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The Amtrak Project

Week of 26 Oct 2009

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The biorefinery crowds, indeed many in the entire "private" energy research arena, are running around calling their efforts the new "Manhattan Project." They could not be further from the truth. It really deserves to be called the "Amtrak Project"--let me explain.

For those that do not know history, the Manhattan Project was the extraordinary effort exerted by the US during World War II to build the atomic bomb. Leo Szalard was a Hungarian physicist. He escaped Europe and came to the US. He was extremely concerned that Germany was developing an atomic bomb. He went to Albert Einstein, convinced him of his perceptions, whereupon Einstein wrote a letter to President Roosevelt on July 16, 1939. This was the genesis of the project--a project taken very seriously, for a nuclear armed Germany was perceived as a very dangerous threat at the time. So the Manhattan Project had a simple goal: at all costs build a nuclear bomb before Germany does.

In today's world, alternative energy plans, and especially alternative energy plans of the biorefinery ilk, are being promulgated and pressed forward in a manner more reminiscent of the Vietnam War (no clear objectives from the US point of view) and Amtrak (if the result is not competitive, the government will subsidize it).

We are being encouraged as an industry to be fuzzy in our objectives, at least here in the United States. The infamous Black Liquor Tax Credit of 2009 is training us to be subsidy dependent, just like farmers, passenger trains, financial institutions and auto manufacturers. Look at this statement from a major US pulp and paper company's SEC (Security and Exchange Commission) filing after the end of the first half of 2009:

"The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. In January 2009, the Company received notification that its application to be registered as an alternative fuel mixer had been approved. During the first six months of 2009, the Company filed claims for alternative fuel mixture credits covering eligible periods subsequent to November 2008 totaling approximately $1.0 billion, including $189 million recorded in Accounts and notes receivable at June 30, 2009 and $833 million that was received in cash. Accordingly, the accompanying consolidated statement of operations includes credits of approximately $482 million and $1.0 billion for the three months and six months ended June 30, 2009, respectively, in Cost of products sold ($294 million and $624 million after taxes), representing eligible alternative fuel mixture credits earned through June 30, 2009."

It is hard to run a business with any discipline if the government is giving you a billion dollars during half a year's operation for adding a fossil fuel to your black liquor in order to qualify for a tax credit. In the irony of all ironies, adding this fossil fuel (diesel) makes black liquor a renewable energy source, according to the US government.

In the 1950's, the good folks at Procter & Gamble noticed the dissatisfaction with cloth diapers. The only disposable diapers at the time were wretched things people used while traveling--they did not perform well enough for everyday use. So, P & G saw an opportunity and started to develop what came to be known as Pampers (a trademark of P & G). The scientists and the marketing people went to work and developed a diaper that would sell for, if I remember my story correctly, 12 cents apiece at retail. The bigwigs got together and said, "No good. Not enough people will buy at that price." So the scientists and engineers went back to work and developed a diaper with the same performance parameters that they could put on the shelf at retail for less than 10 cents each. Pampers today is in P & G’s portfolio of 23 or so "billion dollar brands" (brands that have annual sales of $1 billion or more).

Notice who made the decisions here--it was the business people. It was not scientists, marketers or economists--it was hard nosed business people. They directed all the necessary disciplines and told these disciplines what the objective was (but did not tell them how to achieve it).

Back in the 1980's those of us not in Japan looked with awe at MITI, the Ministry of International Trade and Industry. Part of the Japanese government, this institution managed much of Japanese industrial policy by funding research and guiding investment. MITI was considered the not-so-secret advantage of Japanese export success. In the twenty years since those days, I suspect the lackluster Japanese economy has reduced the number of foreign visitors seeking answers at MITI; in fact, MITI has become METI (the Ministry of Economy, Trade, and Industry). It appears that a bunch of bureaucratic scientists and economists sitting around thinking up industrial policy did not work out so well after all.

Today, here in the United States, we often gather together groups of scientific types, who through mutual self-aggrandizement ceremonies (you nominate me this year, I'll nominate you next), figuratively carry a chest-full of awards of reputation equivalent to the Nobel Peace Prize, and let them set energy research policy in co-operation with the US government (Note: just like the Nobel Peace Prize, at one time these awards were given to deserving, dedicated people, but that was long before they were hijacked by those few of the current persuasion). Setting energy policy this way is code for how they can get grants for themselves in order to continue to pretend to push the progress of research forward. Not knowing where else to look, government bureaucrats look to these tin-medaled experts as the ones needed to determine and advance energy policy.

