Oil Industry Says Biofuel Push May Hurt at Pump (5/24/07)

May 24, 2007
Oil Industry Says Biofuel Push May Hurt at Pump
By JAD MOUAWAD
Gas prices are spiking again — to an average of $3.22 a gallon, and close to $4 a gallon in many areas.
And some oil executives are now warning that the current shortages of fuel could become a long-term problem, leading to stubbornly higher prices at the pump.
They point to a surprising culprit: uncertainty created by the government’s push to increase the supply of biofuels like ethanol in coming years.
In his State of the Union address in January, President Bush called for a sharp increase in the use of biofuels, along with some improvement in automobile fuel efficiency to reduce America’s use of gasoline by 20 percent within 10 years. Congress is considering legislation calling for a nearly fivefold increase in the use of ethanol.
That has forced many oil companies to reconsider or scale back their plans for constructing new refinery capacity.
In hearings before Congress last year, oil executives outlined plans to increase fuel production by expanding existing refineries. Those plans would add capacity of 1.6 million to 1.8 million barrels a day over the next five years, for an increase of 10 percent, according to the National Petrochemical and Refiners Association.
But those plans have since been scaled back to more than one million barrels a day, according to the Energy Information Administration, an arm of the federal government.
“If the national policy of the country is to push for dramatic increases in the biofuels industry, this is a disincentive for those making investment decisions on expanding capacity in oil products and refining,” said John D. Hofmeister, the president of the Shell Oil Company. “Industrywide, this will have an impact.”
The concerns were echoed in a recent report by Barclays Capital, which said the uncertainty about the ethanol growth “will do little to accelerate desperately needed investment in complex United States refining units.”
“Indeed, it is likely to deter and further delay investment, if not rule out many refinery investments completely.”
Even so, the current cost of gas — which in real terms is approaching the old peak of $1.42 a gallon in March 1981, or $3.31 adjusted for inflation — has renewed suspicions that the oil industry is looking for ways to keep profits high by delaying much-needed investments. Senator Charles E. Schumer, Democrat of New York, began hearings yesterday on the topic “Is Market Concentration in the U.S. Petroleum Industry Harming Consumers?”
And the House voted yesterday by a narrow margin to penalize any oil companies, traders or retailers found to be charging “unconscionably excessive” prices for gasoline and other fuels. President Bush will probably veto the measure because the White House has said such legislation would amount to price controls.
Experts point to many short-term reasons the United States is running low on gasoline, causing prices to rise: many oil companies are doing maintenance work on refineries; new federal rules make fuels cleaner but costlier; and a string of delays, fires and accidents in the industry have reduced supplies just when drivers are starting to hit the road for summer vacations. Many analysts predict prices will keep rising, then soften later in the summer as demand trails off.
Energy executives dismissed any suggestions that they were intentionally keeping gasoline off the market.
The oil companies say their views on the longer-term prospects for fuel reflect simple economics. Because of the enormous investments required to expand refineries, they say they have no other choice but to re-examine their plans in light of the calls for more ethanol fuel, regardless of how realistic they may be.
“The policy environment has shifted dramatically,” said Mike Wirth, head of global refining business for Chevron. “There is a great risk that has been introduced to projects, predicated upon increasing supplies, that the demand may not be there.”
Refineries are a choke point in the nation’s supply of fuel. Because they have not invested enough in refineries to increase gasoline supplies, oil companies have been unable to meet the country’s growing demand in recent years. That has forced them to rely on imports, which are more expensive than fuel refined domestically.
The fragility of the refining system became apparent after Hurricanes Katrina and Rita in 2005. At the time, President Bush offered to reopen some military bases as sites for constructing refineries and Congress passed legislation to encourage refiners.
But oil companies rejected the idea of constructing new refineries in the United States, saying it would be impractical and too expensive.
As a result of the push for biofuels, and encouraged by federal subsidies and grants, dozens of ethanol distilleries are being planned. These investments should double the annual production of ethanol from corn to 15 billion gallons by 2012 from about 6 billion gallons today.
But given farmland constraints and the need to use corn for food, that is as much ethanol as can possibly be produced from corn, according to the ethanol industry’s own calculations. Ethanol producers recognize that it is not clear how an additional 20 billion gallons of ethanol — President Bush has called for 35 billion gallons of biofuels by 2017 — would be produced from cellulose or biomass.
