 This is Think Tech Hawaii, Community Matters here. Okay, we're back, we're live. We're here with Energy in America. And this time Max Pescher is joining us. And he's with E-Pring, the Energy Policy Research Think Tank in Washington. And we're going to talk with Max about gasoline prices and some related U.S. policy initiatives happening right now. Welcome back to the show, Max. Nice to see you smile in face. Thank you. Thank you very much. Great to be here. Thank you for having me. So you and E-Pring, you follow gas prices. And we all want to follow gas prices because the fact is that most of our ground transportation is still in gas prices, especially including here in Hawaii. And I heard that gas prices went up. So I'm wondering what the market is like right now, both in Hawaii and the mainland and elsewhere in the world, and why? Have you got a handle on that? I've got a bit of a handle on that. Obviously, the biggest influencer on transportation fuels, gasoline in particular, are the costs of feedstocks. That's crude oil. The things that are critically affecting crude oil right now are the diminution of supply. I have to put it gently in Venezuela in particular. And then the oncoming sanctions in Iran. So you're removing barrels from the supply side. And consequently, you're constricting the supply-demand balance and that's affecting gasoline prices. So since May, we've seen an overall appreciation of gasoline prices. A wholesale level to about $2 and then depending where you are regionally, Hawaii, California, Texas, to close to $3 and places like New York State or Texas and $3.50 for regular gasoline in California and I assume Hawaii. Hawaii probably tracks California fairly closely. Since the end of August, you had the usual seasonality dip kick in, which means summer demand came off. And you're seeing a flattening in prices on account of that. You're not seeing the same steepness in demand as you saw over the course of the summer. But you'll probably see elevated prices as long as you have a problem with Venezuela and a problem with Iran. So what is the barrel of oil cost these days? Well, the U.S., I think it bounces around 70. U.S., West Texas Intermediate. And Brent, which sets the standard for Atlantic Basin Trade, bounces between 75 and 80. And that implies gasoline prices in the lower 48 of between 250 and 3. And California and Hawaii between 3 and 350. Why the difference? Well, I think, well, in California in particular, it's because of their onerous fuel standards. Back in the 70s and 80s, they decided to legislatively mandate their own formulation of gasoline. So only the refiners within the state of California can produce that formulation of gasoline. And it requires fairly expensive components relative to other places. I assume in the context of Hawaii, it's a matter of location. The freight cost of getting crude oil to Hawaii and then the refining cost. In fact, it's a location factor. So low sulfur oil, where's that in price? Low sulfur oil. Well, I don't have a direct handle on that. And two weeks ago when we discussed the imminent IMO 2020 sulfur regulation, I start to go into effect in 2020, that's going to affect a global recalibration in prices. You're going to see high sulfur. You're going to, there's going to be a requirement to move 2 million barrels of high sulfur fuel oil into a low sulfur range. That means refiners are going to have to, the capacity utilization is going to have to increase. And you're going to have to move hydrocarbon molecules out of certain ranges like gasoline, like diesel, into the ranges that are compatible for bunker fuels. And that right away creates a certain amount of chaos and price volatility and probably increased prices for gasoline. Yeah, we always think about worry about LSO in Hawaii because that's what they use for a good part, if not most of the generated electrical power out here that our systems require it. And although there are benefits, I suppose, to using low sulfur oil, it's more expensive generally. Absolutely. There's going to be a 50% hike. That's what's expected on January 1st, 2020. And given that Hawaii, as I understand it, is 70% reliant on fuel oil for power generation, that will impact electricity prices at the wholesale level. So what about the trouble in the Middle East? I mean, I'm not sure you could yet say that Saudi Arabia and the Khasoggi's disappearance, dismemberment and death, you know, is going to affect oil prices. But I wonder about our relationship with Saudi Arabia. Trump is under some pressure now about trying to make them, you know, tell us what happened. Right. And Mike Pompeo gave them some time this morning. He said that they could do an investigation. This sounds like the Senate Judiciary Committee investigation. They could do an investigation on what happens. What I find interesting is that the investigation is going to be made more difficult by the fact that the Saudi embassy, where this supposedly happened, was immediately repainted inside before the investigative authorities from Turkey got there. Whatever evidence there was has been repainted. Right. This is kind of a problem. And anyway, I guess my question, I'm wondering, but my question is, you know, when you get to the end of it and our relationship with them is affected somehow, I mean, I assume there'll be some effect here because, you know, the story is pretty bad. Right. Will that affect oil? Will this kind of, you know, disruption in international relations affect the price of oil? I myself haven't thought it through, but I was reading stories this afternoon and this evening saying that because pressure is exerted on Saudi Arabia, they might withhold barrels from global markets. That might cause prices to spike. My sense is that they don't hold the keys to the