Record Oil Prices Can't Make Biofuels Profitable  

The Australian reports that Australian Biodiesel Group has joined Australian Renewable Fuels in mothballing a number of biodiesel plants, with high feedstock prices outweighing high oil prices. Axiom Energy seems to think it can succeed where others have failed though, pushing ahead with a new plant in Geelong.

AUSTRALIAN Biodiesel Group has sold a plant and cut staff because of unprofitable production. It is the second Australian producer of the fuel to reduce output in a week, amid a surge in feedstock prices. It would sell other assets and would resume production only when doing so would improve its finances, the Sydney company told the Australian Securities Exchange yesterday. The Narangba plant in Queensland would be kept on standby, it said.

Australian biodiesel capacity, which more than quadrupled last year amid optimism over demand for clean-burning fuel, outstripped production fivefold after tax changes reduced sales. Last week, Australian Renewable Fuels, another producer, halted production at its two plants because of losses. "It's not surprising with the way feedstock prices have increased," said Graeme Bethune, chief executive of Adelaide consultancy Energy Quest. ...

The slump followed a 71 per cent drop in the price of Australian Renewable Fuels on November 5 after it announced the closure of its plants. Most other Australian-listed biodiesel companies, including Natural Fuel, Babcock & Brown Environmental Investments and Sterling Biofuels International, are at or near record lows. Mission Biofuels, an Australian company building a biodiesel plant in Malaysia, is the only stock trading above its offer price.

Prices of tallow, a feedstock for biodiesel, have risen in the past six months to more than $900 a tonne from less than $600, Perth-based Australian Renewable said on November 2. "Under current market conditions and government policy settings, the cost of producing biodiesel exceeds the price it can be sold for," Australian Biodiesel (ABG) said yesterday. "ABG believes there is a good case for the current unsustainable situation to be rectified by governments adopting policies that are common overseas."

Ronald Bailey at Reason is blaming soaring oil prices on under-investment in oil production capacity, but doesn't think social meltdown is imminent.

Crude oil prices hover between $90 and $100 per barrel and U.S. gasoline prices are again north of $3 per gallon. Since 2002, the price of a barrel of oil has risen more than four-fold. Are we running out of oil?

A new report by the German think tank Energy Watch Group (EWG) says so. The EWG report argues that the world reached the peak of oil production last year and supplies will fall from about 81 million per day now to just 39 million by 2030. "The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life," declared EWG founder Joerg Schindler. This fast onset of oil supply shortfalls, warns the EWG report, could trigger the "meltdown of society."

At the heart of the EWG analysis is its drastic downward revision of estimated world oil reserves.

...Higher prices do generally mean that supplies are becoming relatively scarcer. So what is causing today's scarcity? Most people have forgotten that by the mid-1990s, the price of oil dropped to around $10 per barrel. Why? Because the world was awash in oil relative to demand. The oil crisis of the 1970s provoked so much field development that there was a 25 percent excess capacity. Low prices also meant that there was very little incentive to invest in projects to increase supply. For example, when oil prices collapsed in the 1980s, the number of exploratory drilling rigs in the United States fell from 4500 to under 1000.

At the beginning of the 21st century, economic growth in India and China surged after they finally managed to shrug off the shackles of socialist planning. Strong world economic growth soaked up the excess production capacity, which has now fallen to around 2.5 million barrels per day. Generally a cushion of 5 million barrels per day is necessary to keep prices low. Most of the excess capacity is in Saudi Arabia. The world currently consumes about 86 million barrels per day.

...Instead of the "meldown of society," a likely and painful scenario is that greedy and incompetent government oil producers will continue to under-invest, causing a shortfall in supplies that will drive up prices and provoke a global economic slowdown. Expensive oil also encourages consumers and businesses to invest in energy efficiency that will combine with the slowdown to cut demand. Reduced demand will drive down oil prices as steeply as they rose. Some day peak oil production will be reached, but most oil reserve estimates suggest that there are good reasons to doubt that that day is now at hand.

Ralph Nader, on the other hand, thinks that oil prices have manipulated by speculators and the oil industry.

