State's "Farm-to-Fuel" initiative lacks the political will to ensure fair and healthy competition in the marketing of ethanol blends.
By Brian J. Donovan
August 1, 2009
According to the U.S. Energy Information Administration, for the period from January 1, 2003 to January 1, 2009, the State of Florida consumed an average of approximately 23.1 million gallons of gasoline per day. This equates to an average of approximately 8.43 billion gallons of gasoline per year.
Beginning December 31, 2010, all gasoline sold or offered for sale in Florida by a terminal supplier, importer, blender, or wholesaler shall be blended gasoline. "Blended gasoline" means a mixture of 90 to 91 percent gasoline and 9 to 10 percent fuel ethanol, by volume, that meets the specifications as adopted by the Florida Department of Revenue. The fuel ethanol portion may be derived from any agricultural source.
For discussion purposes, let us assume Florida's average annual consumption of gasoline does not change. Beginning December 31, 2010, the State of Florida will require an annual supply of approximately 843 million gallons of fuel ethanol to meet its E10 mandate.
Ethanol Import Tariff
Ethanol imported into the United States is subject to two customs duties: an ad valorem tariff rate of 2.5 percent and a secondary tariff of 54 cents per gallon. The Ethanol Import Tariff of 1980 imposed the 54 cent-per-gallon tariff on imported ethanol. In many cases, this tariff negates lower production costs in other countries. For example, by some estimates, Brazilian ethanol production costs are roughly 50% lower than in the United States. A key motivation for the establishment of the tariff on imported ethanol was to offset the Blender’s Tax Credit incentive for ethanol-blended gasoline. Unless imports enter the United States duty-free, the tariff effectively negates the incentive for those imports.
Caribbean Basin Initiative
U.S. oil companies, due to a loophole in the Caribbean Basin Initiative (“CBI”), are currently allowed to import thousands of barrels of fuel ethanol every month without having to pay the 54-cent-per-gallon tariff.
The CBI was established in 1983 to promote a stable political and economic climate in the Caribbean region. As part of the initiative, duty-free status is granted to a large array of products from beneficiary countries, including fuel ethanol under certain conditions. If produced from at least 50% local feedstocks (e.g., ethanol produced from sugarcane grown in the CBI beneficiary countries), ethanol may be imported duty-free. If the local feedstock content is lower, limitations apply on the quantity of duty-free ethanol. Nevertheless, up to 7% of the U.S. market may be supplied duty-free by CBI ethanol containing no local feedstock. In this case, hydrous (“wet”) ethanol produced in other countries, historically Brazil or European countries, can be shipped to a dehydration plant in a CBI country for reprocessing. After the ethanol is dehydrated, it is imported duty-free into the United States. Currently, imports of dehydrated ethanol under the CBI are far below the 7% cap. CBI imports have the potential to increase significantly over the next few years, especially as the domestic market grows under the renewable fuels standard.
The issue is whether an oil company or refiner, or an affiliate of such oil company or refiner, that imports duty-free fuel ethanol from the Caribbean and subsequently blends the duty-free fuel ethanol with unblended gasoline in the State of Florida has an unfair competitive advantage in the marketing of motor fuel in the State of Florida.
Fair and Healthy Competition in the Marketing of Ethanol Blends
It was never the legislative intent of the U.S. Congress, nor the intent of the U.S. Environmental Protection Agency, to allow oil companies to be the sole beneficiaries of the blender’s tax credit. Section 6426 of the Internal Revenue Code creates a credit against the excise tax on taxable fuels. The excise tax credit is generally available to any person that blends alcohol or biodiesel with taxable fuel in a mixture. To qualify for the credit, a qualifying mixture must either be sold by the producer to a buyer for use by the buyer as a fuel or be used as a fuel in the trade or business of the producer.
Section 526.302 of the Florida Statutes clearly states the findings and intent of the Florida Legislature, “The Legislature finds that fair and healthy competition in the marketing of motor fuel provides maximum benefits to consumers in this state, and that certain marketing practices which impair such competition are contrary to the public interest. Predatory practices and, under certain conditions, discriminatory practices, are unfair trade practices and restraints which adversely affect motor fuel competition. It is the intent of the Legislature to encourage competition and promote the general welfare of citizens of this state by prohibiting such unfair practices.”
Section 526.203 of the Florida Statutes provides states:
“(2) FUEL STANDARD.--Beginning December 31, 2010, all gasoline sold or offered for sale in Florida by a terminal supplier, importer, blender, or wholesaler shall be blended gasoline.
(3) EXEMPTIONS.--The requirements of this act do not apply to the following:
(a) Fuel used in aircraft.
(b) Fuel sold for use in boats and similar watercraft.
(c) Fuel sold to a blender.”
Permitting oil companies to import relatively inexpensive duty-free foreign ethanol under the CBI and subsequently permitting only such oil companies and their affiliates to blend and receive the 45 cents-per-gallon blender’s tax credit impairs fair and healthy competition in the marketing of ethanol blends in the State of Florida. Independent ethanol producers in Florida clearly have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the 45 cents-per-gallon blender’s tax credit and be cost-competitive.
Florida: Leading Ethanol Producer or Leading Ethanol Importer?
Currently, not a single drop of fuel ethanol is produced in the State of Florida.
In November, 2007, Governor Charlie Crist led a five-day trade and economic development mission to São Paulo, Brazil. During the mission, coordinated by Enterprise Florida, Inc., Governor Crist was quoted as saying that he was determined to fight the U.S. tariff on ethanol, while making Florida a gateway for U.S. imports of the Brazilian biofuel.
As recently as January 30, 2009, the president of Gateway Florida, Brian C. Dean, traveled to the Dominican Republic and was quoted as saying that the State of Florida needs to find permanent suppliers of ethanol to cover a demand estimated at 786 million gallons starting next year, when it implements a norm calling for a 10% mix of that fuel in gasoline. Dean further stated, “Gateway Florida aims to get public policies implemented in Latin American and Caribbean countries to support the development of the ethanol and biofuels industry.”
Clearly, the ethanol import tariff should be repealed for the following reasons:
(a) Record prices for gasoline are increasing the costs of producing, transporting, and processing food products. Research shows that energy prices are quickly passed through to higher retail food prices, with retail prices rising 0.52 percent in the short-term for every 1 percent rise in energy prices. As a result, a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices;
(b) Imported petroleum does not pay a tariff, yet clean, renewable ethanol from our own hemisphere is assessed a 54 cent-per-gallon tariff;
(c) Elimination of the ethanol import tariff would provide the U.S. with sufficient ethanol to move ethanol demand beyond being just a blending component in gasoline to a truer fuel alternative and create the required fueling infrastructure;
(d) The Energy Independence and Security Act of 2007 set a new RFS that starts at 9.0 billion gallons of renewable fuel in 2008 and rises to 36 billion gallons by 2022. Of the latter total, 21 billion gallons of renewable fuel in U.S. transportation fuel is required to be obtained from renewable fuel, other than ethanol derived from corn; and
(e) U.S. oil companies, due to a loophole in the CBI, are currently allowed to import thousands of barrels of ethanol every month without having to pay the 54 cents per gallon tariff.
Repeal of the 54 cent-per-gallon import tariff on foreign ethanol would create market competition by allowing U.S. blenders, not only oil companies, to purchase cheaper ethanol from foreign sources, which could help lower gas prices, increase the supply of ethanol to coastal markets, and ease the economic strain that is impacting the agriculture, food and beverage industries.
However, equally as clear:
(a) an oil company or refiner, or an affiliate of such oil company or refiner, that imports duty-free fuel ethanol from the Caribbean and subsequently blends the duty-free fuel ethanol with unblended gasoline in the State of Florida currently has an unfair competitive advantage in the marketing of motor fuel in the State of Florida; and
(b) an oil company or refiner, or an affiliate of such oil company or refiner, must not be allowed to have a monopoly on blending fuel ethanol with unblended gasoline when the fuel ethanol and unblended gasoline are blended in the State of Florida.
Currently, the sole beneficiaries of the duty-free import of fuel ethanol to Florida from the Dominican Republic, or any CBI nation, are the oil companies and refiners and their affiliates in Florida. These same oil companies and refiners and affiliates blend these duty-free ethanol imports with unblended gasoline in the State of Florida and capture the additional blender’s tax credit of 45 cents-per-gallon. As a result, the farmers/landowners and consumers never realize any benefit, rural economic development is ignored, and jobs are not created in Florida.
Rural Development and Job Creation
Beginning December 31, 2010, the State of Florida will need to import an annual supply of approximately 843 million gallons of fuel ethanol to meet its E10 mandate.
Let's calculate the Blender's Tax Credit:
(843 million gallons of imported ethanol per year)($0.45/gallon) = $379,350,000
This $379 million per year will go directly into the coffers of out-of-state oil companies. Not one cent of this $379 million per year will be made available for rural development and job creation in the State of Florida! I doubt this issue will be addressed at the 4th Annual Farm-to-Fuel Summit currently being held in Orlando.
The State of Florida has the resources to be the leading producer of advanced biofuel in the nation. At this point, the state merely lacks the political will to ensure fair and healthy competition in the marketing of ethanol blends.
Showing posts with label blender's tax credit. Show all posts
Showing posts with label blender's tax credit. Show all posts
Saturday, August 1, 2009
Independent Ethanol Producers in Florida Have the Legal Right to Receive Blender's Tax Credit
State's "Farm-to-Fuel" initiative lacks the political will to ensure fair and healthy competition in the marketing of ethanol blends.
By Brian J. Donovan
August 1, 2009
The issue is whether an independent ethanol producer that produces fuel ethanol in the State of Florida has a legal right to be a blender of fuel ethanol with unblended gasoline, and receive the $0.45 per gallon Blender's Tax Credit, when the fuel ethanol and unblended gasoline are blended in the State of Florida if such independent ethanol producer has been licensed or authorized by the Department of Revenue as a blender.
Relevant Federal Legislation
A. The American Jobs Creation Act of 2004
On October 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004 (P.L. 108-357).
Effective January 1, 2005, the American Jobs Creation Act of 2004 established a new system for federal taxation of ethanol blends. The major changes are as follows:
• Eliminates the reduced rate of excise tax for gasohol blends containing 10%, 7.7%, and 5.7% ethanol, and instead, provides a 51 cents-per-gallon excise tax credit for each gallon of ethanol blended with gasoline. The new excise tax credit system is called the “Volumetric Ethanol Excise Tax Credit” (VEETC). In January, 2009, the excise tax credit was reduced to 45 cents-per-gallon for each gallon of ethanol blended with gasoline.
