patrick.net

Not sure how this relates to the current discussion, but someone told me that we should really be paying around $5 a gallon for gas right now, but big oil is keeping prices down in order to crush ethanol. I haven’t heard this theory anywhere else. Think it's true?

First, I don't know where this magic $5 per gallon comes from. I don't know if there is some body of literature that I don't know about that says $5 is the socially optimum price for a gallon of gas, but everytime I have had a debate with big government type of a strong liberal viewpoint this magic number is raised. It also has to be from government taxes because the idea of an oil company making that much money gets the corporate haters in an uproar.

To give my opinion to moonmac's question, I don't believe there is some conspiracy to keep ethanol down. In my opinion they would have kept prices at $1.50 if that were the case since it is now pretty much a push on a cost comparison. Ethanol has its own challenges which is why it has yet to really catch on, and in my opinion lithium ion battery technology will make an all electric car feasible in the next few years. The middle of the road technology will be the plug in Prius which will be out in 2009.
Also visionary oil companies like BP are rethinking their businesses and are morphing from being oil companies to energy companies. At least that is how they are trying to market themselves.

I don't think big oil has to do anything to crush ethanol. It will be crushed under its own weight. Ethanol, even with all the tax-payer subsidies, will not pan out.

Malcom,

True, but that cuts both ways. I don't know how many times I've had conservatives tell me... "If Bill Clinton had his way we'd be paying 5$ for a gallon of gas!" (Toasts and hardy yucks) It's just THAT "magic" a number.

Touché DinOR :)

As Randy H was fond of saying, at some point it becomes "group think" or some kind of echo chamber.

I'm currently reading NGEO and they have an article about corn-based eth. being DOA but they do hold out hope for sugar-based eth. Anyone finish that already?

If ethanol was a viable fuel, the market would be using it already, at least in those countries where gasoline is expensive.

Ethanol from corn would have so many layers of subsidies that it would be hard to figure if it is proving to be viable or not.

Forget getting ethanol from sugarcane. Could we first get sugar from sugarcane? I am tired for this high fructose corn syrup tax-payer subsidized abomination in everything.

www.theoildrum.com has probably the best write-ups on the unfeasability of ethanol .....

I believe it takes a lot of energy to make ethanol - so where do you get the energy from? Oil & Gas? Or maybe they could go nuclear?

sriramgopalan,

Brazil is doing quite ok providing a large fraction of their automotive fuel with ethanol from sugarcane. It can be done. The problem in the US is that `any green program quickly gets hi-jacked and turned into corporate welfare, which is even less efficient than the human welfare programs.

Brazil does have a significant problem that they are scorching jungle to grow sugarcane on the land. This leads to less CO2 absorption and a loss of rain forest. But their program is clearly price-effective and net-energy positive by a significant margin. Check out Wikipedia for more details.

Nuclear is a very good choice for base load energy needs as well as making transportation fuels. I work as an operator at such a plant and have always been impressed on how cost effective it is. I also think we also need coal. I do not want to use coal however for making electricity. Instead I want to use nuclear power to convert coal in to oil using the Fischer-Tropes method. This method would make use of heat that is thrown away through the top of a cooling tower. Why not make use of this waste heat and turn it into a useful commodity?

Nuclear power is a renewable source of power. We have built many breeder reactors in the past and proven its viability. I would however like to see the reactors made under a join ownership program of private industry and government like South Texas Project. About half of STP is owned by the City of San Antonio, the city where I am from, and they have the lowest electric rates in the state. Deregulation is not a good thing for the consumer. I now live in Ohio and am now seeing it too deregulate itself. There is talk of huge increases in our electric rates.

Bap33,

A good humorous post. I love it when you parody yourself :-).

But: Don't discount ideas just because they are advocated by someone you perceive to be a lefty.

By the way, I'm not morally opposed to whale farms. But what are you going to feed them? Corn-fed krill or plankton is one idea, you can see where that leads. I'm sure you could make good biodiesel from whale oil, although not very efficiently. Plant-based fuel will beat animal-based fuel just about any day.

At $90/barrel, oil is abundant. We have tar sands in Canada. We just need time and resources to develop new oil fields.

Ethanol is just silly. What is next? Flintstone-mobiles?

Let the market solve our energy problems.

