By Ryan M. Couture
Over the past four weeks, we looked at the impacts that low prices have had over the last year and a half on U.S. and international gasoline and diesel demand. While demand has continued to grow amid the low prices (significantly in some regions) low prices have pushed alternative fuels to the sidelines. This is part of the cycle, as attention to higher-cost biofuels tends to diminish in the face of inexpensive crude (and a soft economy). While Tom Petty was unlikely to be thinking about ethanol (at least for fuel) when he wrote his song, his lyrics describe alternative fuels today, which refuse to back down despite low oil prices and lack of focus. In today’s blog, we finish this series taking a look at the state of alternative fuels, and what impacts low prices have had.
“There ain’t no easy way out”
As concern over global warming has grown in the preceding decades, many countries began to establish plans to curb emissions (Kyoto Protocol and Paris Climate Agreement among the more notable). While energy consumption across the board was scrutinized, transportation fuels were a key focus. Renewable fuels ramped up across the energy sector, with biofuels playing a key part in decarbonizing the transportation sector. Many countries began to set targets for the adoption of biofuels. Today, over 60 countries have targets or mandates in place.
For years, U.S. politicians lauded Brazil for their use of ethanol, while pointing out U.S. shortcomings, the U.S. now leads the world in both biofuel production and consumption. Owing to the RFS program, the U.S. is ahead of Europe in the biofuels rollout. Brazil still consumes a higher percentage of renewables relative to their total consumption, although that number has fallen in recent years and is only slowly recovering.
“In a world that keeps on pushin’ me around”
In response to the concerns around climate change, policy makers established a 2° C target as the ceiling for global temperature rise, which has been in use since the 1990s. As part of the IEA’s annual review, they publish the Tracking Clean Energy Progress which provides an overview of changes in alternative fuels consumption. One section is devoted to transportation. In it, the IEA tracks biofuel consumption relative to a framework laid out in the mid-2000s designed to meet the 2° limit. The framework would require the global use of biofuels in transportation fuels to be about 4.5% by 2020, 8% by 2025 and 27% by 2050. The current trajectory is well below what is required, with about 2.5% of transportation fuels as renewables in 2015.
The other challenge is the requirement for increasing “advanced” biofuels. The IEA projected that by 2025, 330 billion liters of advanced biofuel would be produced. To date, no significant volumes have been produced, with considerable technical hurdles still in place and that deadline only nine years away.
The definition of what constitutes an advanced biofuel varies between the IEA/EU and the U.S. EPA. The IEA defines an advanced biofuel to be based on conversion technologies that are still in the R&D, pilot or demonstration phase. This includes renewable diesel created from hydrotreated animal fat or plant oils, as well as biofuel based on cellulosic biomass, such as cellulosic ethanol, biomass-to-liquids diesel and bio-synthetic gas. Other technologies such as algae-based biofuels and conversion of sugar into diesel-type biofuels using biological or chemical catalysts are included. Conventional biofuels include sugar and starch-based ethanol, oil crop-based biodiesel and straight vegetable oil, as well as biogas derived through anaerobic digestion. The U.S. EPA is more liberal with their definition of advanced biofuels, including both sugar-based ethanol and biogas derived through anaerobic digestion on the list, as well as the technologies the IEA considers advanced. This has enabled the U.S. RFS program to keep pace with the advanced biofuel targets even while cellulosic ethanol production (and other truly advanced biofuels) remain only a drop in the bucket.
“Won’t be turned around”
While there is a continued push toward advanced biofuels, there has been increasing pressure to reduce the consumption of first generation biofuels today. First generation biofuels are fuels that have been derived from sources like starch, sugar, animal fats and vegetable oil. The oil is obtained using conventional production techniques (principally pressing and solvent extraction). A majority of current renewable fuels, including sugarcane ethanol, are considered first generation. The opposition comes from the food versus fuel debate and its impact on food prices, as well as studies which are bringing into question the true benefits of the process. Already in developed countries in Europe, there have been active steps to limit the growth of first generation biofuels in the transportation sector. So far, these have not had a dramatic impact on consumption, and volumes have held their ground.
Alternative fuels include more than just biofuels. The use of natural gas, LPG, hydrogen, electricity, and gas to liquids (GTL) or coal to liquids (CTL) technologies all play a part in the growing alternative fuels landscapes. Natural gas adoption (predominantly compressed natural gas), primarily in fleet applications or for use in city buses, garbage trucks and other municipal vehicles is on the rise. This transition has been as much environmental as economic. Natural gas burns cleaner, without the harsh exhaust fumes diesel engines emit, while having lower maintenance costs. This is especially important in cities, where municipal heavy vehicles travel millions of miles a year. At the same time, natural gas in the U.S. is relatively inexpensive when compared to diesel fuel. While it is possible to convert many existing vehicles to run on natural gas, including consumer vehicles, the relatively high cost of conversion (in the thousands) and limited fueling infrastructure compared to conventional gasoline or diesel has limited adoption to fleets that can take advantage of a private, central fueling station.
LPG is another commonly used fuel in certain parts of the world. Similar to natural gas, existing engines can be modified to run on it, and it has many of the same operational cost and maintenance-related benefits. It, too, struggles with a limited refueling infrastructure in the U.S., and as such, its market penetration has remained small. With increasing use of natural gas, LPG vehicle use in the U.S. is in decline.
GTL and CTL are two variants of the same technology that utilize the generations-old Fischer-Tropsch process to create liquid fuels from gasified carbon sources. In recent years, stranded gas and high oil prices prompted GTL projects in the Middle East and Africa. On the CTL front, China, flush with coal but lacking in oil, has started several GTL projects, much to the chagrin from environmentalists both in and outside of the country. While those are currently operating, several other larger-scale CTL projects are planned in China, but face an uphill battle amid low prices and public opposition.
Hydrogen for use in fuel cells has remained a niche player for years, with promises of expansions that seem to continually get delayed. While Toyota recently announced the Mirai, a hydrogen fuel cell powered car, the few hydrogen filling stations are limited to Los Angeles. The rise of the electric car in recent years should put industry experts on notice (we certainly are), as the long term impact on gasoline demand, especially in developed countries, could be significant.
Conclusion “And I’ll keep this world from draggin’ me down”
The drop in oil prices dealt a blow to alternative fuels progress. Over the past year and a half, economic incentives rapidly disappeared and resource-dependent economies weakened, removing some support. While many mandates remain in place, we forecast much of the alternative fuels growth will continue to be driven by mandates and incentives rather than purely on economics. In the long term as oil prices recover and advanced biofuels mature, alternative fuels will become an increasingly important part of the transportation fuel mix.
Turner, Mason & Company released our 2016 Crude and Refined Products Outlook Mid-Year Update on Friday. This report includes a detailed analysis of the changing global petroleum supply and demand dynamics, as well as analyses of alternative fuels and regulatory initiatives that may impact them. The Outlook includes regional price and margin forecasts for crude and refined products. For more information on The Outlook or on other consulting engagements, please send us an email or give us a call.