• Requires blenders to pay the full rate of tax (18.4 cents per gallon) on each gallon of a gasoline-ethanol mixture, but currently provides a 45 cents-per-gallon tax credit or refund for each gallon of ethanol used in the mixture.
• Allows blenders having excise tax liability to apply the excise tax credit against the tax imposed on the gasoline-ethanol mixture. For blenders having limited or no motor fuel excise tax liability, a refund may be claimed. IRS is required to provide refunds within 45 days, or if a claim is filed electronically, the refund must be paid within 20 days, or interest will accrue.
• Deposits all gasohol excise taxes into the Highway Trust Fund, and pays for the credit out of the General Fund.
B. Internal Revenue Code
Excise Tax. Section 4081 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an excise tax on the removal of a taxable fuel from a refinery or terminal, entry of a taxable fuel into the United States, and sale of a taxable fuel, not previously taxed upon removal or entry. “Taxable fuel” for this purpose includes gasoline, diesel fuel and kerosene.
Excise Tax Credit. Section 6426 of the Code creates a credit against the excise tax on taxable fuels. The excise tax credit is generally available to any person that blends alcohol or biodiesel with taxable fuel in a mixture. To qualify for the credit, a qualifying mixture must either be sold by the producer to a buyer for use by the buyer as a fuel or be used as a fuel in the trade or business of the producer.
Relevant Florida Statutes
206.01 Definitions. - As used in this chapter:
(1) "Department" means the Department of Revenue.
(30) "Blender" means any person who blends any product with motor or diesel fuel and who has been licensed or authorized by the department as a blender.
286.29 Climate-friendly public business. - The Legislature recognizes the importance of leadership by state government in the area of energy efficiency and in reducing the greenhouse gas emissions of state government operations. The following shall pertain to all state agencies when conducting public business:
(5) All state agencies shall use ethanol and biodiesel blended fuels when available. State agencies administering central fueling operations for state-owned vehicles shall procure biofuels for fleet needs to the greatest extent practicable.
526.202 Legislative findings. - The Legislature finds it is vital to the public interest and to the state's economy to establish a market and the necessary infrastructure for renewable fuels in this state by requiring that all gasoline offered for sale in this state include a percentage of agriculturally derived, denatured ethanol. The Legislature further finds that the use of renewable fuel reduces greenhouse gas emissions and dependence on imports of foreign oil, improves the health and quality of life for Floridians, and stimulates economic development and the creation of a sustainable industry that combines agricultural production with state-of-the-art technology.
526.203 Renewable fuel standard. -
(1) DEFINITIONS. - As used in this act:
(a) "Blender," "importer," "terminal supplier," and "wholesaler" are defined as provided in s. 206.01.
(b) "Blended gasoline" means a mixture of 90 to 91 percent gasoline and 9 to 10 percent fuel ethanol, by volume, that meets the specifications as adopted by the department. The fuel ethanol portion may be derived from any agricultural source.
(c) "Fuel ethanol" means an anhydrous denatured alcohol produced by the conversion of carbohydrates that meets the specifications as adopted by the department.
(d) "Unblended gasoline" means gasoline that has not been blended with fuel ethanol and that meets the specifications as adopted by the department.
(2) FUEL STANDARD. - Beginning December 31, 2010, all gasoline sold or offered for sale in Florida by a terminal supplier, importer, blender, or wholesaler shall be blended gasoline.
(3) EXEMPTIONS. - The requirements of this act do not apply to the following:
(a) Fuel used in aircraft.
(b) Fuel sold for use in boats and similar watercraft.
(c) Fuel sold to a blender.
526.207 Studies and reports. -
(1) The Florida Energy and Climate Commission shall conduct a study to evaluate and recommend the life-cycle greenhouse gas emissions associated with all renewable fuels, including, but not limited to, biodiesel, renewable diesel, biobutanol, and ethanol derived from any source. In addition, the commission shall evaluate and recommend a requirement that all renewable fuels introduced into commerce in the state, as a result of the renewable fuel standard, shall reduce the life-cycle greenhouse gas emissions by an average percentage. The commission may also evaluate and recommend any benefits associated with the creation, banking, transfer, and sale of credits among fuel refiners, blenders, and importers.
(2) The Florida Energy and Climate Commission shall submit a report containing specific recommendations to the President of the Senate and the Speaker of the House of Representatives no later than December 31, 2010.
526.302 Legislative findings and intent. - The Legislature finds that fair and healthy competition in the marketing of motor fuel provides maximum benefits to consumers in this state, and that certain marketing practices which impair such competition are contrary to the public interest. Predatory practices and, under certain conditions, discriminatory practices, are unfair trade practices and restraints which adversely affect motor fuel competition. It is the intent of the Legislature to encourage competition and promote the general welfare of citizens of this state by prohibiting such unfair practices.
Market Reality
Currently, oil companies refuse to sell unblended gasoline to prospective independent ethanol producers in Florida. As a result, the sole beneficiaries of the 45 cents-per-gallon blender’s tax credit are the oil companies, blenders affiliated with oil companies, and oil company shareholders. The farmers/landowners, independent ethanol producers and consumers never realize any benefit from the blender’s tax credit; rural economic development is ignored; and U.S. jobs are not created.
Not a single drop of fuel ethanol is produced in the State of Florida. One reason for the lack of development of a fuel ethanol industry may be attributed to the fact that oil companies, or affiliates of oil companies, currently have a monopoly on blending fuel ethanol with unblended gasoline in Florida. This monopoly is apparently supported by the Florida Energy & Climate Commission (“FECC”) which recently rejected a proposal by an independent ethanol producer to use variable blending pumps in Florida.
If independent ethanol producers are able to be blenders of fuel ethanol and unblended gasoline, and thereby receive the 45 cents-per-gallon tax credit, small-capacity ethanol producers would be able to enter the market. The result would be fair and healthy competition in the marketing of ethanol blends, broad-based rural economic development and job creation for Floridians.
Independent ethanol producers in Florida clearly have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the 45 cents-per-gallon blender’s tax credit and be cost-competitive. The State of Florida has the resources to be the leading producer of advanced biofuel in the nation. At this point, the state merely lacks the political will to ensure fair and healthy competition in the marketing of ethanol blends.
By Brian J. Donovan
August 1, 2009
The issue is whether an independent ethanol producer that produces fuel ethanol in the State of Florida has a legal right to be a blender of fuel ethanol with unblended gasoline, and receive the $0.45 per gallon Blender's Tax Credit, when the fuel ethanol and unblended gasoline are blended in the State of Florida if such independent ethanol producer has been licensed or authorized by the Department of Revenue as a blender.
Relevant Federal Legislation
A. The American Jobs Creation Act of 2004
On October 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004 (P.L. 108-357).
Effective January 1, 2005, the American Jobs Creation Act of 2004 established a new system for federal taxation of ethanol blends. The major changes are as follows:
• Eliminates the reduced rate of excise tax for gasohol blends containing 10%, 7.7%, and 5.7% ethanol, and instead, provides a 51 cents-per-gallon excise tax credit for each gallon of ethanol blended with gasoline. The new excise tax credit system is called the “Volumetric Ethanol Excise Tax Credit” (VEETC). In January, 2009, the excise tax credit was reduced to 45 cents-per-gallon for each gallon of ethanol blended with gasoline.
• Requires blenders to pay the full rate of tax (18.4 cents per gallon) on each gallon of a gasoline-ethanol mixture, but currently provides a 45 cents-per-gallon tax credit or refund for each gallon of ethanol used in the mixture.
• Allows blenders having excise tax liability to apply the excise tax credit against the tax imposed on the gasoline-ethanol mixture. For blenders having limited or no motor fuel excise tax liability, a refund may be claimed. IRS is required to provide refunds within 45 days, or if a claim is filed electronically, the refund must be paid within 20 days, or interest will accrue.
• Deposits all gasohol excise taxes into the Highway Trust Fund, and pays for the credit out of the General Fund.
B. Internal Revenue Code
Excise Tax. Section 4081 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an excise tax on the removal of a taxable fuel from a refinery or terminal, entry of a taxable fuel into the United States, and sale of a taxable fuel, not previously taxed upon removal or entry. “Taxable fuel” for this purpose includes gasoline, diesel fuel and kerosene.
Excise Tax Credit. Section 6426 of the Code creates a credit against the excise tax on taxable fuels. The excise tax credit is generally available to any person that blends alcohol or biodiesel with taxable fuel in a mixture. To qualify for the credit, a qualifying mixture must either be sold by the producer to a buyer for use by the buyer as a fuel or be used as a fuel in the trade or business of the producer.
Relevant Florida Statutes
206.01 Definitions. - As used in this chapter:
(1) "Department" means the Department of Revenue.
(30) "Blender" means any person who blends any product with motor or diesel fuel and who has been licensed or authorized by the department as a blender.
286.29 Climate-friendly public business. - The Legislature recognizes the importance of leadership by state government in the area of energy efficiency and in reducing the greenhouse gas emissions of state government operations. The following shall pertain to all state agencies when conducting public business:
(5) All state agencies shall use ethanol and biodiesel blended fuels when available. State agencies administering central fueling operations for state-owned vehicles shall procure biofuels for fleet needs to the greatest extent practicable.
526.202 Legislative findings. - The Legislature finds it is vital to the public interest and to the state's economy to establish a market and the necessary infrastructure for renewable fuels in this state by requiring that all gasoline offered for sale in this state include a percentage of agriculturally derived, denatured ethanol. The Legislature further finds that the use of renewable fuel reduces greenhouse gas emissions and dependence on imports of foreign oil, improves the health and quality of life for Floridians, and stimulates economic development and the creation of a sustainable industry that combines agricultural production with state-of-the-art technology.
526.203 Renewable fuel standard. -
(1) DEFINITIONS. - As used in this act:
(a) "Blender," "importer," "terminal supplier," and "wholesaler" are defined as provided in s. 206.01.
(b) "Blended gasoline" means a mixture of 90 to 91 percent gasoline and 9 to 10 percent fuel ethanol, by volume, that meets the specifications as adopted by the department. The fuel ethanol portion may be derived from any agricultural source.
(c) "Fuel ethanol" means an anhydrous denatured alcohol produced by the conversion of carbohydrates that meets the specifications as adopted by the department.
(d) "Unblended gasoline" means gasoline that has not been blended with fuel ethanol and that meets the specifications as adopted by the department.
(2) FUEL STANDARD. - Beginning December 31, 2010, all gasoline sold or offered for sale in Florida by a terminal supplier, importer, blender, or wholesaler shall be blended gasoline.
(3) EXEMPTIONS. - The requirements of this act do not apply to the following:
(a) Fuel used in aircraft.
(b) Fuel sold for use in boats and similar watercraft.
(c) Fuel sold to a blender.
