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The Ethanol Remedy
Helping Relieve Pain at the Pump
by Kristin Brekke

“Without ethanol, gasoline prices would be higher.”

This statement, from a June 11 letter by Energy Secretary Samuel Bodman and Ag Secretary Ed Schafer, summarizes one of two key facts that are emerging in the investigation of ethanol’s role in food and fuel markets.

The other key fact – that ethanol has little, if any, impact on the price of food. In fact, 97 percent of the food price increase last year had nothing to do with biofuels.

The U.S. Departments of Agriculture and Energy were asked in mid-May by Senator Jeff Bingaman (D-NM), the chair of the Energy and Natural Resources Committee, to look in to the impact that biofuels are having on food prices and fuel prices. “It’s wise for folks to catch their breath and get better educated on the complexities before charging ahead with changes" to America's recently enacted biofuel policies, Bingaman wrote to the departments.

The USDA-DOE analysis, released last month, finds that biofuels-related feedstock demand plays only a very small role in global food supply and pricing. The data shows that biofuels contributed 3 to 4 percent to the food price increase last year and 4 to 5 percent of the increase so far in 2008. A host of other factors – global crop shortages, growing demand in China and India, the declining value of the dollar, and some countries’ export policies – are the driving factors behind today’s food price situation.

“The food and fuel pricing issues about which you have raised questions are complex,” the Secretaries’ letter to Bingaman states. “We would again caution, therefore, against hasty judgments driven by highly questionable, agenda-driven calculations, some of which have been featured prominently in the popular press.”

“It is clear, however, that biofuels are already moderating gasoline prices ,” the letter states. “That impact is likely to grow substantially as more biofuels come to market.”

Ethanol improves fuel supply, price

Today about 70 percent of America’s gasoline contains ethanol, making ethanol blends more prevalent than some may realize. Most ethanol is retailed as E10, the 10 percent blend that is approved for use in all makes and models of vehicles sold in the United States. The Renewable Fuels Standard (RFS) in the Energy Independence & Security Act of 2007 calls for 9 billion gallons of ethanol and biodiesel to be used nationwide this year.

In last month’s USDA-DOE analysis for the Senate Energy Committee, the agencies note the significant role this rate of ethanol usage plays in the national picture of gasoline supply and price. “Without ethanol, we would have to use 7.2 billion more gallons of gasoline (5 percent more gasoline) in order to maintain current levels of travel. We would only meet the demand for more gasoline without using ethanol mixtures by bidding up the price of gasoline.”

Economist John Urbanchuk took a broader look, examining ethanol’s role in the global fuel supply in a May 27 paper, the “Impact of Ethanol on World Oil Demand and Prices.”

“Biofuels expand the supply of motor fuel and reduce pressure on world crude oil supplies needed to refine gasoline . In a market environment of increasing demand for fuel led in large part by significant economic growth and development of the transportation sectors in China and India, and constrained global production, this means that a relatively small shortfall in supply can translate into a significantly larger short-term increase in price,” the report states.

Urbanchuk found that if ethanol were not available for use, the world’s refiners would need an additional 1.9 million barrels of crude oil per day, or 2.2 percent of current world production.

“Given the inelastic demand for crude oil, a shortfall of this small magnitude would likely result in a short-term price increase of 27.5 percent,” the report states.

Without ethanol to expand the global fuel supply, crude oil prices would be .70 per barrel higher , based on 0 oil. Or, from another angle, world ethanol production is keeping oil prices 27.5 percent lower than would otherwise be the case.

Ethanol is easing Americans’ pain at the pump

An examination of the U.S. gasoline market shows that ethanol is preventing American motorists from shelling out even more at the pump.

An April report from Iowa State University’s Center for Agriculture and Rural Development quantified the impact of ethanol production on retail gas prices. Authors Xiaodong Du and Dermot Hayes found that, over the sample period of 1995 to 2007, the growth in ethanol production has caused retail gas prices to be between 29 and 40 cents per gallon lower than would otherwise have been the case.

Each region of the country has experienced price relief due to ethanol, varying from 17.1 cents per gallon in the Rocky Mountain Region to 39.5 cents in the Midwest.

The report notes that these savings have come at the expense of gasoline refiners’ profits. “Ethanol production has had a significant negative effect on the refiner’s profit margin in all five PADD regions.”

Analysis by Merrill Lynch agrees, finding that in addition to ethanol offering relief over the past several years, the expansion in ethanol production today is preventing further flare-up in the oil and gas markets.

