June 2007 Archives

Five months after US' President George Bush announced a goal of increasing renewable fuel use within a decade, a casual observer might assume business would be booming for alternative fuel producers. But for some biodiesel manufacturers, current economics are rocky.

That's because the price of corn, which is used to make ethanol, has skyrocketed in recent months. As a result, many farmers have switched to growing that commodity instead of soybeans, which in the US are widely used to make biodiesel. And since feedstock comprises up to 80% of the cost of making the fuel, some companies have been forced to trim output in recent months, producers told the Platts Biodiesel Investor 2007 conference June 28.

The American Petroleum Institute unveiled a survey June 27 which it said demonstrates how little Americans know about energy issues and policies.

For example, the majority of the survey's 1,330 respondents didn't know that Canada, not Saudi Arabia, is the largest supplier of imported oil to the US; or continue to underestimate the importance of fossil fuels in meeting global energy demand in the next 25 years; or overestimate the profits US companies earn from gasoline sales and underestimate the investments the companies are making in emerging energy technologies, such as renewables, solar and wind.

The latest weekly oil inventory stats from the Energy Information Administration showed that crude stocks in Cushing, Oklahoma fell 1.4 million barrels to 24.1 million, the lowest since the week ending March 23.

It appears that the glut of crude is starting to work its way out of the NYMEX delivery point, which should contribute to further strengthening of the front of the WTI curve. The Aug/Sep spread has tightened from -48 cents at the close Tuesday, to -39 cents.

The Barrel, in its early days, finds itself writing about ethanol a lot. We did so yesterday. Ethanol as a topic here at The Barrel is way out of whack with its percentage of consumption.

But why not write about ethanol? It's got plenty of things that make it fascinating. It has the full backing of the US government. It has a logistics system that had to be developed almost from scratch, since it doesn't get "married" to petroleum until the end of the chain. It has an increasingly active spot market. We could go on.

"The farmer and the cowboy should be friends," Oscar Hammerstein wrote in his lyrics for the seminal musical "Oklahoma." It's a reference to the range wars on the American frontier which pitted cattlemen and their free-grazing herds against newly arriving farmers who were fencing in the land.

A new range war seems to be brewing in the Midwest and across the US, pitting corn growers against virtually the entire food industry, including the beef, chicken and egg, turkey and pork producers, feed companies, grocery manufacturers, cereal makers and, don't mess with these people, Coca Cola and Pepsi Cola.

The American Petroleum Institute, now formally rechristened as just API, was always considered a stuffy, fairly distant organization. Its long-time president, Charles DiBona, had a lengthy history in Washington, but was about as warm and accessible as Richard Nixon....who used to be his boss.

There is just about zero chance that the old API would ever have had the imagination or creativity to run something like this.

The Barrel explored its darker side at Platt's Bunker and Residual Fuel -- aka the Bottom of the Barrel -- Conference in Houston. If you were tired of hearing about the broken WTI contract or record-high gasoline crack spreads, this was the place to be.

A couple of themes emerged from the event so far. The portion of residual fuel demand going into ship bunkers is outpacing that for power generation or manufacturing. That has led to more firms getting involved with blending bunker fuel, and more demand for tanks in bunker hubs such as Houston.

It's still a great time to be a refiner, based on AG Edwards' latest weekly survey of refining margins. But it's not quite as good as it used to be, and it's not a particularly strong business now in Europe.

Measuring margins as a third-party is a particularly tricky activity, because analysts can argue day and night about how to do it. The most widely watched margin is the so-called 3-2-1 margin, which is arrived at by taking the price of three barrels of crude on the NYMEX, and subtracting that figure from taking two barrels of NYMEX gasoline (which you get by taking the price and multiplying by 42, the number of gallons in a barrel) plus one barrel of NYMEX heating oil.

Is it an act of patriotism or a business venture? Perhaps it is neither. But one thing seems certain about the unusual announcement last week by a small Dallas energy company hoping to attract $8 billion to build the first new US refinery in 30 years. More questions were raised than answered in all the hoopla.