526.207 Studies and reports. -
(1) The Florida Energy and Climate Commission shall conduct a study to evaluate and recommend the life-cycle greenhouse gas emissions associated with all renewable fuels, including, but not limited to, biodiesel, renewable diesel, biobutanol, and ethanol derived from any source. In addition, the commission shall evaluate and recommend a requirement that all renewable fuels introduced into commerce in the state, as a result of the renewable fuel standard, shall reduce the life-cycle greenhouse gas emissions by an average percentage. The commission may also evaluate and recommend any benefits associated with the creation, banking, transfer, and sale of credits among fuel refiners, blenders, and importers.
(2) The Florida Energy and Climate Commission shall submit a report containing specific recommendations to the President of the Senate and the Speaker of the House of Representatives no later than December 31, 2010.
526.302 Legislative findings and intent. - The Legislature finds that fair and healthy competition in the marketing of motor fuel provides maximum benefits to consumers in this state, and that certain marketing practices which impair such competition are contrary to the public interest. Predatory practices and, under certain conditions, discriminatory practices, are unfair trade practices and restraints which adversely affect motor fuel competition. It is the intent of the Legislature to encourage competition and promote the general welfare of citizens of this state by prohibiting such unfair practices.
Market Reality
Currently, oil companies refuse to sell unblended gasoline to prospective independent ethanol producers in Florida. As a result, the sole beneficiaries of the 45 cents-per-gallon blender’s tax credit are the oil companies, blenders affiliated with oil companies, and oil company shareholders. The farmers/landowners, independent ethanol producers and consumers never realize any benefit from the blender’s tax credit; rural economic development is ignored; and U.S. jobs are not created.
Not a single drop of fuel ethanol is produced in the State of Florida. One reason for the lack of development of a fuel ethanol industry may be attributed to the fact that oil companies, or affiliates of oil companies, currently have a monopoly on blending fuel ethanol with unblended gasoline in Florida. This monopoly is apparently supported by the Florida Energy & Climate Commission (“FECC”) which recently rejected a proposal by an independent ethanol producer to use variable blending pumps in Florida.
If independent ethanol producers are able to be blenders of fuel ethanol and unblended gasoline, and thereby receive the 45 cents-per-gallon tax credit, small-capacity ethanol producers would be able to enter the market. The result would be fair and healthy competition in the marketing of ethanol blends, broad-based rural economic development and job creation for Floridians.
Independent ethanol producers in Florida clearly have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the 45 cents-per-gallon blender’s tax credit and be cost-competitive. The State of Florida has the resources to be the leading producer of advanced biofuel in the nation. At this point, the state merely lacks the political will to ensure fair and healthy competition in the marketing of ethanol blends.
Tuesday, July 28, 2009
Independent U.S. Ethanol Producers Will Not Survive as Price Takers
Chicago Board of Trade Dictates Price of Corn and Oil Companies Control Price of Ethanol
By Brian J. Donovan
July 28, 2009
The issue is whether the proper development of an advanced biofuel industry in the United States is feasible when: (a) independent ethanol producers in the U.S. are at the mercy of volatile commodities markets for feedstock; and (b) the price of ethanol is controlled by the oil companies.
Commodity Market Volatility
The corn-to-ethanol business is highly dependent on corn prices. The price paid for corn is determined by taking the Chicago Board of Trade futures price minus the basis, which is the difference between the local cash price and the futures price. The more corn-to-ethanol contributes to our nation's energy supplies, the more it drives up corn feedstock prices and consequently its own cost. While increased ethanol production is partially responsible for the increase in corn prices, the main driving factors in the run-up in corn prices are: rising demand for processed foods and meat in emerging markets such as China and India, droughts and adverse weather around the world, a decrease in the responsiveness of consumers to price increases, export restrictions by many exporting countries to reduce domestic food price inflation, the declining value of the dollar, skyrocketing oil prices, and commodity market speculation. It is important to note that excessive speculation is not necessarily driving corn prices above fundamental values. Speculation can only be considered "excessive" relative to the level of hedging activity in the market.
The government's announcement that it would resurvey corn acreage in several U.S. states launched a rally in Chicago Board of Trade corn on July 23, 2009, giving life to a market that appeared to be sinking toward $3 a bushel. September corn ended up 19 cents to $3.27 a bushel and December corn ended up 19 1/2 cents to $3.38 3/4 a bushel. Traders see the market moving toward the $3.50-$3.75 a bushel range in the December contract. Ethanol futures were also higher. August ethanol ended up $0.065 to $1.597 a gallon and September ethanol ended up $0.064 to $1.555.
Dr. David J. Peters, Assistant Professor of Sociology - College of Agriculture and Life Sciences at Iowa State University, has developed a calculator to determine the long-term economic viability of proposed ethanol plants. Dr. Peters was surprised to learn how sensitive the bottom line is to small changes in corn and ethanol prices. According to Dr. Peters, a typical 100 MGY corn ethanol plant built in 2005 (financing 60 percent of its capital costs at 8 percent interest per annum for 10 years, with debt and depreciation costs of $0.20 per gallon of ethanol produced, and labor and taxes at a cost of $0.06 per gallon) will lose money in the current market:
At $3.25 corn, the ethanol break even price is $1.76 per gallon.
At $3.50 corn, the ethanol break even price is $1.82 per gallon.
At $3.75 corn, the ethanol break even price is $1.88 per gallon.
At $4.00 corn, the ethanol break even price is $1.94 per gallon.
Oil Company Monopoly
U.S. oil companies are using ethanol merely as a blending component in gasoline (in the form of E10) rather than a true alternative transportation fuel (in the form of E85). The major obstacle to widespread ethanol usage continues to be the lack of fueling infrastructure. Only 2,175 of the 161,768 retail gasoline stations in the United States (1.3%) offer E85. These E85 fueling stations are located primarily in the Midwest. According to the U.S. Department of Energy, each 2% increment of U.S. market share growth for E85 represents approximately 3 billion gallons per year of additional ethanol demand.
While alleging an oversupply of corn ethanol, U.S. oil companies, due to a loophole in the Caribbean Basin Initiative, are currently allowed to import thousands of barrels of advanced biofuel ("non-corn ethanol") every month without having to pay the 54-cent-per-gallon tariff.
Oil companies, or affiliates of oil companies, currently have a monopoly on blending fuel ethanol with unblended gasoline. Many states, e.g., Florida, allow only oil companies and their affiliates to blend and receive the 45 cents-per-gallon blender’s tax credit. This monopoly impairs fair and healthy competition in the marketing of ethanol blends. Independent U.S. ethanol producers have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the blender’s tax credit and be cost-competitive.
In short, independent U.S. ethanol producers do not have bargaining power on either end of the supply chain. Corn ethanol producers are price takers. A comprehensive advanced biofuel industry development initiative is required to disrupt the status quo and establish fair and healthy competition in the marketing of advanced biofuel blends in our nation.
The Louisiana Solution
Louisiana is the first state to enact alternative transportation fuel legislation that includes a variable blending pump pilot program and a hydrous advanced biofuel pilot program. On June 21, 2008, Louisiana Governor Bobby Jindal signed into law the Advanced Biofuel Industry Development Initiative ("Act 382"). Act 382, the most comprehensive and far-reaching state legislation in the U.S. enacted to develop a statewide advanced biofuel industry, is based upon the “Field-to-Pump” strategy.
It is the cost of the feedstock which ultimately determines the economic feasibility of an ethanol processing facility. “Field-to-Pump” does not allow an advanced biofuel producer to fall victim to rising feedstock costs. Non-corn feedstock is acquired under the terms of an agreement analogous to an oil & gas lease. It is not purchased as a commodity. A link exists between the cost of feedstock and ethanol market conditions. Farmers/landowners receive a lease payment for their acreage and a royalty payment based on a percentage of the gross revenue generated from the sale of advanced biofuel. “Field-to-Pump” marks the first time that farmers/landowners share risk-free in the profits realized from the sale of value-added products made from their crops.
Smaller is better. “Field-to-Pump” establishes the first commercially viable large-scale decentralized network of small advanced biofuel manufacturing facilities ("SABMFs") in the United States capable of operating 210 days out of the year. Each SABMF has a production capacity of 5 MGY. As with most industrial processes, large ethanol plants typically enjoy better process efficiencies and economies of scale when compared to smaller plants. However, large ethanol plants face greater supply risk than smaller plants. Each SABMF utilizes feedstock from acreage adjacent to the facility. The distributed nature of a SABMF network reduces feedstock supply risk, does not burden local water supplies and provides broad-based economic development. The sweet sorghum bagasse is used for the production of steam. Vinasse, the left over liquid after alcohol is removed, contains nutrients such as nitrogen, potash, phosphate, sucrose, and yeast. The vinasse is applied to the sweet sorghum acreage as a fertilizer.
Act 382 focuses on growing ethanol demand beyond the 10% blend market. Each SABMF produces advanced biofuel, transports the advanced biofuel by tanker trucks to its storage tanks at its local gas stations and, via blending pumps, blends the advanced biofuel with unblended gasoline to offer its customers a choice of E10, E20, E30 and E85. Each SABMF captures the blender’s tax credit of 45-cents-per-gallon to guarantee sufficient royalty payments to its farmers/landowners and be cost-competitive. In the U.S., the primary method for blending ethanol into gasoline is splash blending. The ethanol is “splashed” into the gasoline either in a tanker truck or sometimes into a storage tank of a retail station. The inaccuracy and manipulation of splash blending may be eliminated by precisely blending the advanced biofuel and unblended gasoline at the point of consumption, i.e., the point where the consumer puts E10, E20, E30 or E85 into his or her vehicle. A variable blending pump ensures the consumer that E10 means the fuel entering the fuel tank of the consumer’s vehicle is 10 percent ethanol (rather than the current arbitrary range of 4 percent ethanol to at least 24% ethanol that the splash blending method provides) and 90% gasoline. Moreover, a recent study, co-sponsored by the U.S. Department of Energy and the American Coalition for Ethanol, found E20 and E30 ethanol blends outperform unleaded gasoline in fuel economy tests for certain motor vehicles.
Hydrous advanced biofuel, which eliminates the need for the costly hydrous-to-anhydrous dehydration processing step, results in an energy savings of 35% during processing, a 4% product volume increase, higher mileage per gallon, a cleaner engine interior, and a reduction in greenhouse gas emissions. On February 24, 2009, the U.S. EPA granted a first-of-its-kind waiver for the purpose of testing hydrous E10, E20, E30 & E85 ethanol blends in non-flex-fuel vehicles and flex-fuel vehicles in Louisiana. Under the test program, variable blending pumps, not splash blending, will be used to precisely dispense hydrous ethanol blends of E10, E20, E30, and E85 to test vehicles for the purpose of testing for blend optimization with respect to fuel economy, engine emissions, and vehicle drivability. The Louisiana Department of Agriculture & Forestry Division of Weights and Measures will conduct the vehicle drivability phase of the test program. Fuel economy and engine emissions testing will be conducted by Louisiana State University in Baton Rouge, Louisiana. Sixty vehicles will be involved in the test program which will last for a period of 15 months.
