No wonder...

Sen. Baucus is headed for Japan.  He's going to take some heat from Big Ethanol for his energy tax reform plan.

Baucus's proposal would be to get rid of those 42 energy tax incentives and, in their place, create two broad credits:1) First, any facility producing electricity that is at least 25 percent cleaner than the average for all electricity production facilities would receive a tax credit. The cleaner the facility, the larger the tax credit. (By "clean," Baucus is referring to greenhouse-gas emissions per unit of electricity produced.)This credit starts at 2.3 cents per kilowatt of generation and rises to a maximum of 20 percent of the total cost of the investment. Companies couldn't get the credit until they started producing power, and then they'd get the break for 10 years.All of these credits, meanwhile, would phase out in four years once the greenhouse-gas intensity of the entire U.S. electricity sector is 25 percent below current levels. So there's an overall limit.2) Likewise, any transportation fuel that is at least 25 percent cleaner than conventional gasoline will generally receive a credit. Again, the cleaner and more energy-efficient the fuel, the larger the credit — and the bill would take the entire life-cycle into account when judging the fuel. So if, say, corn-based ethanol wasn't cleaner than gasoline, no tax credit.(Note that the credit for transportation fuels would likely need to be paired with a repeal of the Renewable Fuel Standard that requires refineries to blend a certain amount of ethanol into gasoline. It wouldn't make sense otherwise. But Baucus's committee doesn't have jurisdiction over that fuel standard, so this part isn't in the proposal.)  [More]

Ya live by the mandate, ya perish by the mandate.

An ethanol solution?...  

While it becomes clearer and clearer that any market is a tricky thing to try to railroad, the byzantine economics and regulations for ethanol made a good but now apparently futile try. Scott Irwin and Darrel Good have been wading through the nested blending requirements and done some serious math to reach a recommendation on how to avoid the trainwreck.

We believe our proposal to freeze RFS2 mandates in 2014 and 2015 at 2013 levels represents a pragmatic way forward. It is realistic in that it would not force large scale adoption of E15, E85, or biodiesel. This is particularly important since it is by no means clear whether the infrastructure investments necessary for widespread E15 or E85 adoption could actually be made in this time frame. There is also uncertainty whether sufficient biodiesel production capacity would be available. However, the proposal does provides incentive for modest growth in E15 and/or E85 penetration by keeping the mandate for renewable fuels above the current E10 blend wall. Even with relatively slow growth in domestic ethanol production through 2015, the proposal would maintain a high rate of use of ethanol production capacity and would provide for modest growth in the large demand base for corn. An increasing percentage of the domestic biodiesel capacity would be utilized without straining that capacity. Similarly, requirements for biodiesel feedstock would grow, but the growth would not overwhelm those markets. Obligated parties in the motor fuel supply chain could more easily meet their blending obligations with a combination of physical blending and use of RINs stocks. Finally, implementation of the proposal would also likely reduce the price of D6 ethanol RINs and eliminate the differential impact of those high prices on obligated parties. The key for the success of the proposal is that regulators, legislators, and industry participants use the next two years to develop a mutually agreeable biofuels policy beyond 2015. [More]

I'm not so sure the renewable lobby will go along with this. Any messing with the RFS means is could be messed with more. The general knee-jerk response to rentier threats is absolute inflexibility. But doing nothing means reaching a point of near economic absurdity as the ability to produce what the law demands just isn't there. Really, really strange things could happen as blenders try to stay legal.

I kinds hope the RFA does refuse any compromise just to see what happens.

Danged if I know...  

The trend for Americans to drive less continues. I have several theories, and so do others.

 [Note these are miles per capita]

Long-term forecasting can be an inexact, even embarassing, affair, so I’ll avoid saying too much with too much confidence.  What I’ll do instead is present the three hypotheses laid out by the Roundtable.  For our distinguished panel, recent declines in driving are indicative of one of three trends:

1. The Interrupted Growth Hypothesis: VMT cuts are temporary and increases will resume once the economy picks up (although we know more VMT is not a required, or inevitable, part economic growth);
2. The Saturation Hypothesis: car ownership and personal travel budgets have hit their limit, so no more growth is likely;
3. The Peak Car Hypothesis: VMT has hit its peak, and history will now see a VMT decline of undetermined length.

That’s right, folks.  According to the experts, in the future VMT will either go up, go down, or stay the same. [More and chart source]

Any other theories out there?  Anyone? Bueller?

My concern is when you couple that chart with this one:

[Source]
This doesn't bode well for ethanol - which already is battling the "wall".

A little help from my friends...  

The mini-blizzard in the Midwest knocked down out Internet towers, and it was kinda sad how Jan and I clutched our backup access (via smartphones) while it was being fixed. Meanwhile the computerized mixer on the church sound system also crashed and that is my responsibility, so I've been occupied.

Christmas cookie consumption also played a part.

But some readers offered these interesting tidbits.

From Kevin in Ontario, this bizarre story of gaming the RFS....by Canadians!!

