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wrote: From: "Whiskey & Gunpowder" strategicinvestment@agorafinancial.com

Oil Independence

Date: Tue, 28 Feb 2006 20:18:31 -0500

Greg's note: In the following article, Mish discusses oil independence. Oil independence is a lofty goal. Too lofty? Perhaps for the United States, but what about for Brazil or Sweden? Even if it is too lofty, should we at least make an effort to reduce oil consumption? There are lots of interesting things going on with ethanol. What are other countries doing, and how far behind is America? And sugar, corn, cornstalks, and switch grass can all play a role. Read on and find out. Please e-mail any responses to your independent managing editor: greg@whiskeyandgunpowder.com

Whiskey & Gunpowder February 28, 2006
by Mike Shedlock ~ "Mish"Illinois, U.S.A.

Oil Independence

CAN OIL INDEPENDENCE be achieved?

Sweden seems to think so.

"Sweden Plans to Be World's First Oil-Free Economy":

· 15-year limit set for switch to renewable energy · Biofuels favored over further nuclear power"Sweden is to take the biggest energy step of any advanced Western economy by trying to wean itself off oil completely within 15 years -- without building a new generation of nuclear power stations.

"The attempt by the country of 9 million people to become the world's first practically oil-free economy is being planned by a committee of industrialists, academics, farmers, car makers, civil servants, and others, who will report to parliament in several months.

"The intention, the Swedish government said yesterday, is to replace all fossil fuels with renewables before climate change destroys economies and growing oil scarcity leads to huge new price rises.

"'Our dependency on oil should be broken by 2020,' said Mona Sahlin, minister of sustainable development. 'There shall always be better alternatives to oil, which means no house should need oil for heating, and no driver should need to turn solely to gasoline.'

"According to the energy committee of the Royal Swedish Academy of Sciences, there is growing concern that global oil supplies are peaking and will shortly dwindle, and that a global economic recession could result from high oil prices.

"Ms Sahlin has described oil dependency as one of the greatest problems facing the world. 'A Sweden free of fossil fuels would give us enormous advantages, not least by reducing the impact from fluctuations in oil prices,' she said.

'The price of oil has tripled since 1996…'

"Last week, George Bush surprised analysts by saying that the United States was addicted to oil and should greatly reduce imports from the Middle East. The United States now plans a large increase in nuclear power.

"The British government, which is committed to generating 10% of its electricity from renewable sources by 2012, last month launched an energy review which has a specific remit to consider a large increase in nuclear power. But a report by accountants Ernst & Young yesterday said that the United Kingdom was falling behind in its attempt to meet its renewables target. "

'The United Kingdom has Europe's best wind, wave, and tidal resources, yet it continues to miss out on its economic potential,' said Jonathan Johns, head of renewable energy at Ernst & Young.

"Energy ministry officials in Sweden said they expected the oil committee to recommend further development of biofuels derived from its massive forests, and by expanding other renewable energies, such as wind and wave power.

"Sweden has a head start over most countries. In 2003, 26% of all the energy consumed came from renewable sources -- the E.U. average is 6%. Only 32% of the energy came from oil -- down from 77% in 1970.

"The Swedish government is working with car makers Saab and Volvo to develop cars and lorries that burn ethanol and other biofuels. Last year, the Swedish energy agency said it planned to get the public sector to move out of oil. Its health and library services are being given grants to convert from oil use, and homeowners are being encouraged with green taxes. The paper and pulp industries use bark to produce energy, and sawmills burn wood chips and sawdust to generate power."

Progress in Brazil

Brazil is well down the path to oil self-sufficiency by producing ethanol from sugar cane:

"Three decades after the first oil shock rocked its economy, Brazil has nearly shaken its dependence on foreign oil. More vulnerable than even the United States when the 1973 Middle East oil embargo sent gas prices soaring, Brazil vowed to kick its import habit. Now the country that once relied on outsiders to supply 80% of its crude is projected to be self-sufficient within a few years.