Louisiana Act 382 ensures: (a) ethanol producers in the U.S. are no longer at the mercy of volatile commodities markets for feedstock; (b) farmers/landowners share risk-free in the profits realized from the sale of value-added products made from their crops (c) the price of ethanol is no longer controlled by the oil companies; (d) feedstock supply risk, the burden on local water supplies, and the amount of energy necessary to process advanced biofuel are minimized; and (e) rural development and job creation are maximized. Furthermore, due to the advantages of producing advanced biofuel from sweet sorghum juice, the use of sweet sorghum bagasse for the production of steam in the SABMF, and the energy savings of processing hydrous advanced biofuel, the Louisiana solution reduces field-to-wheel lifecycle GHG emissions by 100%.
By Brian J. Donovan
July 28, 2009
The issue is whether the proper development of an advanced biofuel industry in the United States is feasible when: (a) independent ethanol producers in the U.S. are at the mercy of volatile commodities markets for feedstock; and (b) the price of ethanol is controlled by the oil companies.
Commodity Market Volatility
The corn-to-ethanol business is highly dependent on corn prices. The price paid for corn is determined by taking the Chicago Board of Trade futures price minus the basis, which is the difference between the local cash price and the futures price. The more corn-to-ethanol contributes to our nation's energy supplies, the more it drives up corn feedstock prices and consequently its own cost. While increased ethanol production is partially responsible for the increase in corn prices, the main driving factors in the run-up in corn prices are: rising demand for processed foods and meat in emerging markets such as China and India, droughts and adverse weather around the world, a decrease in the responsiveness of consumers to price increases, export restrictions by many exporting countries to reduce domestic food price inflation, the declining value of the dollar, skyrocketing oil prices, and commodity market speculation. It is important to note that excessive speculation is not necessarily driving corn prices above fundamental values. Speculation can only be considered "excessive" relative to the level of hedging activity in the market.
The government's announcement that it would resurvey corn acreage in several U.S. states launched a rally in Chicago Board of Trade corn on July 23, 2009, giving life to a market that appeared to be sinking toward $3 a bushel. September corn ended up 19 cents to $3.27 a bushel and December corn ended up 19 1/2 cents to $3.38 3/4 a bushel. Traders see the market moving toward the $3.50-$3.75 a bushel range in the December contract. Ethanol futures were also higher. August ethanol ended up $0.065 to $1.597 a gallon and September ethanol ended up $0.064 to $1.555.
Dr. David J. Peters, Assistant Professor of Sociology - College of Agriculture and Life Sciences at Iowa State University, has developed a calculator to determine the long-term economic viability of proposed ethanol plants. Dr. Peters was surprised to learn how sensitive the bottom line is to small changes in corn and ethanol prices. According to Dr. Peters, a typical 100 MGY corn ethanol plant built in 2005 (financing 60 percent of its capital costs at 8 percent interest per annum for 10 years, with debt and depreciation costs of $0.20 per gallon of ethanol produced, and labor and taxes at a cost of $0.06 per gallon) will lose money in the current market:
At $3.25 corn, the ethanol break even price is $1.76 per gallon.
At $3.50 corn, the ethanol break even price is $1.82 per gallon.
At $3.75 corn, the ethanol break even price is $1.88 per gallon.
At $4.00 corn, the ethanol break even price is $1.94 per gallon.
Oil Company Monopoly
U.S. oil companies are using ethanol merely as a blending component in gasoline (in the form of E10) rather than a true alternative transportation fuel (in the form of E85). The major obstacle to widespread ethanol usage continues to be the lack of fueling infrastructure. Only 2,175 of the 161,768 retail gasoline stations in the United States (1.3%) offer E85. These E85 fueling stations are located primarily in the Midwest. According to the U.S. Department of Energy, each 2% increment of U.S. market share growth for E85 represents approximately 3 billion gallons per year of additional ethanol demand.
While alleging an oversupply of corn ethanol, U.S. oil companies, due to a loophole in the Caribbean Basin Initiative, are currently allowed to import thousands of barrels of advanced biofuel ("non-corn ethanol") every month without having to pay the 54-cent-per-gallon tariff.
Oil companies, or affiliates of oil companies, currently have a monopoly on blending fuel ethanol with unblended gasoline. Many states, e.g., Florida, allow only oil companies and their affiliates to blend and receive the 45 cents-per-gallon blender’s tax credit. This monopoly impairs fair and healthy competition in the marketing of ethanol blends. Independent U.S. ethanol producers have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the blender’s tax credit and be cost-competitive.
In short, independent U.S. ethanol producers do not have bargaining power on either end of the supply chain. Corn ethanol producers are price takers. A comprehensive advanced biofuel industry development initiative is required to disrupt the status quo and establish fair and healthy competition in the marketing of advanced biofuel blends in our nation.
The Louisiana Solution
Louisiana is the first state to enact alternative transportation fuel legislation that includes a variable blending pump pilot program and a hydrous advanced biofuel pilot program. On June 21, 2008, Louisiana Governor Bobby Jindal signed into law the Advanced Biofuel Industry Development Initiative ("Act 382"). Act 382, the most comprehensive and far-reaching state legislation in the U.S. enacted to develop a statewide advanced biofuel industry, is based upon the “Field-to-Pump” strategy.
It is the cost of the feedstock which ultimately determines the economic feasibility of an ethanol processing facility. “Field-to-Pump” does not allow an advanced biofuel producer to fall victim to rising feedstock costs. Non-corn feedstock is acquired under the terms of an agreement analogous to an oil & gas lease. It is not purchased as a commodity. A link exists between the cost of feedstock and ethanol market conditions. Farmers/landowners receive a lease payment for their acreage and a royalty payment based on a percentage of the gross revenue generated from the sale of advanced biofuel. “Field-to-Pump” marks the first time that farmers/landowners share risk-free in the profits realized from the sale of value-added products made from their crops.
Smaller is better. “Field-to-Pump” establishes the first commercially viable large-scale decentralized network of small advanced biofuel manufacturing facilities ("SABMFs") in the United States capable of operating 210 days out of the year. Each SABMF has a production capacity of 5 MGY. As with most industrial processes, large ethanol plants typically enjoy better process efficiencies and economies of scale when compared to smaller plants. However, large ethanol plants face greater supply risk than smaller plants. Each SABMF utilizes feedstock from acreage adjacent to the facility. The distributed nature of a SABMF network reduces feedstock supply risk, does not burden local water supplies and provides broad-based economic development. The sweet sorghum bagasse is used for the production of steam. Vinasse, the left over liquid after alcohol is removed, contains nutrients such as nitrogen, potash, phosphate, sucrose, and yeast. The vinasse is applied to the sweet sorghum acreage as a fertilizer.
Act 382 focuses on growing ethanol demand beyond the 10% blend market. Each SABMF produces advanced biofuel, transports the advanced biofuel by tanker trucks to its storage tanks at its local gas stations and, via blending pumps, blends the advanced biofuel with unblended gasoline to offer its customers a choice of E10, E20, E30 and E85. Each SABMF captures the blender’s tax credit of 45-cents-per-gallon to guarantee sufficient royalty payments to its farmers/landowners and be cost-competitive. In the U.S., the primary method for blending ethanol into gasoline is splash blending. The ethanol is “splashed” into the gasoline either in a tanker truck or sometimes into a storage tank of a retail station. The inaccuracy and manipulation of splash blending may be eliminated by precisely blending the advanced biofuel and unblended gasoline at the point of consumption, i.e., the point where the consumer puts E10, E20, E30 or E85 into his or her vehicle. A variable blending pump ensures the consumer that E10 means the fuel entering the fuel tank of the consumer’s vehicle is 10 percent ethanol (rather than the current arbitrary range of 4 percent ethanol to at least 24% ethanol that the splash blending method provides) and 90% gasoline. Moreover, a recent study, co-sponsored by the U.S. Department of Energy and the American Coalition for Ethanol, found E20 and E30 ethanol blends outperform unleaded gasoline in fuel economy tests for certain motor vehicles.
Hydrous advanced biofuel, which eliminates the need for the costly hydrous-to-anhydrous dehydration processing step, results in an energy savings of 35% during processing, a 4% product volume increase, higher mileage per gallon, a cleaner engine interior, and a reduction in greenhouse gas emissions. On February 24, 2009, the U.S. EPA granted a first-of-its-kind waiver for the purpose of testing hydrous E10, E20, E30 & E85 ethanol blends in non-flex-fuel vehicles and flex-fuel vehicles in Louisiana. Under the test program, variable blending pumps, not splash blending, will be used to precisely dispense hydrous ethanol blends of E10, E20, E30, and E85 to test vehicles for the purpose of testing for blend optimization with respect to fuel economy, engine emissions, and vehicle drivability. The Louisiana Department of Agriculture & Forestry Division of Weights and Measures will conduct the vehicle drivability phase of the test program. Fuel economy and engine emissions testing will be conducted by Louisiana State University in Baton Rouge, Louisiana. Sixty vehicles will be involved in the test program which will last for a period of 15 months.
Louisiana Act 382 ensures: (a) ethanol producers in the U.S. are no longer at the mercy of volatile commodities markets for feedstock; (b) farmers/landowners share risk-free in the profits realized from the sale of value-added products made from their crops (c) the price of ethanol is no longer controlled by the oil companies; (d) feedstock supply risk, the burden on local water supplies, and the amount of energy necessary to process advanced biofuel are minimized; and (e) rural development and job creation are maximized. Furthermore, due to the advantages of producing advanced biofuel from sweet sorghum juice, the use of sweet sorghum bagasse for the production of steam in the SABMF, and the energy savings of processing hydrous advanced biofuel, the Louisiana solution reduces field-to-wheel lifecycle GHG emissions by 100%.
Monday, July 27, 2009
Fill Up with Ethanol? One Obstacle is Big Oil: Rules Keep a Key Fuel Out of Some Stations; Car Makers Push Back
By Laura Meckler
The Wall Street Journal
April 2, 2007
President Bush, domestic auto makers, farmers and others tout ethanol as a home-grown alternative to imported oil. Across the Midwest, plants that make the fuel out of corn are multiplying at a torrid pace. Yet so far, only a tiny fraction of U.S. service stations let a driver fill up with ethanol. There are a number of reasons, but one big one is resistance from oil companies.