Bioversel Trading hired CN Rail to import tanker loads of biodiesel to the U.S. to generate RINs, which are valuable in the U.S. because of a "greening" policy regulating the petroleum industry. The EPA's "Renewable Fuel Standard" mandate that oil companies bring a certain amount of renewable fuel to market, quotas they can achieve through blending biofuel with fossil fuel or by purchasing RINs as offsets.
Because RINs can be generated through import, the 12 trainloads that crossed into Michigan would have contained enough biodiesel to create close to 12 million RINs. In the summer of 2010, biodiesel RINs were selling for 50 cents each, but the price soon fluctuated to more than $1 per credit.
Once "imported" to a company capable of generating RINs, ownership of the biodiesel was transferred to Bioversel's American partner company, Verdeo, and then exported back to Canada. RINs must be "retired" once the fuel is exported from the U.S., but Bioversel says Verdeo retired ethanol RINs, worth pennies, instead of the more valuable biodiesel RINs. Bioversel claims this was all perfectly legal.
However, one of the companies Bioversel approached to be the ‘importer of record’—Northern Biodiesel Inc. of Ontario, N.Y. — discovered that the same fuel was going back and forth across the border and the same gallons were being used to repeatedly generate new RINs under their company’s name. The company called the EPA and also sent a letter that would become an open letter to the biodiesel industry, accusing Bioversel of “trying to perpetrate a fraud against NBI and the Renewable Fuel Standard program.”
The EPA, which has a buyer beware policy for oil companies that buy RINs, did not act immediately, and the industry has been begging for it to play the role of sheriff on this case and others. The EPA won’t comment on continuing investigations, but insiders said the case is still under investigation. [More of a great investigative story]

Ah yes, ethanol - The American farmer's ACORN. What can I say, except I am shocked - shocked, I tell you - our mild-mannered neighbors to the north would take advantage of a dismally market-distorting subsidy program just like they were 'Mericans.

However, due to changes in the RFS, there may be more "Dakota shuffles" in the future.

The 2012 drought led to significant increases in corn prices and a slowing in domestic ethanol production and exports. For the first time since the RIN system was established, it is estimated that 2012 net RIN generation will not exceed the non-advanced ethanol mandate, and RIN stocks carried over from previous years will be used for mandate compliance. This was reflected in 2012 ethanol RIN prices, and illustrates how the design of the system can be used by obligated parties to respond to variability in the economics of ethanol blending. Current estimates indicate continued flexibility for corn-for-ethanol demand to meet the 2013 non-advanced mandate, but at lower levels than in previous years due to estimated stock use in meeting the 2012 mandate. [More]

They are not the only neighbor to benefit from this intricate mandate.

So what is driving the large ethanol imports from Brazil? The answer is found in the details of the U.S. Renewable Fuels Standards (RFS). Brazilian sugarcane ethanol production qualifies as an "advanced" biofuel under the RFS greenhouse gas (GHG) calculations. (See our earlier post for further details.) This means that the relevant economic comparison is between Brazilian ethanol and other biofuels that qualify for the advanced component of the RFS. Since the corn-based ethanol has a less favorable GHG reduction rating, it only qualifies as a "renewable" biofuel, and therefore, cannot compete with Brazilian ethanol or other advanced biofuels to fulfill the advanced mandate. To date, the only other biofuel that has been produced in quantity and qualifies to meet the advanced component of the RFS is biomass-based biodiesel. This means the relevant economic comparison is whether U.S. produced biodiesel or Brazilian produced sugarcane ethanol is the cheapest source for fulfilling obligations under the advanced RFS.
Recent price data reveals that Brazilian ethanol is by a wide margin the cheaper of the two alternatives. For example, consider a U.S. energy producer that is faced with this data on gasoline and diesel blending economics on November 29, 2012:

where CBOB is conventional gasoline blendstock, E100 is 100 percent anhydrous ethanol shipped to a Gulf terminal from Brazil (same as before), ULS is ultra low sulfur diesel, and B100 is 100 percent biodiesel. One final conversion must be done to make a fair comparison. Since biodiesel is worth 1.5 gallons of ethanol in the RFS math, we need to divide the net profit for diesel blending by 1.5 to arrive at a net profit of -1.05/1.5 = $-0.70 per gallon. This makes biodiesel almost twice as expensive as imported Brazilian ethanol when it comes to meeting the advanced RFS mandate. And that is the reason why Brazilian ethanol imports are surging into the U.S. during recent months. They will continue to do so until the non-biodiesel part of the 2012 advanced mandate is met (about 500 million gallons total) but will not be higher since blenders are still taking a loss on each gallon of Brazilian ethanol imported. [More]

Meanwhile, back here in the home country, the impact of our inability to spin straw into ethanol means we have only piddling amounts of advanced biofuels to meet the mandate. But what about biodiesel, the Great Hope of soybean producers?

