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    Oil prices reach record highs as the U.S. Energy Information Agency releases a report that showed crude oil inventories fell by more than seven million barrels last week. The rise comes despite a decision by the international oil cartel, OPEC, to raise its output quota by 500,000 barrels. Reuters - September 12, 2007.

    OPEC decided today to increase the volume of crude supplied to the market by Member Countries (excluding Angola and Iraq) by 500,000 b/d, effective 1 November 2007. The decision comes after oil reached near record-highs and after Saudi Aramco announced that last year's crude oil production declined by 1.7 percent, while exports declined by 3.1 percent. OPEC - September 11, 2007.

    GreenField Ethanol and Monsanto Canada launch the 'Gro-ethanol' program which invites Ontario's farmers to grow corn seed containing Monsanto traits, specifically for the ethanol market. The corn hybrids eligible for the program include Monsanto traits that produce higher yielding corn for ethanol production. MarketWire - September 11, 2007.

    Ethanol Statistics, a new industry information resource, reports that U.S. petroleum refiners Citgo and Valero are the top 2 ethanol importing companies in the United States in the first 6 months of 2007. Overall imports were up 7.64% compared to the same period in 2006, from 193,620 gallons to 208,404 gallons. Chevron imported 43% less, whereas Noble and ConocoPhilips' imports were up 255% and 372% respectively. Data are reported in 'The United States Ethanol Market 2007’, which also provides a breakdown of U.S. ethanol production costs and a detailed analysis of U.S. consumption and production. Ethanol Statistics - September 10, 2007.

    The government of British Columbia launches a $100,000 study into the production of biogas, heat, power and clean water from household waste streams. Raw sewage water can be cleaned by microbial fuel cells that deliver electricity as they clean the water; other technologies include classic anaerobic fermentation. Canada.com - September 10, 2007.

    Saudi Aramco in its Annual Review 2006 said that last year the company's crude oil production declined by 1.7 percent, while exports declined by 3.1 percent, compared with the previous year. Crude oil production in 2006 averaged 8.9 million barrels of oil a day (b/d) and exports 6.9 million b/d. Saudi Aramco - September 9, 2007.

    Chinese packaging manufacturer Livan Biodegradable Product Co. Ltd. will build plants in Alsozsolca and Edeleny in eastern Hungary at a combined cost of €18 million by 2009, the Hungarian economics ministry says. The plants, which will employ 800 people, are planned to produce initially 50, 000 metric tons a year of environmentally-friendly packaging material, and double that amount by a later date. Livan will use corn to manufacture biodegradable packaging boxes with similar properties to petroleum-based plastic boxes used in the food industry. Dow Jones Newswires - September 7, 2007.

    South Korea aims to raise biodiesel content in domestic diesel to 3 percent from the current 0.5 percent by 2012, Seoul's energy ministry said today. The government was initially set last year to impose a mandatory 5 percent blend, in line with the level targeted by the European Union by 2010, but the country's powerful refining lobby opposed the move, forcing it to push back the target, according to market sources. Reuters - September 7, 2007.

    Virent Energy Systems, Inc. announced today that it has closed a US$21 million second round of venture financing. Investor interest in Virent was driven in large part by the Company’s continued development of its innovative BioForming process beyond its traditional hydrogen and fuel gas applications and toward the production of bio-based gasoline, diesel, and jet fuels. Virent Energy Systems - September 6, 2007.

    The U.S. National Ethanol Vehicle Coalition (NEVC) announces that 31 models of motor vehicles will be offered in the U.S. with an E85 capable engine in 2008. Chrysler, Ford, General Motors, Nissan and Mercedes Benz will all offer flexible fuel vehicles (FFVs) in the coming year. The NEVC expects 750,000 such FFVs will be produced in 2008. National Ethanol Vehicle Coalition - September 5, 2007.

