The Oil Drum debate, round one

With VC investments in clean technologies growing, and the state making important energy policy decisions to fend off global warming, the oil-ethanol debate is growing in importance. The valley has a stake in understanding the economics of a switch away from oil, to support ethanol.

Robert Rapier (pictured below) works for an oil company, but he says he cares about the environment. He co-authors a powerful blog called The Oil Drum, and recently wrote a scathing critique of Silicon Valley venture capitalist Vinod Khosla’s policy stance on ethanol and other issues.

This is significant because Khosla is probably Silicon Valley’s highest profile leader on the environment these days, along with John Doerr, a venture capitalist with Kleiner Perkins.The gist of the argument is that Khosla — one of the most successful venture capitalists of all time — is overstating the benefits of ethanol, has his facts wrong, and that it is dangerous to place the sort of faith in ethanol that Khosla is proposing we make as a nation.

The context, of course, is that Khosla is not only making huge investments into ethanol and other alternative fuels, he is also pushing a state oil tax initiative — and so you’d expect an backlash from irked oil interests. But if you read Rapier’s critique carefully and the response he has gotten from readers, you can tell he is not just a propaganda mouth-piece; he’s got substance. We’ve talked with him.

We first mentioned Rapier’s critique here, and promised to keep you informed of Khosla’s response.

khosla3.jpgSo what did Khosla do? Well, last month he ventured on to Rapier’s own turf, submitting his response on Rapier’s blog. Rapier, bemused, warned that Khosla might be torn to shreds by his readers — which is what happened. But you’d expect that, on Rapier’s turf. So we’ve since done our best to sort through the rhetoric. Here’s what we came up with, after going back and forth between the two sides. Our own conclusion is that Khosla may have been a bit loose with a fact or two, not necessarily to deceive but because he is to new to the field. But Khosla has got a solid moral argument, in that we desperately need to wean ourselves from greenhouse gas producing energy. You’ll have to read everything yourself to decide. While Rapier wins on a few counts, regarding science and economics, we’re still left wondering how we realize the ultimate goal: reducing global warming.

On to the debate summary:

1) After reading Rapier’s original critique closely, and reading through Khosla’s response, we were left thinking that Rapier had won the debate on at least three counts.

He’d corrected Khosla on the following:

a. The energy return on energy invested, or the amount of energy you get out of oil and gasoline for every unit of energy you put in to create a unit of energy is important. For ethanol, it is only 1.2. For gasoline, it is 5.

b. Brazil, which has been heralded as a great example of oil-independence, has displaced only 10 percent of its petroleum usage with ethanol, not 40 percent.

c. The price of gasoline is higher than ethanol.

2) So we took these three points to Khosla and asked him about them again, to make sure he’d lost on these points. Here’s how Khosla responds.

a. One energy return on energy invested: “[Rapier] is way off in how he calculates it. He calculates only the production energy but his fuel energy is non-renewable and ethanol’s fuel energy is renewable. He ignores that. His is technical and mine is broadly accepted as the right way to calculate.” (Our note: So now we are getting to the heart of the matter. What Khosla seems to be saying is that renewable is inherently better. While market factors alone do not make renewable better, we should as earthlings realize that renewable fuel is better; ethically, for the planet’s sake. But stay tuned, Rapier will come back at this, below).

b. On Brazil: “[Rapier] calculates % of all petroleum use while I have always stuck to the % of gasoline that has been replaced. This is not critical but the Brazilian Ag ministry still uses the 40% number in all their slides.” (Again, stay tuned).

c: The price: “[Rapier] talks about price. I only talk about production cost. There is huge margins as the oil companies switch rapidly away from MTBE (because of legal liability) that has caused a temporary spike in ethanol demand. Supply is fast catching up but this distortion was created by the oil companies. Any economist will tell you price should reflect cost for any commodity product.” (Our note: Ok, but the price is not reflecting the cost. So now we’re learning that there is no argument that ethanol is cheaper than gas. Once you factor in shipping costs, etc, the market is saying gasoline is still cheaper? Stay tuned. )

