Consumer Energy Report is now Energy Trends Insider -- Read More »

By Andrew Holland on Jun 20, 2012 with 23 responses

Why the RAND Report on Biofuels and the U.S. Military has it Wrong

Scale of the Global Oil Market

The RAND corporation recently released a report “Promoting International Energy Security” for the U.S. Air Force that, for the most part, contained the conventional wisdom about oil prices and energy security: in a global marketplace, there is little that one buyer can do to affect prices. The report then went on to state the importance of the US military in maintaining international trade routes and supporting energy infrastructure security around the world. On the whole, it was an anodyne report from a government contractor to its client that generally would have quietly been filed away.

However, the report did have one section that dove directly into a simmering area of contention: the Department of Defense’s investment in a domestic biofuels industry. Both the House and Senate Armed Services Committees have rejected the Department of Defense’s plans to purchase biofuels and to directly invest in domestic biofuels producers. The Senate will likely consider an amendment on the floor to attempt to reinstate the program in July. The specialist media quickly reported the controversial provisions, saying Renewables no fix for U.S. military fuel woes (Reuters) and Alt fuels won’t solve military energy problems (Greenwire).

The RAND report overlooks the strategic importance of developing alternatives to petroleum fuels. It is a strategic mistake for the military over the long term to rely on a single source for 80% of our military’s energy needs. To simply accept that oil is going to remain as the sole source of liquid fuel that the US military relies on for its transportation, operations, and training is to say that we should accept the long-term strategic risks of price volatility and dependence upon uncertain foreign countries (even if we do not import oil directly from Iran or the Middle East, the price we pay for oil is largely set by market conditions in that region). In addition, we know that the amount of oil in the world is finite — a peak could come over the next decades. We should not simply accept this national security risk when there are developing technologies that could alleviate this threat to national security.

The author of the report, James Bartis, has been skeptical of the military’s biofuels missions before, writing in a 2011 report that there is “No Direct Military Benefit from Use of Alternative Fuels by Armed Forces.” In the most recent report, he echoes these findings.

Issue of Costs for Renewable Fuels

The top-line finding of the RAND report, as reported in Reuters’ article, is that renewable fuels are likely to remain “far more expensive” than petroleum products absent a technological breakthrough. However, unreported in these articles is a finding from the report that: “significant national benefits would accrue from establishing a large (i.e., millions of barrels per day), commercially competitive alternative-fuels industry in the United States.”

The RAND report is wrong that renewable fuels are going to remain “far more expensive” than petroleum; the needed technological breakthroughs are happening today. Robert Rapier wrote, in his “Current and Projected Costs for Biofuels from Algae and Pyrolysis” column, the Department of Energy’s Biomass Program anticipates that the cost of production of biofuels could drop significantly — perhaps as low as $2.32 by 2017. This means that biofuels could quickly develop as an alternative to oil. At ASP’s  “Biofuels for National Security” event on March 1, Commander Goudreau of the Navy echoed that statement, saying said that biofuels could be cost competitive with petroleum-based fuel by the end of the decade. He cautioned, however, that without guaranteed purchasers of biofuels, the market will not develop as fast.

Conclusion

Fortunately, the military has a history of creating large scale industries that are important for national security, and benefit the country as a whole. When the Navy was reconstituting itself in the late 19th Century as a modern fleet based on steel-hulled warships, it was faced with the problem that foreign-made steel (particularly German and English) was cheaper. However, instead of buying it from abroad, it worked with companies like Bethlehem Steel and US Steel to create a domestic steel manufacturing capability. The result was both cheaper steel, and an industry with a scale to build the Golden Gate Bridge, the Interstate Highway System, and the industry that won two World Wars.

The Defense Production Act (DPA) of 1950 codified the ability of the DoD to invest in industries deemed important for national security. It helped to establish domestic aluminum and titanium industries through the Cold War. More recently, the DoD used the DPA to invest in silicon carbide, semiconductors, microwave power tubes and superconducting wire; helping to create the conditions in Silicon Valley that would lead to the technology boom of the last several decades. Investing in a domestic biofuels industry follows this same model: it allows the DoD to create a leading industry of the 21st Century.