The biofuels era that began in 2006 helped propel corn and other crop prices to a new higher level that has been sustained for nearly six years. One might be tempted to conclude that this new era is coming to an end as corn consumption for ethanol levels out and corn production begins to catch up. Instead, it actually appears that the new era of higher crop prices could be extended well into the future as a result of the RFS for advanced biofuels that in all likelihood can only be met with a rapid expansion in biodiesel production. To gain some perspective on the potential size of this expansion, consider our projection of 3.113 billion gallons of biodiesel production in 2015. This would require about 23.5 billion pounds of feedstock when total consumption of fats and oils in the U.S. currently totals about 28 billion pounds annually. Consumption of tallow and grease, another biodiesel feedstock, is thought to be near 10 billion pounds per year. At the projected level for 2015, biodiesel would account for over 60 percent of fats and oils consumption from all sources. This compares to about 20 percent in in 2012. The new price era, then, would not be extended by rising corn demand, but by rising vegetable oil demand. Whether this scenario actually is realized depends crucially on the evolution of biofuels policy here in the U.S. and energy policies in Brazil. We will be monitoring these issues closely in the future. [More]

But if we make much of that from soya, what about the rising global demand for soyoil?

Global demand for vegetable oils for food and biofuel use is expected to increase by an additional 23 million tons by 2016; however supply is expected to struggle to keep up with the demand, according to a new report from Rabobank.
According to the report, “Finding the Food-Fuel Balance," vegetable oil stocks reached a 38-year low in 2012 due in large part to constraints, such as land availability and adverse weather. For the past four years, the world’s stock-to-use ratio for vegetable oils has been on a declining trend and will reach a low of 7.5% in 2013, a level not seen since the mid 1970s. The decline is largely down to supply’s inability to keep up with rising demand. Production shortfalls in recent years have resulted in a draw-down of stocks that is unlikely to be reversed in the near future. [More]

Now add in the migration of the Corn Belt north, and maybe the smart move in my part of the world is to plant a heckuva lot of beans on those CoC acres instead of continuing to pound our head against the production barriers that are more serious than we thought when triple-stacks gave us a couple of penalty free yields.
[From Ron]

Corn’s new appeal to Canada’s prairie farmers is based on two things: climate change and price. Growing seasons in the prairie provinces—which border Minnesota, North Dakota, and Montana—have lengthened about two weeks to up to 120 days in the past half-century. The mean annual temperature is likely to climb by as much as 3C (6F) in the region by 2050, according to Canadian researchers.
A temperate climate and longer growing season are ideal for corn. An acre of farmland produces more corn than wheat, making corn the more profitable grain, while the higher yields drive up land values as well.
Corn has long grown in southern Ontario’s mild climate, but for Canadians to be big players in the crop at a new order of magnitude, they must plant in the vast farmland of the prairie provinces. Farmers planted a record 121,400 hectares (300,000 acres) of corn in Manitoba, Saskatchewan, and Alberta this year.
Global corn demand has outstripped supplies three of the last four years. That shortfall, along with the more hospitable growing weather and the introduction of seed varieties from Monsanto (MON) and DuPont (DD) that make plants mature faster, is transforming Canada’s grain mix, says Danny Blair, a professor of geography at the University of Winnipeg. “The winters have warmed and shortened dramatically,” accompanied by more rainfall that allows for earlier planting and greater soil moisture that helps crops.
Global warming will increase the frequency of drought and erratic rainfall even in Canada, says Blair, who notes that the weather creates more opportunities for Canadian agriculture, despite the risks. The anticipated boom in corn is encouraging U.S. agribusiness giant Cargill to invest in grain storage in Canada, according to Chief Executive Officer Gregory Page. The prospect of new demand from Canadian corn farmers is pushing DuPont Pioneer, a seed division of DuPont, to improve its short-season crop varieties, says John Soper, the company’s vice president of crop genetics research and development. [More]

It is in-your-face developments like new yield patterns that will change attitudes about global warming, certainly not mere science. And I think those minds who have the freedom to actually to contemplate the implications without cognitive dissonance from their political catechism will enjoy a distinct business advantages.

Rolling all these ongoing developments into 2013, add the incredible political turmoil in the US, include the ongoing drought, and we have the possibility of a year that makes 2012 seem tame.

This also mean incredible rewards for those who step up to the challenges, IMHO.

Just hope they don't farm near me...

Further into irrelevance...  

I was getting ready for fall speeches, now that harvest is finished. (Whew!) One of the curious trends I will be sharing is gasoline consumption.  In short we may be talking Peak Gas(oline).

 Of course, note that the scale makes the "hump" more dramatic than if it was based at zero, but still, it seems to me the advances in engines and stricter mileage requirements are having a big impact.

Now add in this unexpected trend:

 

(Apologies for the lack of source links - I forgot to load them with the pics)

In short, even with a recovery clearly in progress, we may not see gasoline consumption rise back to former intensity.  in fact, with even a few more CNG vehicles, although facing an uphill battle for acceptance, demand for gas could be dull at best.

That has big implications for the RFS. Also the upcoming changes in the RFS focused on biodiesel. Hence when Scott and Darrel did the math on the ethanol impact for corn, the arrived at a unexpected place, IMHO.

