One for the RoadThe blending of ethanol with gasoline ranks right up there with campaign finance reform as one of those bad public policy ideas that never makes sense and yet never goes away. If we took away the federal subsidies to grow corn, the federal subsidies to distill that corn into ethanol and the federal subsidy in the form of the motor fuel tax rebate, we wouldn't even think of putting this less-efficient fuel into an internal combustion engine. But we aren't going to take away those subsidies any more than we're going to take away the other welfare payments we shovel at farmers and agribusiness giants such as Archer Daniels Midland ( ADM). Just watch how presidential wannabes fall all over themselves in the Iowa caucus in support of ethanol. Use of ethanol as a motor fuel is supported by one of those odd coalitions of strange bedfellows dotting our political landscape and mixing our metaphors. First, several centuries after David Ricardo outlined the principle of competitive advantage in international economics, there are those who would rather waste money on domestic energy boondoggles than buy a cheaper barrel of foreign oil. Memo to file: If you spend more energy on producing the fuel than the fuel contains, you lose. Brazil has been producing alcohol fuels from sugar for more than two decades in search of energy independence, and who wouldn't want to emulate the Brazilian economic miracle? But unlike other energy boondoggles such as oil shale, we actually get a usable fuel back for our money, so at least it isn't a complete loss.
Rack 'Em UpBut ethanol is a commodity, and like all commodities it suffers from declining prices over time. Refiners such as Valero ( VLO), Tosco, Coastal and Koch may sell branded ethanol at their terminals at what is called a rack price, but it's nearly impossible to add value to ethanol. Ethanol is supplanting MTBE as an additive in many markets because of the groundwater issue, and as ethanol producers such as Chippewa Valley Ethanol, which is doubling its capacity, ramp up, prices are plunging (to $1.18 per gallon).
|When Big Oil Meets Big Alcohol |
The price of 87-octane conventional gasoline at the U.S. Gulf Coast tends to lead the national average rack price of ethanol. The relationship has become tighter both in time and in absolute correlation since the groundwater pollution problems of MTBE became more apparent in early 2001. This relationship should be studied by government lawyers and others who still believe in "cost-plus" pricing, the notion that the cost of producing a good or service determines its price in the market. The opposite, the determination of production costs by the price in the final market, holds true here. As the price of gasoline rises and falls, so does the capacity of refiners to pay for ethanol and other additives. By confirmation, the MTBE market tracks the price of gasoline closely as well. The degree of correlation starts to break down in early 2001 as MTBE's environmental problems became more apparent.
|Ether Market Getting Sleepy |