"Developing its own oil reserves was crucial to Brazil's long-term strategy. Its domestic petroleum production has increased sevenfold since 1980. But the Western Hemisphere's second-largest economy also has embraced renewable energy with a vengeance. "Today, about 40% of all the fuel that Brazilians pump into their vehicles is ethanol, known in Brazil as alcohol, compared with about 3% in the United States. No other nation is using ethanol on such a scale…

"Much of Brazil's ethanol usage stems from a government mandate requiring all gasoline to contain 25% alcohol. Vehicles that ran solely on ethanol fell out of favor in Brazil in the 1990s because of an alcohol shortage that pushed drivers back to gas-powered cars. But thanks to a new generation of vehicles that can run on gasoline, ethanol, or any combination of those two fuels, more motorists such as [Brazilian commuter Carolina] Rossini are filling up with 100% alcohol again to beat high gas prices…

"The exploding popularity of these 'flex-fuel' vehicles is reverberating across Brazil's farming sector. Private investors are channeling billions of dollars into sugar and alcohol production, creating much-needed jobs in the countryside. Environmentalists support the expansion of this clean, renewable fuel that has helped improve air quality in Brazil's cities…

"Today, many laud Brazil's Proalcool program for creating a viable domestic market for ethanol and for spawning an industry with tremendous export potential that employs more than 1 million Brazilians.

"Meanwhile, ethanol remains little more than a boutique fuel in the United States. Although the United States is the world's second-largest ethanol maker, producing 3.4 billion gallons last year, compared with about 4 billion gallons for Brazil, ethanol's main use is as a gasoline oxygenate to boost air quality, rather than as a serious replacement for foreign oil…

"Brazil has about 13.5 million acres planted with sugar cane. More than 200 million dormant acres lie ready to cultivate. "

'Oil is running out. The world needs more clean, renewable fuel,' Crystalsev executive Maurilio Biagi Filho said. 'And we are going to be there to supply it…'

"What most can agree on is that Brazil is an example of what might have been if the United States had seriously committed itself 30 years ago to renewable energy. "

'If we would have spent one-hundredth of the money that we have spent to send tanks around the world to protect our oil supplies...we would already be using cellulosic ethanol,' said Michael Bryan, chief executive of BBI Intl., a Colorado biofuels consulting company."

Ethanol Prices Climb

"Scarce Ethanol Fuels Price Rise":

"Fuel ethanol prices are expected to continue climbing in the short term due to scarce supplies and strong demand, brokers and analysts said on Friday.

"'Ethanol is in very short supply and prices will keep rising until at least the cane harvest starts,' said a broker.

"The first center-south mill is due to start crushing cane in Parana state on March 1, and 20 mills are scheduled to start operating in the center-south during March. "Harvesting normally starts in May, but is kicking off earlier this year to ease the supply shortage."

Sugar

The higher oil prices go the more valuable ethanol from sugar becomes. Unfortunately, America cannot compete with Brazil at producing sugar cane, and sugar cane to ethanol is the most economical conversion known. Following is a weekly chart of sugar:

Ethanol From Corn

The San Jose Mercury News is reporting "Ethanol Marketers Prosper in Midwest":

"On early mornings at East Kansas Agri-Energy, trucks pack the driveway loop to unload bushels of dry, yellow corn into a hopper. By nighttime, those kernels are ready to turn into fuel. "

'That's the sound of money,' said ethanol marketer Steve Rust, against the roaring sound of crushed corn passing through the colored pipes overhead.

"Rust, who works for Colwich, Kan.-based ICM, the nation's largest builder of ethanol plants, says the factory sends streams of patrons to Garnett's tiny supermarket and keeps Kansas farmers in business.

"The U.S. ethanol industry now has 95 plants nationwide. Analysts say by 2012 it will almost double in volume, from producing 4.3 billion to 7.5 billion gallons of biofuel. That growth will be aided by the Energy Policy Act of 2005, which gives ethanol producers sizable subsidies, including a federal tax credit for small refiners."