Question of the day: who and what is determining the price of oil and your gasoline and home heating bills? Don't ask Uncle Sam, because George W. Bush and Dick Cheney are running a regime marinated in oil that does not issue reports which explain the real determinants of petroleum pricing beyond the conventional supply-demand curves.

First, let us create a historical framework to provide some background. In the good 'ole oil days, before the producer-countries' cartel in the Third World gained pricing power, there were seven giant oil companies called the 'seven sisters' led by Standard Oil (now Exxon) and Shell. As chronicled in Robert Engler's classic book, The Brotherhood of Oil, they were able to affect pricing through extra-market means. Economists called them a tight oligopoly.

...Today, a third party has moved to the table-the New York Mercantile Exchange, a similar operates in London and a new one in Dubai. There, boisterous traders buy and sell futures contracts on the delivery of oil. But as Ben Mezrich, the author of the new book Rigged said recently, the dollar amounts of these futures contracts are far far larger than the actual oil deliveries they represent as they turn over and over at the Mercantile Exchange.

So now the critical resource of oil is driven by speculation at ever higher abstract electronic levels of futures trading. Increasingly, the distance becomes greater and greater between this abstract trading (fueled by rumors of storms in the Gulf of Mexico, or some possible political turmoil in a region of the world, or some other frightful excuse for bidding up) and the physical supply and demand for oil and its refined products.

These oil gamblers in New York and London try to justify their frenetic daily bidding by saying that these futures markets provide liquidity, and a clear price for oil. Alright, but who benefits when, how and where?

Certainly, the strain between physical supply and demand in recent years does not explain such extreme volatility. With OPEC countries down to supplying only 40 percent of the world production, Chinese demand for oil growing fast, and the expansion of production by Saudi Arabia and others to meet this demand, crude oil supplies are not tight enough to explain such pricing behavior.

Bart at Energy Bulletin notes that both are simply viewing the world through their ideological lenses. I have a fair amount of sympathy for both interpretations personally - and they aren't necessarily mutually exclusive. Its probably important to remember that geology is just one factor determining when oil production peaks - and the other 2 (economics and politics) are often more important.

It's interesting to compare Ralph Nader and Ronald Bailey's analyses. Both find an someone to blame, appropriate to their political positions. Ronald Bailey focuses on "greedy and incompetent government oil producers." Nader blames speculators, oil companies and "oil-indentured politicians."

The Age has a report noting that most Australians would be happy with - higher bills for clean energy.

NEARLY nine out of 10 Australians are prepared to pay more for energy if the extra revenue is spent developing clean energy sources to combat climate change, a global poll has found.

The BBC World Service poll found that among developed countries, Australia had the highest proportion of people — four out of five — who believed the cost of "harmful" energy sources such as coal and oil had to go up to encourage individuals and industry to use less. More than three out of five — 61 per cent — favoured raising taxes on coal and oil no matter what the additional revenue was spent on; this figure leapt to 87 per cent if the money was to be spent on making energy more environmentally friendly.

I was somewhat staggered to see Dr Karl has admitted he made a mistake in his recent comments about "clean coal". Carbonsink had pointed out the fairly large error in Dr Karl's maths at the time, to which I'd cynically retorted "he's a politician now - of course he is lying - his lips are moving". But it turns out it was an honest mistake and he's apologising and conceding clean coal may have a short term transition role as we move to clean energy sources.

Dr Kruszelnicki, a NSW senate candidate for the Climate Change Coalition, told The Australian: "I was wrong. We're very happy to admit our mistake on that."

The error comes from incorrect data found in the first edition of Australian of the year Tim Flannery's best-selling climate change book The Weather Makers, which has subsequently been corrected. "We're stuck with the fact that we have still got to make electricity in the short term from carbon of some sort," he told the paper. "Something is better than nothing, so sequestering carbon dioxide is better than just letting it go out. I see it as a stop-gap, short-term thing rather than a long-term solution because the more you store it away the more the chance that it will escape," he said.

I haven't done a joke for a while, but I liked this story from "OnceFueled" at TOD today.

