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Headlines

February 11, 2009
Congress Agrees to $789 Billion Economic Stimulus Package

Congressional leaders have come to an agreement on the economic stimulus package, Senate Majority Leader Harry Reid (D-Nev.) announced this afternoon.
  
"The difference between the Senate and House versions [of the stimulus package] we've resolved," Reid said during a press conference. "We have said from the beginning that we must adhere to certain fundamental principles. We need to create millions of jobs, including investments in renewable energy. We must have tax relief for middle-class families ... and it must be something that we do to invest in America's future," he said. "Like any negotiation, this involves give and take. ... But the agreement we've reached stays faithful to the principles I've outlined," he added.
  
While details haven't been released, sources said the final cost was around $789 billion, less than either the House or Senate versions of the package. "The middle ground we've reached creates more jobs than the original Senate bill, and spends less than the original House bill," Reid added.
  
It was unclear what specific provisions were cut or altered to reconcile the differing versions of the package, but there were several biofuel-related initiatives in both bills.
  
Specifically, the Senate bill:
  
--Provides $150 million for loan guarantees and grants administered under USDA's Business and Industry Guaranteed Loans to support business opportunities and employment expansion in rural areas, with the loan guarantee portion expected to amount to $2.99 billion. The House version of the bill provides for $2 billion in guaranteed loans for rural development, which could be used to support corn ethanol production facilities.
  
--Allows DOE to enter into loan guarantees for up to $50 billion to support the deployment of innovative energy technologies, likely focusing on renewable biomass and biofuel facilities. Loan guarantees may not exceed 80% of a project's cost. The House version of the bill provides for up to $500 million in loan guarantees for "leading edge" biofuel projects at the pilot or demonstration level and will reduce greenhouse gas emissions. The authority to enter into loan guarantees expires on Sept. 30, 2011.
  
--Provides $200 million in biorefinery assistance to USDA for demonstration- level facilities or loan guarantees for commercial-scale facilities that produce advanced biofuels. The principal of the loan guarantee must not exceed $250 million, or 80% of the project cost.
  
--Contains an expansion of the Alternative Fuel Vehicle Refueling Property, which allows gasoline station owners to claim a 30% tax credit (for up to $30,000) for the cost of installing alternative fuel pumps, such as those that dispense E85, hydrogen and natural gas. The $700 billion economic stimulus bill that former President George W. Bush signed into law in October 2008 included an extension of the 30% tax credit through 2010. The expansion would increase the 30% alternative refueling property credit for businesses to 50% (capped at $50,000), and extends the credit for one year. The same version was included in the House bill.
  
It was not clear when final votes in each chamber would occur, although Congress is set to recess for Presidents' Day starting next week.

February 9, 2009
Economist: Washington, Not Wall St., to Blame for Energy Chaos

Breckenridge, Colo. -- Don't blame speculators for the huge run-up and then precipitous collapse in crude oil prices of the last eight months. Instead, it was federal policy-makers passing ill-thought-out environmental regulation that caused the super-spike and are likely to make the current recession even worse, said economist Phil Verleger presenting at SIGMA's executive leadership conference here today.
  
Regulations limiting sulfur in diesel and mandating biofuels did more to run up crude oil prices to a June 2008 high of $147/bbl than did speculators, Verleger said. Last spring and summer, record-breaking open interest on the NYMEX at times exceeded the world's crude capacity. But Verleger lays the blame for chaos in the energy markets on ethanol and ultra-low-sulfur diesel regulations.
  
Those same regulations are likely to deepen the recession and make refining margins miserable for years to come, perhaps forcing more independent refiners to declare bankruptcy, he said.
  
In June 2008, "the world wasn't running out of oil, the world could accommodate Chinese and Indian demand and the weak U.S. dollar was not driving crude price up," Verleger told the Society of Independent Gasoline Marketers of America. But the world economy could not accommodate ethanol mandates which meant less crude was produced, he said.
  