Then, in mostly innocent collusion with these characters, well-meaning, desperate-for-revenue professional societies put up all sorts of conferences to discuss the mundane points of these matters. All the while, the big picture is missed.

All of this is absolutely the wrong way managed by the wrong people to decide what to do next. First, we need a goal, and that goal should be to produce biofuels, if that is what we want to do, at a retail price competitive with gasoline or whatever else you want to compete against. In other words, if gasoline at the pump sells for $2.50 per gallon, all taxes included, then any biofuel should sell for $2.49 per gallon (on an energy-equivalent basis), all taxes (and no subsidies) included. For if the idea is merely to produce a fuel that with a subsidy will compete, we don't need any research--all we have to do is set the subsidy (is it $10 a gallon, $1 a gallon, or 10 cents a gallon?--makes no difference the way governments throw around money these days). Build the darn thing out of titanium or palladium if necessary and let the government pay for it.

A subsidy makes any research efforts and any subsequent business a joke. One is just playing at research and playing at business, if a sugar daddy is coming along to bail out the entire mess anyway. For of all of the subsidies I have ever seen, and I was aware of agricultural subsidies when I was seven years old, I have never seen one advocate promoting a reduction in any subsidies. There are whole industries, such as some entities that exist in agriculture, that do little but work to make subsidies larger. There are plenty of advocates to raise subsidies--so I say if we are going to have subsidies, cut out the middleman and make them $10 a gallon to start. Subsidies almost never, ever go down. All the money being wasted on research to make the subsidies as small as possible when there are no advocates for smaller and smaller subsidies is a waste.

The fix for this mess? This exercise must be run by hard nose business people (like the P & G example) with a clear objective (like the Manhattan Project). Otherwise it will fail for want of a goal and a lack of understanding of real, SUSTAINABLE, business objectives. The business may look sustainable, due to the seemingly ever-present subsidies, but some day governments will run out of subsidy largess (Click here for more on this problem).

And consider this: as long as we let scientists and researchers decide how they are going to spend government funds on their work (talk about a conflict of interest!), we no longer have to lament that a faceless government is mortgaging our grandchildren's future--we have faces and names to blame for this horrible state of affairs.

The Amtrak Project, unfortunately, is alive and well.

As a postscript, a bit more about awards and so forth. I believe in prestigious awards for deserving people. And those that have hijacked them in all venues, not just in the professional societies of our industry, are certainly few. But the bad apples taint the entire barrel. We need reform in how these awards are presented, if nothing else but to restore the prestige these meant to the honorees of a number of years ago that were truly deserving recipients. These bad apples count on the rest of us being polite and shy and leaving them to their neo-larceny. It is time to put a good reputation back in all awards--this transcends politeness.

We have the same problem with peer reviewed papers. I was once asked to be on a peer review board for a magazine. After reviewing several papers, I resigned, for I did not feel I was qualified to pass judgment on the subjects at hand. But how many others resign if they, in their heart of hearts, know they have no business being a peer reviewer? The answer is unknown.

We stand in front of meetings and say things about following anti-trust policies, for fear of lawsuit. This falls short. There are a couple of other issues, which should not need to be said but do need to be sworn to in today's environment. The first is this: "All work presented here today has been examined to ascertain it was done following the 'Scientific Method' and those observations or visions not following this regimen have been clearly noted." The second is "All economic assumptions and analysis have been subject to rigorous review using the US Army Corps of Engineers Economic Analysis Protocol (see for an example of the process)." As to the second matter, at least in the United States, the US Army Corps of Engineers practically invented the subject of Engineering Economics, or methods to figure out the cost/benefit analysis of projects. And, as to the first, the Scientific Method is a long standing way to properly analyze and test science-based hypotheses (personally, I learned it in the fourth grade--1959). Anyone who stands in front of any audience and can not tell you their research and economic conclusions can stand up to these proven rigors is simply reciting a fairy tale. This has to stop.

For safety this week, have you notice the ubiquitous GPS's in cars? I have had one for years, but keep it low on my dashboard. Sticking them to the windshield at eye level makes for a dangerous blind spot. Consider moving yours now if it is there.

Be safe and we'll talk next week.

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