If we find a way to burn whale blubber in a car, and get nothing but water in the exhaust, and get 180mpg per pound (about 7 gallons), will the lefty’s allow whale farms?

Whale meat tastes like rubber.

I believe it takes a lot of energy to make ethanol - so where do you get the energy from? Oil & Gas?
Claire,
A lot of people erroneously believe that a lot of the energy expended to make ethanol comes from petroleum. Actually, ethanol production is a way to supplement our existing gasoline infrastructure with natural gas, coal, and a small amount of renewable (solar) energy. Here is a recent summary from the Energy and Resources Group at UC Berkeley. They have cool spreadsheet model that reconciles several recent studies about the EROEI for ethanol.

Brazil does well for its drivers that's for sure. What people don't realize is Brazil's drivers are the top 20% of the population who rule the rest with an iron fist - the average person there has no hope of owning a car, and large numbers of peasants are enduring lives of slavery in the sugarcane plantations so the rich can keep driving.

Sort of upsets the soccer moms if their betting skills in the RE casino were not what they thought they were, and they and their kids end up hacking 'cane for the rest of their lives.....

Peter P Says:
December 4th, 2007 at 3:23 pm
"Let the market solve our energy problems."

It's a larger challenge than just saying the market will take care of it. Markets have been slow to react for numerous reasons. The first being that profits actually increase as scarcity increases. Even though I don't believe it is a crisis it is a basic tendency, like rhino horns, to not consider the future social costs to a transaction today.
There is also the catch 22 horse and cart dilema. It will take government infusion in the areas of infrastructure and standards. Say you invent a new fuel; that's great but it won't automatically become a standard or even compatible in the mass market until fuel operators and manufacturers accept it as the new standard. That is why I like the Prius plug in hybrid concept. If that technology catches on, not only will it be environmentally sound, ethanol or other biodeiesels could be its fuel for the 20% of the driving that would be outside of the battery range. Like I said earlier, new Li Ion batteries are coming soon and already the Tesla company is making a $100,000 sports car with a 200 mile range. It is not a huge leap of the imagination to realize this will soon be available in a $20,000 economy car with even greater range.

Peter P Says:
December 4th, 2007 at 3:24 pm
"If we find a way to burn whale blubber in a car, and get nothing but water in the exhaust, and get 180mpg per pound (about 7 gallons), will the lefty’s allow whale farms?
Whale meat tastes like rubber."

I believe the larger goal is energy independence and environmental balance. I think it would speak poorly of our society if we actually chose a solution like that if presented with the dilema. Maybe we could make a car engine which runs off of dead African children, then we would never have a shortage of fuel although it would still be foreign energy.

Malcolm,

>Maybe we could make a car engine which runs off of dead African children, then we >would never have a shortage of fuel although it would still be foreign energy.

With tongue firmly planted in cheek: "uh, let the market decide".

I've discovered that, in Idaho, people make gin and vodka from grain and potatoes www.bardenay.com , beer and ale from grain and hops www.tablerockbrewpub.com , and wine from grapes www.sawtoothwinery.com . I'm not sure if we have figured out whether we should be making auto fuel from our huge production of sugar beets.

We've got two nuke plants in the exploratory state. There's a private capital plant under study in southeast Owyhee county, and just today a consortium headed by Warren Buffet announced investigating a plant in Payette county.

Maybe we could make a car engine which runs off of dead African children

A modest proposal. Make a car engine which runs off Papist babies. ;)

The first being that profits actually increase as scarcity increases.

Two things will happen:

1. Demand goes down
2. Supply increases

See, it self-balances. :)

Too often, market "fails" to react quick enough only because policy makers employ anti-market tactics for populist reasons.

Like I said earlier, new Li Ion batteries are coming soon and already the Tesla company is making a $100,000 sports car with a 200 mile range.

What is the environmental impact of disposing large quantities of li-ion batteries after their useful lives?

With tongue firmly planted in cheek: “uh, let the market decide”.

If developed nations offset their CO2 usage by paying people in underdeveloped countries not to reproduce, can't we solve "global warming" and overpopulation in one shot?

Any breathing person produces CO2.

DennisN those are interesting sites, I'll have to check 'em out.

I think it's not legal to produce "hard" spirits, only wine and beer, without being a licensed distillery? Not that that would slow down a lot of people, just sayin'....