Although some oil executives voice enthusiasm for alternative fuels, oil-company policies make it harder for many service stations to stock a fuel called E85, a blend of 85% ethanol and 15% gasoline.
These policies are hardly the only barrier to wider use of the ethanol fuel. Demand is limited by the small number of vehicles that can burn it -- only about 5% of those on the road in America. It can be slightly costlier to burn E85, even though it costs less per gallon, because a car doesn't go as far on a gallon of the ethanol fuel as on gasoline. These demand restraints would limit service-station owners' enthusiasm for spending on the equipment needed to offer E85 even if the policies of the oil companies were not a factor.
But those policies add a significant extra obstacle. Oil companies lose sales every time a driver chooses E85, and they employ a variety of tactics that help keep the fuel out of stations that bear the company name. For instance, franchises sometimes are required to purchase all the fuel they sell from the oil company. Since oil companies generally don't sell E85, the stations can't either, unless the company grants an exception and lets them buy from another supplier.
Contracts sometimes limit advertising of E85 and restrict the use of credit cards to pay for it. Some require that any E85 pump be on a separate island, not under the main canopy.
Oil companies say they will allow stations to sell E85, but they must have certain rules for the protection of customers and protection of their brand. They call the restrictions reasonable and in some cases necessary to make sure drivers don't fill up with E85 if their vehicle can't burn it.
Most of the U.S.'s 170,000 fuel stations aren't owned by oil companies but are either franchised from them or independent. Less than 1% stock E85. Some experts say that to really take hold and be seen as a viable alternative to gasoline, the fuel would have to be available at, roughly, 10% of stations.
Targeting Stations
Those pushing for ethanol are targeting two very different types of fuel stations: those run by big retailers like Kroger Co. and Wal-Mart Stores Inc., and independent ones owned by small businesses. These represent the biggest and smallest of businesses, but have one thing in common: They aren't under the thumb of the oil industry.
Nearly half of the gasoline sold in the U.S. does have some ethanol in it. Oil companies routinely use it as an additive, typically at 10% ethanol to 90% gasoline, because the corn-based fuel burns cleaner. The blending enables companies to meet government smog-reduction rules. They also add ethanol because of a federal mandate on the industry as a whole, requiring that it use a certain amount of "renewable" fuels in its products.
Among those pressing for wider use of E85 are domestic auto makers, especially Ford Motor Co. and General Motors Corp. Ethanol is one energy initiative where they're out in front of Japanese car makers. While Toyota Motor Corp. and Honda Motor Co. are known for their gasoline-electric hybrids, Detroit, which has been heavily criticized for its sales of gas guzzlers, is far ahead in making "flexible-fuel" vehicles that can burn either gasoline or ethanol.
In Dwight, Ill., Becker's BP on Interstate 55 is one of just a few dozen major-brand gasoline retailers in the U.S. that sell E85. Owner Phil Becker says the governor wanted the state's vehicles to use E85 and targeted his station as a popular stop for state workers. He says BP PLC let him get the fuel from a non-BP supplier, and the Illinois Corn Growers Association gave him $100,000 for new tanks and pumps that BP required.
"Because I've got E85 and we've advertised it, we've had four or five farmers that traded their trucks to get E85 vehicles," Mr. Becker says.
Exxon Mobil Corp.'s standard contract with Exxon stations bars them from buying fuel from anybody but itself, and it doesn't sell E85. A spokeswoman for Exxon Mobil says it makes exceptions case by case.
Even if one is granted, the station must follow rules including one that says E85 must be dispensed from its own unit, not part of an existing multihose dispenser. "This minimizes customer confusion around vehicle compatibility issues and maintains product quality integrity," says the spokeswoman, Prem Nair.
A ConocoPhillips memo to franchisees says the company doesn't allow E85 sales on the primary island, under the covered canopy where gasoline is sold. Stations must find another spot. As a result, it isn't quite as simple for a driver to decide on the spur of the moment to fill up with E85. ConocoPhillips declines to comment.
A Chevron Corp. agreement with franchisees also appears to discourage selling E85 under the main canopy. It says dealers offering alternative fuels cannot "deceive the public as to the source of the product," a phrase that some gas-station interests interpret to mean that E85 can't be sold under the main canopy. Chevron says it recommends, but doesn't require, that E85 pumps be outside the canopy.
Chevron says it requires Chevron- and Texaco-branded stations to keep "E85" off their primary signs listing fuel prices. To show the fuel's price, and alert approaching drivers that E85 is for sale, the stations have to erect a separate sign.
More Expensive
Another Chevron recommendation makes it much more expensive for a station to offer E85 at all. Stations usually have three tanks, for the three gasoline grades, regular, mid-grade and premium. The easiest way to offer E85 in addition to these three is to convert the mid-grade tank to E85. Such a station can still offer mid-grade gasoline, because a "blender pump" can mix some regular with some premium, and mid-grade will come out of the hose.
But Chevron's agreement with station owners recommends they install new pumps and tanks at their own expense if they want to stock E85. Doing so can cost more than $200,000 per station, according to a fuel-station trade group in Washington state called Automotive United Trades Organization. Chevron says it requires special tanks only if they're needed for safety.
Oil companies also require stations to stock all three grades, meaning stations may not simply replace a low-selling mid-grade with E85.
At BP, guidelines for stations that carry the company name bar any mention of E85 on signs on gasoline dispensers, perimeter signs or light poles. The stations also can't let buyers use pay-at-the-pump credit-card machines.
Selling E85 is "not impossible -- it's just that they really kind of hassle you to not put it in," says Ron Lamberty, who owns two stations in South Dakota, one a BP station. Mr. Lamberty doesn't sell E85, even though he is director of market development for the American Coalition for Ethanol. He says he is looking into adding the fuel to his BP station in Sioux Falls.
Mr. Lamberty mocks BP's "Beyond Petroleum" slogan: "It's 'beyond petroleum' but not so far beyond petroleum that it would contain anything but petroleum," he says.
BP says its guidelines are in place so customers realize the mostly ethanol fuel isn't a BP product. The company also bars stations from selling it under another brand name, such as VE85, the brand of a maker in Brookings, S.D., called VeraSun Energy Corp.
A BP spokesman, Scott Dean, says, "When you've got 97% of your customers unable to use the product, you want to be very, very sure it is very clearly advertised." He says BP bought 718 million gallons of ethanol last year to blend into U.S. gasoline in small amounts. "BP is one of the largest if not the largest purveyor of biofuels in the U.S. and the world," Mr. Dean says.
E85 also faces barriers having nothing to do with Big Oil, like the limited number of cars that can burn it. Domestic auto makers have vowed to double production of flex-fuel vehicles to about two million a year by 2010 and to make half of their new vehicles sold in America E85-capable by 2012.
While the fuel usually costs less, it can be costlier to drivers because they get about 25% fewer miles per gallon from ethanol than from gasoline. At a pro-ethanol group called the Iowa Renewable Fuels Association, Executive Director Monte Shaw estimates that E85 has to be at least 20 to 30 cents a gallon cheaper to compete with gasoline on price.
Iowa statewide average prices on a recent day were $2.18 a gallon for regular gasoline and $1.97 for E85, according to a Department of Energy Web site. Because E85 is less energy-intensive, the site said, it would cost the average owner of a big Chevy Tahoe SUV about $2,364 a year to fuel it with E85, and $1,935 to fuel it with regular gasoline.
Creating a Conflict
The price of ethanol has risen in the past year, partly because of demand from oil companies that want it for an additive. This usage creates something of a conflict for big ethanol producers like Archer-Daniels-Midland Co. Their main ethanol customers are the oil companies. Customers for E85 are far smaller and more fragmented.
ADM, whose yearly output of 1.1 billion gallons is more than 20% of the domestic ethanol market, says it is happy to sell E85 if someone wants it, but that is a "very small" part of its business. "Near term, we have focused more attention on the" additive side, says an ADM executive, Edward Harjehausen.
Even the main ethanol lobbying group in Washington, the Renewable Fuels Association, has focused mostly on developing the market for the fuel as an additive. "If you have a pump that sells E85 but you don't have customers pulling up to that pump, why do you want to bother?" says Bob Deneen, its chief lobbyist.
A few smaller producers do actively promote E85, such as VeraSun, which seeks to establish a branded E85. But even the smaller producers sell the bulk of their output for blending as a gasoline additive.
Because ethanol is more corrosive than gasoline, there's some concern it could leak out of a standard dispensing system and spark a fire. No E85 dispensing system -- nozzles, hoses, pumps -- has been certified by Underwriters Laboratories, the organization that tests the safety of products.
In October, UL suspended certification of parts that had been certified for use in E85 systems. Though there hadn't been any reports of problems, UL said it decided it needed to do its own safety research. Results aren't expected until late this year.
Among those trying to overcome obstacles to E85 are the domestic auto makers. They have built flex-fuel vehicles for years because doing so gives them "credits" in their efforts to meet federal fuel-economy standards. Without the credits, Ford and GM wouldn't have met mileage goals for light trucks in 2003, 2004 and 2005 and would have owed fines. The mileage goals pose a bigger challenge to Detroit because of its heavy reliance on large, thirsty vehicles. Foreign makers generally haven't resorted to building flex-fuel cars to meet the mileage goals.
For Detroit, the credits applied even if the flex-fuel cars they built never actually burned ethanol. For a long time, the auto makers said little about ethanol, and many owners of flex-fuel cars didn't know they had them. But when gasoline prices surged in 2005 and 2006, GM and Ford saw their flex-fuel cars as a way to counter their image as gas-guzzler makers.
Both began promotional campaigns, such as one in which GM gave buyers in Chicago and Minneapolis $1,000 gift cards good for E85. GM began to work with state officials to find grants to pay for installing pumping equipment. It has helped add E85 to 235 stations. Ford helped pay for installing 50 pumps so someone could drive from Chicago to Kansas City while filling up only with E85.
Among ethanol backers' recruits are two grocery chains. Kroger installed E85 at about 40 stations in Ohio and Texas. Privately held Meijer Inc. did the same in Michigan and Indiana.
Wal-Mart could provide a significant boost. It said last year it was considering selling E85 at its 388 company-owned stations but hasn't made a decision.
The U.S. tax code acts as a stimulus. Service-station owners can get a credit of up to $30,000 for their outlays to convert equipment to sell E85.
Some states have done their bit to spur the market. New York enacted a bill last year that barred oil companies from requiring stations to buy all of their fuel from the companies.
In the Albany area, station owner Christian King has begun selling E85 at one of his three Mobil outlets and plans to do so at a second. He says Mobil's restrictions still mean he can't put the price of E85 on the main sign or let drivers charge it on their Mobil credit cards.
