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Obama tackles the liquid fuels problem

All that is human must retrograde if it does not advance.

It is easier to deplore the fate, than to describe the actual condition, of Corsica

The principal conquests of the Romans were achieved under the republic; and the emperors, for the most part, were satisfied with preserving those dominions which had been acquired by the policy of the senate, the active emulation of the consuls, and the martial enthusiasm of the people
— Edward Gibbon, selected quotes from The Decline And Fall of the Roman Empire

Today I’ll try to explain President Obama’s policy for decreasing oil consumption in the United States. Right now the administration has so many balls in the air that it is impossible to make a definite statement about what the effects of their initiatives will be, but a coherent policy is emerging if you gather all the pieces together. I compile a list Obama’s policies at the end of 2nd section below.

To round out the picture we need to look at the new fuel economy standards and some special provisions in the Cap & Trade bill. Environmentalists are running this show, so all proposed changes are aimed toward fixing global warming. Aside from tailpipe (among other) emissions, oil is seen strictly as a geopolitical problem—we do not want to import increasing amounts of the stuff from unreliable evil-doers like Venezuela, Libya, Nigeria, or even our “friends” the Saudis.

In light of ongoing oil depletion and supply-side destruction following from the global economic downturn, it appears that the Democrats are simply rearranging the deck chairs on the Titanic. (I am quite sure the Republicans would do worse, given the chance.) However, we are not in a position to evaluate President Obama’s policies unless we understand them. We should also remember that the President inherited these problems after decades of inaction.

A Tale of Two Standards

On May 19, 2009 President Obama announced proposed rule changes for greater fuel efficiency for cars and light trucks. The President said—

In the next five years, we’re seeking to raise fuel-economy standards to an industry average of 35.5 miles per gallon in 2016, an increase of more than eight miles per gallon per vehicle. That’s an unprecedented change, exceeding the demands of Congress [set by H.R. 6 in 2007] and meeting the most stringent requirements sought by many of the environmental advocates represented here today.

As a result, we will save 1.8 billion barrels of oil over the lifetime of the vehicles sold in the next five years. Just to give you a sense of magnitude, that’s more oil than we imported last year from Saudi Arabia, Venezuela, Libya, and Nigeria combined. (Applause.) Here’s another way of looking at it: This is the projected equivalent of taking 58 million cars off the road for an entire year.

A series of major lawsuits will be dropped in support of this new national standard. The state of California has also agreed to support this standard — and I want to applaud California and Governor Schwarzenegger and the entire California delegation for their extraordinary leadership. They have led the way on this as they have in so many other efforts to protect our environment. In addition, because the Department of Transportation and EPA will adopt the same rule, we will avoid an inefficient and ineffective system of regulations that separately govern the fuel economy of autos and the carbon emissions they produce.

[My note: Obama's statement was often misinterpreted to mean we will save 1.8 billion barrels of oil in the next 5 or 7 years. It is over the lifetime of vehicles sold between 2011 and 2016.]

The 1.8 billion barrel savings Obama refers to comes from this Notice of Upcoming Joint Rulemaking to Establish Vehicle GHG Emissions and CAFE Standards issued by the Department of Transportation (DOT) and the Environmental Protection Agency (EPA).

Preliminary analysis indicates cumulative greenhouse gas reductions of approximately 890 million metric tons (CO2 equivalent) and fuel savings of approximately 1.8 billion barrels of oil, over the lifetime of the model years covered.

The problem with the “preliminary analysis” is that we don’t have the formulas used to calculate the oil and emissions savings, so we can’t see the embedded assumptions. For greenhouse gases, the U.S. emitted 7.2 gigatons CO2e (carbon dioxide equivalent) in 2005. The purported savings are 12.3 % of the 2005 total, which is substantial and suspiciously large. For example, what is the presumed turnover rate (Figure 1) for the car fleet? In other words, how many new more fuel efficient vehicles are Americans going to buy between 2011 and 2016?

Figure 1 — The always helpful Calculated Risk graphed the turnover rate of the American vehicle fleet back in March. He said “currently this ratio is at 26.8 years, the highest ever. This is an unsustainable level (I doubt most vehicles will last 27 years!), and the ratio will probably decline over the next few years. This could happen with vehicles being removed from the fleet, but more likely because of a sales increase.”

