The Energy SituationThe Energy Situation

2006 2006

Mike WoolvertonMike Woolverton

Kansas State UniversityKansas State Universitymikewool@agecon.ksu.edumikewool@agecon.ksu.edu

Light Crude Oil, NYMEX, Light Crude Oil, NYMEX, $ per barrel$ per barrel

U.S. Oil Import SuppliersU.S. Oil Import Suppliers1.1. CanadaCanada

2.2. MexicoMexico

3.3. Saudi Arabia Saudi Arabia (OPEC)(OPEC)

4.4. Venezuela Venezuela (OPEC)(OPEC)

5.5. Nigeria Nigeria (OPEC)(OPEC)

6.6. IraqIraq

7.7. AngolaAngola

8.8. Algeria Algeria (OPEC)(OPEC)

9.9. RussiaRussia10.10. EcuadorEcuador Source: Energy Information Administration Source: Energy Information Administration

Years of Oil RemainingYears of Oil Remaining

Total Reserves Total Reserves 1,277,702,000,0001,277,702,000,000 5050yearsyearsUsage Rate Usage Rate 25,000,000,000 25,000,000,000

(Barrels)(Barrels)

Source: en.wikipedia.org/wiki/Fossil_fuelSource: en.wikipedia.org/wiki/Fossil_fuel

Estimated Extraction Cost per Estimated Extraction Cost per Barrel of Oil Barrel of Oil

U.S. U.S. $10 to $12$10 to $12

Arabian PeninsulaArabian Peninsula $1$1

The United States and OilThe United States and Oil

Use 20 million barrels per dayUse 20 million barrels per dayProduce 6 million barrels per dayProduce 6 million barrels per dayOil usage increases 2% per year but the Oil usage increases 2% per year but the economy has been growing at 3.3% per economy has been growing at 3.3% per yearyearUsage in barrels per dollar of GNP is one-Usage in barrels per dollar of GNP is one-half of the 1947 levelhalf of the 1947 levelCost per year to import oil - $175 to $200 Cost per year to import oil - $175 to $200 billion billion

Energy: Non-petroleum SourcesEnergy: Non-petroleum Sources

WindWind

SolarSolar

HydroHydro

Hydrogen cellsHydrogen cells

NuclearNuclear

Bio-fuelsBio-fuels

What it will take to replace imports?What it will take to replace imports?The U.S. uses 140 billion gallons of gasoline per The U.S. uses 140 billion gallons of gasoline per

year and 41 billion gallons of diesel fuel made year and 41 billion gallons of diesel fuel made from oil of which 65% is imported.from oil of which 65% is imported.

To replace the imported gasoline with ethanol To replace the imported gasoline with ethanol would require 33.6 billion bushels of corn. This would require 33.6 billion bushels of corn. This year’s production – 10.7 billion bushels.year’s production – 10.7 billion bushels.

To replace the diesel with soy-diesel would To replace the diesel with soy-diesel would require 26.9 billion bushels of soybeans. This require 26.9 billion bushels of soybeans. This years production – 3.2 billion bushels. years production – 3.2 billion bushels.

Land Needed to ReplaceLand Needed to ReplaceImported FuelsImported Fuels

Corn Corn 224 mil. A. (79.4 mil. A.)224 mil. A. (79.4 mil. A.)

SoybeansSoybeans 598 598 mil. A. (74.9 mil. mil. A. (74.9 mil. A.)A.)

Total NeededTotal Needed 822 mil. A.822 mil. A.

Total AvailableTotal Available 349 mil. A.349 mil. A.

Plus Idle LandPlus Idle Land 387.5 mil. A.387.5 mil. A.

Renewable Fuels DriversRenewable Fuels Drivers

High oil priceHigh oil priceInstability in oil exporting regions of the worldInstability in oil exporting regions of the worldFlow of dollars out of the United StatesFlow of dollars out of the United StatesEnergy Policy Act of 2005Energy Policy Act of 2005Mandates and tax creditsMandates and tax creditsPhase out of MTBEPhase out of MTBEGood Returns on InvestmentGood Returns on Investment

Bio-refining AssumptionsBio-refining Assumptions

Petroleum will remain relatively expensivePetroleum will remain relatively expensive

Raw materials will be relatively inexpensive Raw materials will be relatively inexpensive