kingdom speaking colloquially in the sense that they no longer control the oil markets as they did back in the 1980s. We now have burgeoning production in the United States, in Texas in particular, but also in North Dakota. I think also Russia would like to get more barrels out into the markets. So whatever they might withhold, you have ample supply elsewhere that could be delivered into the markets. And again, referring back to my first point, Venezuela and the Iranian sanctions are the ones that are really constricting the markets in particular. And if Saudis pull barrels off, and I don't understand the motivation there, because they need the money, but if they do pull barrels off, or people, sovereignty has decided that they want to embargo Saudi barrels, there's expanding supply from the United States and Russia would like to get its supply into the markets. Sure. So we shouldn't be too concerned. What about OPEC? I thought I read that there was a certain amount of pressure on OPEC to be more, I want to say, liberal in terms of providing supply. What are the politics, the international politics around OPEC these days? I'm not, my strength isn't in the upstream, but generally the issue with OPEC is quota discipline. They pursue quota discipline in order to raise prices, but once prices reach a certain particular level, the member constituencies of OPEC want to sell into those odd prices. And that's where you begin to, the quota discipline begins to break down. Excuse me, I'm sorry, I have a bad cough, but that's the issue that I see. In this particular context with Iranian sanctions, Venezuela, some sort of policy action against Saudi Arabia, perhaps not on part of the United States, but on a part of other countries, yeah, at $80, $90, I would see discipline breaking down on the part of OPEC members and other constituencies would dearly want to sell into this market. Okay, what policy is the Trump administration presenting to international oil these days that might affect the market going forward? Before we started, you spoke about a conference that you have attended recently and you spoke about action taken in Congress. Can we talk about those policy considerations? Sure, absolutely. Well, last week I was in London, I attended a biofuels conference. I was there both as a panelist and I also chaired a roundtable. The panel was on political will for biofuels, for ethanol, in particular, and the roundtable was a discussion of the potential of growth for ethanol in U.S. markets. The general background that I gave on this was that there are three pillars for biofuels in U.S. markets. The first one obviously is the renewable fuel standard. In the case of Hawaii, Hawaii judiciously opted out of it, I think, in 2015. But it's fine that it opted out, but all these policies might play in such a way that Hawaii might still, as being a constituent of the United States, might still be affected by this. But I'm trying to give you a preview of coming in traction. I still need to give you the baseline. So the first one is the renewable fuel standard. But what predicated the renewable fuel standard was a decision by the U.S. Supreme Court. Not a particularly great one in my opinion, but it was titled Massachusetts vs. EPA. It was decided on a four to three basis in 2007 and it made the determination that greenhouse gases, carbon dioxide in particular, were pollutants. And this gave EPA the authority to regulate things such as ethanol and to make other kinds of determinations about transportation fuels. The third pillar is something that was corporate average fuel economy standards, CAFE standards. So they were originated in the mid-1970s. They'd gone through various periods. But when the Obama administration came into power, they fortified the CAFE standards and gave them three phases. The third phase is particularly onerous. And the automobile manufacturers have to really ramp, really increase fuel efficiency. They can do it one of two ways. They can either do it through higher octane engines or they can do it through electrification. So we're kind of at that juncture. And that's what I was presenting at the conference in Europe, in London. I was saying, we're at the situation where we have to make certain kinds of decisions about do we continue with the internal combustion engine and transportation fuels or do we move into an era of electrification? What has been taking place in Washington is a fairly active deliberations between constituencies among our manufacturers tied to constituencies in refining and transportation fuel production. They've tried to bring the biofuel people to the table. Some have listened, some have been, but others have not participated. But the point is that it's an attempt to move to a higher octane standard, a 95-ron, as it's known. And in that way, you could still continue production of motor vehicles with internal combustion engines. You could increase fuel efficiency and you would have a potential from biofuels, in particular ethanol, to be blended in for higher octane purposes. I mentioned this Supreme Court decision and its determination on carbon dioxide and greenhouse gases. That gave the rationale for higher ethanol blending because it has 20% lower greenhouse gas emissions throughout its whole production supply chain lifecycle. But the concerns here have fallen away from, at least in the Congress, nobody is discussing, at least in this administration and in the Republican-controlled legislatures, what to do about greenhouse gas emissions. The discussion is, if we're going to a higher octane engine, what can give us the octane? So there's two sources. One is the certain refining processes produced something known as reformats. They have a considerable amount of octane, but it's relatively costly to add more