Calculating fuel savings or reduced emissions is very sensitive to the level of consumer spending on big ticket items. It looks like policymakers are assuming new car sales over the next 7 years will be very brisk indeed. But sales are very hard to project, especially with our longer term prospects for economic growth in jeopardy. If income levels are low, or unemployment looms, people will be reluctant to take on 5-year car loans. The additional cost of a new car or light truck will be $1300 on average in 2016, which also discourages purchases.

Sales are also very sensitive to gasoline prices. If gas prices are high and consumers are convinced they will stay that way, purchases of fuel efficient cars will increase. Thus calculating benefits involves making assumptions about gas prices and the longer term price elasticity of gasoline demand. White House officials expect gas to be $3.50/gallon in 2016.

James Kwak does an extensive analysis of the economics of the new fuel efficiency rules at Baseline Scenario. His analysis is interesting but premature because we don’t know what the finalized rules will specify.

The real savings from fuel efficiency is in gallons of gasoline but the quoted number is in barrels of oil. A problem arises when we do the conversion between barrels and gallons to figure out the savings. There are 42 gallons in a barrel, but a refined barrel of oil usually nets anywhere from 18 to 21 gallons. Using an energy equivalence conversion, a barrel of oil is the same as 50.4 gallons of gasoline. We don’t know which (if any) of these numbers were used. The United States consumed 7.55 billion barrels of oil in 2007 and 142.35 billion gallons of gasoline.

Perhaps coincidentally, Douglas Adams’ supercomputer Deep Thought said “42″ was the “answer to life the universe and everything” in The Hitchhiker’s Guide to the Galaxy.

In analyzing the new fuel efficiency rules, I am sorry to tell you things go rapidly down hill from here. There are actually two standards, one from the DOT and one from the EPA. When you buy a car, the window sticker displays the EPA mileage number. This is the real world number, an approximation of the miles-per-gallon you will actually get. The CAFE number is higher than the EPA number, so it does not reflect your expected mileage. This is why President Obama was careful to point out that “the Department of Transportation and EPA will adopt the same rule.” If only things were that simple.

The Joint Rules document describes the “harmonized dual standard”—yes, I know this phrase makes no sense. The EPA’s head Lisa Jackson has proposed the first-ever CO2 emissions rule for cars and light trucks.

EPA and NHTSA [DOT] intend to propose two separate sets of standards, each under their respective statutory authorities. EPA expects to propose a national CO2 vehicle emissions standard under section 202 (a) of the Clean Air Act. EPA currently is considering proposing standards that would, if made final, achieve on average 250 grams/mile of CO2 in model year 2016… NHTSA expects to propose appropriate related CAFE standards.

Technical work conducted by each agency over the last several years indicates that there is a wide range of technologies available for manufacturers to consider in upgrading vehicles to reduce GHG emissions and improve fuel economy. These include improvements to the engines such as use of gasoline direct injection and downsized engines that use turbochargers to provide performance similar to that of larger engines, the use of advanced transmissions, increased use of start-stop technology, improvements in tire performance, reductions in vehicle weight, increased use of hybrid and other advanced technologies, and the initial commercialization of electric vehicles and plug-in hybrids. Although many of these technologies are available today, the emissions reductions and fuel economy improvements under consideration for the proposal would be expected to involve more widespread use of these technologies across the fleet…

Initial evaluations by EPA and NHTSA indicate that utilization of this suite of technologies provides a strong technical basis to proceed with consideration of a proposal containing MY [model year] 2016 GHG standards that would on average achieve 250 gram/mile CO2. If the automotive industry were to achieve this CO2 level all through fuel economy improvements, this would equate to achieving a fleet average level of 35.5 mpg.

So far, so good? Senior editor John O’Dell of explains the double standard.

One of the few secrets that Washington has managed to keep is that the
fuel efficiency numbers politicians toss around when discussing the “corporate average fuel economy,” or CAFE, standard are not the same as the EPA fuel efficiency numbers that journalists and most everyone else use when discussing mileage and that consumers have been trained to look for when shopping for a new car…

While the new federal fuel economy program announced by President Obama this week sets 35.5 MPG as the federal fuel efficiency standard for 2016, it doesn’t necessarily mean there will be a lot of cars and trucks in the market seven years from now with window stickers that boast of 35.5-miles-per-gallon fuel economy.