"Ethanol mandates make things worse and were the key cause of rising commodity prices last summer," Verleger postulated. "Even as demand goes down for gasoline, the ethanol amount is fixed. The resulting loss in gasoline production could cut diesel production because surplus hydrogen from gasoline production is used to make distillate," he said.
  
Because of the Renewable Fuels Standard (RFS), which mandates certain percentages of biofuels be blended into the motor gasoline pool, gasoline production now at 8.5 million b/d could drop to 6.5-7 million b/d by 2014 and go lower, Verleger said. "Refiners are going to be losing money and two to three may face extinction, particularly those independent refiners who arose from the mergers of the late 1990s," he said.
  
On top of the RFS, the federal government pushed forward with desulfurization of
diesel which added further constraints on crude that could be processed economically, Verleger said.
  
Also, from August 2007 to June 2008, the Department of Energy filled the Strategic Petroleum Reserve (SPR) with light, sweet crude even as prices were going up. Because refiners can produce only 1/20th the amount of low-sulfur diesel from sour crude that they can from sweet, filling the SPR with roughly 30,000 b/d of sweet crude meant the world had to produce 600,000 b/d more sour, he said. "The Saudis simply refused to comply with that."
  
"Oil should have been sold from the SPR" when diesel prices skyrocketed last year,
he said.
  
Europe's move to 10-ppm sulfur also squeezed supply as refiners there are more geared to make gasoline and have to import diesel. "Plus, the European Union added 12 new members and they had to meet those sulfur standards as well."
  
New International Maritime Organization limits on sulfur in bunker fuel, from 4.5% currently to 0.5% by 2020 beginning next year, will further pressure refiners' balance sheets, Verleger said. Although demand destruction might make gasoline oversupplied for some time, diesel is likely to be tight "as, if and when global demand comes back," he added.
  
Commenting on the general economy, Verleger noted that the federal government's decision to let Lehman Bros. fail in September 2008 was the rock that started an "avalanche" and that the recession, if it isn't already a depression, will likely last until late 2010 or early 2011 during which time unemployment could reach 12% and Ford and Chrysler might go bankrupt, among other effects.
  
Refined product prices "will hover down as households are pinched for money trying to make credit card and mortgage payments. Consumers will save which will heighten the recession and government services will decline due to the burden of federal and state deficits," Verleger said.
  
"Although lower gasoline prices might help some, gasoline consumption will decline
5-7% for some time," he predicted. "There may be some rallying in September and October but that will be a weak increase."
  
As for crude, "we're in a 10-year cycle and we could see another spike up to $120/bbl" in the 2012-2020 timeframe, Verleger said. But in the meantime, don't be surprised to see crude drummed down by the global recession to $25/bbl, he said.

February 4, 2009
Senate Economic Stimulus Bill Seen as Favoring Advanced Biofuels

Senate debate continues this week on the economic stimulus package -- with a price tag now topping $900 billion -- and at least in its current form, the bill appears to favor advanced biofuels versus so-called first-generation biofuels.
  
"Every industry that can manage to put a lobbyist onto Capitol Hill is busy clamoring for a piece of the economic stimulus legislation that is now working its way through Congress, and the biofuels industry is no different," wrote Mark McMinimy, senior vice president of food, agribusiness, ethanol and tobacco with the Stanford Group Company, in a Feb. 3 note to clients.
  
The U.S. House passed its version of the economic stimulus bill (with a $819 billion price tag) last week and the Senate has held several days of debate on H.R. 1 (the American Recovery and Reinvestment Act of 2009).
  
"As the stimulus legislation moves through the legislative process, a few more provisions that are aimed directly at promoting the growth of the biofuels industry are emerging," McMinimy wrote. "So far, the primary thrust of these is on accelerating the commercialization of advanced biofuels by providing substantial funds for loan guarantees or grants, or both. The loan guarantees are designed to encourage the provision of private funds for the construction of advanced biofuels production facilities," he noted.
  
