The curse of 'F' words.

barrel of oil reaches $135At the moment we are seeing two ‘F’ words which are inflating rapidly, namely, Food and Fuel.

In todays post we will look at the positive effects of fuel and food prices shooting through the roof, and how people can turn this to their advantage. Fuel prices have really shot up in the last year, in fact a year ago the fuel prices were in the mid $50 per barrell range and at this point an analyst from Goldman Sachs (Arjun Murti)had said that we would see $100 a barrel oil soon and he was laughed at, then it came true and suddenly Mr. Murti went from ridiculed to divinity.

Then the man who seems to be able to predict the future went on the record talking about $200 a barrel oil and that sent a shiver down the spine of every oil consumer. In 2005 there were predictions of $200 a barrel oil as early as 2010, when looking forward its obviously not possible to nail times and dates exactly but one published report states this over three years ago, it didn’t get the same press as the Goldman Sachs announcements though because it came out at a time of cheap oil.

The commodity bear market reached a bottom in Q4 of 1998, and since then oil prices (which were at $10 a barrel) have gone up by over 1300% and we are witnessing a deficit of 2 million barrels a day in oil, at the same time as a decline in production from most of the major oil fields (Mexico, Nigeria etc.) and then there is the erosion of supply due to geo-political issues, almost every oil producing area tends to have instability as well (Venezuela, Nigeria, Middle East etc.). I think its safe to say that 2008/2009 is the period of Peak Oil. Peak Oil is important to understand, it refers to the time when the maximum global oil production rate is reached and from that point on you enter a period of decline.

peak oilHave we seen Peak Oil? In terms of production that is a distinct possibility, the general increase in consumption isn’t set to end, and then there is the rapidly increasing world population as well as the emergence of strong markets outside of the traditional first world, demand is coming on stream from China and India and that will have a massive effect as their middle classes embrace car ownership etc. Actual supply is a different matter, there are huge oil fields off the coast of California and there is oil in slate in Canada as well as deep drilling oil in different pockets around the world.

The primary issue with supply is getting it, in the case of deep drilling and slate-bound oil it’s expensive because it’s hard to reach (in the first case) and expensive due to being labour intensive (in the second case), rising oil prices may eventually justify the extra cost in extraction, however that doesn’t solve the short term compression.

wind turbineIn two days Exxon Mobil will have their AGM and it is expected to see the shareholders vote for a push towards alternative energy. This may now finally be the time for alternative energy to come to the fore. High oil prices will create the demand and in an efficient market when there is enough demand you will then see supply, the first step (certainly for Europe and the USA) is to allow and encourage alternative transportation options.

What alternatives are there? We’ll take Ireland as an example, firstly good cycle lanes throughout every main artery to the city, and trams (which work well in other countries and our own LUAS is a good service as well) on the same routes. the creation of large car parks near strategic entry points would be vital, a strategic entry point is a place that would contribute to a high inflow (eg: the Malahide Road) and where all cars are going to the same place (into the city centre) and set up transportation points such as tramlines at those nodes and what that achieves is to intersperse congestion into pre-controlled nodal areas.

Alternative energy will likely precede developmental solutions (at least in Ireland!), what might we see? For a start there are Air Cars, these are cars that run on compressed air, for the mechanically minded readers you might say ‘cars already run on compressed air!’ and that’s true, the four cycles in an internal combustion engine are intake, combustion, compression, exhaust. However, air cars don’t require petrol to create their compression, instead they use tanks or sometimes hybrids of petrol/compressed air – in fact one fuel tank can get a car and passengers 4,500 km. That would mean crossing Australia on a single tank of petrol.

god save usHow do you compress air? You can compress air using ethanol, even grades that are not acceptable to petrol engines, you can use solar power, wind turbines or hydro-electricity, and compressed air may be a better solution than batteries/electric cars. Why? Well, carbon fibre stores air energy and the air engines are similar to existing engines, the important thing here is firstly: regular mechanics could probably fix an air car, to fix an electric car you’d need to be specially trained, secondly, carbon fibre tanks are not as harsh to make as hundreds of lithium ion batteries, and they weigh less, and of course, if you need to dispose of carbon fibre tanks you can just get them dumped, lithium ion batteries require special disposal.

MDI air carThere is an air engine maker in named Angelo Di Pietro in Australia who uses rotary engines to drive vehicles, and his engines are tiny in comparison to MDI’s engines, a rotary engine is not different from the ones that were used in the F1 Norton bikes (Isle of Man TT fans might recognise this) in that they don’t use pistons and instead they use a central column that is rotated. These engines are much smaller than piston engines and they have been tested on boats, forklifts, cars etc.