The point with ethanol is, it looks feasable with our modern "green revolution" farming that uses tons of petroleum derived fertilizers. Peak Oil means we're heading back towards farming organically. No more huge bags of ammonium nitrate or whatever. Back to cow poo, horse poo, done right, your poo....

This means there won't be our present huge excesses of grain, corn, etc. No more corn stoves, corn will be for people. Or our work animals. What this means is, the ethanol is more likely to be enjoyed by a person than an engine - trust me alcohol makes great bicyclist fuel, ask any bike messenger.

Sure, we'll have engines, but they won't be the way of life they are now.

www.energybulletin.net is another good source site.

http://www.mrp3.com/bobf/global_warming.html

Actually Bardenay is the first fully-licensed distillary/restaurant in the nation. Think of it as a brew-pub that serves cocktails made from spirits produced on-site. There are now two locations around Boise, the original being downtown in the Basque district.

Bap33,

>hey ….. aint petro animal based ??

Some small amount of it is, hence inefficiently made.

However, some people think petro is synthesized deep down under the earth's crust and then just percolates up for the benefit of mankind :-).

ex-sunny,

>>Sort of upsets the soccer moms if their betting skills in the RE casino were not what they thought they were, and they and their kids end up hacking ‘cane for the rest of their lives…..

Now there's an image I like. A herd of the species "soccermommus paloaltus" out herding their children in the 'cane fields, all because their nasty RE exploitations went sour. All the while, I sit on the porch of the plantation sipping a home-made Mohito. Keep on rocking in the free market.

Hey, why am in in moderation now. I'm guessing because the words "nasty exploitation" (oops, I did it again) triggered the sensitive spam filter?

@SP

There is another elephant in the interest rate freeze room. When it passes, even if no contractual obligations were broken and it is merely implementing optional clauses that pre-existed on the contracts, it would only take a first-year finance grad student a moment to work out the imputed mark to market of all the securitized tranches directly and indirectly impacted by the freeze. A more orderly signal to investors in these securitized mortgages to not only mark down their holdings, but to reduce or even halt their market activity in these instruments, I cannot imagine.

Because the real estate industry is mostly a volume and velocity-based business in its current shape, this will drastically reduce their credit supply. I predict the next step after everyone thinks the freeze has fixed the implosion is to increase the jumbo limit and then unload the worst of these properties onto the GSEs as fast as they can. The brokers don't know this yet, but the banking (who handles most of the servicing) and finance (who handles most of the investment accounts) industries just made an end run around all the various kinds of brokers in the real estate industry by taking dibs on a future taxpayer-funded bailout with this interest rate freeze. The brokers have been handed to the wolves while they were playing checkers, and the banking and finance sectors will get out of this pretty much unscathed by comparison, by playing Go.

The brokers are playing a short-term game. They're focused upon growing their commission amounts by keeping prices up when they should be preserving their volume. It's like the hapless investor who is taking up growth positions when instead the game has changed and he should congratulate himself for simply preserving wealth and staying still in real terms at the end of the day. And just like novice investors who double-down on a sliding position ("it's cheaper!"), the brokers are going to resist downward price movements with each leg down while the volume ebbs away from them. If the brokers were smart, they would be jawboning to push down prices as quickly as they can to pump up volume.

The banks and finance companies are playing a smarter, rougher, longer-term game. They're positioning to preserve the core of these assets, by drawing out the income stream as much as they can, instead of trying to continuing to do business as usual. If the brokers aren't careful, they will find themselves turned into low-rent subcontractors to the banks and finance companies at the end of this ugly economics and investment history lesson that is unfolding before our very eyes.

apostasy,

yours is the best post I have seen here in a long time. Thanks.

I wish some brokers would actually read that advice.

Peter P Says:
December 4th, 2007 at 5:07 pm
"What is the environmental impact of disposing large quantities of li-ion batteries after their useful lives?"