Specifically, the latest version of the Senate package:
  
--Allows DOE to enter into loan guarantees for up to $50 billion to support the deployment of innovative energy technologies, likely focusing on renewable biomass and biofuel facilities. Loan guarantees may not exceed 80% of a project's cost. The House version of the bill provides for up to $500 million in loan guarantees for "leading edge" biofuel projects at the pilot or demonstration level and will reduce greenhouse gas emissions. The authority to enter into loan guarantees expires on Sept. 30, 2011.
  
--Provides $200 million in biorefinery assistance to USDA for demonstration- level facilities or loan guarantees for commercial-scale facilities that produce advanced biofuels. The principal of the loan guarantee must not exceed $250 million, or 80% of the project cost. The House version did not provide a comparable provision.
  
--Contains an expansion of the Alternative Fuel Vehicle Refueling Property, which allows gasoline station owners to claim a 30% tax credit (for up to $30,000) for the cost of installing alternative fuel pumps, such as those that dispense E85, hydrogen and natural gas. The $700 billion economic stimulus bill that former President George W. Bush signed into law in October 2008 included an extension of the 30% tax credit through 2010. The expansion would increase the 30% alternative refueling property credit for businesses to 50% (capped at $50,000), and extends the credit for one year.
  
"What is not showing up in the legislation for the most part -- at least not yet -- are provisions designed to buck-up the hard-pressed corn-starch based ethanol industry that is being buffeted by low, or negative, margins in the face of low crude oil prices," McMinimy continued. He cited a possible effort to increase ethanol blends beyond 10%, but said that provision will likely find inclusion via an EPA rulemaking or as an amendment in an energy bill that Congress may tackle later this year.
  
Meanwhile, the Senate adopted amendments yesterday that pushed the bill's price tag to $901.5 billion. However, Senate Democratic leadership acknowledged they don't have the votes to pass the bill in its current form and in an effort to gain further support, said they would consider cutting provisions that would not immediately boost the economy.
  
While no specifics have been provided on which provisions would be cut, McMinimy told OPIS he's inclined to think the biofuel-related provisions will likely stay put. "I am inclined to think the richer credit for alternative refueling facilities will survive any shake out, as it shows up in both the House and Senate versions. I also have a hunch that the additional funding for the biorefinery assistance program [which provides $200 million in funds] may
well make the final cut as well, as that program is up and running. I assume there will be some additional leash provided in the final version of the stimulus legislation for loan guarantees too, though what the ultimate parameters of that initiative may be remains to be seen," he said.
  
Senate Majority Leader Harry Reid (D-Nev.) continues to target passage of the economic stimulus bill this week, which would give lawmakers in both chambers next week to reconcile the differing versions of the bill. If that highly expedited schedule is successful, the lawmakers could send the bill to President Obama for signature by mid-February.

February 2, 2009
Economist's Hard Look at Stimulus Bill Raises Questions on Efficacy

The Obama administration's stimulus bill is a reasonable approach to the U.S. economic crisis but may well not turn the economy around, according to a prominent economist.
  
The plan to inject $800-billion-plus into the economy over two years is the largest government intervention ever -- wide-ranging, diverse and energetic -- but "given the scale of events, is it sufficient?" James Galbraith asked last week at the OPIS Fuel Price & Profitability Outlook conference in Orlando, Fla.
  
"The slump may or may not be approaching the end but it looks bad," he said. "Credit growth is nil, car sales are a catastrophe, the GDP (gross domestic product) is in decline, manufacturing is in decline, personal income is in decline, home ownership is on the way down and there's been no peak yet in mortgage problems," he explained.
  
Galbraith, an economist at the Lyndon Baines Johnson School of Public Affairs at the University of Texas at Austin and a self-styled "ambulance chaser on economic crises," made no predictions about the package's chances of success. Instead, drawing on his firsthand experience with previous administrations' economic plans, he took conference attendees through a sharp historical and economic analysis of the bill. He questioned the assumptions underlying the plan of action, the administration's approach and even the
larger vision informing the response to the crisis.
  
The White House's baseline forecast assumes no change in current policy if there's no stimulus and the administration is, quite reasonably, calibrating a policy response in order to make economic outcomes better than that baseline, Galbraith said. This "technocratic" approach can work, he said, but depends on making correct economic assumptions for the baseline.
  
