maybe some sanity

[TOM4CWB]

maybe some sanity?

NOT A CHANCE!

The same folks who brought us 'global warming'... are behind this move as well!

AS always... there is a portion of truth behind what they are saying... but the reality is only part of the picture they paint.

Livestock eating feed grains; are much more a cause of overall grain consumption increases... that will be the next shoe to be dropped... as evil?

[Fransisco]

Well then if you folks believe the increase in corn prices has nothing to do with ethanol then you should have no problem with eliminating the subsidies and mandates.

[Fransisco]

Preliminary thoughts on the RFA’s PR campaign

Posted by Marlo Lewis

As most ethanol watchers know, the Renewable Fuels Association ran a full-page ad in The Hill magazine last week (May 6, 2008) titled: “Without ethanol, we’d be paying over $4.00 a gallon for gasoline today.” To substantiate this claim, the ad quotes from a March 24, 2008 column by Wall Street Journal reporter Patrick Barta:

“Without biofuels, which can be refined to produce fuels like the ones made from petroleum, oil prices would be even higher. Merrill Lynch commodity strategist Francisco Blanch says that oil and gasoline prices would be about 15% higher if biofuel producers weren’t increasing their output.”

What to make of this? Some preliminary thoughts.

(1) If Blanch’s analysis is correct, then proponents of the ethanol mandate, the 51-cent per gallon blenders tax credit, the 54-cent per gallon tariff, and other forms of policy privilege can no longer claim that ethanol “displaces” petroleum in the nation’s fuel supply. Rather, ethanol adds to the total stock of motor fuel. It is by increasing total liquid fuel supply relative to global demand that ethanol, in Blanch’s analysis, reduces crude oil and gasoline prices.

If correct, this is also an argument for opening the Alaska National Wildlife Refuge (ANWR) and the Outer Continental Shelves to oil production. Increased oil production should also increase supply relative to demand, lowering oil and gasoline prices.

(2) Blanch’s estimate, as far as I can determine, is not part of a formal or published study. It may merely be one analyst’s back-of-the-envelope. I find it troubling that RFA and others are making political hay out of an estimate based on assumptions, methods, and data that the RFA has not shared with the public, may not have evaluated, and may not even be privy to.

(3) The WSJ article says that global oil demand rose by 900,000 barrels per day (bpd) last year, and biofuel production rose by 300,000 bpd. We may surmise, therefore, that Blanch, assuming a particular elasticity of demand, estimated what would happen if biofuel production had not increased.

That is a reasonable thought experiment, but it tacitly assumes an “other things being equal” universe. Yes, if demand grows by 900,000 bpd and biofuels don’t grow by 300,000 bpd, then – other things being equal – the price impact might be exactly as Blanch estimates. But usually other things are not equal.

For example, the same WSJ article says that OPEC’s output “declined by about 400,000 barrels per day, according to the IEA [International Energy Agency].” How do we know that if biofuel production had been lower, OPEC output would not have been higher? If OPEC is truly the cunning cartel some commentators claim it is, then OPEC adjusts its production decisions in light of what other actors, including biofuel makers, plan to do. If OPEC’s 400,000 bpd cutback was a strategic decision, designed to prop up oil prices despite planned increases in other liquid fuels, then it wiped out any price reduction from the lesser, 300,000 bpd increase in biofuels.

For years, environmentalists have opposed opening ANWR to oil production on the grounds that its output would be just “a drop in the bucket,” the price-reducing effects of which OPEC could easily negate just by cutting back production. The same critique applies with equal merit (or the lack thereof) to ethanol.

(4) Blanch’s 15% estimate is questionable in light of recent changes in oil prices. He estimated in late March that without the increase in biofuels, oil would be $115 a barrel instead of $102. However, some six weeks later, oil hit $120 a barrel. Between those dates there was no drop in biofuel production. So it is not obvious that, in March, biofuels were responsible for the price of oil being $102 instead of $115.

(5) As you’d expect, RFA ignores the many ways in which ethanol increases the price of gasoline. These include the increased costs to store and ship ethanol, the increased cost to refine gasoline mixed with ethanol to counteract ethanol’s volatility and the associated hydrocarbon emissions, and the fuel economy penalty resulting from the fact that ethanol has one-third less energy content by volume than gasoline. To what extent Blanch’s estimate takes these factors into account is unknown at this point.

In closing, let me make clear that I mean no criticism of Blanch. Making estimates is what economists do. But I am troubled by the facile conclusions that the RFA and others are drawing from his estimate. They may have no idea what assumptions it is based on. They very likely have never considered whether the estimate takes into account potential strategic behavior by OPEC, or whether it is reasonable to give ethanol credit for lowering oil by $13 a barrel in March when oil prices were $18 a barrel higher in May.

[charliep]

Will leave the bigger picture ethanol discussion alone. Always an interesting question if there were no ethanol subsidies, would there be an industry? Having said that, subsidies have always been a part of US agriculture. That might raise the question is there were no US farm program, would corn productivity be where it is today? If there were no US/EU subsidies that increased their production/drove prices down, would other regions have improved their productivity more quickly based on market signals?

Other interesting thing is that ethanol will have to take a page from the livestock industry. The meat business finds value in every component of a pig including the squeel if they knew how to capture. Have seen a presentation on barley/ethanol and a major part of the model is to find full value from the barley seed start with identifying higher valued products like nutricuticals/breaking them out. From there, the issue will be to find full value from the plant. It will be a different of thinking about things starting with the varieties farmers grow (high starch/low protein, components aimed at nutricutical market, etc).

[Fransisco]

And I know that the hog industry in the US receives no direct subsidies.

Yes they got the benefit from the cheap corn because of corn subsidies but then again so did/does ethanol.

[Fransisco]

Credit Suisse Analysts Say Corn Undervalued Versus Crude Oil


CHICAGO -- Corn futures prices and crude oil prices have both hit record highs in recent days, but one analyst said the grain's price is sharply undervalued when comparing the energy
value to oil.
"Corn has energy value whether we like or not, so the market is increasingly willing to value it on that basis. If crude oil is worth $120/barrel, the market is valuing oil at $0.021 per thousand btus. If so, a bushel of corn would be worth $8.20/bushel in terms of combustible value. We get similar value if we convert it into ethanol, <b>but only if we include the $0.51/gallon federal
subsidy,"</b> said Robert Moskow, U.S. food and agribusiness analyst at Credit Suisse, in a research note.