Behind the ethanol scandal

The Renewable Fuel Standard is bringing abundance to the fuel market, and the oil industry is howling mad about it.

By TheStreet Staff Sep 18, 2013 9:43AM

Corn field © Bob Rashid, Brand X, CorbisBy Dana Blackenhorn, TheStreet

 

The idea that you can anticipate a high and rising price for fuel, regardless of demand, never made sense to me.

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What I was taught in economics class was that demand encouraged supply, and at some point the two would balance.

 

That's what seems to be happening. Shale oil, shale gas and new strikes around the world are dramatically increasing gas supplies and proven reserves, to the point where one-third of natural gas being pumped in North Dakota's Bakken deposit is being flared, burned away, $100 million in gas a month.

 

North Dakota's Department of Mineral Resources explained this happens only when the oil flow from a well is being tested. Or, if a producer determines it "is not economically feasible" to connect the gas in a well to a pipeline, they may "seek relief" from paying taxes and royalties on it.

 

If something is not "economically feasible," doesn't that mean the market has cleared at a price below the cost to bring on production? At its current price of $3.67/MCF, according to the latest report on Investing.com, it's still not economically feasible.


Prices below production costs

 

Prices below production costs have long been the problem with ethanol. The Renewable Fuel Standard was created to bridge this gap, enabling production. The idea that traders may be exploiting this program is separate from the question of supply and demand. You wanted supply and you got it. Genetic engineering is coming to the rescue of fuel prices.


A bumper corn harvest, driven by genetically engineered seeds, is driving ethanol prices below those for unblended gasoline. This pressure is going to increase next year.

 

Ethanol Producer writes that cellulosic alcohol projects, which don't require food crops as fuel, are starting to come on-stream.

 

Science & Enterprise writes that non-fuel crops like castor beans, genetically engineered to be used as fuel, are also heading to market.

 

Venture-funded start-ups like Midori Renewables are preparing new catalysts that get even more fuel sugar from existing feedstocks.

 

So the only recourse left to oil advocates is to attack the the Renewable Fuel Standard that created all this abundance. Take away the bridge, chop off ethanol supplies at the source and the price pressure on refiners and oil producers may abate.


Economic assumptions are wrong

 

Issues that appear political are often just economic, and that's the case here. Ethanol, with government aid, is now putting downward pressure on gasoline prices, and the producers of that fuel are howling about unfair competition.

 

But take away the market pressure of ethanol, do away with the Renewable Fuel Standard, flare enough gas in enough fields, and the market clears at the higher prices fossil fuel producers have built into their own economic models.

 

The lesson should be clear. The economic assumptions of this decade are wrong. There is a limit to how high natural gas and gasoline prices can rise before the market bites back. Now that this has happened, producers are squealing like stuck pigs.

 

Is the answer to give the old-line producers the political power they need to drive new supplies from the market so that they can keep raising costs and prices? Or is it to see that squealing as a victory and increase the pressure, forcing a permanent re-examination of the fuel industries' cost structures?

 

The answer to that one, I think, is obvious. The war against oil is being won, and now is the time to go in for the kill.

 

At the time of publication, the author owned no ethanol stocks.

  

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7Comments
Sep 18, 2013 9:08PM
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Corn based ethanol has been a fraud from day 1.  The only reason we are forced to burn it is because politicians of both parties receive bushels of money from the ag lobby.
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 there is nothing food about putting ethanol in gasoline except to pad the corn growing farmers. people are starving around the world and here we are using corn to fuel our cars when we have plenty of petroleum to do that. ethanol lowers mpg, ruins many parts in older cars, causes carburetor problems if left in there too long and doesn't really lower air pollution because more fuel is burned per mile. the sad thing is ... trying to take back the subsidies given to corn farmers to stop the use of ethanol.
Sep 19, 2013 12:47AM
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Notice that this is written by "The Street" staff, which is a clue to what's behind ethanol (besides rich farmers and the congressmen in their pockets). Ethanol has become a big Wall Street commodity, and you can add their lobbyists to the Ag lobbyists and the pseudo-Green lobbyists, all helping to keep taxpayers broke.
Sep 20, 2013 9:26PM
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All that water needed to Frac and produce ethanol has to come from the very same sources that we drink and grow our food. When that's gone or polluted it wont matter anymore. I am not aware of anyone addressing that problem.
Sep 23, 2013 4:39PM
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I would rather put it in my car  than sell it  to a rag head that wants to kill me...
Sep 27, 2013 5:08PM
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Ms. Blackenhorn is patently lying about the economic facts of ethanol, most of which are simple, i.e., Transportation of product - alcohol from crop products cannot be shipped by pipeline due to fact it will accumulate moisture_become useless, so is shipped by rail or truck, 300 - 1000% times more transport expense than petroleum product ...throw in the "congressional subsidies" and so-called "supply and demand" DOES NOT APPLY!
Oct 8, 2013 5:46PM
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6 posts all by what I presume are toadies of the oil industry. Ethanol is a viable fuel particularly thanks to the fact that we can genetically engineer certain bacteria to eat paper and produce ethanol. We have thousands of acres of farmland available to produce corn (which is not the best way and other ethanol producing crops. The end game is not to make Ethanol the fuel of the future but to put pressure on the oil/gas companies to keep our prices down.
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