Are alternative fuels reliving the 1980s?

Today’s slumping oil prices may undermine viability of alt-fuel programs – again.

Marcio Jose Sanchez/AP
A driver fuels a natural-gas-powered car. Alternatives to oil are less attractive to investors during the credit crisis and oil slump. But the longer-term outlook is good, experts say.
Melanie Stetson Freeman/The Christian Science Monitor/File
This experimental installation atop MIT’s power plant in Cambridge, Mass., used sunlight, algae, and flue gases to grow a biofuel that could be turned into a diesel substitute. The algae also absorbed carbon dioxide and neutralized nitrous oxide.

Tumbling gas-pump prices make motorists smile, but not Peter Vanderzee. They remind him how falling oil costs sank his effort to unshackle the United States from Middle East oil two decades ago.

As project manager for two large alternative-energy projects under President Carter’s US Synthetic Fuels program launched in 1980, Mr. Vanderzee was pushing his team to make methanol from coal for auto fuel.

But in 1985, just as his technology was starting to produce results, oil plummeted. In today’s inflation-adjusted dollars, oil went from $53 a barrel to $28, with pump prices falling from $2.20 a gallon to $1.60. The next year, President Reagan pulled the plug on the US Synfuels program.

“It was a huge letdown,” Vanderzee recalls. “We had the technology ready to go. But Mideast crude oil suppliers decided the US was serious about our program and just didn’t want the US making alternatives to oil. So they pumped more oil and lowered the price.”

Oil prices last week hovered just over $60 a barrel after peaking around $140 this summer. Will today’s falling oil prices also bury fledgling efforts to convert the US auto fleet from gas guzzling SUVs into fuel-sipping hybrids? Will investors still want to invest in advanced biofuels? Will the new president slow the push for energy security?

“If I were Saudi Arabia and I wanted to undermine alternative energy,” says Robert Wescott, former chief economist for the Pres­ident’s Council of Economic Advisers, “my optimal pricing strategy would be $100 per barrel for the first year, second year, third year, and fourth – and drop it to $10 on the fifth year.” Why?

“You would capture lots of revenue, but flatten the alternative-energy sector every fifth year – at least enough to scare off investors and ensure that alternatives don’t get a foothold.”
But even if falling oil prices sap political will and investor confidence, critical differences between today and the 1980s make it less likely that US policy or investment in oil alternatives will falter, he and others say.

“I worry much less today than I did back then,” says Amory Lovins, who became a leading US voice on energy efficiency after the 1970s oil crises, “because what’s different today is that our concerns about energy security and climate change are much broader and more intense.”

Falling oil prices “will make the problem harder and slower to deal with,” says the cofounder of the Rocky Mountain Institute, an energy think tank. But because the last few years have seen “the rise of such a vibrant efficiency and renewable sector ... this time it’s not going away. We can take a hit and still bounce back.”

Can the US set and meet quotas?
Right now, he says, it’s the credit crisis, not sinking oil prices, that is cooling investors on alternative energy. But corn-based ethanol, advanced cellulosic ethanol, and coal- and oil-shale-to-fuel are feeling the pinch, too, experts say.

In the farm belt, many ethanol producers are barely making money, caught between high prices for corn feedstock and much lower gasoline prices. Back in the 1980s, there were more than 100 ethanol facilities. After the 1985-86 price drop, only about a dozen survived.

“When oil prices dropped, it killed that push to ethanol – and you could have that happen again,” says Chad Hart, an agricultural economist at Iowa State University. But there is a safety net this time, he and others agree: the US Renewable Fuel Standard (RFS). Today the US produces 9 billion gallons of ethanol from corn but under RFS is mandated to make 36 billion gallons by 2022.

That demand, most of which must by law come from cellulosic ethanol and advanced biofuels, is aimed at reducing greenhouse gas emissions and improving US energy security. The RFS currently pays gasoline blenders a hefty 51-cents-per-gallon subsidy for every gallon of ethanol they use.

“Things are fundamentally different than they were in the 1980s, especially with respect to fuels policy,” says Bob Dinneen, president of the Renewable Fuels Association. “We now have the RFS in place. So no matter what happens, we have a foundation, a safety net.”

To meet RFS requirements, investors must pour billions into cellulosic ethanol plants. How eager they will be to do so is a question. Today, about 30 cellulosic projects are in various stages of development nationwide. Investors are wary. Among six large DOE-sponsored projects, two big investors have recently pulled out.

The Energy Department’s target is to bring cellulosic ethanol costs down to about $1 per gallon so it can compete with corn ethanol. That’s the equivalent of $40 to $50 a barrel – a rough target for venture capitalists, too.

At a recent conference on algae-based biofuels, a noted venture capitalist set $50 a barrel for oil as the base line his investments must beat, says Nathanael Greene, senior biofuels policy analyst for the Natural Resources Defense Council, who attended the conference.

When the RFS was put in place, cellulosic ethanol investors thought $70 to $80 per barrel was the price threshold at which to jump in, says Paul Winters, a spokesman for the Bio­tech­nology Industry Organization (BIO), which represents cellulosic ethanol producers. “Now that those investors have jumped in and oil prices are falling, they’re not sure what the base number is going to be.”

With such uncertainty, federal loan guarantees will be critical, a spokesman for a major cellulosic ethanol producer wrote in response to a BIO survey.

“With the collapse of the credit markets, access to capital has become and will likely remain much more difficult to access,” the spokesman wrote in an e-mail shared by Mr. Winters. “The high price of oil has been a trigger for the current melt-down that we are facing by sucking a lot of oxygen out of the US economy.”

Gas-sipping cars may be vulnerable

Fuel-efficient vehicle technology also looks acutely vulnerable to falling oil prices. Cash-strapped auto giant General Motors last week announced it was suspending new product development efforts, including several hybrid models.

But GM will continue developing the plug-in hybrid Chevrolet Volt, which could go 40 miles on one charge. Energy security experts say such capability is vital since it would replace imported oil with power from the electrical grid derived from coal, natural gas, wind, and other domestically derived sources.

But will GM stay with the Volt if oil prices drop further? Will consumers pay $40,000 for it if gas is $2.50 per gallon?

“With the economy in the dumps and gas prices coming down, people right now are thinking ‘I’ll hold onto my car and drive it less ... rather than moving to a more fuel-efficient
car,’ ” says Bradley Berman, editor and founder of Hybridcars­.com, a website that focuses on hybrid vehicle trends.

For the US auto industry, recession may be a greater threat than cheap gas.

“Interest in hybrids is not anymore at the fever pitch with long lines, but it remains solid,” Mr. Berman says. “A lot of people still want higher fuel economy just to save money.”

The big question, he says, is what happens when the economy strengthens and people start buying cars again. Will they buy fuel-efficient vehicles – and will Detroit offer them in volume?

“There’s going to be plenty of demand to absorb the initial ability of car companies to produce these new fuel-efficient vehicles,” says Reid Detchon, executive director of the Energy Future Coalition, a coalition of energy security experts and environmental groups who favor a shift to 25 percent renewable energy by 2025.

“If gas prices do go under $2 a gallon, well, there would be less excitement about plug-in hybrids,” Mr. Detchon admits. “But there’s really a lot less concern about gas prices these days – and a lot more about US energy security. That’s a big difference from the 1980s. So I think that detaching the US from dependence on Middle Eastern oil will continue to be a concern that will drive policy.”

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