reforming capacity to refineries. Ethanol, as controversial as it is, has high octane content. And while biorefineries themselves are not particularly cheap when compared to reformers at refineries, they can be quickly implemented. There's a huge oversupply of corn and ethanol right now priced against gasoline at the wholesale level. It's very cheap. $1.50 versus $1.20. $1.20 per gallon at the wholesale level. At the end of the day, there's a bill or hearings going on in the House Energy Committee. And that bill is going to have a big effect on exactly what this country does going forward in terms of the use of octane fuel or electrification. Exactly. And so, Max, I want to take a short break, a minute. Sure. We come back. Max Pesier, we're going to discuss what the pressures are on that committee. Who wants what? What the lobbyists are saying and demanding what the constituents want. And therefore, we can make some prognostications about how it will go in a highly political, highly polarized Congress. And it wasn't only polarized in judiciary. It's polarized in energy, too. We'll be right back after this break. This is Think Tech Hawaii, raising public awareness. There was a new woman who lived in a shoe. She had so many children, she didn't know what to do. She gave them some broth. Without any bread. And kissed them all soundly. And put them to bed. Hunger is a story we can end. End it at feedingamerica.org. Hello, I'm Dave Stevens, host of the Cyber Underground. This is where we discuss everything that relates to computers that just kind of scare you out of your mind. So come join us every week here on thinktechawaii.com, 1 p.m. on Friday afternoons. And then you can go see all our episodes on YouTube. Just look up the Cyber Underground on YouTube. All our shows will show up. And please follow us. We're always giving you current, relevant information to protect you. Keeping you safe. Aloha. Okay, we're back. We're examining energy in America with Max Pesier. And he is with E-Princk in Washington, D.C. And we're talking about little politics now. We're talking about some investigations and hearings going on in the House Energy Committee. Having to do with whether we continue to use fossil fuel for automobile transportation. Or whether we sort of migrate more to electrification is a big question. So what is going on in the House Energy Committee, Max? Well, there's been a considerable amount of activity in this particular session. There is a subcommittee of the House Energy and Commerce Committee called the Environment Subcommittee. It's chaired by Illinois Congressman John Shimkus. He is from, I think it's the 12th, it's not, you don't have to run for your maps. I'll describe the district in a second. But it's the 12th district, I think, of the state of Illinois. He is in kind of a strange triangle. He's got an awful lot of cropland, an awful lot of corn farmers. But he's from Collinsville, which is on the western side of the state. So he has a lot of, there's a refinery close by in Wood River, Illinois, to a large refinery. So a lot of those workers live within his district. So that's tax dollars there. And then Marathon Petroleum has a refinery in Robinson on closer to the Wabash River. So he has both interests within his own jurisdiction. And I'm sure they work his ears very strongly. Two Congressman Shimkus' credit and his counterpart Congressman Flores, who doesn't hold an administrative position within the subcommittee, but he's very active in trying to promote this legislation. So they held four hearings beginning in March. And I think the last one was just before the Congress recess at the end of July. Chairman Shimkus concluded the hearing saying, well, we get back from recess after Labor Day. We hope to start writing the bill. But the bill hasn't been written because we also had the Supreme Court decision. We had any number of other scandals. And we have President Trump's tweets to deal with. So if it doesn't happen now, it possibly could happen in the lame duck session after the elections. And if it doesn't happen in the lame duck sessions, then it might happen right at the beginning of when the new Congress is seated. But if none of this happens, the automobile manufacturers have said, we're in a tight spot. If you don't bend the curb down, this last phase of the Obama administration's revamping of the CAFE standards, then we have to go to various measures in order to comply with the statute. And that means electrification. If we're going to go to high fuel efficiency, no emission vehicles, then we have to go to electrification. Plug-in hybrids, fully electrified vehicles, some form of that in order to gain compliance and not be in violation and not incur all the fines that the EPA would be, and the Department of Transportation would be levying against them. So let me try to restate what I think is happening here. And that is, we have Obama very tough CAFE standards in the third phase of the CAFE standard increase that he set up. This committee could soften the third phase. It could soften the CAFE standards and thus allow for a continuation of fossil fuel in the American transportation market. I think if the committee fails because of political considerations and delays and possibly the midterms and nothing happens by the end of the year, then we may see this effort, I guess it's a Republican effort, to soften the CAFE standards fail. And if it fails in order to comply with the statute, which is the law, they're going to have to go to electrification, and this is of some concern to the people who have to spend the money to make the investment to go to electrification. So am I right, Max, to think that this is politically charged, that the Republicans want to soften the EPA standards and the Democrats don't? They want