By Robert Gough
Standing under a sign at his service station that advertises propane, natural gas, biodiesel and ethanol €" alongside gasoline and diesel €" Mike Lewis of Pearson Fuels in San Diego calls himself an "energy futurist."
As a leading retailer of alternative fuels in California, a state that prides itself on being on the cutting edge of "green" regulation, Lewis can certainly be counted among a handful of retailers trying to push the frontier of automotive fuels.
Pearson brought the ï¬?rst ethanol station to the state of California, the first biodiesel station to San Diego and the first dual pressure natural gas station to San Diego County, according to his Web site. Pearson also built San Diego€™s largest electric vehicle charging facility, the county€™s first propane vehicle fueling station and was the first independent station in San Diego to offer ultra-low-sulfur diesel. Three grades of gasoline round the offering for a total of 10 different vehicle fuels in his retail network.
Fourteen additional Pearson sites have opened since 2003 and another at the San Diego Airport is on the way, each offering E85, a blend of 85 percent ethanol and 15 percent gasoline, and many other exotic alternatives.
"The key is to make it normal, just like gasoline," Lewis said. "Don€™t stick it out on some chained off corner of your site. That€™s not planning for growth. You€™ve got to get it out on Main Street."
Despite Lewis€™ alternative fuel investment and commitment, he€™s quick to say he€™s no foe of gasoline and diesel or oil companies. Still, he feels there€™s a definite place for a wide variety of fuel choices, mainly E85, followed by biodiesel, propane, natural gas and perhaps one day, electricity and hydrogen.
"The transportation industry€™s total reliance on petroleum fuel is the greatest challenge my children will face," Lewis said. And his concern isn€™t just for the air his children will have to breathe but also for the type of world they€™ll grow up in, citing the national security concerns of relying on oil that comes from countries hostile to the United States.
Eventually, these fossil fuel alternatives will be able to take advantage of economies of scale, Lewis predicts, and "we€™ll all consider ourselves in the energy business, not just the oil business."
As Lewis discovered, adding alternative fuels to your station€™s fuels offer is an expensive strategy, and one that€™s often underpinned by a broad spectrum of federal and state efforts aimed at reducing the use of gasoline and diesel. From biofuel blending mandates to dictated reductions in conventional fuel use to ï¬?nancial incentives for electric vehicles, governments are attacking fossil fuels on a variety of fronts.
However, a closer look at the combined effects of these regulatory approaches shows that both the short-and long-term impact on gasoline and diesel sales is likely to be much smaller than politicians and environmentalists would lead you to believe.
Much attention has been given to a host of U.S. policy changes already made or anticipated to reduce U.S. dependence on foreign oil and clean up the environment €" all of which will reduce demand for hydrocarbon-based transportation fuels (gasoline and diesel). While their impact on traditional motor fuels cannot be ignored, these policies will not signiï¬?cantly reduce consumer dependence on gasoline and diesel for at least the next give to seven years.
Take a look at a few headline-grabbing federal initiatives and their true influence on oil products:
The U.S. Department of Transportation (DOT) proposes to increase Corporate Average Fuel Economy (CAFE) standards to a fleet-wide national average of 35.5 miles per gallon (mpg) for all classes of passenger vehicles by 2016. That is expected to cut about 1.8 billion barrels of oil demand over the 20-year life of a vehicle, according to DOT. Currently, the United States uses about 7.5 billion barrels a year of oil, so the CAFE increase represents just a 1.2 percent drop in oil use over two decades at current usage rates. DOT is tasked with finalizing the rules by March 31, 2010. The effort is coupled with an initiative by the Environmental Protection Agency (EPA) to regulate greenhouse gas emissions from motor vehicles.
The U.S. Supreme Court has ruled that the U.S. Environmental Protection Agency (EPA) must regulate greenhouse gas emissions (GHG), and a climate change bill with carbon cap-and-trade language passed the House of Representatives in the summer of 2009. The Senate is now considering a version of climate change legislation that calls for a 20 percent reduction in global warming pollution by 2020, compared to the House version of a 17 percent reduction.
Under the House-passed bill, U.S. refiners would receive carbon credits for up to 2.25 percent of emissions but would be responsible for nearly 50 percent of carbon dioxide emissions regulated under the bill. The Senate version is silent on the carbon credit allowances refiners can expect. Ethanol producers are also subject to GHG caps. The carbon cap-and-trade system is central to both bills. Estimates are that credits would sell for around $25/metric ton on the open market, at least initially.
Gasoline pump prices are projected to rise by 77 cents a gallon, and diesel by 88 cents a gallon, if carbon cap and trade passes. At current national retail averages, that would put gasoline at $3.32 a gallon and diesel at $3.48 a gallon. In 2008, when pump prices rose above $3.50 a gallon, fuel demand fell by more than 5 percent €" even before economic recession fears took over. International climate change talks in Copenhagen on December 7 established goals but no concrete steps to reduce GHG emissions.
