The (Possible) Problem With Methanol

People looking for a way that natural gas could break oil’s stranglehold on the U.S. transport system typically run into forbidding limits. Gas could be used to run power plants that would charge electric cars, but those cars are currently too expensive for most drivers. Gas could be compressed and used directly in automobiles, but limited range and fueling infrastructure are big barriers. Natural gas could also be converted into gasoline or diesel, but the costs and risks of building plants can scare investors.

A dedicated band of analysts, advocates, and former policymakers has been pushing another solution: methanol. Methanol is a liquid fuel can be produced from natural gas using technology that is already widely utilized in the chemicals industry. Its advocates claim that it costs a mere $100 to alter a car so that it can use the fuel. And, using current cost estimates, advocates argue that methanol could be produced at a price that would make it a highly cost-effective competitor for gasoline and diesel.

Advocates acknowledge, though, that methanol isn’t going anywhere with the current transport system. They argue that legislators should require that all cars be built to take methanol as a fuel – a so-called tri-fuel mandate. That, they claim, would allow methanol to compete on a level playing field, and potentially help replace oil.

It’s an intriguing idea, but it needs more flesh on the bones. Introducing a tri-fuel mandate would be politically challenging. Current fuel economy regulations give automakers special credit against their fuel economy obligations when they sell flex-fuel vehicles. If a new tri-fuel mandate replaced this approach, automakers would be forced to take other steps to boost fuel economy instead, possibly threatening margins, and prompting political opposition. At the same time, creating a new market for methanol (the transport sector) would raise the price of methanol and hurt chemicals producers who already use it as a feedstock. They would be reliable opponents of any tri-fuel mandate.

Policymakers faced with these sorts of obstacles aren’t going to be swayed by the simple claim that a tri-fuel mandate would “increase competition” and possibly help displace oil. They’re going to want some stronger analysis that persuades them that the energy payoff would be worth the political price.

Doing that requires three pieces of analysis that I haven’t seen:

1. What would the all-in cost of marginal methanol supplies be in a world that featured rapidly growing U.S. methanol production for transportation? That cost estimate would need to include not only production costs for new facilities, but also new distribution and storage infrastructure. Simply pointing to the current market price of methanol doesn’t answer that question – that price does not necessarily reflect the cost of new capital investments.
2. How much risk would investors in methanol production face – and what would that mean for likely investment and production? It’s all well and good to claim that, at current natural gas and oil prices, methanol production looks like a good bet. A real-world investor will need to consider the potential risks of lower oil prices and higher natural gas prices. Is it reasonable to expect large investments once one considers how real investors will behave? If not, a tri-fuel standard would probably do little, and policymakers are unlikely to want to pursue one.
3. What would the national benefits of an oil-to-methanol shift be? Or, put a different way, is a shift to methanol similar to increasing oil production, or to cutting oil use? Increasing U.S. production lowers world prices by increasing supply relative to demand, but doesn’t protect the country from volatile oil prices (or reduce greenhouse gas emissions). Reducing U.S. oil demand generally does all of these. My instinct is that, at least for modest volumes, methanol prices are likely to follow gasoline and diesel prices, failing to insulate the U.S. economy from oil price volatility. For larger volumes, I’m less certain. Moreover, different fuel options can have different consequences for vulnerability to short- and long-run price increases. My sense is that methanol would do more to address long-run price increases, but those happens to be a smaller economic vulnerability in the first place. The answers to these questions are particularly important if there’s a chance that a focus on boosting methanol production might substitute for other measures to reduce oil dependence.

With advocacy for methanol on the rise, it’s all the more important that these questions be answered. If methanol really is as promising as its supporters claim, then solid answers here might prompt some policy progress. Absent that, I’m skeptical that we’ll see much action on this front.