Deleting ethanol from U.S. fuel production systems would hard consumers
COMMSTOCK REPORTBy DAVID KRUSE
With so much public focus being put on oil and gasoline prices, it's difficult to imagine EPA doing anything that would send pump prices higher, potentially sharply higher. While many impacted by corn prices are "whining" as Phil Gramm puts it, the ethanol industry has become a large enough part of the U.S. fuel production system that deleting it now would have an unequivocally worse impact on consumers from raising pump prices than it has had in raising food costs.
No matter how much oil there is, there is a finite capacity in the U.S. to refine petroleum. The failure to build new petroleum refineries in the U.S. limits the U.S. ability to grow gasoline or distillate production to meet demand. While it's little talked about, ethanol made a significant contribution to U.S. refinery capacity. Albeit, ethanol plants refine corn into ethanol, the concept and result is the same.
Ethanol plants are refineries. They were a welcome expansion to U.S. refinery capacity. They are strategically located away from the Gulf where U.S. petroleum refineries are concentrated. That makes them less vulnerable to Gulf hurricanes, a strategic benefit. Ethanol production has added enough to U.S. motor fuel supply to have a significant impact on prices from boosting aggregate motor fuel production.
Texas Big Oil and Big Cattle interests have led a fight to roll back the ethanol RFS claiming that the push to produce biofuel was too disruptive. Big Oil still considers ethanol as competition. Big Cattle likes things the way they were, with farmers subsidized to produce grain for feed that they could buy below the cost of production. The truth is, that whatever temporary disruption the ethanol industry has generated impacting food prices, the alternative now is worse.
Consumers are paying more for food. Only a minor portion of the higher prices for food is biofuel related. Ironically more of food price inflation is energy price related so ethanol, while raising corn prices, reduces fuel costs significantly reducing the net inflation factor for food prices attributable to ethanol. With gasoline and diesel pump prices setting records at the pump, it's harder for the average consumer to appreciate the impact biofuel has had in lowering those prices. They can't see it now, but they certainly would if the RFS is rolled backed or the Blender's Credit is eliminated dumping the ethanol industry.
Tom Waterman, editor of the Ethanol Monitor says, "What mainstream media doesn't get, from the Los Angeles Times to TIME magazine, is that it will guarantee that $5.00 gasoline occurs within a month of an announcement to grant Governor Perry's request that the Federal mandate be cut in half. U.S. refiners would suddenly be faced with finding roughly between 320,000 and 350,000 barrels or 13.8 million gallons of gasoline per day immediately. These events are definite if the EPA acts and Congress follows by removing the tariff on Brazilian ethanol. Big oil will be on the road to eliminating a competitor, and Congress will be feeling the pressure to drill everywhere. We still maintain that the U.S. is in a recession right now, and such a move by the EPA could trigger one of the biggest economic catastrophes we've seen since the Great Depression."
We are already maxing out U.S. petroleum refinery capacity. To roll back ethanol would essentially cut back a significant portion of U.S. motor fuel refinery capacity. When you hear of a refinery problem - fire, weather, etc - the price of gasoline jumps. Rolling back the RFS would be the equivalent of taking several percent of U.S. motor fuel refinery capacity off-line. That would get the price of gasoline moving sharply higher. Big oil supports rolling back the RFS, not because they can meet U.S. motor fuel demand but because petroleum refinery margins would jump with gas prices. They like a tight gasoline market and ethanol adds supply. For July 2006, gasoline carried a 27.6% premium price to crude oil. Today the premium is just 3.2%. If big oil can get rid of ethanol, then they get their premium back.
Who would benefit from rolling back the RFS? U.S. consumers wouldn't. They would see motor fuel prices significantly higher with little, if any, offsetting result from moderating food prices. This is again because food prices are more sensitive to energy costs than the relatively less impact corn price has had on food prices. The U.S. consumer will pay more for fuel, having less disposable income, if the RFS is rolled back. Needless to say, the Midwest ag economy would be derailed, even deflating asset values including farmland.
Big Oil and Big Cattle would be the isolated beneficiaries, one seeking total dominate control of the U.S. motor fuel supply and the other cheaper feed, which would not be passed on to consumers. Big Oil would squeeze more dollars from oil through reduced refinery capacity while Big Cattle would see some benefit of lower feed costs diluted by a higher cost of transportation. The cattle industry is now gravitating to the Midwest in proximity of distiller's grain production. That trend would stop but Plains states would see a limited benefit as higher cost of transportation to move feed from the CornBelt to the Southern Plains results.
The Federal government made a promise to ethanol investors that rolling back the RFS would renege on, squelching future investment in value-added agriculture. The bottom line is that I will be shocked if the EPA is stupid enough to turn what is an unreasonable request by some into total chaos creating a motor fuel shortage and economic upheaval of the Midwest.
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David Kruse is president of CommStock Investments,Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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MTownResident
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07-28-08 8:25 AM
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Big Oil? Big Cattle? What about Big Corn? All these people that talk of Big companies as something bad is dumb. You know a bigger industry than oil? Tech companies. They make more profit than the oil industry at about 3-6 times the operating profit. People just love to hate "big" oil. Now Big cattle is an enemy too? Since when did the big cattle (I think that is where the world gets a lot of its food i.e. BEEF) become a problem? The cattle industry doesn't "gravitate" it has always been where it is and will probably stay there as the land they use is only really good for cattle or buffalo grazing. David, I know for a fact that you have had to spent a little time in agriculture. I even used to subscribe to DTN. What is happening with you bud?
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