Consumer Federation of America: The RFS and Ethanol Help Consumers
Should we let the “free” market decide the fate of alternative fuels?
“Contrary to the past several years, there is plenty of gasoline available, demand has fallen, and increased amounts of less expensive ethanol are being blended into more than 60 percent of the nation’s gasoline. It is critical for policy makers to shine a spotlight on the industry so it does not cut back on refinery runs to tighten the market, and they need to ensure that the 2007 Energy Independence and Security Act, is implemented vigorously since it emphasizes the two key long-term elements that can help consumes escape from the grip of both the domestic refining oligopoly and the crude oil cartel – expansion of alternative fuels and reduction of demand though increased fuel economy -- Dr. Mark Cooper, Director of Research, Consumer Federation of America, March 26, 2008, National Press Club
Reporters and cameras from NBC, CNN (watch it here) and other media outlets came to the National Press Club this morning to learn more about the release of a new report by the Consumer Federation of America, “Rising Gasoline Prices: Why Can’t Consumers Catch A Break.” Several times during the press conference Dr. Cooper mentioned the important role ethanol is playing, and can play in the future, to help reduce gasoline prices and increase competition in the market place. A related report from May 2005 “Over a Barrel: Why Aren’t Oil Companies Using Ethanol to Lower Gasoline Prices” also discusses some of the dynamics of the gasoline market and the role ethanol can play to help consumers.
Some Highlights of the Press Conference and Report:
- There are two potential effects in the domestic market that might hold gasoline prices down. First, slack demand and increased supply may put downward pressure on the domestic spread. Second, spare capacity in the refining sector may create pressure to pass the lower cost of ethanol through to the consumer. Combined these two factors could prevent price increases of as much as $0.25 per gallon….If not, prices could increase by $0.75 per gallon, or $75 Billion in the final three quarters of the year.
[Save those economic stimulus checks]
- The gasoline market should act more like a free market, and be much more like the ethanol industry’s response to market indicators. When the supply of ethanol goes up the price goes down, when the demand for ethanol goes up the price goes up, and when prices and demand are down, capacity slows down. This does not appear to be the case with the U.S. gasoline market.
- The Energy Independence and Security Act of 2007 will save 100,000 barrels per day in gasoline demand from CAFE increases and the RFS will increase supplies by 600,000 barrels per day.
- The bite that declining demand has taken out of the refinery capacity gap is small compared to the bite that expanding use of ethanol has taken. A 1.1.% decline in demand for gasoline in a winter month is somewhat less than 100,000 barrels per day. By the end of 2007, domestic U.S. production of ethanol was over five times as high and the refining sector has taken notice. Bill Day, a spokesman for Valero Energy Corp. The largest U.S. oil refiner, said his company foresees ethanol growth offsetting gasoline imports to the U.S.
- The number of major refiners is down by 50%. Consumers are suffering from a concentrated refining market that resulted from mergers and the consolidation of the oil industry. There is no competition in the marketplace and therefore no competitive forces to make refiners adjust prices, and no competitors to steal their customers during times of tight supplies, high prices, and high margins. There are reports that Exxon/Mobil is now looking to increase its monitoring and control of ethanol blending at its terminals.
- The excessive profits enjoyed by these companies since 2002, above the normal return on equity earned by all manufacturing, equals over $190 billion in after tax dollars, which makes the pre-tax total increase in income about $280 billion.
- The increase in gasoline prices is having a spiraling effect on crude oil prices. That means that as gasoline prices go up, crude oil prices follow them. When OPEC sees U.S. refiners experiencing high margins (e.g., $1.00 per gallon after hurricane Katrina), they raise their crude oil prices to reflect the ability of the U.S. gasoline market to pay more.
- The increase in ethanol production represents a doubling of what the U.S. refining industry has invested in increasing gasoline refining capacity in the last seven years. While the refining industry complains about not being able to expand production in the U.S. because of environmental regulations and permitting issues and other reasons – they have not asked to build any new refineries either. In fact, they turned down President’s Bush’s offer to build refiner capacity on U.S. military bases.
- The impact ethanol has on food is vastly overstated. The impact of higher crude oil prices and the cost of fuel to get the milk to market have a much bigger impact on consumer prices.
I could not agree more. More supplies should lower prices for gasoline, and then crude oil, and therefore all consumer products. Ethanol deserves some financial credit for lowering gasoline and oil prices. That credit should be worth something to consumers at the pump and policy makers in Washington DC. If gasoline prices don't come down then we are going to need more that just an RFS to create a competitive U.S. gasoline market and home for the growing amount of alternative fuels.
What do you think?
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