    GreenHunter BioFuels, Inc., has begun commercial operations with the start-up of a 1,500 barrel per day methanol distillation system. Methanol is an alcohol used to transesterify vegetable oils into biodiesel. The methanol production facility is a key element of GreenHunter's 105 million gallon per year biodiesel refinery, the largest in the U.S., slated for initial operations during the first quarter of 2008. PRNewswire - September 5, 2007.

    GreenHunter BioFuels, Inc., has begun commercial operations with the start-up of a 1,500 barrel per day methanol distillation system. Methanol is an alcohol used to transesterify vegetable oils into biodiesel. The methanol production facility is a key element of GreenHunter's 105 million gallon per year biodiesel refinery, the largest in the U.S., slated for initial operations during the first quarter of 2008. PRNewswire - September 5, 2007.

    Spanish renewables group Abengoa released its results for the first half of 2007 financial year in which its consolidated sales were €1,393.6 million, which is a 27.9 percent increase on the previous year. Earnings after tax were €54.9 million, an 18.6 percent increase on the previous year's figure of 46.3 million euro. Abengoa is active in the bioenergy, solar and environmental services sector. Abengoa - September 4, 2007.

    Canadian hydro power developer Run of River Power Inc. has reached an agreement to buy privately owned Western Biomass Power Corp. in a $2.2 million share swap deal that could help finance development of new green sources of electricity in British Columbia. The Canadian Press - September 4, 2007.

    As of Sept. 1, a biodiesel blending mandate has come into force in the Czech Republic, requiring diesel suppliers to mix 2 per cent biodiesel into the fuel. The same rule will be obligatory for gasoline starting next year. In 2009 the biofuel ratio will grow to 3.5 percent in gasoline and 4.5 percent in diesel oil. CBW - September 3, 2007.

    Budapest's first biofuel station opens on Monday near the Pesterzsébet (District XX) Tesco hypermarket. This is the third station selling the E85 fuel containing bioethanol in Hungary, as two other stations are encouraging eco-friendly driving in Bábolna and Győr. Caboodle - September 3, 2007.

    Canadian forest products company Tembec announced that it has completed the acquisition of the assets of Chapleau Cogeneration Limited located in Chapleau, Ontario. The transaction includes a biomass fired boiler and steam turbine with an installed capacity of 7.2 megawatts. Consideration for the assets consists of a series of future annual payments to 2022, with a present value of approximately $1 million. Tembec - September 1, 2007.

    Innovative internet and cable/satellite channel CurrentTV is producing a documentary on Brazil's biofuel revolution. Biopact collegues and friends Marcelo Coelho (EthanolBrasil Blog), Henrique Oliveira (Ethablog) and Marcelo Alioti (E-Machine) provided consulting on the technical, economic, environmental and social aspects of Brazil's energy transformation. ProCana - August 31, 2007.

    Oil major BP Plc and Associated British Foods Plc won competition clearance from the European Commission on to build a plant to make transport fuel from wheat in Hull, northeast England. U.S. chemical company DuPont is also involved. Reuters UK - August 31, 2007.

    The government of the Indian state of Orissa announced its policy for biofuel production which includes a slew of incentives as well as measures to promote the establishment of energy plantations. The state aims to bring 600,000 hectares of barren and fallow land under Jatropha and Karanj. At least 2 million hectares degraded land are available in the State. The new policy's other objectives are to provide a platform for investors and entrepreneurs, market linkages and quality control measures. Newindpress - August 29, 2007.

    Brazil's state-run oil company Petrobras said today it expects to reach large scale cellulosic ethanol production in 2015, with the first plant entering operations as early as 2011. Lignocellulosic biomass is the most abundant biological material on the planet, making up the bulk of the structure of wood and plants. In a first phase, Petrobras intends to use bagasse as a feedstock. Reuters / MacauHub- August 29, 2007.

    Seattle based Propel Biofuels, is announcing a $4.75 million first round of capital from @Ventures and Nth Power. The money will be used to help Propel set up and manage biodiesel fueling stations. BusinessWire - August 29, 2007.