“The current thinking is that based on today’s technology, we suspect corn-based ethanol will generate at least 15 billion gallons,” said Brian Jennings, the executive vice president of the American Coalition for Ethanol, an association of ethanol and corn producers. “Beyond that, it’s uncertain. The marketplace will make that determination on where it will come from.”
Yet some members of Congress would like to make the president’s goal for biofuels a mandatory target — the equivalent of 2.3 million barrels a day that would, in effect, create an ethanol industry roughly the size of world-class oil producers like Kuwait or Nigeria.
The economics of cellulosic ethanol, made from nonfood crops and agricultural waste, are also unclear. Since cellulosic ethanol, still at an experimental stage, is twice as expensive as corn-based ethanol, there are currently no commercial-scale cellulosic plants.
Lawrence Goldstein, an energy analyst at the Energy Policy Research Foundation, an industry-financed group, has been warning for nearly a year that the government’s twin goals of encouraging refiners to increase production and promoting increased supplies of biofuels work against each other.
“These two policies are not complementary,” Mr. Goldstein said. “These policies are in conflict.”
In addition, Mr. Goldstein said, an emphasis on ethanol might lead to increased volatility in fuel prices.
“If we get a bad corn crop, we will end up paying for it at the pump and on the food shelves,” he said. “We are not buying security. We are increasing volatility.”
Clay Sell, the deputy secretary of energy, acknowledged the concern, but said that rising energy consumption meant both biofuels and additional refining capacity would be needed in the long term.
“One can think that these goals are potentially in conflict,” Mr. Sell said. “But demand growth supports the need for investments in biofuels and growth in refining capacity. Are we concerned about it? Yes. But do we believe these concerns are well founded? No.”
Until the mid-1990s, the United States had significant spare refining capacity. But because of consolidation in the industry, the number of refineries declined while unprofitable operations were shut. As demand grew, however, and capacity remained flat, the picture changed. In recent years, refineries in the United States have been running at or close to full capacity.
Domestic refineries can now process about 17.5 million barrels of crude oil each day, much of it imported. But with consumption now close to about 21 million barrels a day, more imports of refined products are also needed.
In recent weeks, refiners point out that they have been increasing output: gasoline production in the United States is at its highest level ever, 8.85 million barrels a day.
Also, by increasing output from existing refineries, oil companies say they have expanded their production by 200,000 barrels a day since last year. Expansion of existing plants has added the equivalent of 10 new refineries over the last 10 years.
The refining industry has also spent vast amounts — more than $50 billion in the last 10 years — to meet requirements to produce cleaner fuels, according to the American Petroleum Institute, the industry’s main trade group.
But demand is outstripping supply. In the first three quarters of the year, gasoline use grew by 2 percent, nearly twice last year’s pace. Domestically produced supplies, though, have increased by only 0.5 percent a year on average.
Some consumers, meanwhile, are trying to drive less or are simply absorbing the higher cost. “I’m already driving the minimum,” said Dennis Zygnowicz, 51, of Garden City, Mich., who recently stopped at a Shell station and paid about $12 to put less than four gallons in his GMC Jimmy. “The only way I could do any less would be to ride a bike.”
Another driver, Tamar Bittelman, a kindergarten teacher from Berkeley, Calif., says her daily commute gives her little choice. “It’s unbelievable to me how much I’m paying for gas,” said Ms. Bittelman, who recently paid $3.56 a gallon to fill her 1998 Subaru Legacy wagon. “I’m just much more aware of how much every trip to the grocery store is costing us.”
Lisa Alcalay Klug and Nick Bunkley contributed reporting.

Internet Giants Vie to Snap Up Web Ad Firms (NYTimes, 5/19/07)

May 19, 2007
Internet Giants Vie to Snap Up Web Ad Firms
By MIGUEL HELFT
It’s a good time to be an Internet advertising company.
In the struggle for advantage in the digital advertising boom, companies like Google, Yahoo, Microsoft and AOL are rapidly acquiring once-obscure firms, sometimes for eye-popping prices. The payoff, they hope, will be in the relationships and technology that can deliver the right ad to the right person at the right time across myriad online sites.
