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SIGMA Spring 2011 Observations

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Matt TormollenHaving recently returned from the SIGMA Annual Event in California, I came across this interesting quote from Pat Gruber, CEO of GEVO, on the Biofuels Digest website, “We make isobutanol, a known molecule with a known market, and at a lower cost than you can make it from petroleum," says Gruber.

Why should you care and what’s the relevance? GEVO’s stock is up nearly 55% since mid-January, which is great if you are stock holder. If not, it’s illustrative of the policy position we have asserted that good old fashioned capitalism will drive the replacement of petroleum-based fuels, not government subsidies and tax breaks. And, at the SIGMA conference last week, there were numerous opportunities for debate surrounding the effects of governmental mandate and subsidy versus market forces. Two examples particularly relevant for the convenience industry are the ongoing debates concerning the suitability of E15 blends in the consumer automobile fleet and the renewal of renewable fuel tax credits.

The EPA’s decisions concerning 15% ethanol blends seem to raise more questions than answers. In October 2010, the EPA granted a waiver for use of E15 in model year 2007 and later cars as well as light duty trucks. The waiver was extended in January 2011 to include model year 2001-2006 vehicles. Unfortunately, the onus of liability if the consumer inadvertently or intentionally puts E15 into a vehicle unsuited for it is unclear. You can be darned sure that if the E15 blend is the cheapest alternative at the pump some consumers are likely to put it in their tank regardless of the possible consequences to their vehicle. Therefore, SIGMA is rightfully concerned regarding the ambiguous nature of liability definition and its affect on fuel sellers.

Given all the debate on budget deficits, the Federal government spent an estimated $6.5 billion on renewable fuel tax credits; the $.45 per gallon ethanol blender credit and $1.00 biodiesel tax credit. The debate is really about whether these markets should be “funded” at all given the existing RSF2 mandates for incremental alternative fuel annually and the persistently high crude oil prices. One interesting alternative being debated is a variable tax credit tied to crude oil price. When the price is high, there’s no credit to promote production. When the price is low, a credit kicks in. Obviously, there are many implications of this type of approach (complexity, compliance, cost). An excellent analysis of the alternatives is found in this agricultural policy brief. Given that the credits were only temporarily extended thru 2011, the only certainty is that there will be a change in this program before the year ends.

Being a technology nerd at heart, I really enjoyed a SIGMA lunch time presentation by major automakers of their alternative fuel vehicle strategies. It’s interesting that when purpose and distance are combined as a matrix, no one alternative is preferred by automakers in the 10-20 year horizon. Interestingly, one of the automakers summarized his presentation by saying “of all the choices, gasoline combustion engines still provide the best overall suitability. Unfortunately, they have the issues surrounding energy security and pollution”. Let’s hope one of the hundreds of capitalist ventures emulating GEVO’s example in isobutanol gives us a cost-effective conventional petroleum alternative without the federal tax breaks, mandates, and protectionist tariffs.

Cheers, Matt

Predictably Turbulent Start to the New Year

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Matt TormollenWow, it’s February first already. Clearly I haven’t kept to my new year’s resolution which was to write blog entries more predictably and consistently. I had the best intentions of writing a top eleven trends to watch for 2011, but never put fingers to keyboard on it. Had I, I would have been correct on one and way off on the one other, so let’s dive in.

My #1 trend to watch for 2011 was increased oil price volatility driven by upheaval in the developing world. However, I certainly hadn’t foreseen the melt-down in Egypt. I thought it might be economic or social turmoil in the over-heating economies of China or Brazil that would impact oil prices (they still may of course).

Brazil Talks Tough on Inflation

Inflation Concerns Persist as Prices Increase

But Egypt, while not a large oil producer, has strategic supply resources, the Suez Canal and Sumed pipeline, which, if disrupted, can greatly impact global oil flow and by consequence, oil prices.

Oil Prices Surge on Fears Unrest May Hurt Supply

Politically, the outcome in Egypt is far from evident and potentially far reaching throughout the major oil producing countries in the Middle East. For oil marketers and consumers, this is not simple “headline news”, this is a major geopolitical and economic event to monitor.

Changing gears, I was very encouraged by President Obama’s State of the Union address concerning energy policy. In this blog, I have consistently advocated increased governmental investment in research and development of energy sources that, at production scale, have lower cost and similar benefit as conventional hydrocarbon-based fuels. As opposed to the current governmental practices of subsidies or tariffs for wind, solar and conventional biofuels, or growth-retarding tax increases in the form of carbon cap and trade, Obama’s energy plans appears to be shifting towards good old American R&D…huzzah!

Obama's Breakthrough

I’d love to hear your thoughts concerning the start of the new year.

Cheers, Matt

Insight from International Convenience & Retailing Conference

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Matt TormollenI attended the Insight NACS Future of International Convenience & Petroleum Retailing 2010 conference, and it was an outstanding show. Besides being a well-run event in the heart of London, the speakers were excellent. Two of the presentations from Day 1 that were particular highlights for me were from Kate Smith Bingham, Offer Development Manager at Waitrose and Joe Barrett, Operations Director at Applegreen.

Waitrose, a large grocery chain based in the U.K., has recently embarked on a small and large convenience store strategy taking advantage of their late entry into the market by borrowing best practices from other market players. At the same time, they have re-imagined the convenience store concept incorporating key insights from extensive customer surveys. An example of this re-imagination is their new store layout. For the customer looking for fresh, ready-made meals and needing to move fast through the shopping experience, Waitrose dedicates space for those meals at the front of the store near the entrance and registers with a clear path to get in and out quickly. Fruits and vegetables, which have been traditionally at the front of grocery stores, are now towards the back where evening meal or less hurried shoppers can take their time.