The Department of Defense is attempting to secure a similar future for the biofuels industry. This is an industry that provides clear benefits for the United States as a whole, and significant benefits for the military.

  1. By Robert Rapier on June 20, 2012 at 2:53 pm

    This means that biofuels could quickly develop as an alternative to oil.

    What I think you will find is that the type of feedstocks needed for that $2.32 projection will be in extremely short supply. And purpose-grown feedstocks are going to be a lot more expensive — and certainly not scalable to be able to displace large amounts of oil.

    RR

    [link]      
    • By Andrew Holland on June 20, 2012 at 3:24 pm

      Robert – yeah I was wondering about that: what’s the scale possible for these feedstocks? 

      But – at this point, at least – the point of biofuels is not to replace petroleum based fuels, but to act as a price-leveler for future price spikes. To do that, you don’t need to get to $2.30 a gallon: you probably don’t even need to get to $4.00 a gallon. You just need to be able to call on the capability if you need it.

      [link]      
      • By Robert Rapier on June 20, 2012 at 3:36 pm

        Robert – yeah I was wondering about that: what’s the scale possible for these feedstocks? 

        I did a thought experiment a few years ago where I looked at total available arable land, and then made some assumptions about conversion rates, etc. My best guess is that we can’t replace more than about 10% of our global oil consumption without seriously impacting food supplies.

        RR

        [link]      
        • By Will Rogers on June 21, 2012 at 4:22 pm

          My best guess is that we can’t replace more than about 10% of our global oil consumption without seriously impacting food supplies.

          Robert,

          Good point. Do you see any viable technological solutions to this problem on the horizon? We’ve seen some interesting stuff done recently with algae biofuel being produced in vertical silos that has dramatically cut down the production footprint without affecting output.

          [link]      
          • By Robert Rapier on June 21, 2012 at 4:46 pm

            I think the solution to our current need for oil will not be filled by a liquid fuel substitute. The solution will be a mixture of some biofuels, much lower consumption, and alternative transportation options.

            RR

            [link]      
        • By Breath on the Wind on June 21, 2012 at 5:02 pm

          Your assumptions may be inaccurate.  “Total arable land” would not include offshore potential of floating salt water algae.   

          This said even offshore there may be a limit to how much sunlight could be taken without disrupting the natural ecosystem.   I have seen estimates as high as about 30% of our present usage of petrochemical fuel.   Ultimately direct conversion of sunlight to chemical heat storage or electricity should be more efficient. 

          However, what is most interesting in the present argument is the right and need for the military and the DOD to promote alternative industries of any kind, regardless of size or potential. 

          [link]      
  2. By Bob Brooks on June 20, 2012 at 9:41 pm

    UOP has already announced production of bio crude oil via a thermal system that costs one half compared with petroleum crude. Others, such as KiOR will demonstrate additional competitive system…… Those who are negative on biofuels need only watch the news.  They will learn about Algae.Tec, etc, etc, etc

     

    [link]      
    • By Robert Rapier on June 21, 2012 at 12:10 am

      UOP has already announced production of bio crude oil via a thermal system that costs one half compared with petroleum crude.

      Two things I can tell you about that. The costs are certainly not half of crude oil’s; more like $90/bbl in reality. Second, the energy content of that oil is half that of oil. So really it’s like $180 crude oil.

      RR

      [link]      
      • By terry on June 24, 2012 at 7:00 am

        Robert what are you thoughts around pyrolysis oil and coal gasification to syngas to transport grade methanol that can be introduced into the liquid fuel supply in numerous ways?

        The use of coal reducing as economic biomass can further substitute coal volumes. I have seen lazatech study for a wood based  ethanol plant in New Zealand and see methanol as a more suitable longterm solution.

        There has been significant growth in the energy transport methanol market.