Obama the way Obama set it up. It's peculiar on the Democratic side. When I watched the House hearings, because there's also a Senate counterpart to this and there's activity in the trade associations trying to promote this bill. The refining interests are promoting this and the automobile manufacturers are promoting this. The challenge is trying to bring the ethanol people to the table. There are certain constituencies within the ethanol table. But as far as the politics of it, you definitely see Republicans interested in this and more strongly interested in it than Democratic politicians. In the case of the Democrats, it varies. There are some who don't understand the economics, don't understand how costly the electoral investment would be, and are fine with electrification. They also don't understand that you have to change the whole effect of the fueling system. You're going to have to go to some sort of massive recharging system for those fully electric vehicles. And that impacts the whole power generation situation. The way I would frame it is certain coastal Democrats, and I paid attention to one in New Jersey who's in charge of the House Energy Committee, the ranking member. He says, in his opening remarks, he always says, well, we're just going to electrification anyway, so we really don't need these hearings. But I'll make an opening statement anyway. It strikes me that if the country, it certainly isn't together on this, but if the country were together on this issue, and that means global climate change, and it means carbon emissions and all that, then we would say we have to move to electrification as soon as possible. Let's not dawdle with trying to preserve fossil fuel. Let's go there now. We know we have to pay a price. Everybody has to pay a price. And the issue is not so much whether we're going there, but who pays the price? So the question ultimately is, as it is in so many issues around environmental protection these days, is what is the administration's position? What is the EPA's position and how much influence they have on this committee? Well, the administration, they're only paying attention to the corn farms. And there was recently, in fact, in today's Wall Street Journal, there was Senator Grassley and Senator Ernst from the state of Iowa co-authored an op-ed commending the president on his promotion of what's known as E-15, 15% blend of ethanol and gasoline in the United States to be available year round. The president doesn't have executive authority to implement this. The EPA is complying with the request, but it's a rulemaking process. They have to engage in their own hearings of the regulated parties. The other problem is that California carries a great deal of weight in this particular discussion because it takes six years for California to authorize a new fuel, given the waiver authority that was granted initially in the 70s and 90s. You're talking about bureaucracy now. But also California, the way it tests fuel, the testing cycle actually takes six years. So they can't implement this, but I think I missed some part of your question. Well, I guess my question ultimately is this. Where are we going on this? You have obviously lobbyist groups operating who have representing clientele around the country who will benefit or be damaged by a change to electrification. They have the possibility of electrification. A lot of interest groups would like to see that. You have the Republicans who are not particularly interested in preserving the environment or issues around carbon emissions and climate change. This is a really complex mixture of political winds and sweeping across the issue. So my question, I'm not making this easy for you, Max. My question is, what's going to happen? What's going to happen? Right now, from my vantage point, it looks as though America likes SUVs. They like driving SUVs. While you have political constituencies in the state of California, especially the governor, who are more than eager to sign bills to implement lower carbon fuels or no carbon fuels, you have automobile manufacturers that are concerned about investment, global platforms selling globally, things of that nature, and that would dearly love to preserve the internal combustion engine. You have a chairman like John Shimpkis that wants to satisfy both his corn farming interests and his refining interests in his particular district. But what's going to happen? My feeling is, if I heard the people at General Motors correctly, they're going to have to go into some kind of electrification. And then the problem is, how do you educate the consumer to buy their vehicles, and how do you market these vehicles so that General Motors stays in compliance and is a commercially viable business? So I'm not answering your question as to what the future is going to look like. I'm just telling you what the problem is going to be. Well, I'm sure the midterm elections are going to have an effect on this, too. Sure, absolutely. Given the polling, the Senate stays Republican. It looks as though on a generic ballot, the House flips. So if the House flips, then all the work that Chairman Shimpkis has done, along with the Congressman Flores, that just might be dispensed with and pushed off, unless lobbying interests can still keep this legislative activity alive going into the next Congress. Yeah, so what happened in the Judiciary Committee is the kind of thing is happening elsewhere. The country is in this kind of situation right now, and it's not just in one area, it's in many areas. And as they say in China, we live in interesting times. Yeah. Thank you so much, Max Pesier. Really appreciate you coming around for this discussion. Thank you all, thank you also, and I look forward to the next time. Thank you. Thank you, Aloha. Aloha, yes.