Raw materials can be replenished each year Raw materials can be replenished each year (sustainable)(sustainable)

Net Energy BalanceNet Energy Balance

ProductProduct Energy Out/Energy InEnergy Out/Energy In

GasolineGasoline .81 .81

Ethanol from grainEthanol from grain 1.351.35

Ethanol from celluloseEthanol from cellulose4.174.17

DieselDiesel .91 .91

Bio-dieselBio-diesel 3.243.24

Sources: Argonne National Laboratory and OECD International Energy AgencySources: Argonne National Laboratory and OECD International Energy Agency

ETHANOLETHANOL

Industry at a GlanceIndustry at a GlanceNumber of operating ethanol plants: 108 Number of operating ethanol plants: 108 Plants under construction and expanding: 62Plants under construction and expanding: 62Announced plants: 100+*Announced plants: 100+*2005 production: 3.9 BG2005 production: 3.9 BG Current production capacity: 5.1 BGPY Current production capacity: 5.1 BGPY Projected production capacity: 7.7 BGPY in 2007Projected production capacity: 7.7 BGPY in 2007Size: New plants 100 MGPYSize: New plants 100 MGPYProcess: wet or dryProcess: wet or dryDaily water usage – 1.5 million gallonsDaily water usage – 1.5 million gallonsFeedstock percentage:Feedstock percentage:

CornCorn 97 97SorghumSorghum 2 2Other 1Other 1

Ethanol Plant EconomicsEthanol Plant Economics

Cost to build a 100 MGPY plant -Cost to build a 100 MGPY plant - $140 million$140 million

Will purchase about 37 million bushels of cornWill purchase about 37 million bushels of corn

Natural gas expense - $16.5 millionNatural gas expense - $16.5 million

Payroll expense about $2 millionPayroll expense about $2 million

Distiller’s Dried Grains income about $25 millionDistiller’s Dried Grains income about $25 million

COCO22 income about $4 million (314,500 tons) income about $4 million (314,500 tons)

At current ethanol price $2.385 per gallon, theAt current ethanol price $2.385 per gallon, the

BE corn price is $5.06 per bushelBE corn price is $5.06 per bushel

Goal 30% R.O.I. Goal 30% R.O.I.

Ethanol Price, $ per gallonEthanol Price, $ per gallon

Distiller’s Grain FactsDistiller’s Grain FactsEach bushel of corn dry grind processed for Each bushel of corn dry grind processed for ethanol yields about 1/3 bushel of distiller’s ethanol yields about 1/3 bushel of distiller’s grain.grain.

Distiller’s grain retains one-third of the nutrient Distiller’s grain retains one-third of the nutrient value of corn.value of corn.

In N. America: In N. America: 45% dairy45% dairy

37% beef37% beef

13% swine13% swine

5% poultry5% poultry

Distiller’s GrainDistiller’s Grain

WDG – wet distiller’s grainWDG – wet distiller’s grainDDG – dried distiller’s grainDDG – dried distiller’s grainWDGS – wet with solublesWDGS – wet with solublesDDGS – dried with solublesDDGS – dried with solublesDDGS Ave. Nutrients (Percentage):DDGS Ave. Nutrients (Percentage):

Dry matter Dry matter 89.389.3Crude proteinCrude protein 30.930.9Crude fatCrude fat 10.710.7Crude fiberCrude fiber 7.27.2AshAsh 6.06.0LysineLysine .9 .9PhosphorousPhosphorous .75 .75

Distiller’s Grain Production and UseDistiller’s Grain Production and Use((MMT)MMT)

ProductionProduction DomesticDomestic ExportExport

05/0605/06 8.35 8.35 7.4 7.4 .94 .94

06/0706/07 10.8 10.8 9.2 9.2 est.est. 1.6 1.6 est.est.

11/1211/12 20.0 20.0 est.est. 12.0 12.0 est.est. 8.0 8.0 est.est.

Fermentable Sugar Cost Fermentable Sugar Cost per Gallon of Ethanol per Gallon of Ethanol

SugarcaneSugarcane $.30$.30

CornCorn .91 .91

SugarbeetsSugarbeets .95 .95

Corn/Ethanol Projections, U.S.Corn/Ethanol Projections, U.S.