Adding E85 "is a personal thing," Mr. King says. "I'm trying to do anything I can to reduce our dependence on foreign oil. And if this thing kicks off, I'm in a position to benefit."
Write to Laura Meckler at laura.meckler@wsj.com
The Wall Street Journal
April 2, 2007
President Bush, domestic auto makers, farmers and others tout ethanol as a home-grown alternative to imported oil. Across the Midwest, plants that make the fuel out of corn are multiplying at a torrid pace. Yet so far, only a tiny fraction of U.S. service stations let a driver fill up with ethanol. There are a number of reasons, but one big one is resistance from oil companies.
Although some oil executives voice enthusiasm for alternative fuels, oil-company policies make it harder for many service stations to stock a fuel called E85, a blend of 85% ethanol and 15% gasoline.
These policies are hardly the only barrier to wider use of the ethanol fuel. Demand is limited by the small number of vehicles that can burn it -- only about 5% of those on the road in America. It can be slightly costlier to burn E85, even though it costs less per gallon, because a car doesn't go as far on a gallon of the ethanol fuel as on gasoline. These demand restraints would limit service-station owners' enthusiasm for spending on the equipment needed to offer E85 even if the policies of the oil companies were not a factor.
But those policies add a significant extra obstacle. Oil companies lose sales every time a driver chooses E85, and they employ a variety of tactics that help keep the fuel out of stations that bear the company name. For instance, franchises sometimes are required to purchase all the fuel they sell from the oil company. Since oil companies generally don't sell E85, the stations can't either, unless the company grants an exception and lets them buy from another supplier.
Contracts sometimes limit advertising of E85 and restrict the use of credit cards to pay for it. Some require that any E85 pump be on a separate island, not under the main canopy.
Oil companies say they will allow stations to sell E85, but they must have certain rules for the protection of customers and protection of their brand. They call the restrictions reasonable and in some cases necessary to make sure drivers don't fill up with E85 if their vehicle can't burn it.
Most of the U.S.'s 170,000 fuel stations aren't owned by oil companies but are either franchised from them or independent. Less than 1% stock E85. Some experts say that to really take hold and be seen as a viable alternative to gasoline, the fuel would have to be available at, roughly, 10% of stations.
Targeting Stations
Those pushing for ethanol are targeting two very different types of fuel stations: those run by big retailers like Kroger Co. and Wal-Mart Stores Inc., and independent ones owned by small businesses. These represent the biggest and smallest of businesses, but have one thing in common: They aren't under the thumb of the oil industry.
Nearly half of the gasoline sold in the U.S. does have some ethanol in it. Oil companies routinely use it as an additive, typically at 10% ethanol to 90% gasoline, because the corn-based fuel burns cleaner. The blending enables companies to meet government smog-reduction rules. They also add ethanol because of a federal mandate on the industry as a whole, requiring that it use a certain amount of "renewable" fuels in its products.
Among those pressing for wider use of E85 are domestic auto makers, especially Ford Motor Co. and General Motors Corp. Ethanol is one energy initiative where they're out in front of Japanese car makers. While Toyota Motor Corp. and Honda Motor Co. are known for their gasoline-electric hybrids, Detroit, which has been heavily criticized for its sales of gas guzzlers, is far ahead in making "flexible-fuel" vehicles that can burn either gasoline or ethanol.
In Dwight, Ill., Becker's BP on Interstate 55 is one of just a few dozen major-brand gasoline retailers in the U.S. that sell E85. Owner Phil Becker says the governor wanted the state's vehicles to use E85 and targeted his station as a popular stop for state workers. He says BP PLC let him get the fuel from a non-BP supplier, and the Illinois Corn Growers Association gave him $100,000 for new tanks and pumps that BP required.
"Because I've got E85 and we've advertised it, we've had four or five farmers that traded their trucks to get E85 vehicles," Mr. Becker says.
Exxon Mobil Corp.'s standard contract with Exxon stations bars them from buying fuel from anybody but itself, and it doesn't sell E85. A spokeswoman for Exxon Mobil says it makes exceptions case by case.
Even if one is granted, the station must follow rules including one that says E85 must be dispensed from its own unit, not part of an existing multihose dispenser. "This minimizes customer confusion around vehicle compatibility issues and maintains product quality integrity," says the spokeswoman, Prem Nair.
A ConocoPhillips memo to franchisees says the company doesn't allow E85 sales on the primary island, under the covered canopy where gasoline is sold. Stations must find another spot. As a result, it isn't quite as simple for a driver to decide on the spur of the moment to fill up with E85. ConocoPhillips declines to comment.
A Chevron Corp. agreement with franchisees also appears to discourage selling E85 under the main canopy. It says dealers offering alternative fuels cannot "deceive the public as to the source of the product," a phrase that some gas-station interests interpret to mean that E85 can't be sold under the main canopy. Chevron says it recommends, but doesn't require, that E85 pumps be outside the canopy.
Chevron says it requires Chevron- and Texaco-branded stations to keep "E85" off their primary signs listing fuel prices. To show the fuel's price, and alert approaching drivers that E85 is for sale, the stations have to erect a separate sign.
More Expensive
Another Chevron recommendation makes it much more expensive for a station to offer E85 at all. Stations usually have three tanks, for the three gasoline grades, regular, mid-grade and premium. The easiest way to offer E85 in addition to these three is to convert the mid-grade tank to E85. Such a station can still offer mid-grade gasoline, because a "blender pump" can mix some regular with some premium, and mid-grade will come out of the hose.
But Chevron's agreement with station owners recommends they install new pumps and tanks at their own expense if they want to stock E85. Doing so can cost more than $200,000 per station, according to a fuel-station trade group in Washington state called Automotive United Trades Organization. Chevron says it requires special tanks only if they're needed for safety.
Oil companies also require stations to stock all three grades, meaning stations may not simply replace a low-selling mid-grade with E85.
At BP, guidelines for stations that carry the company name bar any mention of E85 on signs on gasoline dispensers, perimeter signs or light poles. The stations also can't let buyers use pay-at-the-pump credit-card machines.
Selling E85 is "not impossible -- it's just that they really kind of hassle you to not put it in," says Ron Lamberty, who owns two stations in South Dakota, one a BP station. Mr. Lamberty doesn't sell E85, even though he is director of market development for the American Coalition for Ethanol. He says he is looking into adding the fuel to his BP station in Sioux Falls.
Mr. Lamberty mocks BP's "Beyond Petroleum" slogan: "It's 'beyond petroleum' but not so far beyond petroleum that it would contain anything but petroleum," he says.
BP says its guidelines are in place so customers realize the mostly ethanol fuel isn't a BP product. The company also bars stations from selling it under another brand name, such as VE85, the brand of a maker in Brookings, S.D., called VeraSun Energy Corp.
A BP spokesman, Scott Dean, says, "When you've got 97% of your customers unable to use the product, you want to be very, very sure it is very clearly advertised." He says BP bought 718 million gallons of ethanol last year to blend into U.S. gasoline in small amounts. "BP is one of the largest if not the largest purveyor of biofuels in the U.S. and the world," Mr. Dean says.
E85 also faces barriers having nothing to do with Big Oil, like the limited number of cars that can burn it. Domestic auto makers have vowed to double production of flex-fuel vehicles to about two million a year by 2010 and to make half of their new vehicles sold in America E85-capable by 2012.
While the fuel usually costs less, it can be costlier to drivers because they get about 25% fewer miles per gallon from ethanol than from gasoline. At a pro-ethanol group called the Iowa Renewable Fuels Association, Executive Director Monte Shaw estimates that E85 has to be at least 20 to 30 cents a gallon cheaper to compete with gasoline on price.
Iowa statewide average prices on a recent day were $2.18 a gallon for regular gasoline and $1.97 for E85, according to a Department of Energy Web site. Because E85 is less energy-intensive, the site said, it would cost the average owner of a big Chevy Tahoe SUV about $2,364 a year to fuel it with E85, and $1,935 to fuel it with regular gasoline.
Creating a Conflict
The price of ethanol has risen in the past year, partly because of demand from oil companies that want it for an additive. This usage creates something of a conflict for big ethanol producers like Archer-Daniels-Midland Co. Their main ethanol customers are the oil companies. Customers for E85 are far smaller and more fragmented.
ADM, whose yearly output of 1.1 billion gallons is more than 20% of the domestic ethanol market, says it is happy to sell E85 if someone wants it, but that is a "very small" part of its business. "Near term, we have focused more attention on the" additive side, says an ADM executive, Edward Harjehausen.
Even the main ethanol lobbying group in Washington, the Renewable Fuels Association, has focused mostly on developing the market for the fuel as an additive. "If you have a pump that sells E85 but you don't have customers pulling up to that pump, why do you want to bother?" says Bob Deneen, its chief lobbyist.
A few smaller producers do actively promote E85, such as VeraSun, which seeks to establish a branded E85. But even the smaller producers sell the bulk of their output for blending as a gasoline additive.
Because ethanol is more corrosive than gasoline, there's some concern it could leak out of a standard dispensing system and spark a fire. No E85 dispensing system -- nozzles, hoses, pumps -- has been certified by Underwriters Laboratories, the organization that tests the safety of products.
In October, UL suspended certification of parts that had been certified for use in E85 systems. Though there hadn't been any reports of problems, UL said it decided it needed to do its own safety research. Results aren't expected until late this year.
Among those trying to overcome obstacles to E85 are the domestic auto makers. They have built flex-fuel vehicles for years because doing so gives them "credits" in their efforts to meet federal fuel-economy standards. Without the credits, Ford and GM wouldn't have met mileage goals for light trucks in 2003, 2004 and 2005 and would have owed fines. The mileage goals pose a bigger challenge to Detroit because of its heavy reliance on large, thirsty vehicles. Foreign makers generally haven't resorted to building flex-fuel cars to meet the mileage goals.
For Detroit, the credits applied even if the flex-fuel cars they built never actually burned ethanol. For a long time, the auto makers said little about ethanol, and many owners of flex-fuel cars didn't know they had them. But when gasoline prices surged in 2005 and 2006, GM and Ford saw their flex-fuel cars as a way to counter their image as gas-guzzler makers.
Both began promotional campaigns, such as one in which GM gave buyers in Chicago and Minneapolis $1,000 gift cards good for E85. GM began to work with state officials to find grants to pay for installing pumping equipment. It has helped add E85 to 235 stations. Ford helped pay for installing 50 pumps so someone could drive from Chicago to Kansas City while filling up only with E85.
Among ethanol backers' recruits are two grocery chains. Kroger installed E85 at about 40 stations in Ohio and Texas. Privately held Meijer Inc. did the same in Michigan and Indiana.