    BioEnergy International, a science and technology company committed to developing biorefineries to produce fuels and specialty chemicals from renewable resources, announced today the closing of a major US$61.6 million investment that will provide funding for the Company’s three strategic initiatives: generating secure cash flow from its conventional ethanol platform, product diversification through the introduction of novel biocatalysts for the manufacture of green chemicals and biopolymers and the integration of its cellulose technology. BusinessWire - August 28, 2007.

    German company Verbio Vereinigte BioEnergie, the biggest biofuels producer in Europe, says it is considering plans to invest up to €100/US$136.5 million in a biofuel production facility in Bulgaria. The company wants the new facility to be located close to a port and Bulgaria's city of Varna on the Black Sea is one of the options under consideration. If Verbio goes through with the plan, it would produce both biodiesel and bioethanol, making Bulgaria a major source of biofuels in southeastern Europe. Verbi currently produces around 700,000 tonnes of biofuels per year. Sofia News Agency - August 27, 2007.

    Czech brown-coal-fired power plant Elektrárna Tisová (ETI), a unit of the energy producer ČEZ, could co-fire up to 40,000 tons of biomass this year, the biggest amount in the company’s history, said Martin Sobotka, ČEZ spokesman for West Bohemia. ETI burned more than 19,000 tons of biomass in the first half of 2007. The company’s plan reckoned with biomass consumption of up to 35,000 tons a year. Czech Business Weekly - August 27, 2007.


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Wednesday, September 12, 2007

High oil prices disastrous for developing countries

Oil prices have breached the psychological barrier of US$80 per barrel today, as a result of a report by the U.S. Energy Information Agency which showed that crude oil inventories have sharply declined. The rise comes despite OPEC's recent announcement that it agreed to raise output by 500,000 barrels per day.

Norway's energy minister Odd Roger Enoksen says these high prices are 'justified' and that 'global oil markets are balanced'. Present high oil prices are needed to develop new resources in harder-to-reach places and offset rising production costs: "(Production) costs have increased a lot in the last couple of years, and we need a high price to develop new resources". Peak oil analysts would say that this is a discourse typical of oil producing countries that have maxed out. And indeed, Norway's North Sea oil fields have already hit that infamous peak.

Enoksen says record oil prices have a limited effect on that abstract thing called the 'global economy', but he does admit, by way of detail, that:
Of course the less developed countries can suffer from high oil prices but so far we have not seen threatening signs (of an oil-induced slowdown in global growth).
We don't see this as a detail. In fact, high oil prices are outright disastrous for developing countries and are already hitting them. The 'global economy' is dominated by a handful of highly industrialised countries whose economies are robust and can cope easily with volatility in energy prices. But for oil importing developing countries, representing more than 2 billion people, the situation is entirely different. Their economies are energy intensive and each increase in oil prices affects all productive segments of society immediately. Abundant and cheap energy is key to development. Scarce and expensive energy is detrimental to progress. The correlation is one of the best established relationships in development economics. The generic 'human development index' strictly correlates with the 'energy development index' (earlier post).

For the wealthiest countries (non-oil producing OECD), oil imports make up less than 2% of GDP, whereas for African oil importing nations this was more than 10% of GDP in 2006 (more here *.doc). In poor oil importing countries, oil price rises of the current magnitude imply a significant reduction of economic growth rates, an erosion of trade balances and a hike in inflation rates.