06/0706/07 07/0807/08Corn AcresCorn Acres 79.4 mil.79.4 mil. 86.2 mil.86.2 mil.Corn ProductionCorn Production 10.7 bil. Bu.10.7 bil. Bu. 12.0 bil. Bu.12.0 bil. Bu.Corn ExportsCorn Exports 2.2 bil. Bu.2.2 bil. Bu. 2.0 bil. Bu. 2.0 bil. Bu.Corn for EthanolCorn for Ethanol 2.15 bil. Bu.2.15 bil. Bu. 2.85 bil. Bu.2.85 bil. Bu.Ethanol ProductionEthanol Production 5.1 bil. Gal.5.1 bil. Gal. 7.7 bil. Gal.7.7 bil. Gal.DDG ProductionDDG Production 10.5 MMT10.5 MMT 14.3 MMT 14.3 MMT

(Thirty to 40 percent will replace corn in rations. Sixty to 70% will replace soybean meal.)(Thirty to 40 percent will replace corn in rations. Sixty to 70% will replace soybean meal.)

Dangers Ahead for EthanolDangers Ahead for Ethanol

Over expansion – On-line capacity will exceed Over expansion – On-line capacity will exceed the mandated usage in 2007 the mandated usage in 2007

Drop in the price of ethanol that causes Drop in the price of ethanol that causes production to become unprofitableproduction to become unprofitable

Competition from iso-octane and iso-octene Competition from iso-octane and iso-octene oxygenates made in converted MTBE plantsoxygenates made in converted MTBE plants

Low cost importsLow cost imports

Food or fuel debateFood or fuel debate

BIO-DIESELBIO-DIESEL

The Bio-diesel FormulaThe Bio-diesel Formula

100 gallons of veg. oil or animal fats100 gallons of veg. oil or animal fats

+10 gallons of methanol+10 gallons of methanol

==

100 gallons of bio-diesel100 gallons of bio-diesel

+10 gallons of glycerol+10 gallons of glycerol

Advantages of Bio-dieselAdvantages of Bio-diesel

No sulfur and less carbon emissionsNo sulfur and less carbon emissions

Higher cetane rating – better mileageHigher cetane rating – better mileage

Superior lubricitySuperior lubricity

One disadvantage:One disadvantage:

Bio-diesel requires an additive to prevent Bio-diesel requires an additive to prevent jelling at low temperaturesjelling at low temperatures

Bio-diesel Processing Margin per Gallon, Bio-diesel Processing Margin per Gallon, Dec. 5thDec. 5th

Diesel Fuel Diesel Fuel (Wholesale per gallon)(Wholesale per gallon) $ 1.762$ 1.762

Soybean oil Soybean oil ($ .289 per pound)($ .289 per pound) $ 2.17 $ 2.17

Glycerin credit = Methanol cost 0Glycerin credit = Methanol cost 0

Net Margin Net Margin $ -.41 $ -.41

U.S. Soy-diesel ProductionU.S. Soy-diesel Production

Currently 65 plants in U.S. Currently 65 plants in U.S.

Total capacity 365 mg – ave. size 7.45 mil.Total capacity 365 mg – ave. size 7.45 mil.

Output 2005 – 75 mg of biodiesel Why?Output 2005 – 75 mg of biodiesel Why?

Plants under 10 mg batch process using waste Plants under 10 mg batch process using waste fats and oils fats and oils

Much of output has been going to soap and Much of output has been going to soap and shampoo rather than biodieselshampoo rather than biodiesel

U.S. Soy-diesel ProductionU.S. Soy-diesel Production

58 plants expanding or under construction58 plants expanding or under construction

projected capacity 713 mil. gal.projected capacity 713 mil. gal.

Many of the new plants - 30 mil. gal. Many of the new plants - 30 mil. gal.

(Requires the oil from 400,000 A. soybeans.)(Requires the oil from 400,000 A. soybeans.)

Continuous processing using multiple Continuous processing using multiple feedstocks of vegetable oilfeedstocks of vegetable oil

Vegetable Oil YieldsVegetable Oil Yields

CornCorn 18 gal./A.18 gal./A.