The struggle reached new heights yesterday when Microsoft agreed to buy the online advertising company aQuantive for about $6 billion. It is Microsoft’s largest acquisition ever and a sign of its struggle to build an Internet ad business on its own.
The purchase caps a month of intense deal making, ignited when Google agreed to buy DoubleClick, a competitor of aQuantive, for $3.1 billion, outbidding Microsoft. Since then, all of Google’s main competitors have snapped up online advertising specialists.
Underlying the deals, which total more than $10.5 billion, is a transformation of the advertising world away from traditional media like television, radio and print.
“We’ve reached a tipping point,” said Bryan Wiener, chief executive of 360i, a search marketing company based in New York. “It’s not just talk anymore. The flood of dollars online is starting to accelerate to match the amount of time we spend online.”
Online ads accounted for 5.8 percent of the $285 billion spent on advertising in the United States in 2006, according to eMarketer, a research firm. It estimates that the online share will rise to 10.2 percent by 2010.
In the first quarter of this year, AT&T spent $79 million on online image-based advertising, compared with $55.6 million in the quarter a year ago, according to Nielsen/NetRatings Ad Relevance. The Ford Motor Company increased its purchases to $29 million in the period, from $7 million a year earlier.
As those dollars move online, the big Internet companies see a chance to capture an ever-larger portion of the ad business, and they are seeking to expand.
Until recently, for instance, Google was largely focused on selling small text ads that appear alongside its search results and on other Web sites. Microsoft and Yahoo have sought a piece of that business and have sold ads on their own Web portals, which attract hundreds of millions of users each month.
Now, the large Internet companies all want to become intermediaries between advertisers and the millions of Web sites that have fragmented the online audience. And they are hoping to help deliver ads to online video games, cellphones and Internet television services.
“This is about the opportunity,” said Kevin Johnson, president of Microsoft’s platforms and services division. “We believe that there are tens of billions of dollars in economic value that can be generated in this industry, and we are committed to getting a bigger share of it.”
Analysts say that strengthening its online advertising business is particularly critical for Microsoft, not only because the company has lagged behind competitors like Google and Yahoo, but also because a major technological shift risks eroding the company’s core software business.
Google, which leads the online advertising world, is among those trying to make inroads into Microsoft’s traditional software business by offering word processing, spreadsheets and other software free.
Microsoft has “a strategic need to get into advertising in a big way and to protect the castle against the Google onslaught,” said Todd Dagres, founder and general partner of Spark Capital, a venture capital firm in Boston.
So far, Microsoft’s online advertising efforts have been a mixed bag. Seeking to compete more effectively with Google and Yahoo, Microsoft made a major investment in building a search engine and a technology system to deliver ads on it. Despite that effort, Microsoft’s share of the online search audience has declined steadily, making it harder to persuade advertisers to use the system.
“To effectively compete with the likes of Google and Yahoo, Microsoft needs to have a large base of advertisers,” said Anthony Noto, an analyst with Goldman Sachs. Mr. Noto said that Google had more than 500,000 advertisers and Yahoo about 300,000, while Microsoft has only a small fraction of that. “As long as that gap exists, they will have an inferior ability to monetize their own product,” Mr. Noto said.
Now aQuantive, which is based in Seattle, will bring many advertisers to Microsoft — and more.
The company has three business units, including Atlas, which like DoubleClick sells tools to advertisers and Web publishers that select and deliver the ads that appear on any given Web page when a user clicks on it. The so-called ad-serving technology, for which aQuantive charges a fee, uses data collected across the Web to figure out which ads are likely to be relevant to a particular user.
For example, when a user visits a news Web site, an ad server might deliver an ad from a marketer that is trying to reach the typical reader of the site. Even more valuable, it might make a match between the marketer’s target audience and typical readers of a news article on a particular subject.
The technology also uses the data to help Web publishers earn the most for the ad space available on their sites. That could also help Microsoft get more from the ads that appear on its own Internet portal.
Additionally, the DRIVEpm unit of aQuantive brings to Microsoft an advertising network that buys ad space from online publishers and sells it to advertisers. Both units would give Microsoft a greater role in brokering and selling ads outside of its own Web portal, MSN.