In the real world - or as real as we can get - the cars and trucks on dealers’ lots are still going to be wearing EPA fuel economy labels. And it [currently] only requires an EPA rating of 29 miles per gallon for a passenger car to equal the CAFE rating of 39 MPG, while 23 MPG on the EPA scale equates to the truck segment’s CAFE standard of 30 miles a gallon

Finally, there’s no requirement that consumers use the CAFE numbers when shopping for new vehicles. Except for the higher fuel costs of a less efficient vehicle - and the potential of reduced resale value - there’s no penalty for buying a 15 MPG truck or 24 MPG car just because the CAFE standard for each type of vehicle is higher.

If a car can be certified for a CAFE rating of 39 MPG now with an actual (EPA) mileage of 29 MPG, will a similar disparity still exist in 2016 after the new rules are implemented? That’s the $64000 question. Does 250 grams of CO2 per mile really raise the EPA number to a fleet-wide average of 35.5 MPG? Or will the real world EPA standard be lower as it is now?

O’Dell tells us positive side of things if the new rules still reflect the double standard.

On the plus side, we’re talking about a 30 percent increase in average fuel economy from today’s standards, and setting it is a coup for the administration because it marks first time automakers and environmentalists have lined up with the government and agreed in advance to support a CAFE increase.

Revisiting the oil calculation, is the 1.8 billion barrels savings based on “meeting” a bogus CAFE standard (39 MPG for cars, 30 for light trucks) in 2016 or an EPA real world standard that could be (much) lower? Time and bureaucracies will tell, but I suspect the former.

If the rules are harmonized at an actual 35.5 MPG, the automakers will not have enough time to meet the new fleet average. Here are Kevin Bullis’ comments in MIT’s Technology Review along with the relevant statement from the Joint Rules document—

The plan doesn’t give automakers much time. Only a few cars- hybrids–meet these standards today, and it can take 5 years to develop a new car. The good news is that technology exists to achieve these standards, and automakers are already planning on rolling out much of it… But ramping up production will take time. [from Technology Review ]

With respect to technological feasibility, during MYs 2012-2016 manufacturers are expected to go through the normal automotive business cycle of redesigning and upgrading their light-duty vehicle products (and in some cases introducing entirely new vehicles not on the market today). The proposal under consideration is expected to allow manufacturers the time needed to incorporate technology to achieve GHG reductions and improve fuel economy during the vehicle redesign process This is an important aspect of the proposal under consideration, as it would avoid the much higher costs that would occur if manufacturers needed to add or change technology at times other than these scheduled redesigns. [from the EPA & DOT Joint Rules]

We don’t see automakers clamoring for more time. (Chrysler and GM are on the dole, so they can’t protest anything.) Their acquiescence is prima facie evidence that EPA’s real world mileage numbers will be lower than the CAFE number as O’Dell contends. There is an air-conditioning loophole affecting emissions but not fuel efficiency. (See the Joint Rules document.) There are also numerous credit loopholes.

Many current cars and trucks already have EPA fuel economy ratings that “meet” the 35.5 MPG CAFE standard. But if vehicles sold in the United States really had to achieve a fleet average of 35.5 in 2016, only a few hybrids like the Prius would be in compliance today.

Will the automakers have to achieve a real world 35.5 MGP average in 2016? Probably not. The clincher is that these rule changes are only in the early proposal stage.

Today, auto industry officials applauded the president’s effort to bring together a wide range of stakeholders to hammer out what one trade group described as “broad outlines of an agreement.

“What’s significant about the announcement is it launches a new beginning, an era of cooperation [between NHTSA, EPA and California],” said Dave McCurdy, president of the Alliance of Automobile Manufacturers, a trade group representing Detroit’s Big Three, Toyota Motor Co. and other carmakers. “The president has succeeded in bringing three regulatory bodies, 15 states, a dozen automakers and many environmental groups to the table. We’re all agreeing to work together on a national program.”

