April 2014

The last barrel

Federal mandate results in unintended GOM “dead zone”
Kurt Abraham / World Oil


To you, our loyal, steadfast readers, I have said this time and time again: There is nothing—and I mean nothing—that the U.S. federal government does well. And, as a corollary statement regarding federal actions, you can apply this timeless saying: “The road to Hell is paved with good intentions.”

These statements certainly apply to an ongoing, annual situation in the Gulf of Mexico, where a “dead zone,” better known as a “hypoxia zone” (derived from “hypoxic,” meaning “low-oxygen”), continues to be a problem in the late spring and summer months. Hypoxia zones, in particular, are not able to support bottom-dwelling life, such as clams, crabs and shrimp.

Ironically, this situation is an unintended consequence of the federal government’s Energy Independence and Security Act of 2007 (EISA), which mandated a steep rise in ethanol production by amending the Renewable Fuel Standard (RFS, originally passed in 2005). EISA prescribed that the volume of renewable fuel required by the RFS, to be blended into transportation fuel, be boosted from 9 billion gal in 2008 to 36 billion gal by 2022.

According to Dr. Larry McKinney, executive director of the Harte Research Institute, Gulf of Mexico Studies, at Texas A&M University–Corpus Christi, this aggressive expansion of the RFS “incentivized the rapid escalation of corn crop planted for fuel production,” even though, in recent years, it has been revealed that corn ethanol is actually harming the environment. As the RFS mandate continues, with more than 80% of it met by corn ethanol, “farms across the Midwest have converted an additional 13.5 million acres to grow corn,” explained McKinney. “This expanding corn crop requires a tremendous amount of fertilizer, which runs off into the Mississippi River and ultimately makes its way into the Gulf of Mexico. The end result is catastrophic.”

The growing amount of fertilizer being dumped into the Gulf, continued McKinney, has led to the creation of the dead zone. “When fertilizer reaches the ocean,” he said, “it encourages the growth of algae blooms. The algae eventually die and decompose, in a process that consumes oxygen and creates oxygen-free areas, where fish and other aquatic creatures cannot survive.” The Gulf produces roughly 40% of all the seafood in the Lower 48 states, so as the dead zone grows, more and more fishermen face economic difficulty. The area covered by last year’s dead zone produced nearly 18% of the total U.S. commercial seafood, costing that industry and tourism about $82 million while hurting the Gulf Coast economy.

Last year’s dead zone was 5,840 sq mi, slightly smaller than predicted by the National Oceanic and Atmospheric Administration (NOAA). Each year, NOAA makes a prediction during mid-June about how large the Gulf dead zone will be; thus, the 2014 estimate is not ready, as NOAA has yet to assess May rains and potential flooding in the Mississippi River watershed. A significant item in NOAA’s model is, of course, the runoff volume that may reach the Gulf. Nevertheless, said McKinney, given current rainfall forecasts, the 2014 dead zone “is likely to be somewhere between 5,000 and 8,000 sq mi.”

As McKinney noted, the Obama administration is beginning to realize the many ways that the RFS affects the environment, food producers and various industries. Thus, the EPA recently proposed reductions to the 2014 biofuel blending requirements, which could prevent an increase in fertilizer runoff—but only for this year. What is really needed, he added, is for Congress to get involved and pass long-term reform of the RFS. Otherwise, the dead zone will continue to grow, and the Gulf Coast will continue to suffer.

Additional details in Ukraine. Following up on one of last month’s topics, this editor has stated, on more than one occasion, that Russian President Vladimir Putin seems intent on reassembling the old Soviet Union, at least spiritually, and perhaps physically. Putin’s actions regarding Ukraine during the last month certainly have escalated the prospects of this happening, witness the bold grab of Crimea; the staging of an illegal sovereignty referendum in that province; and the massing of Russian troops on Ukraine’s eastern border.

These moves are meant to punish Ukraine for overthrowing former Ukrainian President Viktor Yanukovych, who was much more allied to Russia than the new regime in Kiev. But there is another form of punishment that Putin has just imposed, and this one involves energy. Last month, Russian gas giant Gazprom raised prices that it charges for exporting gas to Ukraine, to levels previously in place before last November. This move should come as no surprise, said Michael Bradshaw, professor of Global Energy at UK-based Warwick Business School, The University of Warwick.

“The initial discount to Ukraine from Gazprom was part of a wider package of economic incentives, including a substantial loan,” noted Bradshaw. “They were a reward last November to (Yanukovych) for rejecting a closer relationship with the EU, in favor of Russia’s Eurasian economic union. The new interim government in Ukraine is now building closer links with the EU and the West more generally, hence the discount is no longer on offer.

“The real problem is Ukraine’s inability to pay its gas bill,” continued Bradshaw. “This was behind previous gas crises in 2006 and 2009. The West will need to provide the Ukrainian government with financial support to pay its debt and finance future purchases to avoid providing Russia with the pretext for cutting off the gas. However, I do not think that Gazprom or the Kremlin want to do that….Longer-term, the EU needs to assist Ukraine in getting its energy system in order.”

Meanwhile, in the final days of March, the world was treated to news video clips showing Russian tanks being moved on railroad flatcars into far western Russia, near the Ukrainian border. For those of us old enough to remember the 1960s and 1970s, it brought back chilling memories. wo-box_blue.gif

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Kurt Abraham
World Oil
Kurt Abraham kurt.abraham@worldoil.com
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