Biological Fuel as Basis for Russian Energy

   The only thing which stays unchanged: the principle of the engine’s operation: for more than 100 years the fuel has been produced out of refined petroleum – gasoline, diesel fuel, gas. Lately, much research has been done in hydrogen engine, which consumes water as fuel. So far, however, nothing better than internal combustion engine has been invented by mankind.

   Meanwhile, considering how things are these times, seeing the growing number of automobiles on the roads, greater consumption of fuel, and higher prices of it, the issue of what fuel to use, becomes a priority. Petroleum and gasoline are more expensive each day. Gas as a fuel, which is a by-product of oil refinery, is also appreciating.

   Now the developed world decides to take in hand its prior experience.  Historically, the first automobiles, including the Russian ones of the Revolution period, worked on alcohol. Today alcohol (С₂Н₅ОН - ethanol) has acquired a fashionable name: bio-fuel, bio-ethanol. As was expected, bio-diesel followed suit.

   As far as the bio-fuel industry is concerned, there are three major questions related to its development:

1. How soon will bio-fuel displace the traditional engine fuel (gasoline, diesel fuel)?

2. How will its introduction affect the Russian oil exports?

3. What are the prospects of bio-fuel production industry in Russia?

A few more words about bio-fuel itself. Normally, we distinguish liquid bio-fuel (for interior combustion engines, for example, ethanol, methanol, bio-diesel), solid bio-fuel (firewood, straw) and gaseous (bio-gas, hydrogen). The oldest type of bio-fuel is firewood.

 

 

Bio-fuel

 

1. liquid (for internal combustion engines) (for internal combustion engines) 1.1. Ethanol 1.2. Methanol 1.3. Bio-diesel

 

2. solid 1.1. Firewood 1.2. Straw

 

3. gaseous 1.1. Bio-gas 1.2. Hydrogen

Diagram 1 – Types of bio-fuel

 

   We’ll focus our attention on bio-ethanol and bio-diesel. The mixture of ethanol with gasoline is indicated by Е. The number beside the letter Е indicates the percentage content of ethanol. Е85 — indicates a mixture of 85% of ethanol and 15% of gasoline. The mixtures of up to 20% of ethanol content can be consumed by any automobile. However, some auto producers tend to limit their guarantee under use of mixture of more than 10% ethanol. Mixtures of more than 20% of ethanol, in many cases require alterations in the ignition system of the automobile. Automakers can also produce cars capable of operation both on gasoline and Е85. Such cars are called «Flex-Fuel» (hybrid). Mixture of bio-diesel with diesel fuel is indicated by B. As well as bio-ethanol, pure bio-diesel can be applied without a special tuning of the engines.

   Ecological aspects of bio-fuel consumption. Experience shows that use of bio-fuel is ecologically safe. Bio-ethanol as a fuel is neutral in producing hothouse gases, possesses zero balance of carbon dioxide, because in its production by way of fermentation and subsequent combustion, the exhaust of CO₂ in the atmosphere is the same as was originated by consumed plants by themselves.

   The use of ethanol in US in 2006 helped to prevent exhaust of 8 million tons of hothouse gases (in СО₂ equivalent), which is equal to annual exhaust of 1.21 million automobiles. But to plant and produce the needed raw material, rain forests are destroyed in the developing countries. It is by itself harmful for the environment. Besides, priority of technical plantations exacerbates famine in those nations.

   State programs for ethanol use in transport. Active development of bio-fuel in the world began back in 1992. Currently, the majority of developed countries of the world adopt appropriate energy programs for use of bio-fuel (table 1).

Table 1 – State programs for ethanol use according to the countries of the world

Source: www.wikipedia.org

 

   It’s worth mentioning that bio-fuel is not rejected by such petroleum-producing countries as Venezuela and Canada. The most active champions of bio-fuel are Brazil, US and the EU countries.

Economic effect of bio-fuel use is illustrated on Table 2.

Table 2 – Cost of bio-ethanol and gasoline price, 2006-2007.

