Oil and gas in the capitals

	Vol. 228 No. 11
DAVID MICHAEL COHEN, PRODUCTION ENGINEERING EDITOR

Corncob pipedream. At odds on increases to CAFE standards, emergency caps on gasoline prices, and removing tax incentives for oil companies, the US Senate and the White House have found agreement over one area of energy policy: expanding ethanol. The energy bill that passed in the Senate on June 21 would boost ethanol and biofuels consumption to 36 billion gallons (860 million barrels) a year by 2022, closely matching the Bush administration’s goal of 35 billion gallons (830 million barrels) per year by 2017. Both the White House and the Senate bill’s supporters say boosting ethanol use is essential to weaning the US off foreign oil and lowering greenhouse emissions.

Too bad ethanol stands little chance of making a dent in these problems, and will likely have harmful economic and environmental effects to boot, according to two research reports issued this month. The National Research Council (NRC) predicts that the planned ethanol drive would seriously strain local water supplies by pushing production of corn-a notoriously thirsty crop-into more drought-prone areas and vastly expanding ethanol refinery activity. The NRC found that a refinery producing 2.4 million barrels of ethanol a year uses as much water as a town of 5,000 people. The report also said farmers switching to corn for ethanol would have to use much more fertilizer and pesticides per acre, which could greatly increase nitrate and nitrite levels in drinking water.

Another report from the Canadian Imperial Bank of Commerce (CIBC) blames ethanol for soaring food inflation of 4.4%-the highest rate in 15 years-which it predicts will increase to 7% in 2009 as corn for ethanol pushes aside other crops, as well as corn for human consumption and animal feed.

The report goes on to say that meeting the White House ethanol goal would only reduce gasoline consumption by about 6.5% by 2017. About 95% of ethanol produced in the US comes from corn, which must be planted and harvested using tractors that run on diesel, transported by truck, and distilled into ethanol using natural gas for heat. Because ethanol cannot be pipelined, it must be shipped by truck and train, adding to the fossil fuel cost. Add it all up, says the CIBC report, and you’ve got a fuel that not only uses up almost as much fossil fuel as it replaces (savings are only 10-20% according to a December 2006 article in Nature) but that’s also not economic to produce, even at $100/barrel oil prices.

Which is where the subsidies come in. The CIBC estimates that federal and state subsidies for farmers and processors of ethanol crops-including a prohibitive tariff on much more efficient sugar cane ethanol from Brazil-had cost taxpayers almost $8 billion by the end of 2006. The Senate energy bill adds $500 million more in direct payments and $2 billion in loan guarantees for ethanol refineries.

The ethanol picture might look better in terms of energy, water and food if more of it were produced from low-input cellulosic sources, such as native grasses and biomass (e.g., woodchips, sawdust, corncobs). A separate Senate farm bill offers incentives to develop this experimental resource.

While the House bill does offer some incentives for ethanol production, it has not jumped on the biofuels bandwagon, and instead requires electrical utilities to produce at least 15% of their power from other renewables like wind, solar and geothermal by 2020. The measure is one of several new standards in the two bills that Bush opposes, according to a letter sent to leaders of both houses by White House National Economic Council Director Allan Hubbard. The letter also threatened a veto on any bill that raises taxes on the oil industry, arguing that this would discourage domestic production and increase US dependence on foreign oil. The House bill would raise $16 billion in revenue over 10 years by repealing tax incentives for oil and gas companies.

Though the White House is likely to equate the repeal of any tax break with a “tax hike,” this would be a radical interpretation of at least some provisions. For example, one measure in the House bill would deny new Gulf of Mexico leases to some companies operating in the Gulf unless they renegotiate their leases with the Minerals Management Service (MMS) to include limits on the oil price at which the lessees can receive royalty relief. This measure aims to fix an error in leases issued in 1998 and 1999, which, unlike leases from other years, did not include price thresholds for royalty relief, and which have cost taxpayers as much as $1 billion so far. The new rule was proposed by MMS in 2003, and at least five companies have already renegotiated their leases with the agency voluntarily to include the price thresholds.

Though the Senate bill has no tax provisions, it still does not pass White House muster. The president has sided strongly with auto makers against the Senate’s proposal to raise Corporate Average Fuel Economy standards for the first time in over 20 year, to 35 mpg by 2020. The loudest opposition stems from the inclusion of pickup trucks and SUVs in the measure, which auto makers say would make these vehicles prohibitively expensive. A House proposal to raise CAFE standards while maintaining separate, lower expectations for SUVs and pickups was endorsed by industry leaders but didn’t make it into the energy bill.

The White House letter called up the specter of 1970s gasoline lines to attack language in both bills aimed at criminalizing price gouging at the pump. It also opposed the so-called NOPEC provision in both bills that would allow the US to sue OPEC for antitrust violation, on the grounds that such measures would provoke retaliation against US companies.

House Speaker Nancy Pelosi (D-Calif.) has chosen to iron out the differences between the House and Senate bills by an unorthodox means that is unlikely to bridge the widening chasm between the two parties. Rather than convene a conference committee to reconcile the bills, she’s holding closed, informal meetings with key Senate Democrats, and shutting Republicans out of the process. While Pelosi’s determination to expedite the legislation is understandable-an energy bill would have little chance of getting passed in 2008 with an election looming-her partisan tactics almost guarantee that neither house will garner enough votes on the final product to override an almost inevitable Bush veto.