We have broad outlines of an agreement between 3 regulatory bodies, 15 states, a dozen automakers, and many environmental groups. Sounds like a done deal to me!

When did everything get so complicated? Diminishing marginal returns from added complexity speeds the Decline And Fall of the American Empire.

The Hidden Gasoline Tax

The oil & gas industry is unhappy with the proposed Cap & Trade legislation. It is easy to see why.

The Waxman-Markey bill is making just about every segment of the oil and natural-gas industry unhappy. Oil refiners would be hit, because they would likely be among the largest buyers of emissions allowances. In addition to covering their own emissions, the refineries that turn crude oil into gasoline, diesel and other fuels will be responsible for the carbon emissions from transportation.

That puts the industry on the hook for some 44% of U.S. carbon emissions, according to the American Petroleum Institute, but it would receive just 2% of the emissions allowances available under the bill. Refiners would have to buy the rest at auction or on the open market.

By comparison, the electricity sector, which accounts for about 40% of U.S. CO2 emissions, would receive 35% of the allowances, with other industries such as cement, glass and paper manufacturers getting 15% of the free permits.

“The distribution of these credits is out of line with the actual distribution of emissions,” said Amy Myers Jaffe, associate director of the Rice University Energy Program.

Refiners will only get 2% of the emission allowances up front, which will force them to buy many additional permits on the carbon market. These purchases will raise overall costs for refiners considerably. By contrast, the electricity sector—49% powered by coal—will get 35% of the allowances, so this sector’s need for additional permits is much smaller. The Houston Chronicle’s Loren Steffy knows a fuel tax when he sees one.

The government would allocate just 2 percent of the emission allowance permits to the refining industry. The cost of buying all those extra permits would get passed on to motorists, making cap-and-trade a thinly disguised gasoline tax

It’s been portrayed as a free market solution, but with all the manipulation before the first permit has even traded, it doesn’t resemble anything close to a market.

And it darn sure won’t be free.

Technology Review, like most commentators, missed the hidden gasoline tax which is embedded in the Cap & Trade legislation.

Also, convincing consumers to buy enough of the most fuel efficient cars to make up for other people buying larger cars will be difficult. Gas taxes have helped meet a similar fuel economy standard in Europe. A proposed system of government fees and rebates could also help, and might be more palatable to consumers than raising gas prices.

Both the proposed EPA rule change for vehicle emissions and the Cap & Trade legislation must be considered together to see how the Obama administration’s liquid fuels policy works. An additional piece called “Cash For Clunkers,” which is also currently embedded in Cap & Trade, provides rebate incentives to trade in your gas guzzler for a more efficient model.

Under Sen. Diane Feinstein’s [D-CA] bill, S. 247, old cars that qualify for the program must be drivable, registered in the United States and have a “when-new” fuel economy rating of less than 18 miles per gallon. New vehicles must have a fuel economy rating that exceeds federal targets for that class of vehicle by at least 25 percent and a manufacturer-suggested retail price of less than $45,000 and be a model year 2004 or later.

Initial estimates set the cost of the program between $1 billion and $2 billion a year. Feinstein’s bill envisions the program lasting for four years and encouraging the retirement of up to 1 million vehicles a year, while ultimately saving between 40,000 and 80,000 barrels of motor fuel a day.

In the first year of such a proposed program, a person trading in a vehicle that is model year 2002 or later would be eligible to receive $4,500 for purchase of a new vehicle, $3,000 for purchase of a used vehicle, or $3,000 for transit fare credit. For model-year vehicles 1999 to 2001, drivers would get… [etc.]

I am now in a position to sum up the Obama administration’s policies for tackling the liquid fuels problem in the United States. This summary is based on my previous research as published in this space and publicly available information.