The biofuels era that began in 2006 helped propel corn and other crop prices to a new higher level that has been sustained for nearly six years. One might be tempted to conclude that this new era is coming to an end as corn consumption for ethanol levels out and corn production begins to catch up. Instead, it actually appears that the new era of higher crop prices could be extended well into the future as a result of the RFS for advanced biofuels that in all likelihood can only be met with a rapid expansion in biodiesel production. To gain some perspective on the potential size of this expansion, consider our projection of 3.113 billion gallons of biodiesel production in 2015. This would require about 23.5 billion pounds of feedstock when total consumption of fats and oils in the U.S. currently totals about 28 billion pounds annually. Consumption of tallow and grease, another biodiesel feedstock, is thought to be near 10 billion pounds per year. At the projected level for 2015, biodiesel would account for over 60 percent of fats and oils consumption from all sources. This compares to about 20 percent in in 2012. The new price era, then, would not be extended by rising corn demand, but by rising vegetable oil demand. Whether this scenario actually is realized depends crucially on the evolution of biofuels policy here in the U.S. and energy policies in Brazil. We will be monitoring these issues closely in the future. [More]

I just don't see how policy makers will let fuels compete this directly for food - unlike corn, which is largely for feed, we're talking human consumption of vegetable oils. Demand for same is strong, driven by oil-deficit nations beginning to upgrade diets. No longer is oil a drag on oil-commodity prices - it is often the driver these days.

The persistent assumption - and I admit it still seems reasonable - is corn production will resume what we thought was a permanent acceleration of yield, thanks to biotech, better tools and our immodest brilliance. Climate change may brutally revise those expectations for many of us, but it will take a couple more clunker national yields before we will address it, I would venture.

The battle over the ethanol mandate could replace Afghanistan as our longest war. And it may be not so much resolved as just quietly fizzling out. Oddly, perhaps the same as Afghanistan ends. Maybe the longer the conflict, the fuzzier the end.

Peak ethanol...  

Perhaps.

Drivers of the approximately 16,500 highway-worthy electric vehicles in the U.S. can choose from 4,448 public charging stations should they want to plug in someplace other than home or work, according to U.S. Energy Department data.
That's one per 3.7 electric cars, such as Nissan's Leaf or Tesla's Roadster. That compares with 2,468 places to fill up the 7.6 million vehicles that can run on E85, a fuel that is 85% ethanol. E85-capable vehicles, also known as flex-fuel vehicles, can run on either E85 or traditional gasoline.
The Obama administration is pushing for still more charging stations, with $230 million worth of support from the Energy Department and private investment:
Ecotality received funds under the federal program to install 14,000 chargers in 18 metropolitan areas in six states and the District of Columbia.
"Electricity is the flavor of the month, just as others have had their time in the sun, electricity is now there," said Brett Smith, co-director of manufacturing, engineering and technology at the Center for Automotive Research in Ann Arbor, Michigan. "Is this a long-term technology or is it just that flavor of the month?"
Smith cited E85 and hydrogen fuel-cell cars as examples of technologies that have been favored by the government before the Obama administration chose to promote electric vehicles through policy and spending. [More]

And of course, ethanol is not wildly popular with the Republican Tea party base outside farm states.

But this year is an exception because the party, under increasing influence from the Tea Party, has pivoted on the subsidy. This summer, many Republicans in Washington voted to end the $6 billion-per-year ethanol subsidy. Though it ultimately survived, subsidies have become a rallying call for fiscal conservatives looking to cut waste and Tea Partiers who don’t want government ‘picking winners and losers.” No other candidate is as uncompromisingly for the subsidy than Newt. Mitt Romney, who has been vague on the issue, most recently says that while he initially supported the subsidy, should not “go on forever” — hardly a comforting position for Iowa farmers. Rick Perry, Michele Bachmann, Rick Santorum, and Ron Paul have all come out against the subsidy.  [More]

Finally, the antipathy on the right for the EPA doesn't really reassure ethanol producers either.

You live by the subsidy, you die by the subsidy, I guess. In this case it looks like the whole political spectrum is a threat.

Wait - he was a cheerleader???...  

Rick Perry has done little to attract my admiration. But I may be giving him too much credit.

State and federal taxpayers financed his college education at Texas A&M, even giving him the extracurricular opportunity to be a cheerleader. Upon graduation, he spent four years on the federal payroll as an Air Force transport pilot who never did any combat duty.

Then, in 1984, Perry hit the mother lode of government pay by moving into elected office -- squatting there for 27 years and counting. In addition to getting regular paychecks from taxpayers for nearly three decades as a state representative, agriculture commissioner, lieutenant governor and governor, he also receives platinum-level health care coverage and a generous pension from the state, plus $10,000 a month for renting a luxury suburban home, a covey of political and personal aides and even a publicly paid subscription to Food & Wine magazine. [More]

This Bozo could well walk away with the nomination, as it stands today. And I will watch with interest as the only governor to request an ethanol waiver gets corn farmers to vote for him by not being Obama.

This oughta be good...

Tim Pawlenty, trying to avoid the "Newt takeoff", could be about to repeat.  If he does what he's says he's going to do today, I'll bet he's walking it back just like the Newster in the next few days.

That's why later this week I'm going to New York City to tell Wall Street that if I'm elected, the era of bailouts and handouts for big banks is over. I'm going to Florida to tell both young people and seniors that our entitlement programs are on an unsustainable path and have to be changed. And, today, I'm in Iowa to speak truthfully about farm subsidies. [More]

My guess (and if it's already out, I haven't seen it - just rained out of planting) is he'll offer very timid curbs on these entitlements, and talk about waste and fraud again. But the GOP can't seem to learn this lesson.


