An Overview of the U.S. Transportation Fuel Sector
An Overview of the U.S. Transportation Fuel Sector
Peaking of World Crude Oil Production
Virtually all transportation fuels are derived from crude oil. As long as crude oil remains relatively inexpensive and available, relative to alternative fuels, consumers will use it. The most widely accepted model for petroleum extraction states that crude oil production, whether from an individual well, a particular region or worldwide, is shaped like a bell curve with respect to time. Production ramps up after discovery is made, tapers off as the peak approaches, peaks, and then begins to decline. This theory was formulated by Dr. M. King Hubbert in 1956, a geophysicist who worked for Shell. “Hubbert’s Peak” marks the onset of decline, a trend that accelerates as the cost of further extraction approaches the commercial value of each barrel pumped. Dr. Hubbert correctly predicted that U.S. crude oil production would peak in the early 1970s. Since then, the U.S. has been able to meet its growing crude oil demand by increasing imports. There has historically been broad agreement that the world’s ultimate oil supply is approximately 2 trillion barrels, of which approximately 50 percent has been consumed. Most of the world’s so-called easy oil has already been discovered or extracted, leaving the bulk of the undiscovered or unexploited oil in deep water, or other isolated areas far from transportation infrastructure and markets. The much-touted Alaska National Wildlife Refuge is estimated to contain 7.7 billion barrels of recoverable oil, enough to supply the United States just over a year. Although tar sands and heavy oil hold promise, their economics and energy balance are daunting at best. The debate rages over when the worldwide peak will occur (some say it has already occurred), but estimates range from immediately to 70 years from now. However, there is no debate over the fact that, sooner or later, crude oil will no longer be affordable; therefore an alternative will have to be used. Renergie wants to ensure that the U.S. is prepared for a world without oil.
As indicated by the following table, over the four year period from 2002 – 2006, crude oil prices have nearly tripled as global demand, especially in China and India, increased and supplies tightened.
Brent Crude Oil Spot Prices
2002 2003 2004 2005 2006
Price/bbl $24.69 $27.14 $35.58 $56.92 $71.12
U.S. Petroleum Consumption
In 2005, the United States consumed approximately 21 million barrels of petroleum per day. Approximately 62% of this amount was imported. The Energy Information Administration (“EIA”) has projected petroleum consumption in 2025 to be 28.3 million barrels per day with 70% of this amount to be imported. The transportation sector accounts for two-thirds of U.S. petroleum use. In 2004, U.S. petroleum consumption for transportation was approximately 13.86 million barrels per day, or just over 5 billion barrels per year. The EIA projection of U.S. liquid fuel consumption through 2030 indicates that the demand for gasoline will increase 31 percent. Reducing the transportation sector’s reliance on oil is clearly the key to improving our nation’s energy security.
Moreover, the U.S. transportation sector is responsible for one-third of our country’s carbon dioxide emissions, the principal greenhouse gas contributing to global warming. Combustion of biofuels also releases carbon dioxide, but because biofuels are made from plants that just recently captured that carbon dioxide from the atmosphere – rather than billions of years ago – that release is largely balanced by carbon dioxide uptake for the plant’s growth. The carbon dioxide released when biomass is converted into biofuels and burned in truck or automobile engines is recaptured when new biomass is grown to produce more biofuels.
The use of ethanol as an automobile fuel in the United States dates as far back as 1908, to the Ford Model T. Henry Ford was a supporter of home-grown renewable fuels and his Model T could be modified to run on either gasoline or pure alcohol. After World War II, there was little interest in the use of agricultural crops to produce liquid fuels. Fuels from petroleum and natural gas became available in large quantities at low cost, eliminating the economic incentives for production of liquid fuels from crops. Interest in ethanol was renewed in the 1970s, when oil supply disruptions in the Middle East became a national security issue and the United States began to phase out lead (an octane booster) from gasoline. Federal and State tax incentives have made ethanol economically attractive in the Corn Belt of the Midwest, but the difficulty and high cost of transporting ethanol precludes significant consumption in other markets.
Governmental Regulation and Federal Ethanol Supports
In the United States, ethanol has been described as a “political commodity,” due to the importance of federal and state government policies that stimulate the production and consumption of ethanol and make it price-competitive in fuel markets. Government incentives, such as small ethanol producer tax credits and import duties on fuel ethanol imports, helped increase the production of ethanol during the 1980s.
The Energy Policy Act of 2005 (“EPACT 2005”) established the Renewable Fuels Standard (“RFS”) which directs that gasoline sold in the U.S. contain specified minimum volumes of renewable fuel.
The Energy Independence and Security Act of 2007 (“H.R. 6”), which became law on December 19, 2007, sets a new RFS that starts at 9.0 billion gallons of renewable fuel in 2008 and rises to 36 billion gallons by 2022.
Under Section 1342 of EPACT 2005, fueling stations receive a tax credit of 30% for the cost of installing pumps dispensing alternative fuel (e.g. Renergie E85 ethanol pumping stations).