Is Ethanol From Corn Energy Efficient?

Let's look at a joint study sponsored by the U.S. departments of Agriculture and Energy from 2000: "In 1978, ethanol was estimated to cost $2.47 per gallon to produce (in year 2000 dollars). By 1994, this price had dropped to $1.43 per gallon, and current fuel ethanol production costs are estimated by the authors to be about 88 cents per gallon for dry mill operations. The cost reductions may be traced to various factors. The production of ethanol has become less energy intensive due to new techniques in energy integration and the use of molecular sieves for ethanol dehydration. The amount of pure ethanol produced from a bushel of corn has increased from 2.5 gallons to more than 2.7 gallons.

"The capital costs of dry mill ethanol plants have also decreased. In 1978, Katzen reported costs for a 50-million-annual-gallon plant to be about $2.07 per annual gallon in current dollars. Today, new ethanol plants with the necessary utilities are estimated to cost between $1.25-1.50 per annual gallon.

"Ethanol production costs and profitability vary within the industry. Ethanol plants range in size with rated yearly capacities from 1 or 2 million gallons to several hundred million gallons. The larger facilities can achieve economies of scale, but other factors enter into the cost of producing ethanol. Producers located near corn growers have the advantage of lower shipping costs to their plants. Producers located near animal feed lots can ship portions of their animal feed co-products in a wet form and eliminate the costs associated with drying wet stillage. Producers located close to markets for CO2 can sell the CO2 generated in their fermentors, while other producers must vent it to the atmosphere. Tax credits are given in some, but not all states, to ethanol producers that meet varying size requirements or other restrictions."

Corn vs. Switch Grass

The energy balance from corn is slightly positive. However, ethanol can also be derived from other sources, such as corn stover, switch grass, and straw. Let's consider comparative energy and ecologic factors in producing ethanol from corn versus switch grass:

In addition to obvious energy efficiencies of switch grass versus corn, switch grass can grow over large areas of the United States. Also note that switch grass requires herbicide only during the establishment year of an estimated 10-year cycle, whereas corn and other annual crops require annual application. The costs of these additional chemicals must be included both in economic production costs to the farmer and the ecological costs of increased rates of infiltration of chemicals into groundwater and runoff into streams.

Ethanol From Straw

FORTUNE is reporting a "Biorefinery Breakthrough":

"No one has ever brewed biofuel from straw on a commercial scale. With Shell's backing, Iogen is likely to be the first. "A guy driving a forklift spears a bale of straw the size of a stack of mattresses. Then he stuffs it into a whirring shredder that reduces the 1,000-pound rectangle of dry oat stems to a fluffy, fibrous state. These steps…are the first in making ethanol motor fuel at Iogen's experimental plant in Ottawa. Built next to a former Air Canada hangar at the edge of the municipal airport, the factory is really a big science project aimed at learning how to make alcohol on a commercial scale from nonfood biomass like straw. If Iogen succeeds -- and it is getting close -- it will have the technology the world needs to kick its gasoline habit.

"Each big bale will emerge after about a week as 35-40 gallons of ethanol. After shredding, the stuff goes through a 'steam explosion' process that breaks up its structure, like popcorn in a popper. The following step, enzymatic hydrolysis, involves combining the biomass with water, heat, and enzymes in sealed, Dumpster-sized, stainless steel cylinders. The resulting mushroom soup-looking slurry sits for a few days while the enzymes convert the cellulose portion of the straw fiber -- which is about 75% of it -- into sugars. (The leftover woody matter, lignin, is dried and pressed into burnable cakes; future ethanol factories may use them to fuel their processes.)

Once you've got sugar, you can make ethanol -- or booze, as it is known to most of us…

"Many eyes are watching the progress at this privately held $15-million-a-year Canadian biotech. Four years ago, Shell Global Solutions, the oil giant's technology arm, made a $45 million investment in Iogen to hasten development of a cost-effective way to make cellulosic ethanol. Iogen's plant has been cranking out test quantities for almost two years now.