Wal-Mart could provide a significant boost. It said last year it was considering selling E85 at its 388 company-owned stations but hasn't made a decision.
The U.S. tax code acts as a stimulus. Service-station owners can get a credit of up to $30,000 for their outlays to convert equipment to sell E85.
Some states have done their bit to spur the market. New York enacted a bill last year that barred oil companies from requiring stations to buy all of their fuel from the companies.
In the Albany area, station owner Christian King has begun selling E85 at one of his three Mobil outlets and plans to do so at a second. He says Mobil's restrictions still mean he can't put the price of E85 on the main sign or let drivers charge it on their Mobil credit cards.
Adding E85 "is a personal thing," Mr. King says. "I'm trying to do anything I can to reduce our dependence on foreign oil. And if this thing kicks off, I'm in a position to benefit."
Write to Laura Meckler at laura.meckler@wsj.com
Saturday, July 25, 2009
Oil Companies and Ethanol Plants: Slash, Burn and Buy
RenewableEnergyWorld.com
by David Blume
February 26, 2009
With all of the corporate bailouts and economic disasters our country is facing at present, it really is easy to welcome the wallet-relief provided by currently low transportation and heating fuel prices. As the saying goes, “Why look a gift horse in the mouth?” It isn’t comfortable to consider that the relatively calm waters international oil prices present could be covering an insidious undertow that is quietly dragging our renewable and alcohol fuel industry down to the OPEC equivalent of Davey Jones’s Locker where it will lay submerged until the big oil pumps finally do run dry.
In some places around the country today we are paying US $1.89 a gallon for gas (or even less). However, it is important to point out that with that short term windfall comes the ominous realization that nearly 25% of our Alcohol fuel producing industry will be going belly-up soon. That is correct. Many investor-backed as well as entrepreneurially driven Alcohol plants currently producing in the US may be bankrupted by the end of February 2009.
It is very likely that 40 of the nearly 200 alcohol fuel plants we have working now will be victims of what I refer to as big oil’s slash, burn and buy strategy to collapse, consume and control our fledgling alcohol fuel industry.
The obvious poster child for this tragedy is VeraSun. Declaring bankruptcy recently in a federal court in Delaware, VeraSun represents a considerable failure for the alcohol fuel industry. Having fallen from the vanguard of ethanol plants funded by venture capital, its collapse is having a rip-tide effect through the investment (and sadly) the farming community as well. Once a mighty force for alcohol expansion VeraSun is now reduced in value to pennies on the dollar. [Editor's note, for more on the takeover bid, read RenewableEnergyWorld.com's story, Ethanol Industry Eyes Valero's Bid for Verasun.]
How did this happen? What is the sleight of hand big oil is using to lull us to sleep at the wheel, while it methodically implements the conquest and enslavement of America’s independent and sustainable energy future?
Here’s the answer. Oil companies are using the commodities futures trading system to artificially drive up the price of corn while depressing the price of alcohol, essentially gaming the futures market. The impact of artificially high corn prices is that plants like VeraSun (that aren’t built and supported by farm-owners, but rather by capital investors) had to pay high prices to compete with big oil to buy corn and make fuel. Meanwhile, the futures price of alcohol was driven down by big oil’s fuel monopoly-easy since they buy over 99% of alcohol fuel produced.
Although VeraSun recently named the company that has offered to buy it out of bankruptcy and as I had predicted, it’s an oil company. Big oil recently spent a billion dollars conducting a fictitious food vs. fuel campaign, contributing to devaluation of US $6 billion dollars’ worth of alcohol plants by more than 90%. Big oil is now quietly spending a fraction of the $125 billion they made in profit last year to buy up alcohol fuel plants for pennies on the dollar.
It is sad that VeraSun and some other independent distillery companies face bankruptcy, but the real market losers are our farmers. While oil companies bought futures contracts for corn at $6 a bushel, farmers were subjected to a quadrupling of prices for oil-based crop inputs such as fertilizer.
With the federal court ruling in the VeraSun bankruptcy, a legal precedence is being set that now allows plant owners to reject contract commitments for grain and corn purchases they have made with working farmers. For the first time ever for any company, there may be an escape from paying for the futures contracts that are bought. The problem with this is that farmers have of course already borrowed money (based on futures pricing) to pay for higher input costs in producing the supposedly higher-priced corn. Unlike the plant owners, they won’t get to avoid their debts and as that crunch goes on.
I think that there is a real chance that big oil will buy up the alcohol plants, reject the futures contracts, bankrupt the farmers and then be able to buy their land.
If the oil companies gain control of even a quarter of the alcohol production infrastructure and land for the crops, there will be no end to the disruption they can cause in markets, they could even potentially bankrupt the rest of the industry. If you think that it’s a nightmare that big oil controls our energy, think what life would be like if it controlled our land and food, as well.
Oh no, I hear another bailout in the makings! Unfortunately, I think that the only way to avoid this catastrophic scenario is for us to provide alcohol fuel plants with a bail-out plan. However, as I have recommended for the auto industry bailout, there should be conditions. While a number of initiatives should be addressed to ensure the alcohol fuel industry’s long-term growth, implementing these bailout conditions in the short term will make the ethanol business more secure and less likely to need any future assistance:
•All alcohol fuel plants should be required to install the equipment necessary to handle non-corn energy crops.
•By 2010 plants should be required to diversify their crop inputs, limiting corn to 50% of the total. This would insulate them from further manipulation by oil companies and start the country, especially the Midwest, on the path of sustainable agriculture.
•By 2011 all plants should be required to run at least 90% on renewable fuel, not fossil fuels. Corn Plus has already converted its plant to run on biomass, reporting a 6:1 energy return compared to the usual 1.5:1 of coal-based alcohol fuel plants.
•The bailout should include loans to provide energy to alcohol fuel plants using biomass-fired combined-heat-and-electricity facilities. This would reduce alcohol price volatility, since alcohol production would largely be decoupled from the prices of oil, coal, and natural gas.
Even though I am an advocate for smaller alcohol fuel plants for many reasons (security, local economy strength, true energy independence among others), the larger plants need to be protected for the health of the industry and the United States. Without an effective alcohol industry to compete with big oil, the sky would be the limit on gasoline prices.
I have already gone on record predicting that we can expect gas prices to rocket by March 2009. I have also stated that there will be a concerted effort to blame the new administration for this occurrence. This will happen because oil companies and OPEC are afraid that President Obama will carry out his campaign promises to reduce oil imports and address climate change.
There is already a big oil campaign going on to portray the oil companies as back in control of energy prices that somehow got out of control last summer due to “speculators.” You might have caught the 60 Minutes Infomercial they ran for OPEC and the Saudi family recently, (wow take a guess at what that cost to purchase and produce).
Big oil is already floating articles that say that putting money into alternative fuels will be a waste of taxpayer dollars and will raise rather than lower the price of auto fuel. Expect this chorus to become a propaganda flood during the first 60 to 90 days of President Obama’s administration, with the aim of discouraging Congress from doing anything substantial to cut our oil use via any alternatives not controlled by big oil (oil shale, tar sands, coal-to-gas).
It will be in the oil companies’ best interests to avoid attention until after the first round of legislation from the new administration. Traditionally, new presidents can get almost anything passed in the first 60 days or so. The oil companies would prefer to not have the gun sights of legislators trained on them during this period. Once the first flush of legislation is introduced, it will be autumn before another major bill could be introduced to interfere with the oil companies. They will hope to have the ethanol industry and enough legislators bought up by then.
I urge citizens everywhere to contact their Congressional representatives, the Department of Justice, Antitrust Division and the Federal Trade Commission, Bureau of Competition to express their concern regarding the Valero acquisition of Verasun and to help mandate protectionary and regulatory programs for the formation of a truly independent renewable energy and fuel producers market. (Note: email is not always secure. Mark confidential information “Confidential” and send it via postal mail).
David Blume is the executive director of the International Institute for Ecological Agriculture, (I.I.E.A.). He is a globally renowned permaculture and alcohol fuel expert and is author of the Amazon best-selling book Alcohol Can Be A Gas (www.alcoholcanbeagas.com). Mr. Blume is a leading advocate for alcohol fuel and the role of the American farmer in developing a truly sustainable energy and food policy for the post-oil era.
by David Blume
February 26, 2009
With all of the corporate bailouts and economic disasters our country is facing at present, it really is easy to welcome the wallet-relief provided by currently low transportation and heating fuel prices. As the saying goes, “Why look a gift horse in the mouth?” It isn’t comfortable to consider that the relatively calm waters international oil prices present could be covering an insidious undertow that is quietly dragging our renewable and alcohol fuel industry down to the OPEC equivalent of Davey Jones’s Locker where it will lay submerged until the big oil pumps finally do run dry.
In some places around the country today we are paying US $1.89 a gallon for gas (or even less). However, it is important to point out that with that short term windfall comes the ominous realization that nearly 25% of our Alcohol fuel producing industry will be going belly-up soon. That is correct. Many investor-backed as well as entrepreneurially driven Alcohol plants currently producing in the US may be bankrupted by the end of February 2009.
It is very likely that 40 of the nearly 200 alcohol fuel plants we have working now will be victims of what I refer to as big oil’s slash, burn and buy strategy to collapse, consume and control our fledgling alcohol fuel industry.
The obvious poster child for this tragedy is VeraSun. Declaring bankruptcy recently in a federal court in Delaware, VeraSun represents a considerable failure for the alcohol fuel industry. Having fallen from the vanguard of ethanol plants funded by venture capital, its collapse is having a rip-tide effect through the investment (and sadly) the farming community as well. Once a mighty force for alcohol expansion VeraSun is now reduced in value to pennies on the dollar. [Editor's note, for more on the takeover bid, read RenewableEnergyWorld.com's story, Ethanol Industry Eyes Valero's Bid for Verasun.]
How did this happen? What is the sleight of hand big oil is using to lull us to sleep at the wheel, while it methodically implements the conquest and enslavement of America’s independent and sustainable energy future?
Here’s the answer. Oil companies are using the commodities futures trading system to artificially drive up the price of corn while depressing the price of alcohol, essentially gaming the futures market. The impact of artificially high corn prices is that plants like VeraSun (that aren’t built and supported by farm-owners, but rather by capital investors) had to pay high prices to compete with big oil to buy corn and make fuel. Meanwhile, the futures price of alcohol was driven down by big oil’s fuel monopoly-easy since they buy over 99% of alcohol fuel produced.
Although VeraSun recently named the company that has offered to buy it out of bankruptcy and as I had predicted, it’s an oil company. Big oil recently spent a billion dollars conducting a fictitious food vs. fuel campaign, contributing to devaluation of US $6 billion dollars’ worth of alcohol plants by more than 90%. Big oil is now quietly spending a fraction of the $125 billion they made in profit last year to buy up alcohol fuel plants for pennies on the dollar.