GOD AND ST. FRANCIS DISCUSSING LAWNS

GOD: Francis, you know all about gardens and nature. What in the world is going on down there? What happened to the dandelions, violets, thistle and stuff I started eons ago? I had a perfect, no-maintenance garden plan. Those plants grow in any type of soil, withstand drought and multiply with abandon. The nectar from the long lasting blossoms attracts butterflies, honey bees and flocks of songbirds. I expected to see a vast garden of colors by now. But all I see are these green rectangles.

ST. FRANCIS: It's the tribes that settled there, Lord. The Suburbanites. They started calling your flowers "weeds" and went to great lengths to kill them and replace them with grass.

GOD: Grass? But it's so boring. It's not colorful. It doesn't attract butterflies, birds and bees, only grubs and sod worms. It's temperamental with temperatures. Do these Suburbanites really want all that grass growing there?

ST. FRANCIS: Apparently so, Lord. They go to great pains to grow it and keep it green. They begin each spring by fertilizing grass and poisoning any other plant that crops up in the lawn.

GOD: The spring rains and warm weather probably make grass grow really fast. That must make the Suburbanites happy.

ST. FRANCIS: Apparently not, Lord. As soon as it grows a little, they cut it-sometimes twice a week.

GOD: They cut it? Do they then bale it like hay?

ST. FRANCIS: Not exactly, Lord. Most of them rake it up and put it in bags.

GOD: They bag it? Why? Is it a cash crop? Do they sell it?

ST. FRANCIS: No Sir. Just the opposite. They pay to throw it away.

GOD: Now let me get this straight. They fertilize grass so it will grow. And when it does grow, they cut it off and pay to throw it away?

ST. FRANCIS: Yes, Sir.

GOD: These Suburbanites must be relieved in the summer when we cut back on the rain and turn up the heat. That surely slows the growth and saves them a lot of work.

ST. FRANCIS: You aren't going to believe this Lord. When the grass stops growing so fast, they drag out hoses and pay more money to water it so they can continue to mow it and pay to get rid of it.

GOD: What nonsense. At least they kept some of the trees. That was a sheer stroke of genius, if I do say so myself. The trees grow leaves in the spring to provide beauty and shade in the summer. In the autumn they fall to the ground and form a natural blanket to keep moisture in the soil and protect the trees and bushes. Plus, as they rot, the leaves form compost to enhance the soil. It's a natural circle of life.

ST. FRANCIS: You better sit down, Lord. The Suburbanites have drawn a new circle. As soon as the leaves fall, they rake them into great piles and pay to have them hauled away.

GOD: No. What do they do to protect the shrub and tree roots in the winter and to keep the soil moist and loose?

ST. FRANCIS: After throwing away the leaves, they go out and buy something which they call mulch. They haul it home and spread it around in place of the leaves.

GOD: And where do they get this mulch?

ST. FRANCIS: They cut down trees and grind them up to make the mulch.

GOD: Enough. I don't want to think about this anymore. St. Catherine, you're in charge of the arts. What movie have they scheduled for us tonight?"

ST. CATHERINE: "Dumb and Dumber", Lord. It's a really stupid movie about.....

GOD: Never mind, I think I just heard the whole story from St. Francis.

Links:

* SMH - Oil price creates a new world order
* Jeff Vail - On Odalisques and Obelisks (e.g. Bartiromo & Yergin)
* WSJ - Winter-Heating Crisis Looms
* Business Green - Firms are playing with matches over biofuel
* Clean Break - Geothermal: flourishing under the shadow of solar
* After Gutenberg - Bye-Bye, Ballard
* WSJ - Marvell to Unveil Energy-Saving Chip
* Truveo - Glacier Surfing Alaska
* Reuters - US GMO rice caused $1.2 bln in damages -- Greenpeace
* David Poulson - How to be a good source of environmental (or peak oil) news
* AP - Skepticism Greets New US Africa Command
* SMH - Deadliest year so far for US military in Iraq
* The Times - Blair 'knew Iraq had no WMD'. Robin Cook and David kelly speaking from the grave...
* Washington Post - Former Technician 'Turning In' AT&T Over NSA Program
* Cryptogon - Mark Klein on AT&T/NSA Domestic Surveillance Program: “The NSA is Getting Everything.”