3) Still not satisified we’d reached conclusion, we took these points back to Rapier. Here’s how he responded:

a. On energy return: “[Khosla's] claim that ethanol is renewable is false. The only renewable part is the very tiny fraction of net energy. For an input of 1.0 BTUs of fossil fuels, you get back out 1.2 BTUs of ethanol. You only netted 0.2 BTUs, but a portion of that is animal feed byproducts. With respect to fuels in and fuels out, you got out about the same amount of ethanol BTUs as your fossil fuel BTU inputs. In other words, ethanol is merely recycled fossil fuels. I just did an in-depth explanation of this at The Oil Drum. You might ask how ethanol is a renewable fuel, when its energy inputs are fossil fuels.

b. On Brazil: “Khosla’s own slides say ‘Petroleum use reduction of 40%.’ This is exactly the kind of misinformation that I have criticized. Look at slide 5 of his July 2006 version of his PPT ‘Biofuels: Think Outside the Barrel.’ Watch his Google video presentation, and you will hear him say ‘Brazil has displaced 40% of their petroleum.’ Even the gasoline claim is misleading, since they didn’t replace 40% of their gasoline. The usage numbers from the Brazilian Ministry of Mines and Energy are: Diesel 54%, gasoline 26%, and ethanol 17% by volume. The 40% number is because 17% is 40% of 26%. I will leave it to you to determine whether that is misleading. It is also inaccurate in the fact that the BTUs of that 17% ethanol are far less than the BTUs of that 26% gasoline. So, in this case 17% is not really 40% of 26% in the area that matters: How much energy was actually displaced.

c. Price: “[Khosla] refutes himself here: ‘Any economist will tell you price should reflect cost for any commodity product.’ That’s exactly what I have been saying. If ethanol had a lower production cost, why has it been more expensive for 25 years? See this chart.”

4) Finally, believing we’d finally pinned down Khosla on at least these three points, we took it back to Khosla one last time. But Khosla is a fighter, and here’s how he responds:

a. Energy returned: “[Rapier] is wrong and misses the point that our two main objectives are (1) reducing petroleum use, and we reduce it by 90% even with the worst ethanol. Don’t know why they keep ignoring this. We don’t have enough oil but have lots of coal; (2) green house gas reductions, and we reduce that by 20% with the typical corn ethanol. The NRDC will tell you (see NRDC paper Ethanol: Energy Well Spent) that there is a gradation of carbon emissions PER MILE DRIVEN depending upon how the ethanol is produced. That chart is in my paper and I highly recommend you reproduce it in your reporting. Oil interests and other interests (some wind guys told me they oppose this because a focus on biofuels will reduce wind funding). The Cilion plants in California will be approx 2X the carbon reduction of gasoline per mile driven because they use dramatically less natural gas (or fossil fuels). (Our note: Ok, so again, Khosla is falling back on the ethical/moral argument that market forces don’t take into account certain higher needs. We need to reduce dependence and stop global warming. Yes, we agree with him. So we need policies, such as subsidies, to create real market forces to help this. That’s why Khosla is supporting the oil tax. What Rapier is saying is that there’s a real, serious economic cost to this. We agree with him too. Somehow, then we need to meet in the middle!)

b. Brazil: “It is hard to put everything on a slide but I generally clarify that it is ‘petroleum use reduction for gasoline’ when speaking to the slides. (Note: Wow, so Khosla has quasi-conceded on a point. Mark for history books).

c. Price: “Wrong again. [Ethanol] price is up because of oil company mismanagement and their rapid switch to ethanol to minimize liability from MTBE. In 2004 it was selling at $1.40 ‘sales price.’ Transportation is not a huge part of the cost of ethanol despite what opponents say and it is coming down with destination ethanol plants (like all the ones being built in California, TX, NY…). The destination ethanol is often (definitely true of the ethanol that our company Cilion will be producing in California) much greener if they are built around existing cattle feedlots. (Our note: Khosla uses a technicality to defend himself here. Fact is, ethanol is still more expensive than gas. However, he’s got a point. The oil lobby and industry is large enough that any move, such adopting ethanol additives quickly, in a regulatory-required move away from MTBE, can indeed jolt prices.)

Now you see why we concluded as we did. There is a ethical-market divide in these arguments, and it is unresolved. Stay tuned, for when we come back with the second round of the Oil Drum debate.

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Final note: Check out this Merc sory, about a nice new oil find, albeit fairly limited; a reminder of how quickly things can change.