Morning ENERGY Discussion
Let me switch gears for a moment and talk about energy. We have record crude oil inventories and the price is going up. Gasoline inventories are up but so are gasoline prices. Why? For the answer, read the lead editorial in yesterday’s Wall Street Journal entitled “The Gasoline Follies”. If you recall, last summer Congress passed an energy bill. I assume the bill was intended to help either to increase oil supplies or to reduce prices. Of course, it did neither. Gasoline contains an additive called MTBE that serves as an oxygen additive.
However, there are environmental issues with MTBE and producers of the product would have severe liability exposure unless the government, which mandated its use in gasoline in the first place, didn’t provide a liability umbrella. That protection is expiring because Congress couldn’t come to an agreement to extend it or how to deal with the issue when it passed the energy bill last year. So, quite obviously, production of MTBE is grinding to a halt. Congress, still meddling where it doesn’t belong, has mandated ethanol as a replacement. Furthermore, it has mandated the consumption of 7.5 billion gallons of ethanol in gasoline by the end of 2012. It even granted ethanol manufacturers a subsidy of about $0.50 per gallon while providing oil companies huge tax incentives as an offset. Ethanol comes from refining grain and sugars. Of course, the government provides subsidies and price supports to corn and sugar producers with raise the cost of these ingredients.
Are you with me so far?
As it turns out there are a few problems with all this. First, while ethanol production is rising, it isn’t rising fast enough to offset the loss of MTBE production which will go from 1 ½% of the gasoline supply to zero almost overnight when liability protection disappears. In addition, while MTBE can be transported by pipelines like gasoline and crude oil, ethanol cannot. It must be transported by truck or rail and blended at the final terminal destination.
There could be an obvious solution….ethanol imports. Not so fast. Ethanol is subject to a 2.5% tariff and a second duty of $0.54 per gallon. This is done so that we don’t import “cheap” ethanol from Brazil which is cheap because it is not burdened with the costs of price supports and other government add-ons. If you remember back a few months ago, the United States couldn’t come to an agreement on free trade with Central and South America because Brazil wanted these tariffs eliminated as a quid pro quo. We said know. Oil and corn are both produced in red states.
East Coast terminals would be much better served importing ethanol from Brazil that paying to transport it inefficiently from the Gulf Coast. Thus, while we are awash with crude, America may be short of gasoline this summer because of an ethanol shortage and high costs related to subsidies and tax incentives for the producers. The winners will be the oil companies that reap the tax incentives and any domestic ethanol producer that can get capacity up and running. Do you have to guess who the losers are going to be? You’ll answer that question every time you fill up your gas tank.
By the way, I forgot to mention that low-sulfur diesel rules begin to take effect in June. All new large trucks next year will have to run on a new low-sulfur diesel fuel. The trucking companies are going to react by buying as many of this year’s trucks as they can. That will defer the low-sulfur diesel problem by will bloat current capacity. Next year, you won’t want to be in the business of making heavy duty trucks. Of course, refiners will have to make today’s diesel fuel for the old model trucks as well as low-sulfur diesel for the new trucks. That will add to costs and create further bottlenecks.
AI
