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« Fair and Balanced: Biofuels, Ethanol, Food and the Future | Main | The Fuel vs. Food Fight Takes a Turn…Towards Real Data »

May 29, 2008

A Very Memorial Day: Ethanol Lowers Gasoline & Oil Prices, Oil Imports, and Food Prices

Ethanol: Fact vs. Myth

Learn the truth about ethanol...

The addition of ethanol into the U.S. gasoline pool lowers gasoline and crude oil prices by 15% -- therefore -- ethanol is actually lowering the price of food too.

“…the billions of gallons of ethanol are moderating oil prices by "easing energy bottlenecks, Oil prices would be at least 15% higher than they are, if not for today's output of ethanol.” -- Francisco Blanch, head of global commodity research at Merrill Lynch.

For decades proponents of alternative fuels and ethanol have claimed “in a free market adding an additional supply of finished product should lower gasoline prices.”  In addition, the federal government tax incentive (i.e., a lower tax on cleaner domestic fuels) should also insure ethanol could be sold to oil companies that claim the tax incentive at a lower price than gasoline – and possibly pass it along to the consumers.  One out of two is not bad.

Based on the Merrill Lynch analysis, lowering the price of world crude oil by 15% is worth $19.50 per barrel when the record was $130 per barrel. With world oil demand estimated at 87 million barrels per day – that is a savings to world oil users of $619 billion.  That’s a lot of bread in any currency!

This Memorial Day 2008, after thirty years of debate, we have 33 multi-million dollar IndyCars fueled with 100% ethanol racing around the track, and private and government analysts are validating and accepting the fact that ethanol supplies are helping to lower gasoline and crude oil prices, and reduce crude oil imports.

Do you want to help lower gasoline and food prices?

Ladies and gentlemen -- Start Your Flexible Fuel Vehicle Engines!!

Biofuels are playing "a critical role" in satisfying world demand. Without them, "it would be much more difficult to balance global oil markets,"  -- Fatih Birol, chief economist of the Paris-based International Energy Agency.

Ethanol Lowers Gasoline and Crude Oil Prices
Lowering your $4.00 per gallon gasoline price by 15% (Merrill Lynch) is worth 60 cents per gallon.  Iowa State says in some regions its 40 cents per gallon lower and some others estimate the savings to be about 10 cents per gallon.  You pick, you do the math, you save money.  If you estimate that the average motorist drives 12,000 miles per year, and gets 22 miles per gallon, the savings is times 500 gallons per year -- and if you (and your family) drive a little more, you can use 1,000 gallons times the savings.  Any way you calculate it -- ethanol saves you dough.

Using pooled regional time-series data and panel data estimation, we quantify the impact of monthly ethanol production on monthly retail regular gasoline prices. This analysis suggests that the growth in ethanol production has caused retail gasoline prices to be $0.29 to $0.40 per gallon lower than would otherwise have been the case. The analysis shows that the negative impact of ethanol on gasoline prices varies considerably across regions. The Midwest region has the biggest impact, at $0.39/gallon, while the Rocky Mountain region had the smallest impact, at $0.17/gallon. The results also indicate that ethanol production has significantly reduced the profit margin of the oil refinery industry. The results are robust with respect to alternative model specifications. Iowa State University

A study released this month confirms Missouri drivers are saving money at the pump thanks to ethanol. Research by John Urbanchuk, of the economic consulting service LECG, concludes that drivers in Missouri are expected to save nearly 10 cents per gallon due to the 10 percent ethanol standard that went into effect this year in the state. Extrapolated to reflect that Missouri drivers used over 2.9 billion gallons of gasoline in 2007, the research means statewide savings to consumers of more than $285 million in 2008.

American Farm Bureau Federation Economist: Without Ethanol Blending, Fuel Could Cost Ten Cents More Per Gallon

The high price of oil and gas is driving up the cost of nearly all consumer products, but the ethanol industry helps keep the Nebraska economy strong amidst nationwide inflation.  A recent study by Creighton University economist Ernie Goss found that the ethanol industry and higher ag commodity prices have boosted the Midwest economy while much of the country faces an impending recession. The production and use of ethanol strengthens Nebraska’s economy while lowering fuel costs. Ethanol blended fuels saved Nebraska consumers more than $70 million during 2007.