A couple of things first, start thinking sustainability, ideally they would be recyclable. - remember your car currently has a lead acid battery which is recycled - 2nd, there is a benefit to single pollution sources, therefore it makes more sense to have a disposal site for something like that type of component as well as single pollution sources for the generation of electricity. We would have much cleaner air, and end oil dependence which in itself will have massive impacts on our economy and world politics.
Peter, this is why I have abonded the strict free market point of view, because there is never a collective plan for solutions to problems. This failed ideology is the reason this country is on the verge of collapsing. When we don't set boundaries for a free market to operate in you wake up one day realizing China has overtaken you and now has its own space program, 40 million people are uninsured, we live like drug addicts burning money in our gas tanks while we empower our enemies. I've always though you are a nice guy but I am really starting to resent this view of the planet as a plantation, anything goes, and anyone who questions components of the free market bears the soc1al1st scarlet letter.

apostasy Says:
December 4th, 2007 at 7:57 pm
@SP
"The brokers are playing a short-term game. They’re focused upon growing their commission amounts by keeping prices up when they should be preserving their volume. It’s like the hapless investor who is taking up growth positions when instead the game has changed and he should congratulate himself for simply preserving wealth and staying still in real terms at the end of the day. And just like novice investors who double-down on a sliding position (”it’s cheaper!”), the brokers are going to resist downward price movements with each leg down while the volume ebbs away from them. If the brokers were smart, they would be jawboning to push down prices as quickly as they can to pump up volume."

No, it is the right thing to do. You can't go to a volume strategy in a shrinking market. Credit is getting tighter and there are more brokers chasing fewer deals. They will be forced to drop their fees through competition, but in general lower sales volume will force greater margins or the industry will bust which it will for different reasons. Among them are the fact that more lenders will move to a direct model since the internet has made it so easy for them to do so. I have a broker friend who disagrees and says there will always be a need for external brokers because they generate business and provide service at the very individual level. I don't buy it though, my last deals were so much easier just going through Priceline or Ditech, the notary even showed up at my home to get the signatures.

BTW Peter, I've never said I believe cars are causing global warming. Just for the record.
They do contribute to smog, acid rain, and probably lung diseases. It should be a national priority to eliminate this urban pollution source for these reasons alone.

Very astute Dennis, I was thinking of Jonathan Swift as I wrote it.

@apostasy
Excellent point. As Malcolm pointed out, the brokers have very litle room to maneuver in either direction.

Unfortunately for most of us, you are right that this is moving towards a taxpayer funded bailout via the GSE's.

SP

Last paragraph of a post over at Ben's, purportedly from our very own DinOR.

Ahem, who in Vegas isn't "stated". No strippers I know! Ooops. (Not that I'd no any)

Should I take this to mean you 'yes' them then?? ;)

ozajh,

Imagine my surprise!? Of late it seems Ben's been having tech. issues and the longer you take to proof read a post, the more likely it won't. I suppose I "could" have corrected it but when I looked back I kind of got a kick out of it so I let it slide. (Keeps 'em guessing) :)

That aside, it's another nail in the coffin for Sin City RE. Since nearly everyone there is reliant on tips as a sustantial part of their income, the new law throws a sizeable wrench in the Stated Income loan machine. What a shame.

DennisN,

That model is receiving NATIONAL attention! We're not in the habit of using this form to dispense any form of investment advice but... if you are offered in any way to provide seed capital for some these start-ups... "I" would give it serious consideration.

Most are shoe-string operations and get funding, well, where they can. It's not big enough (yet) to attract larger players so we may look back on this as a genuine opportunity. Even if it's structured as an LLC etc.

apostasy,

I had thought much the same, except that the limits were reaffirmed at 417K with talk supporting why they were not, in fact lowered. Big Ben's $1m is not going to happen.
The GSEs are now raising capital through preferred stock sales and they are cutting dividends. They are hurting already and I think the ship of Fannie and Freddie being forced to suck up the bad loans has sailed.
What I see really amounts to a lot of window dressing. The 'freeze' affects so few people that it is just media hype to buy time for the regulation arms of the Fed and the Treasury to step in. Those regulations are a must becuase America has seriously comprimised the trust of the international community and any added cost to our debt servicing is harsh for such a debt-based nation.
Even with the governement moving to restore confidence, the theory that 'inflation was slain by globalization' will be sorely tested. It is my contention that the stock market asset bubble will be pricked (or has been pricked) and as the unleveraging and contraction proceeds we will see inflation again. Strikes in France and Germany and strong inflation pressures in Italy and England all seem to point to even the European Union facing significant problems.
As you say, we need to know when the game changes from growth to hunker-in-for-the-bad-times. Well, start a-hunkering.