Galbraith is concerned that U.S. officials aren't properly anticipating the course of the crisis. Economic data don't go back as far as the 1930s and the recession of the early 1980s isn't analogous.
  
The oil shock and tight monetary policy ended in 1982 and interest rates were cut, pent-up consumer demand emerged and people came back into the stock market. Financial institutions were willing to lend, he said.
  
"Do we have a comparable situation today?" Galbraith asked. "Clearly not."

Structural failure (and the resulting loss of investor confidence) in the financial sector is the source of the economic crisis, he said, the roots of which are in regulatory malfeasance in the housing sector.
  
"The financial sector has rendered itself insolvent," Galbraith said. The key impediment for policy makers is their unwillingness to recognize that, much like Japan did during its recent decade and a half of no growth. On the other hand, in Sweden, bank directors became personally liable for insolvency, which moved them to a whole new pattern of behavior and rapid recovery, he said.
  
"How are banks to 'lend in a way consistent with their solvency'?" he asked, referring to the current stimulus plan. "How do you do that without addressing insolvency head-on?"
  
Galbraith said later that he favors structural changes in the financial industry. "Risk management people were pushed aside -- put them back on top," he offered.
  
The economist reassured conference attendees that the U.S. wasn't likely to return to the dire economic times of the Great Depression owing to economic improvements such as federal deposit insurance and Social Security that emerged as a result of the period.
  
However, Galbraith is doubtful the economic stimulus plan will do much to ease the crisis. The most likely outlook is that the hard times will stretch into 2010, Galbraith said.
  
"We haven't come to grips with the problem and so the stimulus won't be enough,"
he said.

January 28, 2009
EPA's Proposed RFS2 Rules Withdrawn From OMB

In a move that may indicate possible changes are in store, the proposed rule for the expanded renewable fuels standard (RFS) has been withdrawn from the Office of Management and Budget (OMB), where the provision had been undergoing a review, according to a document posted on a government website earlier this week.
  
The document, posted on www.reginfo.gov with a Jan. 26 publish date, simply states that the expanded RFS provision had been withdrawn. No further information was available and attempts to reach EPA officials were not successful by presstime.
  
On the same day he took office, President Obama directed all federal agencies to halt pending regulations until the new administration had a chance to review the provisions. The directive, described in a memo from White House Chief of Staff Rahm Emanuel, triggered an interpretive memo from OMB to have agencies withdraw proposed rules, explained one source familiar with the issue. "Federal entities evaluated these ... [proposed rules] and then listed them in a memo with a request to have them withdrawn. The RFS proposal was just one of a number of EPA actions falling under this guidance," the source explained.
  
EPA had been working on issuing the notice of proposed rulemaking (NOPR) for the expanded RFS. The 36-billion gal/yr RFS contains four carve-outs: caps the amount of corn-based ethanol at 15 billion gallons by 2015; 21 billion gallons of the overall mandate to contain "advanced biofuels" by 2022, with 16 billion gallons of that amount, under the same timeframe, from cellulosic biofuel. For the fourth carve-out, up to 1 billion gallons by 2012 is required to be from biomass-based diesel.

Meanwhile, conventional biofuels would be required to emit 20% fewer lifecycle greenhouse gas emissions compared to gasoline, while "advanced biofuels" would be required to emit 50% fewer lifecycle greenhouse gas emissions.
  
The timeframe for when EPA had planned to issue its NOPR had been slipping, initially expected to be released during the fall of 2008. Once the NOPR is issued, a public comment period is likely to be held, after which EPA will assess the input received and then issue its final rule. It's unclear if that will still occur by mid-2009.
  
Sources are also unclear whether this withdrawal indicates a possible change in direction for the NOPR. Paul Winters, a spokesman for the Biotechnology Industry Association, said the EPA move could be an indication that the Obama administration will pursue its own rulemaking rather than pursue the provision under the Bush administration, however other sources believe the withdrawal is merely to adhere to the Emanuel memo and does not represent a change in direction for EPA.