Dave's Energy

Thursday, August 10, 2006

Ethanol impact on natural gas

I posted this as a comment to a piece by Robert Rapier on his blog R-squared . It is in response to Vinod Khosla's view of ethanol's future. I thought I'd post it here as it ties back to some of our prior comments on ethanol:

Mr. Khosla also appears to skim over the cost and logistics associated with significant increased use of natural gas in the production of ethanol (and as a second-order effect, the increase in nitrogen-based fertilizers derived from natural gas). He correctly states that the energy balance question needs to consider that ethanol production displaces crude oil consumption with natural gas consumption, and that implies an improvement in full-cycle greenhouse gas emissions.

However, he doesn't seem to understand that natural gas production in the United States is declining fast, and that we stand at a peak point not unlike where we stood with regard to U.S. crude oil production in the 1970s. If we continue to increase our demand for natural gas through ethanol production, that will do one of two things: 1) increase our need to import more via Liquefied Natural Gas (LNG) or 2) drive price-sensitive users out of the market, thereby potentially increasing use of coal for electric generation. Neither of these outcomes are much of an improvement over our current crude oil situation.

Mr. Khosla also needs to understand that by increasing our dependence on imported natural gas (historically not something we've had to worry about outside of Mexico and Canada), we're just trading one set of trade partners (Saudi Arabia, Iran, Venezuela) for a new group. Some of the largest natural gas reserves in the world are held by Russia, Qatar, and Iran. I'm not sure that wedding ourselves to these countries satisfies anyone's view of "energy independence".

Natural gas finding and development costs in the U.S. are high and rising. It is a mature province with limited hope for massive new reserves. Foreign sources, by virtue of scale, are vastly cheaper and will necessarily be the choice of source, assuming much of the very expensive LNG infrastructure gets built, which is only a given if gas prices stay high (they will). Because of the massive capital needed, there are few scenarios where we have both low prices AND abundant new imports.

Bottom line: trading natural gas for ethanol probably isn't the best and highest use of those molecules.

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