If ethanol producers weren’t expanding their output, oil and gas prices would be 15 percent higher, Merrill Lynch commodity strategist Francisco Blanch told The Wall Street Journal on March 24.

Additional analysis in the June 6 edition of the firm’s Global Energy Weekly concludes that biofuels are “now the single largest contributor to world oil supply growth.” The authors estimate that retail gasoline prices would be per barrel higher without the expanding ethanol supply, equal to a savings of 50 cents per gallon of gasoline at the retail level.

A snapshot of wholesale ethanol and gasoline prices taken over the Memorial Day holiday weekend shows how these per-gallon savings translate to big dollars for the American economy.

Based on national rack prices published May 23, the net price of ethanol was between .15 and .30 a gallon less than unleaded gasoline, a lower cost which equaled a savings to American motorists of million a day and more than 0 million over the three-day weekend.

“Without ethanol, Americans would pay a billion dollars more each month for gas ,” noted Ron Lamberty, Vice President / Market Development for the American Coalition for Ethanol (ACE).

Though at press time gas prices have softened and ethanol prices have increased slightly, there is still about a dollar net advantage with ethanol.

Feverish growth in oil demand is outpacing supply

Biofuels will be more important ever in the coming years as lower than expected oil production is strained by higher than expected demand.

The International Energy Agency (IEA) is preparing a thorough survey of the global oil supply, for the first time turning its focus from the survey of demand that it and most other agencies have done in the past.

According to a WSJ article on May 22, the IEA has predicted for several years that fuel supplies will keep pace with rising demand, projecting that supply will top 116 million barrels a day by 2030, an increase from the 87 million barrels at present. But now the agency hints of uncertainty in whether or not the necessary investments are being made in supply to keep up with worldwide increases in demand.

“The oil investments required may be much, much higher than what people assume ,” Fatih Birol, IEA chief economist, told The Wall Street Journal. “ This is a dangerous situation .”

The Energy Information Administration (EIA), the U.S. Department of Energy’s statistical arm, agrees.

"We are optimistic in terms of resource availability, but wary about whether the investments get made in the right places and at a pace that will bring on supply to meet demand," Guy Caruso, EIA Administrator, said in the same article.

The article states that “analysts at IEA also fret that a lack of investment in many OPEC countries, combined with a diminished incentive to ramp up output, casts serious doubt over how much the cartel will expand its production in the future. The big OPEC producers have been raking in record profits, creating a disincentive in many countries to sink more billions into increased oil production.”

Flat oil production and growing demand were cited by Energy Secretary Bodman in recent testimony before Congress, noting that, beginning in 2005, there has been no change in global production to meet the growing demand.

The IEA notes that new demand in the coming decades will come mainly from China, India, and the Middle East – a change from the past when the main demand drivers were the United States and Europe.

“Both on the demand and supply side, we have new actors who change the rules of the game. We are entering a new world energy order,” he told the Associated Press in a May 22 article.

Oil imports drop for first time in thirty years

For the first time in 30 years, America has slowed its imports of oil, finally making progress in the effort to cut reliance on crude – especially from foreign sources.

Data from the DOE’s Energy Information Administration shows that U.S. oil imports dropped for the first time since 1977. The agency also shows that U.S. foreign oil dependency is expected to fall from 60 percent to 50 percent by 2015, the same timeframe as the 2007 energy bill calls for U.S. biofuels production and use to approach 15 billion gallons.

“The 1970s is the last time we saw any significant decline in net import dependency in the U.S. It shows that markets do work, policy changes do work, technology does work,” stated EIA Administrator Caruso in a Financial Times article on May 21.

“This data from the Department of Energy makes the compelling case that, thanks in part to U.S. ethanol policy, we are finally reducing our expensive and risky addiction on foreign oil,” according to Brian Jennings, executive vice president of ACE. “Despite a dishonest PR attack campaign against ethanol, the facts clearly indicate that ethanol is part of the solution to U.S. energy security, economic security, and climate change concerns.”

Ethanol is not a panacea for the trouble facing America’s energy sector, which is deep and complex. But the facts show that ethanol is part of the solution to treating high gas prices, which are a symptom of the disease of dependence on increasingly expensive and decreasingly available oil.

© American Coalition for Ethanol, all rights reserved.
The American Coalition for Ethanol publishes Ethanol Today magazine each month to cover the biofuels industry�s hot topics, including cellulosic ethanol, E85, corn ethanol, food versus fuel, ethanol�s carbon footprint, E10, E15, and mid-range ethanol blends.
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