Source: www.eia.doe.gov

 

   Commercially, the production of bio-fuel looks a rather attractive business. Compared to gasoline retail price, the cost of bio-ethanol in US is 2.4 times lower. In EU, the gap between cost of bio-ethanol and gasoline, which is applied as a solvent, is 4 times. Profitability is obvious.

USbio-fuelindustry. Now some data US bio-fuel industry development, which is the most advanced in the world:

·         In 2005 30% of gasoline in US was sold in mixture with ethanol.

·         In 2006 US produced ethanol at 110 plants in 19 states. Overall capacity of the new plants: 3.990 billion liters. 15 new plants were constructed in 2006. As of January 2007 73 plants are at various stages of construction, 8 plants are expanding their capacity.  

·         Priority of the bio-fuel industry in US is also underscored by the adequate amortization policy toward the plants operating in this sector. The US amortization system for the bio-fuel plants foresees a special amortization discount of 50% of the initial equipment cost, after December 20, 2006. [www.irs.gov]. For the Russian Tax Code, even general amortization discounts, let alone sectoral ones, are an absolute novelty.  

·         Compared to 2005, the 2006 ethanol output in US hiked 25%, compared to 2000: by 300%.

·         2.5% of US automobiles have engines of the type Flex-Fuel (2006). Annual increase of cars with hybrid engines: 1 million units.

·         1,200 out of 170,000 gas stations in US sell E85 (2007).

In his annual address to the Congress on the state of the nation in January 2007, President George Bush offered the so called plan «20 for 10». The plan stipulates cutting down the consumption of gasoline by 20% within 10 years. 15% of gasoline will, according to the plan, be replaced by bio-fuel. In this way, within 60 years bio-fuel will completely displace the conventional engine fuel in US.

   Such is the evidence of a sizeable production growth of bio-ethanol in US, against greater number of plants and the enforcement of the state program for the development of the bio-fuel industry.

    Nonetheless, the above figures still fail to give a clear picture of what is the share of bio-fuel consumption. To clarify the situation we present here some calculations concerning the average volumes of bio-fuels per one car in US and Germany.

Table 3 – Production of bio-fuels per 1 car, US and Germany

Source: calculations on the basis of data from www.energy.ca.gov, www.wikipedia.org,

 

   The data of Table 3 illustrates that current annual outputs of bio-ethanol and bio-diesel in US and Germany are only sufficient for one filling of one passenger car. Considering that on the average one car consumes 3,000 liters of fuel per year, the share of bio-fuel remains quite insufficient (2-3%). Also noteworthy is the dissymmetry of production structure of bio-diesel/bio-ethanol in US and Germany.  Now we’ll switch over to the question of how soon the bio-fuel will displace the conventional engine fuel (gasoline, diesel) and how its introduction will tell on the Russian oil exports.

   The lion share of Russian exportation of oil is allocated to the former USSR countries. As of today, the annual accrual of bio-fuel consumption in Europe is 50% (Table 4). In all probability, the rate will not remain as high for much longer.

Table 4 – Consumption of ethanol in EU and dynamic of Russian oil exports

* On assumption that refinery of 1 liter of crude oil yields 0.5 liter of gasoline.

Sources: www.gks.ru, www.wikipedia.org

 

   Under the growing consumption of bio-fuel and gradual substitution of gasoline by bio-fuel at Europe’s refineries (Table 4), variation calculations have been made as to when bio-fuel will finally displace conventional engine fuel. Here are the ensuing estimations (Table 5).

Table 5 – Forecast of bio-fuel consumption growth rate in EU and termination of Russian oil exports to EU.

 

  

   Parting from the results of Table 5, we can maintain that the era of conventional gasoline and diesel fuel is coming to an end. The question “How soon will the world oil resources be exhausted?” is in the past. It should be formulated this way: “How soon will the bio-fuel completely substitute conventional energy materials?”

In our opinion, the world is facing the beginning of decline of the oil states. Basing on the calculations, Russia has hardly more than 15 years to find other income sources than oil exportation. That’s why it is so important to build up an innovation economy.