It is that same ambition that explains the recent wave of deals by other Internet companies. In addition to Google’s purchase of DoubleClick, Yahoo recently bought the 80 percent of Right Media that it did not already own for $680 million. The company operates an auction marketplace in which advertisers and publishers buy and sell online advertising space in real time.
This week, AOL bought Third Screen Media, which operates an ad network for mobile phones, and Adtech, an online advertising firm in Germany. AOL was the first Internet portal to buy a major advertising network, Advertising.com, in 2004.
“We early on saw the value of a big owned and operated portal, plus a large third-party network,” said Michael J. Kelly, president of AOL Media Networks.
The recent deals are also blurring the lines between the big Internet companies and traditional advertising companies like the Omnicom Group, WPP Group and Publicis Groupe, potentially bringing them into conflict.
On Thursday, the WPP Group bought 24/7 Real Media, another DoubleClick competitor, for $649 million, to compete better with Internet companies.
And in aQuantive, Microsoft is also getting the Avenue A/Razorfish unit, a leading interactive agency that helps marketers plan advertising campaigns, design ads and place those ads on Web sites either directly or by taking part in ad networks and exchanges.
This is “a watershed week for advertising in general,” said Rich LeFurgy, a former Madison Avenue executive who is an online advertising consultant and investor. “The boundary between ad agencies and ad media has been breached at the highest level. That’s never happened before.”
To understand how hot the market for online advertising technology has become, consider aQuantive’s stock price, which opened the year at about $25 a share. The company’s shares jumped when Google said it would buy DoubleClick for what many analysts thought was a steep price. Microsoft ultimately offered $66.50 a share in cash for aQuantive, an 85 percent premium over its closing price Thursday. Shares of aQuantive soared 78 percent yesterday, to $63.79.
Microsoft said the bidding for aQuantive was competitive, but would not say which other companies were interested in acquiring it. But having been outbid by Google for DoubleClick, Microsoft may have believed it could not afford to let this deal get away.
“They weren’t going to lose this process,” said a person close to the transaction. “That’s why they paid the price they did.” The conversations between Microsoft and aQuantive “got serious after the Google-DoubleClick deal was announced,” this person said.
Microsoft said the acquisition would require antitrust review.
The software giant has asked regulators to scrutinize the Google-DoubleClick deal, which it said would reduce competition. But Bradford L. Smith, Microsoft’s general counsel, said during a conference call with analysts that Microsoft and aQuantive were complementary businesses and that their union would promote competition.
The pursuit of online advertising businesses has not gone unnoticed by venture capitalists, who are financing a new generation of ad-focused start-up companies.
In 2006, these investors put $372 million into companies involved in Internet marketing services, according to the National Venture Capital Association, an industry trade group. That was the highest annual figure since 2000.
Carl Eibl, a managing director at Enterprise Partners Venture Capital, a San Diego firm, said there was a sense of urgency among entrepreneurs and investors to start companies based on Internet advertising and marketing and to develop them quickly. “There’s a race to critical mass and a race to position,” he said.
In that respect, he said investors view the recent spate of acquisitions as “heartening but also sobering.”
“The key acquisitions are happening right now,” he said.
Matt Richtel, Steve Lohr and Eric Pfanner contributed reporting.

Economy at Its Slowest in 4 Years (NYTimes, 4/28/07)

April 28, 2007
Economy at Its Slowest in 4 Years
By EDUARDO PORTER and JEREMY W. PETERS
Economic growth slowed to its weakest pace in four years during the first three months of 2007, underscoring how the persistent slump in the housing market continued to serve as a drag on the American economy.
In its first estimate of economic growth for the quarter, the Commerce Department said the nation gross domestic product, the most comprehensive measure of overall economic activity, expanded 1.3 percent for the quarter, barely over half the rate recorded in the final quarter of last year.
The abrupt slowdown was not enough to put a brake on inflation, however. The consumer price index most carefully monitored by the Federal Reserve, which excludes food and energy, rose 2.2 percent in the quarter, at an annual rate, above the Fed stated comfort ceiling.
t sort of more inflation, less growth,?said Stuart Hoffman, chief economist of PNC Financial. hat not a tasty combination.?/p>
On Wall Street, economists had forecast a slide in growth, but not one this sharp. The dollar plunged against the euro, briefly falling to a record low as investors factored in expectations of faster growth and rising interest rates in Europe against low growth and the possibility of lower rates in the United States.