If coupled with low foreign reserves some of the effects of current high oil prices are: decreased import capacity, lower consumption and investment, lower production and employment. And as always, the poor are hit hardest as they face lower employment prospects, higher inflation (fuel, transportation, basic goods), and cuts in government spending on social services (in a recent report, when oil stood at around US$ 60 per barrel, the UN found that some of the poorest countries are already forced to spend twice as much on imported oil as on such fundamental social services as health care and education (earlier post). According to an African Development Bank document on the effects of high oil prices on African societies:
Lower employment prospects and the higher inflation rate will lower the purchasing power of the poor who have fewer (if any) instruments to hedge against the oil price increase. The biggest impact will be through higher price of kerosene which is used for cooking and lighting. The poor will also be affected by higher transportation costs. Clearly, higher petroleum costs will increase commuting costs and, especially in the case of agricultural economies, the cost of getting the crops to the markets.
Of the 47 poorest countries, 38 are net importers of oil, and 25 are fully dependent on imports (more here):
:: :: :: :: :: :: :: :: ::

Given the limited availability of foreign exchange, these poor oil-importing countries face a number of options. Consumers and firms could decide to reduce their oil consumption but since the demand for oil is highly inelastic in the short-term, they may be compelled to reduce their consumption of other imported goods. Doing so could undermine economic growth especially if capital goods imports are affected.

Alternatively, countries could try to access foreign currencies to fill the gap and finance the energy bill. However, obtaining funds from private markets, bilateral and multilateral sources must be consistent with medium-term sustainability and sound debt management. In highly indebted poor countries, the only solution to fill the financing gap, and not to weaken growth, is to obtain grants or highly concessional loans. More importantly, governments will have to consider sustainable financing plans as all evidence points to oil remaining at high prices.

High oil prices will also exert a heavy toll on the budget both on the revenue and expenditure sides. On the revenue side, the tax base will be eroded if the profitability of oil-consuming companies is adversely affected and if unemployment increases. Expenditure could increase wherever governments subsidize oil products, or programs, which make intensive use of petroleum products. In that regard, an important question is if there should be complete pass-through of the oil price increase.

Governments are under heavy pressure to intervene to cushion the effect of the oil price increase. If the price of oil is not mean-reverting, price controls will lead to ever increasing losses which will ultimately be borne by current or future tax payers.

Subsidies to public utilities can also worsen the consolidated government budget deficit. In many countries electricity is produced using oil and is sold by law below its cost of production. In this case, the government will have to bear the additional expenditure from a higher oil bill. If the government does not have the resources to do so (for instance, if foreign reserves are too low), it may have to resort to rolling blackouts which have very adverse effects. Moreover, governments will themselves face higher energy bills through their own activities and that of state-owned companies.

Central banks may be tempted to tighten their monetary policy in reaction to the increase in inflation. Previous oil price shocks have produced significant increases in real interest rates which undermined domestic investment, pushed countries deeper into recession and produced stagflation. Furthermore, a rising fiscal deficit, combined with increasing public expenditures due to petrol consumption by public entities, can prompt the authorities to use monetary creation to finance the additional expenditures. As the increase in the price of oil is akin to a supply shock, an accommodating monetary policy would contribute to inflation. Non-inflationary policies are needed to avoid hyperinflation and to maintain monetary credibility.

For all these major problems, alternative sources of energy may offer a way out provided they are produced locally and can compete with oil. Many developing countries have the natural resources and the agro-ecological conditions to produce such competitive biofuels. But this would require significant investments in these countries, known for their difficult investment climates.

In any case, it is high time for the energy and development think tanks of this world to start working on a study showing the social and economic effects of high oil prices on the economies of the poorest countries and the potential for biofuels to mitigate these effects. Such an exercise could demonstrate the fact that biofuels have an important role to play not just in mitigating climate change, but in shielding the poorest countries from the catastrophic effects of high oil prices. Biofuels are not merely 'green', they are 'red' and 'blue' too - they can bring social justice and security.

References:
Reuters: Norway says high oil prices justified - September 11, 2007.

Ralf Krüger: Impact of high oil prices on oil-importing countries in Africa [*.pdf], UNECA
Project LINK meeting, Fall 2006, Geneva.

African Development Bank Group: Can Struggling African Economies Survive Escalating Oil Prices?

African Development Bank Group: High Oil Prices and the African Economy [*.doc] - Concept paper prepared for the 2006 African Development Bank Annual Meetings Ouagadougou, Burkina Faso.

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