Ethanol Lowers Crude Oil Imports
The trend [in lower crude oil imports] was set to continue as people adjusted to high oil prices and the impact of the Energy Independence and Security Act, which became law in December 2007.  The 1970s is the last time we saw any significant decline in net import dependency in the US. It shows that markets do work, policy changes do work, technology does work.  The EIA expects the energy act to help boost biofuel production from 8bn gallons this year to at least 32bn by 2030, while prompting a 40 per cent efficiency improvement in new cars from 2020. -- Guy Caruso, head of the US Energy Information Administration

Therefore…Ethanol Lowers Food Prices
As detailed in an earlier Clean Fuels Blog April 21, 2008 The Missing Link in the Food vs. Fuel Fight

If ethanol is lowering the price of gasoline consumers use to get to the store, and it is reducing the price of petroleum products farmers use to produce food, and it is reducing the cost of diesel that distributors rely on to get food to market, and it is reducing the cost of energy in the store -- then ethanol has to be lowering food prices. So why are food prices increasing?

Has ethanol contributed to the surge in food prices? Not very much, concludes a group of agricultural economists at Texas A&M University in an April 10, 2008 report from the school's Agricultural & Food Policy Center. "The underlying force driving changes in the agricultural industry, along with the economy as a whole, is overall higher energy costs," the researchers conclude, not biofuels.

Food vs. fuel a global myth, chicagotribune.com, By Robert Zubrin and Gal Luft, May 6, 2008
In recent weeks, a flood of reports and statements has claimed that the world's biofuel programs—in particular the U.S. corn ethanol effort—is starving poor people around the globe. Even the UN's special reporter for the Right to Food decried biofuel production as "a crime against humanity."  It seems so obvious: With so much corn being turned into fuel, food shortages must inevitably result, and biofuel programs must be the cause. However, that's completely untrue.

Here are the facts. In the last five years, despite the nearly threefold growth of the corn ethanol industry (or actually because of it), the U.S. corn crop grew by 35 percent, the production of distillers grain (a high-value animal feed made from the protein saved from the corn used for ethanol) quadrupled and the net corn food and feed product of the U.S. increased 26 percent.  Contrary to claims that farmers have cut other crops to grow more corn, U.S. soybean plantings this year are expected to be up 18 percent and wheat plantings up 6 percent. U.S. farm exports are up 23 percent. America is clearly doing its share in feeding the world.

Agriculture is not a zero-sum game. There are 800 million acres of farmland in the U.S., and only about 30 percent of it is actually being used to grow anything. As a result of the ethanol program, the corn price received by farmers doubled over the last five years, causing a huge increase in the amount grown in terms of acreage and yield.

The increased demand for food from the hundreds of millions of people in China and India rising out of poverty and moving to a more calorie-rich diet affects the price of food the most. Second is the price of fuel. Higher fuel prices increase the cost of production, transport, wages and packaging, the main cost of retail food. For example, a $3 box of cornflakes contains 15 ounces of corn that cost 8 cents when bought from the farmer. So, farm commodity prices have almost no effect on retail prices. But the effect of oil price increases can be huge.

Which brings us to the real culprit: the Organization of the Petroleum Exporting Countries. This year, with OPEC-rigged oil prices exceeding $100 a barrel, the U.S. will pay $800 billion for its oil supply and the world as a whole will pay $3.2 trillion. These figures are both up a factor of 10 from what they were in 1999 and represent a huge regressive tax on the world economy.

Maybe by Memorial Day 2008 ethanol critics will accept and validate the fact the American capitalistic spirit and can do ingenuity can provide food, fiber, fuel and healthier economy.

Food or Fuel? Maybe We Can Have Both  - Washington Post, By Warren Brown, Sunday, May 25, 2008; Page G02

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