        [link]      
  3. By Russ Finley on June 20, 2012 at 11:00 pm

    Nazi Germany fought a world war largely by converting coal into liquid fuel. South Africa still does. If push came to shove, we would do the same. It’s important for the whole world economy that oil supplies not be badly disrupted. Biofuel is the worst idea to ever hit the biosphere. It’s one subject that George Monbiot and Matt Ridley agree on.

    [link]      
    • By Andrew Holland on June 21, 2012 at 4:57 pm

      Thanks, Russ

      If you’re not worried about emissions or cost, F-T is an option. As it is, Congress and the Bush Administration agreed that such fuels would not be pursued when they passed the 2007 Energy Policy Act.

      [link]      
      • By Russ Finley on June 22, 2012 at 12:42 am

        This is a fairly old topic. If we needed to make fuel out of coal to fight a war, congress would quickly approve it …emissions and cost would take a back seat. The military needs fossil fuels. Electrification of transport has great potential in the private sector, not so much in the military.

        It’s unlikely we would turn our food into fuel. Corn ethanol and soy biodiesel account for about 99% of the liquid biofuels we produce.

        Biofuels  are not cheaper than oil. Many studies suggest their emissions can also be worse than fossil fuels.  

         

         

        [link]      
        • By Herm on July 8, 2012 at 10:29 pm

          The US military would be better served if they spent that money on a CTL plant, and Congress could help by mandating a small percentage of the nation’s diesel and gasoline was made from coal. Just like the ethanol mandate.

          [link]      
        • By Biocrude on July 9, 2012 at 4:28 pm

          @Russ, looks like you are using old science again.  Where is your data suggesting biofuels are worse than fossil fuels?  I bet you aren’t using updated data from up to date production facilities.  

          [link]      
  4. By Scott Pugh CAPT, USN (ret) on June 21, 2012 at 4:39 pm

    Why should DOD purchase 5x$ aviation biofuels if United, American, Delta and Southwest don’t?

    Why should the Navy buy 5x$ biofuel for ships when Maersk (world’s largest cargo line), Carnival (world’s largest passenger line), the Military Sealift Command and the US Coast Guard don’t?

    [link]      
    • By Andrew Holland on June 21, 2012 at 4:54 pm

      Scott – thanks for reading.

      My answer to that is that they shouldn’t – for operations. For testing and evaluation – yes, a $12 million buy is appropriate. 

      But – we should know that unlike the airlines or the shippers, the Navy (of course) is not a business that has to make money. Its mission is national security: and Congress, every administration since Nixon, and the military brass have all defined dependence on oil as a threat to national security. Directly investing in the creation of a biofuels industry is appropriate because it helps to alleviate that threat to national security (not today, or next year, but maybe over the long term).

      The Navy is doing this for the same reason they bought steel from Carnegie and Bethlehem steel in the 19th century: we need this industry here.

      [link]      
      • By Scott Pugh CAPT, USN (ret) on June 22, 2012 at 7:46 am

        Right but it’s not the Navy or DOD’s job to create US industries.

        If DOD bought a ship or aircraft that cost 5 times more than an equally capable platform then Congress and the public would demand an investigation.

        A few years ago the Navy studied nuclear power for surface warships and concluded that the lifecycle costs were too high because it would cost about 3 times more than oil at 2006 prices. Today’s biofuels cost about 5 times more than marine distillate fuel and do not have nuclear power’s advantages of essentially unlimited range. The USS Cole was vulnerable to attack in port because it needed refeuling. Nuclear ships can stay at sea rather than enter a risky port. Nuclear propulsion costs more but offers many advantages. Biofuels cost even more but offer no warfighting advantages.