SoybeansSoybeans 6666

SunflowersSunflowers 102102

RapeseedRapeseed 127127

Castor BeansCastor Beans 151151

Oil PalmOil Palm 635635

World Production of Fats and Oils, World Production of Fats and Oils, 2003/04, MMT2003/04, MMT

VegetableVegetable TropicalTropical

SoySoy 30.130.1 PalmPalm 28.728.7

RapeRape 14.114.1 Palm Kernel Palm Kernel 3.5 3.5

SunSun 9.3 9.3 CoconutCoconut 3.3 3.3

PeanutPeanut 5.0 5.0

CottonCotton 3.8 3.8

OliveOlive 2.8 2.8

Source: USDA, Agricultural Statistics, 2005.Source: USDA, Agricultural Statistics, 2005.

Soybean/Bio-diesel Projections, U.S.Soybean/Bio-diesel Projections, U.S.

06/0706/07 07/0807/08Soybean AcresSoybean Acres 75.675.6 69.0 69.0Soybean ProductionSoybean Production 3.2 bil. bu.3.2 bil. bu. 2.8 bil. bu. 2.8 bil. bu.Soybean ExportsSoybean Exports 1.1 bil bu.1.1 bil bu. 900 mil. bu. 900 mil. bu.Soybean Oil for BDSoybean Oil for BD 2.35 bil lbs.2.35 bil lbs. 4.65 bil. lbs. 4.65 bil. lbs.Bio-diesel ProductionBio-diesel Production 400 mil. g. 730 mil. g. 400 mil. g. 730 mil. g.

(330 from SBO) (600 from SBO)(330 from SBO) (600 from SBO)

Soybean Meal ExportsSoybean Meal Exports 7.5 MMT 11 MMT7.5 MMT 11 MMT

Source: Paul Smolen, AgriNetwork Management and Mike Woolverton, KSUSource: Paul Smolen, AgriNetwork Management and Mike Woolverton, KSU

Bio-diesel ConclusionsBio-diesel Conclusions

The industry is ramping up production capacity.The industry is ramping up production capacity.

Increased demand for vegetable oil will drive Increased demand for vegetable oil will drive price up. price up.

Bio-diesel production will be constrained by the Bio-diesel production will be constrained by the supply and price of vegetable oil.supply and price of vegetable oil.

Soybean meal will become the by-product and Soybean meal will become the by-product and increased supply will cause price to fall.increased supply will cause price to fall.

U.S. soybean meal exports will increase.U.S. soybean meal exports will increase.

Corn and soybeans will continue to be fierce Corn and soybeans will continue to be fierce competitors for available acres of land.competitors for available acres of land.

Alternative TechnologiesAlternative Technologies

Cellulosic EthanolCellulosic Ethanol

Bio-diesel from Algae OilBio-diesel from Algae Oil

NITROGENNITROGENFERTILIZER ECONOMICSFERTILIZER ECONOMICS

Farm Price of NH3Farm Price of NH3

Pre-KatrinaPre-Katrina $175-200 per ton$175-200 per ton

Post-KatrinaPost-Katrina $500+ per ton$500+ per ton

Nitrogen FactsNitrogen Facts

Imports are now about 50% of annual usageImports are now about 50% of annual usage

No new U.S. plants; shut down old plants No new U.S. plants; shut down old plants

U.S. high natural gas cost compared to U.S. high natural gas cost compared to overseas competitorsoverseas competitors

Production capacity growth 5.7% - all outside Production capacity growth 5.7% - all outside U.S. U.S.

Major suppliers – Trinidad, Mexico, and Major suppliers – Trinidad, Mexico, and VenezuelaVenezuela

Natural Gas Price, Natural Gas Price, $ per thousand cubic feet$ per thousand cubic feet

NH3 Farm Price EstimatorNH3 Farm Price Estimator

Approximate Farm Price for ton of NH3 = Approximate Farm Price for ton of NH3 =

NG price per kcf X 33.5 + $100NG price per kcf X 33.5 + $100

$8.50 X 33.5 + $100 = $384.75 $8.50 X 33.5 + $100 = $384.75

Anhydrous and Diesel Price ForecastsAnhydrous and Diesel Price Forecasts

www.agmanager.info/farmmgt/machinerywww.agmanager.info/farmmgt/machinery

At the same website find a paper by Dhuyvetter At the same website find a paper by Dhuyvetter and Kastens on the impacts of rising fertilizer and Kastens on the impacts of rising fertilizer and fuel prices and fuel prices