Company executives were careful to bang the twin drums of environmentalism and patriotism loudly in their announcement. Instead of talking about privately-held Hyperion's opportunity to prosper from this venture, former Marathon refinery veteran Corky Frank touted the country's need in his statement, noting that "gas prices are the highest in US history and the US refining infrastructure hasn't seen a significant change since 1976."

Reading this week's International Energy Agency report would give little comfort to any market bears. There is virtually nothing in there that would lead one to believe that oil prices are going down soon. A few observations:

--Although the data on countries making up the OECD -- the main western economies, plus such countries as Japan, South Korea and Australia -- show that demand in those nations remains flat, high prices are not having the same impact in non-OECD countries, which are reporting revised, higher demand projections for 2006 and 2007. Now, one of the reasons for that is that old data is coming in showing 2005 demand was more than the IEA had thought, so the base is now higher. But year-on-year figures 2007 to 2006 still show solid growth.

About 99% of the ethanol used as fuel in the US in 2006 was blended with gasoline at levels of 10% or less, the Government Accountability Office said in a recent report.

However, the Holy Grail for ethanol proponents is E85, an 85%ethnaol/15% gasoline blend, particularly as Congress considers legislation to increase the mandated use of renewable fuels in the nation's gasoline supply from 7.5 billion gal in 2012, to as much as 60 billion gal in 2030.

The EIA weekly data looks bullish for both crude and products, for a change. Crude and products on NYMEX are rallying, after trading lower ahead of expected stock builds.

The report showed a 100,000 barrel build in crude stocks; however, that includes a 2.2 million barrel build on the West Coast, which is isolated from the rest of the country. East of the Rockies, crude stocks fell 2.1 million barrels.

BP published Tuesday its latest annual statistical review of energy, where the company said it was unfazed by falling global oil reserves but sounded a warning signal on CO2 emissions from China's booming, coal-fired economy.

According to the industry-respected review, world oil reserves dipped slightly last year, a mere 1 billion barrels or 0.1% to 1.208 trillion barrels.

Sometimes in policy debates, just as the volume is getting almost deafening, quietly a solution to the problem at hand is being hatched.

So it is with the Cushing, Oklahoma delivery point of the New York Mercantile Exchange. Increasingly since its 1983 launch, it had suffered from a lack of supply, as domestic crude production in Texas, Oklahoma and nearby areas declined, leading to questions whether such an important benchmark could remain vital when supported by such a small amount of production. The price of WTI was becoming disconnected from the rest of the world, on the high side.

It's a question US Environmental Protection Agency Administrator Stephen Johnson just wouldn't answer.

"Do greenhouse gas emissions endanger public health?" he was asked at a June 8 hearing of the House Select Committee on Energy Independence and Global Warming.

"It's a serious issue," Johnson said.

A little bit more evidence came through last week that US gasoline demand growth has slowed.

The latest Petroleum Supply Monthly report from the Energy Information Administration released May 30 showed only 0.4% year-over-year growth in the amount of finished gasoline supplied to the market in March. During January through March, demand was 1.4% higher year-over-year, down from 2% demand growth during the Jan-Feb period.

One of the many miscalculations made by the Bush administration in the run-up to the US invasion of Iraq was that revenues from Iraqi oil production would help foot the bill, including, and most prominently, for post-war reconstruction.

Currently, Iraqi production limping along at about 2-million barrels/day, far below potential capacity; the industry is beset by significant infrastructure problems and sabotage; and parliament is unable to reach an agreement on a legal framework intended to ensure the equitable distribution of the oil wealth to all parts of Iraq.

The "alphabet soup" of Washington recently got a little thicker, with the American Petroleum Institute deciding it was time to be known just by the letters API.

While the US' largest oil-lobbying association will continue to be the American Petroleum Institute legally, its decision to be known as API is part of a "concentrated effort to counter any public perception that our member companies are simply petroleum" and to "highlight the fact that they are involved in things other than petroleum, such as alternative fuels and alternative energy," a spokesman told The Barrel.

Oil industry officials who are warily watching the Democratic-controlled Congress flirt with legislation imposing mandatory caps on carbon emissions, may have little to fear from President Bush's proposal May 31 to reduce greenhouse gas emissions. To paraphrase Gertrude Stein's putdown of Oakland, California: There's not much there, there.