It is sad that VeraSun and some other independent distillery companies face bankruptcy, but the real market losers are our farmers. While oil companies bought futures contracts for corn at $6 a bushel, farmers were subjected to a quadrupling of prices for oil-based crop inputs such as fertilizer.
With the federal court ruling in the VeraSun bankruptcy, a legal precedence is being set that now allows plant owners to reject contract commitments for grain and corn purchases they have made with working farmers. For the first time ever for any company, there may be an escape from paying for the futures contracts that are bought. The problem with this is that farmers have of course already borrowed money (based on futures pricing) to pay for higher input costs in producing the supposedly higher-priced corn. Unlike the plant owners, they won’t get to avoid their debts and as that crunch goes on.
I think that there is a real chance that big oil will buy up the alcohol plants, reject the futures contracts, bankrupt the farmers and then be able to buy their land.
If the oil companies gain control of even a quarter of the alcohol production infrastructure and land for the crops, there will be no end to the disruption they can cause in markets, they could even potentially bankrupt the rest of the industry. If you think that it’s a nightmare that big oil controls our energy, think what life would be like if it controlled our land and food, as well.
Oh no, I hear another bailout in the makings! Unfortunately, I think that the only way to avoid this catastrophic scenario is for us to provide alcohol fuel plants with a bail-out plan. However, as I have recommended for the auto industry bailout, there should be conditions. While a number of initiatives should be addressed to ensure the alcohol fuel industry’s long-term growth, implementing these bailout conditions in the short term will make the ethanol business more secure and less likely to need any future assistance:
•All alcohol fuel plants should be required to install the equipment necessary to handle non-corn energy crops.
•By 2010 plants should be required to diversify their crop inputs, limiting corn to 50% of the total. This would insulate them from further manipulation by oil companies and start the country, especially the Midwest, on the path of sustainable agriculture.
•By 2011 all plants should be required to run at least 90% on renewable fuel, not fossil fuels. Corn Plus has already converted its plant to run on biomass, reporting a 6:1 energy return compared to the usual 1.5:1 of coal-based alcohol fuel plants.
•The bailout should include loans to provide energy to alcohol fuel plants using biomass-fired combined-heat-and-electricity facilities. This would reduce alcohol price volatility, since alcohol production would largely be decoupled from the prices of oil, coal, and natural gas.
Even though I am an advocate for smaller alcohol fuel plants for many reasons (security, local economy strength, true energy independence among others), the larger plants need to be protected for the health of the industry and the United States. Without an effective alcohol industry to compete with big oil, the sky would be the limit on gasoline prices.
I have already gone on record predicting that we can expect gas prices to rocket by March 2009. I have also stated that there will be a concerted effort to blame the new administration for this occurrence. This will happen because oil companies and OPEC are afraid that President Obama will carry out his campaign promises to reduce oil imports and address climate change.
There is already a big oil campaign going on to portray the oil companies as back in control of energy prices that somehow got out of control last summer due to “speculators.” You might have caught the 60 Minutes Infomercial they ran for OPEC and the Saudi family recently, (wow take a guess at what that cost to purchase and produce).
Big oil is already floating articles that say that putting money into alternative fuels will be a waste of taxpayer dollars and will raise rather than lower the price of auto fuel. Expect this chorus to become a propaganda flood during the first 60 to 90 days of President Obama’s administration, with the aim of discouraging Congress from doing anything substantial to cut our oil use via any alternatives not controlled by big oil (oil shale, tar sands, coal-to-gas).
It will be in the oil companies’ best interests to avoid attention until after the first round of legislation from the new administration. Traditionally, new presidents can get almost anything passed in the first 60 days or so. The oil companies would prefer to not have the gun sights of legislators trained on them during this period. Once the first flush of legislation is introduced, it will be autumn before another major bill could be introduced to interfere with the oil companies. They will hope to have the ethanol industry and enough legislators bought up by then.
I urge citizens everywhere to contact their Congressional representatives, the Department of Justice, Antitrust Division and the Federal Trade Commission, Bureau of Competition to express their concern regarding the Valero acquisition of Verasun and to help mandate protectionary and regulatory programs for the formation of a truly independent renewable energy and fuel producers market. (Note: email is not always secure. Mark confidential information “Confidential” and send it via postal mail).
David Blume is the executive director of the International Institute for Ecological Agriculture, (I.I.E.A.). He is a globally renowned permaculture and alcohol fuel expert and is author of the Amazon best-selling book Alcohol Can Be A Gas (www.alcoholcanbeagas.com). Mr. Blume is a leading advocate for alcohol fuel and the role of the American farmer in developing a truly sustainable energy and food policy for the post-oil era.
Friday, July 3, 2009
Petroleum Marketers, Refiners Battle Over Ethanol in Southeast
Petroleum Marketers, Refiners Battle Over Ethanol in Southeast
By Ryan C. Christiansen
Ethanol Producer Magazine
July, 2009
Petroleum marketers in the southeastern U.S. are supporting efforts to force oil refiners to supply them with unblended gasoline so that the marketers can choose to blend ethanol into the gasoline themselves.
According to petroleum marketing groups, their inability to obtain unblended gasoline from refiners is a growing problem. “It’s being clamped down,” said Sherri Cabrera, vice president of the Petroleum Marketers Association of America, a federation of 47 state and regional trade associations representing approximately 8,000 independent petroleum marketers nationwide. “We’re seeing just more and more refiners offering [unblended gasoline] less and less.”
The issue so far appears to be most prevalent in the southeastern U.S., where North Carolina, South Carolina, Tennessee and Georgia have all either pursued legislation or passed laws to address the issue.
In South Carolina, legislators passed a law in June 2008 which required oil refiners to supply marketers with unblended gasoline. The law was bundled with provisions for sales tax exemptions for energy efficient products and for a sales tax holiday for firearms. The American Petroleum Institute and BP Products North America Inc. sued, claiming the law violated the “one subject” provision in the state constitution which states that “every act or resolution having the force of law shall relate to but one subject, and that shall be expressed in the title.” The state’s Supreme Court agreed. In May 2009, the court repealed the law.
Meanwhile, legislators in Tennessee pursued similar legislation this spring. Petroleum refiner and marketer Valero Energy Corp. reacted by threatening to shut down its Memphis, Tenn., refinery, claiming the company would need to spend up to $150 million over two years for new equipment to comply with the proposed law.
In North Carolina, the National Petrochemical & Refiners Association, a lobbying group of which Valero is a also a member, sued the state for passing a law that requires refiners to sell unblended gasoline to marketers, allowing marketers to be “blenders of record” and obtain federal tax credits for blending ethanol into gasoline. The NPRA said North Carolina’s law “conflicts with federal law by preventing entities with a federal obligation to blend renewable fuels from doing so, and by requiring them to sell unblended fuel to entities that are not obliged by federal or state law to use renewable fuels.”
Cabrera said petroleum marketers have a lot invested in tanks and infrastructure for blending ethanol with gasoline. “Refiners have tried to lock their business partners—petroleum marketers—out of the option to do that,” she said. “So some states have come in to say to refiners, ‘we’re going to make you do the right thing and work with your marketer business partners.’”
The ethanol industry is supportive of petroleum marketers and their efforts to secure ethanol blending opportunities. “In the history of ethanol, there have always been a number of petroleum marketers that want to do their own splash blending,” said Greg Krissek, board member of industry group Growth Energy. “Where this is an issue for petroleum marketers, we would be supportive of them wanting to have the clear, unblended streams.”
Krissek said the ethanol industry can be a partner in the effort to ensure marketers continue to have ethanol blending opportunities. “In a number of states, you have plants that have good relationships with the petroleum marketing organizations,” he said, “and this is an area where we can probably work together.”
By Ryan C. Christiansen
Ethanol Producer Magazine
July, 2009
Petroleum marketers in the southeastern U.S. are supporting efforts to force oil refiners to supply them with unblended gasoline so that the marketers can choose to blend ethanol into the gasoline themselves.
According to petroleum marketing groups, their inability to obtain unblended gasoline from refiners is a growing problem. “It’s being clamped down,” said Sherri Cabrera, vice president of the Petroleum Marketers Association of America, a federation of 47 state and regional trade associations representing approximately 8,000 independent petroleum marketers nationwide. “We’re seeing just more and more refiners offering [unblended gasoline] less and less.”
The issue so far appears to be most prevalent in the southeastern U.S., where North Carolina, South Carolina, Tennessee and Georgia have all either pursued legislation or passed laws to address the issue.
In South Carolina, legislators passed a law in June 2008 which required oil refiners to supply marketers with unblended gasoline. The law was bundled with provisions for sales tax exemptions for energy efficient products and for a sales tax holiday for firearms. The American Petroleum Institute and BP Products North America Inc. sued, claiming the law violated the “one subject” provision in the state constitution which states that “every act or resolution having the force of law shall relate to but one subject, and that shall be expressed in the title.” The state’s Supreme Court agreed. In May 2009, the court repealed the law.
Meanwhile, legislators in Tennessee pursued similar legislation this spring. Petroleum refiner and marketer Valero Energy Corp. reacted by threatening to shut down its Memphis, Tenn., refinery, claiming the company would need to spend up to $150 million over two years for new equipment to comply with the proposed law.
In North Carolina, the National Petrochemical & Refiners Association, a lobbying group of which Valero is a also a member, sued the state for passing a law that requires refiners to sell unblended gasoline to marketers, allowing marketers to be “blenders of record” and obtain federal tax credits for blending ethanol into gasoline. The NPRA said North Carolina’s law “conflicts with federal law by preventing entities with a federal obligation to blend renewable fuels from doing so, and by requiring them to sell unblended fuel to entities that are not obliged by federal or state law to use renewable fuels.”
Cabrera said petroleum marketers have a lot invested in tanks and infrastructure for blending ethanol with gasoline. “Refiners have tried to lock their business partners—petroleum marketers—out of the option to do that,” she said. “So some states have come in to say to refiners, ‘we’re going to make you do the right thing and work with your marketer business partners.’”
The ethanol industry is supportive of petroleum marketers and their efforts to secure ethanol blending opportunities. “In the history of ethanol, there have always been a number of petroleum marketers that want to do their own splash blending,” said Greg Krissek, board member of industry group Growth Energy. “Where this is an issue for petroleum marketers, we would be supportive of them wanting to have the clear, unblended streams.”
Krissek said the ethanol industry can be a partner in the effort to ensure marketers continue to have ethanol blending opportunities. “In a number of states, you have plants that have good relationships with the petroleum marketing organizations,” he said, “and this is an area where we can probably work together.”
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