All measures are geared toward reducing greenhouse gas emissions to mitigate climate change. Reducing or replacing oil consumption to reduce our dependency on foreign oil is presumed to follow from emission reduction policies in all cases. Oil depletion is not a motivating factor in any Obama policy. Here’s the list—

  • Increased vehicle fuel efficiency as Dr. Chu wants, starting with strengthening of the EPA/CAFE rules as described above. Efficiency is supposed to save 1.8 billion barrels of oil during the lifetime of the cars sold between 2011 and 2016. The Union of Concerned Scientists estimates that the U.S. will save 1.4 million barrels-per-day by 2020 based on the new timetable. I do not know how either of these calculations were done, including the assumptions used for real world mileage, car sales, etc. So considerable uncertainty exists about what the real savings will be.
  • A gasoline tax imposed by severely limiting emission allowances to oil refiners in the Cap & Trade legislation combined with a short-term “Cash for Clunkers” rebate program. The latter is supposed to save between 40 and 80 thousand barrels-per-day during the program’s lifetime.
  • Thinking really hard about expanding the passenger/freight rail system in the United States.
  • Giving some serious thought to 4th Generation biofuels which might or might not be available 20 to 80 years from now. Funded R&D is ongoing.
  • Setting a goal to get 1 million plug-in hybrid vehicles on the road by 2015. Since these vehicles do not exist because the batteries aren’t ready, $2 billion has been provided for battery R & D. (I haven’t written about plug-ins yet.)
  • 15 billion gallons of corn ethanol by 2015 as required in the Energy Independence and Security Act of 2007. We already had 9 billion gallons in 2008.
  • Proposed tax changes that discourage new drilling and marginal oil production in the United States. 18% of American production comes from stripper wells.

I might add (only half facetiously) the additional “policy” spelled out below.

I believe this policy list is comprehensive and up-to-date. If you are a regular reader of this column, you know that I believe Cap & Trade will not become the Law in the United States. Regarding CAFE standards, many uncertainties must be resolved and obstacles overcome before we’ll know what the actual policy and its effects are. Proposed tax changes discouraging new drilling and stripper well production have not yet been enacted. Accelerating production declines is not a wise policy, but accords with the climate change imperative.

If I’m right about Cap & Trade, that leaves us with 1) some improved fuel economy and 2) a little more corn ethanol. Everything else is hand waving. Obama’s policies form a coherent whole, but taken together are inadequate to meet the coming liquid fuels crisis.

A Final Thought On Fuel Efficiency

I’m sure many of you know that Gallons Per Mile (GPM) is the right way to measure fuel efficiency (Figure 2).

Figure 2 — The actual Gallons-Per-Mile function used by the Department of Transportation for CAFE and its graph, where N is the total number of cars, Ni is the number of model i, and MPGi is the MPG of model i. Formula from James Kwak at Baseline Scenario, graph from the journal Science.

The GPM function demonstrates that you get far more bang for the buck if you curtail sales of gas guzzlers. Efficiency improvements have less and less effect at the high end. Despite these real world considerations, the Joint Rule document says—

Under a footprint-based [standard, each manufacturer would have a GHG and CAFE standard unique to its fleet, with a separate standard for passenger cars and light-trucks, depending on the footprints of the vehicle models produced by that manufacturer. Generally, manufacturers of larger vehicles (i.e. vehicles with larger footprints) would face less stringent standards (i.e., higher CO2 grams/mile standards and lower CAFE standards) than manufacturers of smaller vehicles. While a manufacturer’s fleet average standard could be estimated throughout the model year based on projected sales volume of its vehicle fleet, the standard of compliance would be based on the final model year sales figures. A manufacturer’s calculation of fleet average emissions at the end of the model year would be based on the sales-weighted average emissions of each model in its fleet.

[My note: the footprint is defined as "a vehicle’s wheelbase multiplied by its track width --in other words, the area enclosed by the points at which the wheels meet the ground."]

The government’s matter-of-fact statement belies the important point that manufacturers of larger vehicles should face more stringent standards than they probably will in 2016 in order to maximize fuel savings (or reduce emissions). One might even go so far as to propose that SUVs or light trucks not used for business purposes be phased out over time or heavily taxed like cigarettes. We lived happily without these gas guzzlers before the 1990s, so why do we need them now? Such a policy would demonstrate that President Obama’s expert team is truly serious about reducing our dependency on foreign oil. Politics precludes this sensible proposal.

I must confess that examining government fuel economy rules is not an intellectually rewarding activity. Reading my analysis and conclusions is surely tiresome as well. But our world is made up of such stuff. It is far easier to deplore the American Empire’s lamentable condition than it is to describe it. Congratulations if you got this far—your painful journey is at an end.

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