Renewable fuels €" ethanol and biodiesel €" are mandated under the Renewable Fuels Standard (RFS), a program administered by EPA. Recent RFS revisions (known as RFS2) require refiners and other obligated parties to blend 36 billion gallons of biofuel per year by 2022 (previous RFS required only 7.5 billion gallons by 2012). Petroleum transportation fuel use should hit 202.5 billion gallons a year in that same year, according to the Energy Information Administration, so biofuels€™ market share is expected to reach nearly 18 percent in 10 years€™ time.
Traditional corn-based ethanol and soy-based biodiesel are limited under the federal blending mandate to 15 billion gallons per year and 1 billion gallons per year, respectively. Concerns over grain-based biofuels€™ effect on food prices as well as indirect land use change led to the limits. Advanced biofuels, such as cellulosic ethanol, algae-based biodiesel and processes that use other non-food feedstocks, largely avoid these issues but have yet to reach commercial scale.
Low carbon fuel initiatives also promote the use of alternative fueled vehicles such as hybrid electrics, battery electrics, compressed natural gas and flexible-fuel vehicles (FFVs) that can burn either gasoline or an 85 percent ethanol mixture (E85).
The Obama administration has pledged to put 1 million plug-in hybrid electric vehicles (PHEVs) on the road by 2015. General Motor€™s Chevy Volt boasts 230-mpg fuel efficiency. So 1 million PHEVs getting similar mileage would cut total gasoline consumption by less than one half of 1 percent (0.36 percent). About 8 million FFVs are capable of using E85 in the United States, and since FFVs can use either gasoline or E85, biofuel use will be subject to economics relative to conventional fuel.
For context, there are about 143 million passenger vehicles in the United States. At the close of 2009, hybrid sales totaled 290,272. "Hybrid sales were off by 8 percent compared to 2008, while the overall market fell by 21 percent. The total market share of hybrid gas-electric vehicles was 2.8 percent," according to hybridcars.com.
The "Cash for Clunkers" program took nearly 700,000 older cars off the road, replacing them with new vehicles that average just 9 more miles per gallon, according to DOT. The program resulted in an immediate reduction in motor fuels demand of about 200 to 300 million gallons a year (about .1 to .15 percent of total yearly motor fuels demand), based on estimates from the ClearView consulting group. The majority of the trade-ins (84 percent) were trucks and 59 percent were passenger cars, DOT said. New vehicles bought under the program had an average fuel-efficiency of 24.9 mpg, compared with an average of 15.8 mpg for trade-ins.
There€™s no doubt that environmental and energy security pressures will change the transportation fuel mix in the United States. If all programs currently under consideration were implemented to their fullest, traditional motor fuels demand would be reduced by 23 percent in 2022. But while that€™s a significant reduction, there would still be more than 10 million barrels a day of gasoline and diesel fuel being produced €" the same amount produced in 1993.
Over the next 12 years, the "clean" component of transportation fuels will be small relative to overall volume €" but it will evolve to be the more important focus as technologies and infrastructure change over time.
Interestingly, the refueling infrastructure is playing a key role in shaping present day investment decisions €" Exxon is investing heavily in algae-based fuels that can be made at refineries and transported through common carrier pipelines to service stations; BP is spending big on developing bio-butanol, an ethanol-like fuel that can be produced at refineries and shipped to stations; and Shell has invested heavily in cellulosic ethanol, which would be sold through existing fueling stations.
Advanced biofuels do promise a greater role for retailers than the hydrogen or electricity schemes of today, but eventually retailers will find their role, according to Pearson Fuels€™ Mike Lewis. "Maybe we won€™t call them gas stations any more. We€™ll call them fuel stations."
Robert Gough is executive editor - renewables, at the Oil Price Information Service (OPIS).
During any energy and environmental policy debates on Capitol Hill, NACS stands out as the leading voice for the motor fuels retailing community. When the original renewable fuels standard (RFS) was crafted, NACS engaged with policymakers to ensure that retailers were treated fairly and protected from undue regulatory burdens. Today, as the debate looks to the future, NACS again stands for the voice of the retailer.
The new RFS establishes unattainable renewable fuel mandates given the existing infrastructures and associated legal impediments. There€™s not a single motor fuels dispenser certified to sell any fuel with more than 10 percent ethanol. Consequently, retailers who increase their ethanol volumes beyond 10 percent are violating a variety of federal regulations and opening themselves up to gross negligence litigation.
Meanwhile, refiners seeking to comply with the ever-increasing RFS mandates are being forced to consider blending gasoline with more than 10 percent ethanol or face big penalties. If they blend, however, they will have no way to sell the higher blended product. NACS is working to revise the legal structures that dictate equipment compatibility to allow more retailers to sell higher blends of ethanol without replacing equipment.
Beyond renewable fuels, NACS is looking at the future of transportation energy demands. The current infrastructure is ideally situated to sell liquid motor fuels. Since these products will dominate the market for the foreseeable future, NACS is supporting policies that improve the efficiencies of the system and preserve the role of convenience stores in fueling America.
If future demand shifts to hydrogen, electricity, natural gas or some other energy source, NACS will continue to advocate for policies that ease the transition to these alternatives €" and over a sufficient length of time €" to enable convenience stores to adapt to the changing demands of consumers.