Pawlenty may be trying to ignite something before the Big Girls show up and while other guys are folding. He may also be trying to tap into Big Right $$ with some strong libertarian rhetoric. He may also have no idea why he's running.


Maybe he will target ethanol.


Update: That appears to be the case.

im Pawlenty pre-announced his official entry into the 2012 presidential race Sunday with a video promising that he'd tell the hard truths. In Des Moines Monday, the hard truth Pawlenty opened with was telling Iowans that he'd phase out ethanol subsidies, Politico's Kendra Marr reports. The Republican said the government needs to get out "of the business of handing out favors and special deals" and allow "the free market, not freebies" to reign. His truth-telling tour will next take him to Florida, where he'll call for the raising of the Social Security retirement age, then New York, where he'll say it's time to end "the era of bailouts." Pawlenty said he was going against the "conventional wisdom" because "Someone has to finally stand up and level with the American people." [More]

Fair enough. Let's see how it plays.


It will be an interesting test of farm lobby clout, and the possible end of Iowa as our candidate chooser if he pulls this off.

Upperdate: Frum possibly sees the real reason for this IA tactic.

It’s courageous, principled, and right for Tim Pawlenty to travel to Iowa to denounce ethanol and other farm subsidies. But I’m also left wondering: is this also a very good way to manage expectations if he comes second or third or worse in Iowa, where Pawlenty is currently polling in single digits? [More]

Pawlenty is having trouble raising money compared to Romney, and maybe blowing off IA makes some kind of sense.


Still it seems to have a whiff of "loser" about it.

I wonder which side...

Big Ethanol is lobbying for. Oil subsidies could actually be in trouble.

In a letter to congressional leaders this week, Obama urged “immediate action” on the tax subsidies, arguing that the revenue generated from the move should be invested in clean energy programs to reduce America’s dependence on foreign oil.
In the letter, Obama said he was “heartened” by the “openness” House Speak John Boehner (R-Ohio) expressed on April 25 to the idea of eliminating tax subsidies for energy companies. “Our political system has for too long avoided and ignored this important step, and I hope we can come together in a bipartisan manner to get it done,” Obama wrote.
Later in the week, House Budget Committee Chairman Paul Ryan (R-Wis.) said he agreed that federal oil subsidies should be eliminated. “We’re talking about reforming the safety net, the welfare system; we also want to get rid of corporate welfare,” Ryan said at a town hall in Waterford, Wis. “And corporate welfare goes to agribusiness companies, energy companies, financial services companies, so we propose to repeal all that.”
[More]

I did some simple math a few months ago to show how a real btu-to-btu comparison reveals the considerably higher subsidy levels for ethanol compared to gasoline.

So if we use 51% as gasoline's share (allocated below), here is what the subsidy levels per gallon look like, using Todd's numbers.  I think this is fair because Todd counts home heating oil subsidies, for one example, in the mix, which don't have anything to do with the 140 B gallons of gasoline he divides by.  The last column using the energy difference between gasoline and ethanol (80%) for an energy equivalent number.

		DTN	Allocated	Allocated
	$B	$/gal	$/gal	$/eqiv gal
Oil (low)*	133.2	$0.96	$0.49	$0.49
Oil (high)*	280.8	$2.01	$1.03	$1.03
Ethanol	16.1	$1.24	$1.24	$1.55

[*These labels were stupidly reversed in the original post] 

It is fair to report the huge total number oil gets, but as I noted before, most farmers still believe the bigger you are the more subsidies you deserve.  And oil is a really big industry.
So for this observer, I think the idea oil is getting "more" subsidies is an artful arrangement of fact.  At the very least, oil gives the taxpayer more energy bang for his/her subsidy buck.

While I am skeptical of actual oil subsidy cuts, should it occur, enormous pressure would come to bear on the blender credit and tariff. Not to mention the revenge factor from the oil lobby.

Of course, we delay planting another three weeks or so and ethanol is toast, IMHO.

Another shot across the bow...

As more shells are lobbed from right and left over what to cut from the budget, some interesting linkages are forming. For example, the anti-junk-food-tax lobby could be a perfect partner for no-subsidy proponents.

If you were watching the Superbowl in the DC area last night, one of the ads you saw came from the No Food Taxes coalition (which includes 7-Eleven, Alcoa, the Mid-Atlantic Petroleum Distributers Association, American Airlines, McDonald's, and many more). It showed a sensible-looking woman putting soda into her shopping cart and complaining that "some politicians" are "trying to control what we eat and drink with taxes." Pulling into the checkout lane, a deep-voiced announcer intones, "government needs to trim its budget back, and leave our grocery budgets alone." Watch the ad here.
It's evidence of how seriously the sugared drink industry takes the threat of a soda tax. And, in the interest of balance -- I did link to the ad -- here's David Leonhardt making the case for one. But a federal soda tax doesn't currently exist and, if it did, it would reduce deficits, so it's not really a great place to concentrate your energies if you want to reduce budget deficits and ensure a level-playing field in the snack foods aisle. That said, however, I'd like to propose common cause with my brothers and sisters in the Coca-Cola Company. Government does need to trim its budget back. And it probably should be doing less to influence us in the checkout lines. So let's make this the year we finally end subsidies to the corn industry. Deal? [More]

While it is hard to see serious cuts in corn subsidies when guys like Gingrich are genuflecting at the Altar of Iowa Ethanol (to the horror of many on the right), there seems to be a growing weight of concern that farm subsidies be pushed farther up the list of "Things to Cut".

