of grains and fats for ethanol conversion and processing costs are too high relative to oil). So the original boost to ethanol came from its use as an oxygenating additive in reformulated gasoline, rather than as fuel in its own right, when a number of states banned the use of MTBE.
As oil prices breached $50 in late 2004 and continued to climb steadily higher over the next four years, ethanol’s properties as a fuel suddenly became more attractive. Blenders began to use ethanol as a cheaper (partial) substitute for conventional oil-derived blendstocks in making gasoline.
Prompted by national security concerns and encouraged by lobbyists for the farm sector, U.S. legislators tried to accelerate the use of ethanol by mandating a minimum ethanol content for all gasoline produced or imported into the United States.
The centerpiece of the government’s intervention is the Renewable Fuel Standard (RFS) which sets a steadily increasing minimum volume of ethanol that must be blended into the nationwide gasoline supply each year.
quote: For $100 the auto Industry can make any vehicle a Flex Fuel Vehicle capable of running on Gasoline or any blend of ethanol..
the flex fuel sensor for a GM costs $500, the larger needed injectors cause worse atomization, and less accurate fuel air mixtures. GM gets away with this because it lets the vechile get %20 worse fuel economy. They trade these MPG costs to other vechiles to stay under the cafe cap.
OPEC appears to concur on the danger posed by permanent demand destruction:
According to the Financial Times today, the cartel on Tuesday said high prices and the economic crisis had triggered a shortfall in demand among members of the Organisation for Economic Co-operation and Development, the rich countries’ club.
“The crisis appears to have induced a permanent loss in oil demand in OECD and slower rate of growth in non-OECD, due to policy measures and changes in consumer behaviour,” the cartel’s economists told ministers in a presentation.