Proposition 87 in California: A battle over ethanol

I have written before on the ethanol craze (here, here, here, and here). I have acknowledged VC Vinod Khosla for his efforts to bring research dollars into alternative technologies, but I have also chided him for using inappropriate political tactics to armwrestle people into going along for a ride with him. The recent vote in California for a tax on oil, called Proposition 87, is one example of such arm-wrestling going on.

I actually do not care either way on Proposition 87, partly because I am not a California resident, and partly because I do not believe a yes or a no vote would make a dent of a difference to the larger issue. Alternative energy technologies will continue to be funded because, slowly but surely, the world is coming around to realize that global warming and energy security are going to be the most important challenges in this century (with clean water security as a close second). Hence, markets will continue to open up, and thrive under some circumstances, and as long as their are markets, investments will come.

My big problem is with people not being honest about their real reasons for backing one set of technologies over the other, and not allowing market place to decide for itself what it will bear. Proponent of hybrid vehicles think it is the best thing to have hit man since sliced bread, when I can tell you that a well kept standard gasoline Honda Civic, or a diesel Honda 2.0 ltr would give you equal or even better fuel economy (approx 55mpg on highway). Similarly, ethanol lovers talk about oil security, and do not mention how food security is an issue we all must grapple with as well… We think oil is difficult to find, try asking anybody by ADM and the corn growers of MidWest if ethanol will be abundantly available in any part of the world? Yes, Khosla tells us about the cellulosic ethanol future, but no, it is still in future and research can continue until some results starts to show. We cannot change oil for ethanol just because of national fuel security concerns. The environmental concerns are far more important and need to be considered when making tough choices between technologies to support and promote. Ethanol doesn’t do that for me, even if it provides some protection against against the Saudi control of fuel resources.

Anyways – all that rambling above was only to point to an ongoing duel between Vinod Khosla and Robert Rapier in the VentureBeat. You should check out the series of 9 articles published by Venture Beat on this issue. Back and forth arguments were presented by both sides and reading these makes it clear that both sides are really only battling for their own financial concerns (and investments), and not about the environment or the long term energy future for this earth’s population.

Read the latest installments here:
Vinod Khosla: Benefits of an alternative energy future: More jobs, economic growth, cheaper fuels, cleaner air
Robert Rapier: People in Glass Houses

Some interesting quotes:

Vinod Khosla: Vinod Khosla is founder of venture capital firm Khosla Ventures,. He is a former partner at Kleiner Perkins Caufield & Byers, and co-founder of Sun Microsystems.

Prop 87 will create hundreds of thousands of jobs. It will create a new Cleantech Silicon Valley. A dollar invested in alternative energy is much cheaper in “oil production” than the dollar that won’t be invested in oil production.

aving oil through efficiency improvements is even cheaper. But it will all involve Silicon Valley like investment in clean technologies, new companies, entrepreneurs and technologists. They will create jobs that will spread California’s products throughout the world. Many new Google’s and Yahoo’s and Ebay’s will be created in this new industry.

A Saudi sheik is often quoted as having warned decades ago that the stone age did not end for the lack of stone. What is not reported is that he went on to say that “technology is our enemy.” Why? Because technology can create alternatives.

Do you believe Al Gore, Bill Clinton, Senator Feinstein and Los Angeles Mayor Villaraigosa, (all unpaid)? Or do you believe the oil companies and their “bought endorsers”?

Robert Rapier: Robert Rapier has a master’s degree in chemical engineering, and bachelor’s degrees in chemistry and mathematics. He has 15 years of experience in the petrochemicals industry, including experience with cellulosic ethanol, gas-to-liquids (GTL), and butanol production. He holds several U.S. and international patents, and is currently employed by a major oil company. Robert maintains an energy blog at http://i-r-squared.blogspot.com/

…I become concerned when people with expertise in one field try to influence policy in another. My dentist is a great guy, and very good at what he does, but I wouldn’t let him remove my appendix. And while he should certainly be involved in the discourse, he shouldn’t receive undue influence on energy policy just because he is a good dentist.

I find it very ironic that those who are flying around the country to decry the “evil oil industry” are doing so using jet fuel supplied by the oil industry. They enjoy many conveniences as a result of oil and gas production, but have deluded themselves into believing their lifestyle could be maintained if we all switched to alternative energy.

I covered profit margins in my previous essay, and noted the hypocrisy coming from an industry [Ed: i.e. Internet companies] that sees double the profit margins of the oil industry. But “they wouldn’t want a cheaper alternative” is misinformation. The entry barrier for ethanol production and biodiesel is quite low. If ethanol is ultimately a cheaper option, oil companies will start making ethanol. Right now, most do not see that it is clearly viable in the long-term without subsidies.

The ethanol industry is the recipient of $0.51 gallon in direct ethanol subsidies. However, the subsidy is per gallon of ethanol produced, as opposed to actual net energy produced. If the ethanol energy return is 1.3/1, then it takes 3.3 gallons produced to net the energy equivalent of 1 gallon of ethanol. The website Zfacts, strongly supportive of alternative energy, concludes that when all the subsidies are added in, displacing a single gallon of gasoline costs $7.24 in ethanol

I have an idea then. Since Silicon Valley is so innovative, and we know that companies there are quite profitable, why don’t we tax them to fund this measure? That seems like a real win-win solution. The people who most strongly support this proposition will be the ones who will both pay for it, and “benefit” from it.

Now, if Mr. Khosla is correct, and it is in fact cheaper to produce ethanol than gasoline, it suggests that 1). Ethanol profit margins are far higher than gasoline profit margins; 2). Ethanol producers are “ripping us all off”; and 3). Ethanol producers should have no problem funding their own growth.