Governments could help by opting out of charging VRT on these vehicles, and as they have zero emissions the road tax (which is now based on emissions) laws could be revised to make this car more affordable, and indeed incentives only start there. The one issue with air cars is probably safety, not the tanks exploding (any more than petrol tanks explode) but because they are so lightweight, a crash at 60kmh could be more dangerous to a passenger than in a conventional car. If this is true then you are into the murky area of societal benefits versus societal cost and in that situation one should naturally err on the side of savings lives, the proponents of air cars claim they are safe but they have not been tested extensively enough to satisfy your writer.

sugar cane used to make ethanolOn the biofuel front it would be important to see a move away from corn ethanol and instead look at Brazilian sugar ethanol, it can be made cheaper and faster than any other current alternative (see diagram). I used to make beer as hobby, now I just stick to drinking it, I learned the basics of brewing from my dad who was an avid wine-maker, and from this I can discern why Brazil is and will be ahead of the posse in ethanol production. Ethanol is alcohol, and alcohol is made when sugar is converted by yeast into ethanol. So if you use corn then its instantly inefficient because only a certain amount of the corn kernel has the sugar/starch levels required, if you want to make bourbon its fine because you don’t need efficiency, you need a good tasting drink, but for raw output straight sugar won’t be beaten.

Sugar Cane is from the same Class, Order and Family as Bamboo, the Grass Family (Poaceae), however they are of a different genus. Both however grow very fast in the right environment, sugar cane can yield up to 6,000 litres of ethanol per hectare, that’s approximately twice the yield of corn ethanol! There is an output of about 75 tonnes per hectare of sugar cane in Brazil, which turns into about 58 tonnes B&C (that stands for ‘burned and cropped’ where the leaves and some of the stalks removed) the unused parts are often burned and used as fertilizer for new growth.

Bagasse‘ refers to the biomass remains of sugar cane stalks after they are crushed to remove their juice, this ‘waste product’ can then be used in different ways, it can be used as feedstock, used to create paper/cardboard, burned to produce energy or heat for a sugar mill resulting in cogeneration (which is a really big upside to the general operations of a sugar cane ethanol plant), or ground into fertilizer (commonly used to grow mushrooms). Current research is even considering the bagasse for use in ‘cellulosic ethanol‘ production.

sugar cane producersWith corn the benefit ends at ethanol production, however, with sugarcane you can re-use and recycle the materials for different purposes at different stages and this synergistic feature will likely mean that sugar-cane ethanol will become the standard eventually, it has greater output, it burns as clean and its a proven technology in fact ethanol accounts for 50% of Brazil’s annual automotive fuel consumption. Brazil is the worlds second largest producer of ethanol and the largest exporter, the total output is c. 22 Billion litres p.a.

Sugar made ethanol doesn’t take food off the table either, the second ‘F’ word, ‘food’ is causing worldwide chaos as well, corn prices have risen 56% in the last year and that’s largely due to corn being diverted to use as fuel, there have not been any ‘sugar shortages’ in the world though, so again Brazil may have the answer, the one thing that a solution (no matter how good it is) can’t get around on its own is lobby groups and trade barriers, Europe is protected from Brazilian ethanol entering, and in the USA there is a 54 cents per gallon tariff on Brazilian ethanol, just enough amount to make it uncompetitive. The Green Party activists should really turn their attention towards this aspect of the markets because if tarrifs were lifted free markets would take care of themselves, protectionist moves only reward those who are not as efficient.

biofuel production costs: corn vs sugarBrazil can be a net exporter of energy as much as Venezuela can, however Brazil will never run out of product because they can grow it, whereas we are seeing OPEC stating that increased production is not possible, removing oil dependence would help every nation that doesn’t have oil because part of the spiraling prices in the market are strictly due to geo-political risk. If you create a map of oil producing areas and then another map of most of the wars and strife in the world you are almost looking at the same map!

Rising oil also causes wider inflation in the market as the underlying commodity cost/push effect takes place, demand from emerging markets is also aiding so there is blended inflation in these areas, if the ECB is going to control inflation then they can only do that by raising rates, this in turn makes mortgages more expensive and expensive mortgages hurt property prices etc. If sugar ethanol is embraced then sweets may well get dearer but better than than shortages of corn and rice! You may well witness an inverse correlation between the price of a Mars Bar and the price of your mortgage if sugar cane ethanol is embraced as the energy solution of the future.

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