In fact, the uncertainty around ethanol would skyrocket should even a minor production problem surfaces this spring and corn prices get even crazier. As it is ethanol is skating on very thin ice - barely meeting the cost of capital.

The graph below divides the price of ethanol into three components: the net cost of corn in ethanol (corn costs less distillers grains value), natural gas and other costs (see the previous paragraph) in ethanol, and the ethanol operating returns. A positive operating return does not necessarily imply profits as other costs, such as plant financing, and returns to capital, must be taken into account, but a positive operating return does signal the potential for profits in the industry. The horizontal line (at 25 cents per gallon) aims to represent the costs of capital. Profits are implied under the current set of assumptions when operating returns exceed the horizontal line. [More]

[Click to make readable]

Looking at this chart, loss of any subsidy would collapse a business model already on the edge. So would substantially higher interest rates (cost of capital) or lower ethanol prices or lower DDG prices...

Meanwhile, $6 corn is beginning to show up at the meat counter. Undoubtedly, and rightfully, the protein sector will point the finger upstream. At which point, even Iowa's primary might not be enough to preserve the political subsidies.

*** Repost: This oughta be good (II)...

This is a re-post from 10/26/2010 when Todd Neeley originally published his research on oil vs. ethanol subsidies. I just got my copy of Progressive Farmer and he ignored all counterarguments and simply arranged the answer to please his audience, I think. My conclusion below, using his numbers, still better compares the two government policies. [More here]

I have been following The Ethanol Blog by Todd Neeley as he wades through the complex maze of subsidies for ethanol and oil.  His breadth of coverage is admirable, even if his blogging style is distracting, not to mention finding your way past the subscription gates.  Here are links to the first three posts anyway: 1   2  3

My comments about the latest two installments.

Much space is given to the March study by Bruce Babcock at CARD, although irritatingly, the actual study (pdf) is not linked.  However, the report is accurately reflected and answers one of the questions I had posed about the value of the mandate (RFS).

Babcock said it would be easy to figure out the level of subsidy from RFS if VEETC wasn't there by examining the price of renewable identification numbers, or RINS. These are the numbers assigned to each gallon of renewable fuel to allow the EPA to track usage of those fuels.

Fuel blenders are required to either blend a certain amount of ethanol or to purchase those identification numbers from blender companies that have met RFS requirements and have "excess" renewable fuel to sell. The RIN system works to ensure industry-wide compliance with the RFS.

"All you would need to do would be to look at the RIN price to look at how much support is being received by the ethanol industry. But with VEETC, the RIN price is as much as 45 cents per gallon lower than what it would be," said Babcock.

With the influence of VEETC, the RFS provides little support. With VEETC removed, Babcock said, the RFS would be worth about 30 cents per gallon, or about $3.9 billion, based on the 2010 RFS of 12.95 billion gallons.

Koplow said the RFS will become more valuable every year on its way to the mandated 36 billion gallons of production in 2022. [More]

[Curiously, we have no way of knowing who this "Koplow" guy is, but I appreciate his input.  Actually he is identified in the third? fourth? post.]

This value for the mandate seems low to me, but I can find no fault in Babcock's logic other than at the extremes: low oil prices, for example. 

Also the original study referenced regarding oil protection costs is here. The report does answer my speculation about the importance of Israel vs. oil.

Next, the CRS (1992) claims that the U.S. military salso is concerned with the security of Israel. But we see no evidence of a major military concern for Israel per se, independent of concern about energy security. In the first place, the Military Posture statements cited above make it clear that the JCS cares about Israel only in the context of the Arab-Israeli conflict. On account of its oil interests in the Gulf, the U.S. does want the region to be stable, and to forestall and resolve Arab-Israeli conflicts. As cited above, the Joint Chiefs of Staff are clear on this. Thus, U.S. military planners care mainly about regional stability – because of the region’s oil – and not so much about Israel per se. We believe that, if the Middle East had neither oil nor strategic importance, the U.S. would not maintain a significant military presence in the region solely to help protect Israel. Fuller and Lesser (1997) agree, stating that “at this point, Israel’s security, however important, does not represent an extra dimension of U.S. Gulf Policy” (p. 45).11 [Same]

This will come as harsh news to AIPAC, I'll bet.

However, the authors of the study warn against using their analysis to do, well, what this series is doing - numerical comparison.