'We have made it work with straw from barley, wheat, oats, and rice; with cornstalks; with bagasse left over from sugar-cane processing; and with chips of hardwoods such as poplar and aspen,' says president Brian Foody, whose father founded the company. 'There's also research going on with energy crops like switch grass.'

"Iogen's gold is those enzymes that convert cellulose into sugar. Produced by genetically modified microorganisms, they are a major focus of R&D. The best enzyme so far comes from a hopped-up version of Trichoderma reesei, the humble fungus that causes jungle rot, which devours canvas tents and other natural-fiber items in the tropics. (Rival enzyme developers like Genencor and BCI use Trichoderma and other organisms.)

"For now, the plant consumes only about 30 tons of wheat, oat, and barley straw a week -- just 10% of its capacity. Even running full tilt at 1 million gallons a year, the demonstration plant is small compared with a high-volume corn-ethanol plant, not to mention an oil refinery. Iogen calculates that an economically viable cellulosic-ethanol plant would consume 1,500 tons of biomass a day and produce about 45 million gallons of ethanol per year.

The first such factory could end up being built in Germany: At the recent Detroit auto show, Volkswagen, Shell, and Iogen announced they are studying the possibility. Says Rob Routs, the senior officer at Royal Dutch Shell who oversees the company's ethanol bets: 'We're going to get this thing to work on a larger scale.'

Zillions of yeast organisms in Ottawa will drink to that.

"Let's see..."

Four years ago, Shell Global Solutions, the oil giant's technology arm, made a $45 million investment in Iogen to hasten development of a cost-effective way to make cellulosic ethanol." It's Mish question time:
· $45 million is a drop in a bucket to Shell Oil. Why is such a paltry sum spent on alternative energy research?
· Why is Canada at least making some progress while the U.S. is more or less standing still?
· Mobil had over $100 billion in quarterly sales last quarter. What is Mobil doing with alternative energy?

ExxonMobil:

"America Will Always Rely on Foreign Oil":

"The United States will always rely on foreign imports of oil to feed its energy needs and should stop trying to become energy independent, a top ExxonMobil Corp. executive said on Tuesday.

"'Realistically, it is simply not feasible in any time period relevant to our discussion today,' Exxon Mobil Senior Vice President Stuart McGill said, referring to what he called the 'misperception' that the United States can achieve energy independence.

"The comments, in a speech at an energy conference in Houston, come a few days after U.S. President George W. Bush declared America was addicted to Middle Eastern oil and promised to help the country kick the habit.

"Many in the United States believe America should wean itself off oil imports from the Middle East, fearing it makes the country dangerously dependent on an unstable region.

"The world's largest publicly traded oil company, however, says hoping to end foreign oil imports is not only a bad idea, but also impossible.

"'Americans depend upon imports to fill the gap,' McGill said. 'No combination of conservation measures, alternative energy sources and technological advances could realistically and economically provide a way to completely replace those imports in the short or medium term.'"

It's one thing to recognize that America is likely never to be energy sufficient, but it's another thing altogether to throw up one's hands and not even try to do anything reasonable. Brazil, Sweden, and Canada are leading the way, while the United States does nothing but pay lip service to the problem. If there are genuine breakthroughs in fusion or nuclear or solar technology, the odds are they will be in Australia, China, or about anywhere but here. It is simply in oil companies' best interests (profit-wise) for us to be as dependent as possible on foreign oil. With every supply disruption and every price hike in crude, oil profits go up. With that thought in mind, it might be naive to expect anything other than the message touted by ExxonMobil's McGill.

To paraphrase that message: Prices are going up, get used to it, and don't bother trying to do anything about it. Our energy policy (if you can call it that) is to invade Iraq, antagonize Hugo Chavez (the leader of Venezuela, which happens to be one of our largest sources of crude), get bogged down in trade wars with Canada, openly feud with Iran, give tax credits to Hummers, and subsidize corn (one of the least efficient ways of producing ethanol).