   Of course, objections will follow to the effect that Russian oil may be directed to China, India and other countries, or will be used to other production purposes than refineries, and therefore Russia’s international status quo will remain. However, such illusions are hardly worth entertaining.

   Prospects of Russia’s bio-fuel industry. Potentially, the prospects are rather promising in the way that now the sector is practically at the zero level. As of end 2007 Russia has no federal program for the development of bio-fuel, no plant for the production of bio-diesel, no bio-fuel filling stations.

   In reality, domestic industry and national innovation system absolutely ignore the high potential of bio-fuel and manifest indifference to unfavorable home prices for gasoline. The insensitivity of national economy to the growth of energy consumption is visible in the absence of any transition to alternative energy sources even under exaggerated price of conventional fuel. The fuel appreciation automatically triggers inflation of retail prices by the producer. This process, although destructive for the national economy, will go on indefinitely, until the end of easy revenues from oil and gas sales abroad.

   The more resource the economy consumes, the less effective it is. Russia, an oil mining country, has nearly twice as big retail prices for gas as US, which is an oil importer (Table 6). It’s not excluded that US refrain from development of its own oilfields not just to keep them unexhausted, rather, to stimulate power saving and prevent access to cheap resources, hence to protect the economy from the windfall money created by the market situation.

Table 6 – Comparative gasoline retail prices in Russia and US (early 2008)

* estimation of Russia/US currency by PPP according to the Big Mac Index (www.economist.com, 5 July, 2007), by which $1 is equal to R15.25.

** according to $3 per 1 gallon (3.785 liters).

 

   The main reason for Russia’s ignoring the bio-fuel is the monopolization of the fuel industry and the absence of competition. The market has no economic agents ready to liven up and sharpen the market situation. As for the state’s policy, it not only fails to support this tendency, rather, it prevents it. The main hindrance is the proscription to sell mixture of ethanol with gasoline, as well as bio-diesel. Besides, there is the rather strict Federal Law of November 22, 1995, #171-ФЗ “On State Regulation of the Production and Sale of Ethyl Spirit, Alcohol, and Alcohol-containing Products.”

   In innovation sphere, the state is required to comply with at least one condition: not to meddle, while the state’s help is not necessary. A good example is the burgeoning market of plastic windows. This market of innovation product for Russian housing owners was built up in a very few years on the basis of foreign production technologies without any participation of the state or its innovation system, supported by tax-payers’ money.

   While monitoring the regional initiatives in the production of bio-fuel, we can state that 2008 is the starting year in this sector in Russia. For example, we can note such projects as the construction of a bio-ethanol plant in Adyghe republic (start in March 2008), and of a bio-diesel plant in Volgograd region (Russian-German project started in September, 2008). However, the product of the above plants is not destined for domestic consumption, but for the export.

   The development of Russia’s bio-fuel may be qualified variously, but the universal energy vector indicates that the epoch of oil and easy export money is coming to an end. Can Russia in the future alter its export portfolio and trade bio-ethanol instead of oil? Theoretically, yes, but this path is as futile as is the oil export.   The Russian oil export spree creates an artificial raw material deficit for domestic refineries. The result is high domestic gasoline prices. A similar situation is with Russian grain, which is the raw material for bio-fuel. For example, in 2007, volumes of Russian grain export to the states producing bio-fuel triggered an artificial deficit inside the country, and occasioned price rise for bakery products. Remarkable, that consumer reaction to price rise is mitigated by the saturation of economy by the windfall export money, but their influx will radically decrease in the near future.      It does not mean, though, that Russia should overlook bio-fuel: the country should learn to produce it, use, sell and make money on it. It means that the accents of energy and innovation politics should be flexible and not fundamentally fixed on obsolete goals. In means that development of bio-fuel should retarget the national economy on its consumption.      Our opinion is that for the world economy the development of bio-fuel is not a step forward but rather a step aside, and a temporary solution of the gasoline cost problem. The world needs, rather than just an alternative for expensive fuel, some principally new technologies of movement in space, more advanced than the good old internal combustion engine.

Gusev Alexander ,
03.07.2008. Views: 3069

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