But bond yields rose slightly, indicating deeper concern about potentially higher inflation. Stocks ?which have risen almost uninterruptedly since early March, defying concerns over a potential economic weakening ?ended mixed.
Economists said that the latest report card left the Fed in even more of a quandary over interest rates, with a weaker economy prodding it to cut rates to stimulate growth but inflationary pressures pushing it toward higher rates to curb price increases. The end result is likely to be a decision by the central bank to keep rates where they are until a clearer picture emerges.
t a bugaboo for the Fed,?said John Silvia, chief economist at the Wachovia Corporation, the bank holding company. t is a difficult spot to be in.?/p>
As throughout much of last year, the housing slump was the biggest anchor on the economy. Home construction recorded its sixth consecutive quarterly decline, falling 17 percent at an annual rate and subtracting almost a full percentage point from G.D.P.
Still, there were several upbeat signals in the economic report that suggested to many economists that the pace of growth could pick up this year. Business investment rebounded from its slowdown late last year to expand at a 2 percent annual rate in the first quarter. Silicon Valley was a key to the revival: investment in information technology contributed more than half a percentage point to growth in the quarter.
And despite the worrisome state of housing, Americans continued to borrow and buy. In the first quarter consumer spending grew 3.8 percent, a fairly vigorous pace.
But economic weakness also spread beyond housing. After a sharp cut in inventories in the fourth quarter of last year, businesses slimmed their stockpiles a little more in the first quarter of 2007, shaving 0.3 percentage points from economic growth. A decline in military spending by the government trimmed a quarter of a percentage point percent from total output.
Trade provided the biggest surprise, when exports fell unexpectedly and imports continued growing, subtracting half a percentage point from economic growth, according to the report.
Economists pointed out that the preliminary data on trade is particularly sketchy because the government did not yet have a good handle on exports and imports in March. But the data bewildered some analysts, who pointed out that the combination of a weak dollar and faster growth in Europe and elsewhere should be providing a lift to exports.
e completely discount this number,?said Nariman Behravesh, chief economist at Global Insight of Lexington, Mass. t inconsistent with everything else going on in the world.?
He suggested the estimate for first-quarter exports could be revised upward. And if not, he predicted, exports should record a sharp upswing in the spring quarter that is under way now.
The weakness in the economy and the poor trade results contributed to the dollar rout early in the trading day. And some analysts on foreign exchange markets argued that the dollar could well continue its long fall against key currencies like the euro and the British pound.
he divergence in monetary policy and economic growth between Europe and the U.S. is going to grease the wheels of those central banks who want to diversify their reserves away from the U.S. dollar,?said Ashraf Laidi, chief foreign exchange analyst at CMC Markets U.S., a financial trading company.
And a number of economists noted several reasons for the expected slow growth in coming quarters. The main one is the possibility of weaker consumer spending.
apidly rising energy prices and falling consumer confidence suggest that consumption growth will slow markedly in the second quarter,?Paul Ashworth, senior United States economist with Capital Economics, wrote in a research report.
Moreover, some experts forecast that the relatively strong job market of recent months ?unemployment has fallen to 4.4 percent and wage gains have outpaced inflation despite weak growth ?will buckle soon and kink consumer spending.
rowth at this pace will loosen the labor market,?wrote Ian Shepherdson, chief United States economist at High Frequency Economics in Valhalla, N.Y., in a note to investors. he Fed will blink soon.?/p>
But traders who try to divine the Fed actions were unmoved by the latest data. Futures markets put the chance that the Fed will cut interest rates from 5.25 percent to 5 percent by the end of the year at around 90 percent, about the same as before the new data was released.
Mr. Behravesh suggested Fed governors seem confident that the economy is growing at an underlying, long-term rate of 2 to 2.5 percent, a rate at which they are comfortable.
Some economists even suggested that higher inflation might prompt the Fed to raise, not cut, interest rates.
he Fed has seen inflation numbers creep steadily up in this cycle,?said Michael R. Englund, chief economist of Action Economics in Denver. ee going to see a first half of the year that is going to keep inflation pretty much above the Fed target zone.?/p>