Our analysis of these steps generally is illustrative, not rigorously quantitative. We estimate that there were no oil in the Persian Gulf, then U.S. combined peacetime and wartime defense expenditures could be reduced in the long run by roughly $27 to $73 billion per year (in 2004 dollars). If all motor vehicles in the U.S. did not use oil, U.S. military expenditures could be reduced by $6 to $25 billion per year, or $0.03 to $0.15 per gallon ($0.01 to $0.04 per liter) of all motor fuel. [Same]

The next installment (I think it's next, the numbering is not readily apparent) does yeoman work on summarizing all the possible "subsidies", and again the writing style is puzzling.  The data begs for columns.  Hidden in plain sight are the per-gallon totals I think more accurately reflect subsidy levels, except for one thing: they compare apples to fruit salad.

The oil industry, unlike ethanol, has more products in addition to gasoline.  To allocate all the subsidies to that one product makes no sense.  Here is what you get from a barrel of oil.

[Click to enlarge] [Source]

So if we use 51% as gasoline's share (allocated below), here is what the subsidy levels per gallon look like, using Todd's numbers.  I think this is fair because Todd counts home heating oil subsidies, for one example, in the mix, which don't have anything to do with the 140 B gallons of gasoline he divides by.  The last column using the energy difference between gasoline and ethanol (80%) for an energy equivalent number.

		DTN	Allocated	Allocated
	$B	$/gal	$/gal	$/eqiv gal
Oil (low)*	133.2	$0.96	$0.49	$0.49
Oil (high)*	280.8	$2.01	$1.03	$1.03
Ethanol	16.1	$1.24	$1.24	$1.55

[*These labels were stupidly reversed in the original post] 

It is fair to report the huge total number oil gets, but as I noted before, most farmers still believe the bigger you are the more subsidies you deserve.  And oil is a really big industry.

So for this observer, I think the idea oil is getting "more" subsidies is an artful arrangement of fact.  At the very least, oil gives the taxpayer more energy bang for his/her subsidy buck.
 

It's about food...

More than we think here in the US.  Here is what Egyptians are facing with their household finances.

[Source]

In November, overall inflation in Egypt topped 8.58 percent for the year, its highest level in 19 months. But food inflation has been much more pronounced.

Fitch, in downgrading Egypt's outlook to negative today, specifically cited the high food inflation, which it said was running at about 17 percent a year. The main drivers of food inflation are meat and sugar. [More]

My guess is the food-fuel debate is about to get much hotter. And any hint of trouble during planting season will not be helpful to the current ethanol pseudo-business model.

Energy from heaven...

Confounding most projections, natural gas seems to be showing up more often and in surprising amounts.  I mean Israel could become an energy exporter, for Pete's sake!

A massive offshore natural gas reserve is poised to give Israel energy security, freeing the desert nation from the threat of boycotts and reshaping the political dynamics of the Middle East.
Estimated to contain 16 trillion cubic feet of gas – equivalent to more than a quarter of Canada’s proven reserves and enough to meet Israel’s domestic demand for 100 years – the Leviathan field is believed to be the largest such deepwater gas discovery in a decade.
...
Observers say the windfall, whose size was confirmed this week, could also affect Israel’s relationships not only with its traditional enemies but also with its allies – and free the energy-poor country in an oil-rich region from the often prohibitively high prices of heat.
But the country’s ability to exploit the field will be fraught with difficulties: It must contend with the challenge of drilling far beneath the earth in deep waters as well as with building infrastructure to transport the gas and sorting out clashes with energy companies over its royalty regime. The field is not expected to start producing for at least six years.
The Leviathan find is believed to cover roughly 325 square kilometres off the country’s north coast – an area about twice the size of the city of Vancouver or half the size of Toronto – in an area called the Levant basin that has already yielded smaller fields. The lease is operated by Houston-based Noble Energy, plus Israeli companies Ratio Oil Exploration and Delek Drilling, which said they plan to drill two more exploratory wells in the coming months to confirm the findings.
If exploited, the gas will mean Israel won’t have to buy on the open market any more and could also lessen its dependence on subsidies from the U.S. government, which has sought to use its clout to push its ally to curb settlements in the West Bank and to try to reach a peace agreement with the Palestinians. [More]

While I will pass over the idea that this discovery could increase their drift toward fundamentalist bellicosity  - which is disconcerting enough, it reinforces my recent suspicion that NG seems to be the BTU of the moment.

Coupled with our own new finds in the US I wonder if we have built our last coal-fired plant for a [long] while.  The easiest replacement is for electricity generation, retiring first oil, then coal factilties.

Coal has already been losing market share over the last fifteen years. In that period, the amount of electricity generated using natural gas has nearly doubled, while the amount using coal (and nuclear) has remained the same. The other beneficiary has been renewable energy, but rapid growth in that segment only began in the last few years, during the relatively high natural gas price environment. We anticipate that concerns over increased regulation, including potential carbon caps, will accelerate the coal to gas transition. Planned generating capacity additions are dominated by natural gas, with many utilities vocal in their intentions to use more natural gas-fired power plants to generate electricity going forward. [More, also graph source]

Let's assume this happens, and it lowers the demand growth for oil. This is not good news for ethanol, IMHO. If we buy into ravening appetites for corn keeping prices trending upward (and I think we've all sipped that intoxicating beverage) the reluctance of the oil industry to roll over in the face of new mandates seems unlikely. And the reaction of consumers could also be more vigorous than we think.