Applegreen, Ireland’s largest independent forecourt retailer, was a fascinating study of a young, fast-growing convenience retailer with a strong focus on customer and brand. Embracing the green aspect of their name, Applegreen has adopted numerous programs in support of their community. They harvest rainwater at their stores for use in their car washes, they use LED technology to reduce their carbon footprint, they offer and brand “green” fuel, and they donate 1 cent to different charities for every in-store transaction (and there is more). Additionally, Applegreen is progressive in their business planning and execution taking advantage of outsourced technology and services as one example. Applegreen also has a strong maverick streak in that they are willing to act independently when conventional practices are viewed as sub-par to best-in-class service or are a detriment to their brand.

Over the last few years, Applegreen has grown aggressively during this economic downturn when others have bunkered down. An interesting contrast to the American market is that Applegreen customers utilize pay at the pump only 10% of the time in Ireland versus in the States where pay at the pump predominates. This presents unique challenges in terms of throughput as Irish sites are much smaller than those in the States. Applegreen is also expanding into new markets such as the UK where they have 13 sites currently. Joe even mentioned possible U.S. expansion somewhere down the road.

If I could relay one takeaway that really impressed me from the first day of the conference, it was that the European market – not surprisingly – is highly competitive and consequently spawning innovative ideas and best practices that U.S. retailers would do well to examine. This was surely evidenced by the presence of a number of U.S. retailers attending the conference this year.

All Quiet on the Eastern Front…Or is it?

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Matt TormollenA lot has transpired since my last blog posting; the BP well has been capped in the Gulf, the Baltimore Orioles have a new manager and have actually won a few games (thankfully the Ravens season has started), and, for now, the death of cap and trade.

But one very interesting battle that has generally gone un-noticed is the defiant stance taken by the Texas Committee on Environmental Quality (TCEQ) and the state of Texas concerning unprecedented encroachment by the U.S. Environmental Protection Agency into the issuance of greenhouse gas permits in the state under new rules recently imposed by the EPA. In an open letter to EPA administrators Lisa Jackson and Alfredo Armendariz, Texas Commission on Environmental Quality Chairman Bryan Shaw and Texas Attorney General Greg Abbott stated the following, "In order to deter challenges to your plan for centralized control of industrial development through the issuance of permits for greenhouse gases, you have called upon each state to declare its allegiance to the Environmental Protection Agency's recently enacted greenhouse gas regulations -- regulations that are plainly contrary to United States law”. Wow, heady stuff.

Much has been written about the current administration’s attempts to federalize areas like health care that heretofore have been within the states' domain. And, from a business owner’s point of view, you definitely start getting the feeling that we’re headed toward a patronizing, “we know better than you” centralization of power.

But, does a central political apparatus really know what’s better for local business? As a staunch advocate for R&D investment in clean energy, I was dismayed by the recent decision to “borrow” $1.5 billion from a U.S. Department of Energy Department renewable-energy loan program to help pay for emergency education and Medicaid aid for states. The rationale was that the money wasn’t being allocated fast enough due to governmental bureaucracy. Instead of streamlining the process, we’ll just take the money. Huh? Only Voltaire’s Pangloss could put a positive spin on that logic.

Personally, I fear the centralization of power in a free market democracy because, fundamentally, its ability to execute will never be as good as a centrally planned and governed economy. Juxtapose this example, the Chinese government mandating the closure of 2,000 energy inefficient manufacturing plants by September 30th with the current TCEQ vs. EPA fight. How much time and how many millions of dollars will be spent to resolve the permitting issue? I am certainly not advocating more central planning; quite the contrary. I am most worried about the U.S. stagnating somewhere in the middle with an increasingly burdensome and costly central structure disrupting the normal flow of markets and the ability of businesses to execute.

Just food for thought. I’d love to hear your opinions.

As always, feedback welcome.


Should We Fill Potholes with Toll Road Funds?

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Greg Salverson
This week’s USA Today had a great article titled, “States turn to tolls to fund roads” that reported on how toll roads are emerging as the go-to strategy for states and metro areas that are searching for funds to maintain expressways, repair bridges, and build new highways to ease the traffic congestion that plagues most major cities. States like Illinois, Indiana, Virginia, North Carolina, and Alabama are cited as either signing agreements to move forward with toll roads, funding surveys to explore the possibility, or considering options like allowing private companies to rebuild bridges in exchange for toll revenue.

So why do we need new sources of revenue to maintain, repair, and build new roads/bridges? There are many reasons including:

  • The current federal tax rate has not been raised since 1993
  • Since 1993, the wholesale spot price of gas has increased more than 300%
  • While motor fuel consumption has increased since 1993, the last few years have seen a decrease in taxable fuel types due to an increase in the use of ethanol and biofuels which are either not taxed, receive a tax rebate/credit, or both
  • Fuel efficient cars, hybrids, and electric vehicles increase the number of miles driven per taxed gallon of fuel, resulting in more wear and tear on the road per tax dollar
  • The biggest recession since the Great Depression stripped already tight budgets.
Are toll roads an effective source of funds? Unfortunately, the folks in Houston know the answer to this question. The Harris County Toll Road Authority built a toll road called the Sam Houston Parkway around the city to ease congestion. According to local media outlets, the toll was only supposed to be active until the cost to build the road was recovered; however, the revenue from the toll road is so lucrative that the toll was never repealed. In fact, it recently increased by 25 cents.


There is no debate that governments need more revenue for maintenance, repairs, and new projects. However, the current political climate poses little motive for either party to propose and pass a significant federal tax increase. Enacting toll roads wil increase funds for our decaying infrastructure - without relinquishing tax dollars already in place. The only question I have is, how do you think the government will handle double taxation when the taxed fuel in your car is then taxed again on the toll road?

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