An Unmistakable Message

The Los Angeles Times is reporting "Foiled Attack on Saudi Oil Sends Ominous Message":

"Damage to the world's 'jugular vein' would have been disastrous. Anxiety is ever present.

"A suicide bomb attack at a huge Saudi Arabian petroleum facility rattled world energy markets Friday, sending crude prices soaring more than $2 a barrel in New York as it underscored the fragility of world oil supplies.

"The massive Abqaiq processing plant was undamaged when at least two cars exploded outside its gates, Saudi officials said. Although operations weren't interrupted, the assault on the world's largest oil producer exacerbated the ever-present fear that the flow of oil could fall short of the globe's voracious appetite. Traders call that anxiety petronoia.

"The concerns were heightened because the targeted plant is vital to Saudi oil operations, handling about two-thirds of the kingdom's output of 9.5 million barrels a day and 7% of the world's supply. Without the vast Abqaiq facility, about 25 miles inland from the Persian Gulf coast, the nation's ability to export oil would be crippled. "

'This is a major-league deal,' said Matthew Simmons, an oil-industry consultant who has written a book about Saudi Arabia's role in the world petroleum market. '

This shows that the terrorists are acutely aware of where you want to go for the jugular vein…'

"'This is a reminder that we are out of spare capacity,' said Simmons, the consultant and author. 'We are not able to turn anything else on to make up for any shortfall.'

"Global oil production already has taken a hit in Nigeria, a member of the Organization of the Petroleum Exporting Countries, or OPEC, where rebels have attacked oil facilities and cut off 500,000 barrels a day of supplies. An additional 350,000 barrels a day of output from the Gulf of Mexico is still shut down because of hurricane damage."

Wake-Up Calls

Serious damage to Abqaiq would cripple Saudi oil exports. An accidental fire at Abqaiq in 1977 knocked out 70% of Saudi Arabia's output for three days. If the fire had reached the main complex generating plants, it might have taken months or even years to rebuild the refinery. Whatever spare oil pumping capacity the world has (if any) is in Saudi Arabia. Simply put, a disruption of Saudi supplies could not be made up by another oil producer. To cover any shortfall, the world would have to resort to the use of strategic oil reserves held by the 26 industrial country members of the International Energy Agency. If a disruption lasted for any length of time, we might be looking at $150 oil. The U.S. energy reports on corn and switch grass in this article are from 2000. No doubt the technology has improved since then, perhaps dramatically. Brazil and (to a lesser extent) Sweden have shown what can be achieved if one tries to do something other than pay lip service to the problem.

"'If we would have spent one-hundredth of the money that we have spent to send tanks around the world to protect our oil supplies.. we would already be using cellulosic ethanol,' said Michael Bryan, chief executive of BBI Intl., a Colorado biofuels consulting company."

Obviously, Michael Bryan has an axe to grind, but does anyone doubt what he said? We received the first wake-up call as long ago as 1973.

Peak Oil and declining oil fields should have been the second wake-up call.

Katrina fired a third wake-up call.

The failure in Iraq should have been an eye-opening experience, but no one in this administration seems to be paying any attention to that, either.

Saudi Arabia just fired the latest wake-up call. So when do we wake up?

Regards, Mike Shedlock ~ "Mish"

Greg's endnote: Mish seems to be right about America's need to at least try to attain a measure of energy self-sufficiency. Not only can we not count on our present suppliers of crude, but crude prices have shot skyhigh - and these questionable crude supplies are unquestionably limited and finite. Bad situation. But one thing you can do to combat high energy prices is invest in the companies that profit from rising oil and electricity prices. Or, if you want to jump in on the sugar to ethanol bandwagon, here's a guy who has taken 204%, 379% and 60% on sugar so far this year. Look here for massive sugar gains:

http://www.isecureonline.com/Reports/RTA/ERTAG214/
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