        [link]      
    • By Biocrude on July 9, 2012 at 4:30 pm

      The US Coast Guard is very much involved and supportive of the NAVY’s goals: 

      http://www.komonews.com/news/local/Everett-based-Coast-Guard-ship-testing-biofuel-159898315.html

      [link]      
  5. By Oxymaven on June 22, 2012 at 11:03 am

    Rand report does not really analyze merits of DoD support of research-scale production of biofuels, it just notes that DoD isn’t a large enough consumer (or potential producer) to impact global prices. Not really a news flash, and it ignores the possible benefits from the research findings.  It’s reflective of the hyperpartisanship in DC and the knee-jerks in Congress that Republicans want to eliminate any DoD biofuels evaluations.  I think some of that is opposition to the $510 mil Obama wants to help them construct ‘commercial scale’  biorefineries for drop-in fuels.  I’m not sure that’s such a good investment.  It would seem that a much more reasonable approach would be to allow small scale DoD evaluations, and also use them to help decision makers assess how near (or far) we are from viable aviation biofuel production.  Of course, the airlines should not be freeloaders in this, and they should pony up at least 2-5x or more of the $$ to make these evaluations, since they will likely be the main beneficiaries in the long run.  Of course Delta Airlines has jumped into the refining business lately, and I laughed at this recent statement by their CEO:  “We’re probably the largest private purchaser of jet fuel in the United States but we don’t get to participate in the pricing function,” Anderson told reporters after the Delta’s annual meeting in New York. “It’s our intention to begin to participate in the pricing function and put a lot of downward pressure on the cost of refining a barrel of jet fuel.”  Huh?  Good luck.

    [link]      
    • By Andrew Holland on June 22, 2012 at 11:48 am

      Rand report does not really analyze merits of DoD support of research-scale production of biofuels, it just notes that DoD isn’t a large enough consumer (or potential producer) to impact global prices. 

      You’re right about that. The report hardly even focuses on biofuels at all – it seems like they just added it in because this was a high-profile issue.

       It would seem that a much more reasonable approach would be to allow small scale DoD evaluations, and also use them to help decision makers assess how near (or far) we are from viable aviation biofuel production.

      This is the Air Force’s model for how they’re going about it: essentially, we’ll test everything to make sure it works, but we’re not going to buy anything until you get it to cost. I think that leaves us with a chicken-or-egg scenario: costs won’t come down until there’s full scale production facilities, but you can’t get financing to build full-scale production facilities until you know there will be buyers. Tough.

      And – Delta’s economic illiteracy notwithstanding – the airlines should have a much bigger role in this: with the new EU climate rules coming into effect on air travel, they need cleaner fuels.

      [link]      
      • By Samuel R. Avro on June 22, 2012 at 1:13 pm

        This is the Air Force’s model for how they’re going about it: essentially, we’ll test everything to make sure it works, but we’re not going to buy anything until you get it to cost. I think that leaves us with a chicken-or-egg scenario: costs won’t come down until there’s full scale production facilities, but you can’t get financing to build full-scale production facilities until you know there will be buyers. Tough.

        If the finance people can be convinced of the ability to produce alternatives at or near the going rate of conventional fuels, why should it be so difficult to get a project financed? I think it points to the fact that the technology for large scale production of alternatives at prices on par with conventional fuels does not yet exist.

        [link]      
  6. By Russ Finley on June 23, 2012 at 11:31 am

    We should not simply accept this national security risk when there are developing technologies that could alleviate this threat to national security.

    As RR suggests, there are no such developing technologies capable of scaling to that level. The threat to national security is an economic depression caused by a sudden disruption of oil supply. The threat is not our ability to fight a war. We produce more than enough oil domestically to do that, in addition to the capacity to convert coal and natural gas into liquid fuels.

    If we were to reduce oil use to the point that we could eliminate imports and have an excess of domestically produced oil, we could hold that oil in reserve, but we wouldn’t do that. We would export it for profit. In fact, by importing more today, we could stop producing oil domestically now to keep it in reserve for future supply perturbations. But we are not going to do that either. It’s all about money.

    But even if we had the resolve to hold domestic oil production in reserve, it would do little in the event of a global supply disruption because our trading partners would be in trouble. Our computers might double in price along with everything else.

    It’s rare for congress to make smart moves and when they do it’s often for the wrong reasons, getting it right by accident.

    [link]      
Register or log in now to save your comments and get priority moderation!