The EIA apparently agrees with rosy price outlook.

[Source and below]

 Many aren't buying it, however.

It is understandable that the EIA, as a branch of government, must produce an annual report that is politically expedient and that supports a view that meets public policy expectations. The EIA approach takes a long-term economic view and is, therefore, not concerned with the fluctuations that characterize the real world of petroleum supply, demand and price. At the same time, it is not useful that this report is in conflict with industry best practices and opinion as well as trend data available to the public.
The EIA’s resource estimate of technically recoverable gas from shale is interesting but not relevant to future price or production volume forecasts. The Potential Gas Committee’s 2009 report is the benchmark of credibility, and we hope that the full EIA report in March will explain why we should accept unwarranted and insupportable upward revisions to PGC resource estimates and how these might translate to energy reserves and price. The EIA treats shale gas just like conventional gas in its forecasting and does not acknowledge the much higher decline rates and, therefore, great number of wells required to maintain supply.
Exploration and production companies involved in shale gas production have presented a position that emphasizes production and reserve growth over earnings or profit. It is confusing that the EIA has assumed that market forces and improving efficiencies will save the day for oil and gas prices. It would be more appropriate to frame the problem in the context of reasonable expectations that would be useful to public understanding of the shale gas phenomenon and its potential contribution to natural gas volumes and price. It is unsettling that the EIA has not acknowledged the belief by the U.S. military and other credible sources of an impending liquid fuel shortage that confronts the United States and the world (e.g. Hirsch, Benzdek and Wendling, 2010; JOE Report) . Instead, the EIA has provided an unrealistic view of future oil and gas supply and price that will inevitably not serve public understanding or promote reasonable planning for resource availability or price.

I take this critique with a grain of NaCl, since the author is among peak-oil enthusiasts who were gob-smacked by the recession-aided plummet in demand, and subsequent revisions of energy outlook to "slightly less apocalyptic". Nor do I believe the EIA to be as sensitive to politics as other observers.

So I'm watching for more NG finds in improbable places, increased agitation by the coal industry against GHG regulation, and the sales of the Volt, et al. Ethanol may have less of a supply hole to fill that we imagine.

This oughta be good (II)...

I have been following The Ethanol Blog by Todd Neeley as he wades through the complex maze of subsidies for ethanol and oil.  His breadth of coverage is admirable, even if his blogging style is distracting, not to mention finding your way past the subscription gates.  Here are links to the first three posts anyway: 1   2  3

My comments about the latest two installments.

Much space is given to the March study by Bruce Babcock at CARD, although irritatingly, the actual study (pdf) is not linked.  However, the report is accurately reflected and answers one of the questions I had posed about the value of the mandate (RFS).

Babcock said it would be easy to figure out the level of subsidy from RFS if VEETC wasn't there by examining the price of renewable identification numbers, or RINS. These are the numbers assigned to each gallon of renewable fuel to allow the EPA to track usage of those fuels.

Fuel blenders are required to either blend a certain amount of ethanol or to purchase those identification numbers from blender companies that have met RFS requirements and have "excess" renewable fuel to sell. The RIN system works to ensure industry-wide compliance with the RFS.

"All you would need to do would be to look at the RIN price to look at how much support is being received by the ethanol industry. But with VEETC, the RIN price is as much as 45 cents per gallon lower than what it would be," said Babcock.

With the influence of VEETC, the RFS provides little support. With VEETC removed, Babcock said, the RFS would be worth about 30 cents per gallon, or about $3.9 billion, based on the 2010 RFS of 12.95 billion gallons.

Koplow said the RFS will become more valuable every year on its way to the mandated 36 billion gallons of production in 2022. [More]

[Curiously, we have no way of knowing who this "Koplow" guy is, but I appreciate his input.  Actually he is identified in the third? fourth? post.]

This value for the mandate seems low to me, but I can find no fault in Babcock's logic other than at the extremes: low oil prices, for example. 

Also the original study referenced regarding oil protection costs is here. The report does answer my speculation about the importance of Israel vs. oil.

Next, the CRS (1992) claims that the U.S. military salso is concerned with the security of Israel. But we see no evidence of a major military concern for Israel per se, independent of concern about energy security. In the first place, the Military Posture statements cited above make it clear that the JCS cares about Israel only in the context of the Arab-Israeli conflict. On account of its oil interests in the Gulf, the U.S. does want the region to be stable, and to forestall and resolve Arab-Israeli conflicts. As cited above, the Joint Chiefs of Staff are clear on this. Thus, U.S. military planners care mainly about regional stability – because of the region’s oil – and not so much about Israel per se. We believe that, if the Middle East had neither oil nor strategic importance, the U.S. would not maintain a significant military presence in the region solely to help protect Israel. Fuller and Lesser (1997) agree, stating that “at this point, Israel’s security, however important, does not represent an extra dimension of U.S. Gulf Policy” (p. 45).11 [Same]

This will come as harsh news to AIPAC, I'll bet.

However, the authors of the study warn against using their analysis to do, well, what this series is doing - numerical comparison.

Our analysis of these steps generally is illustrative, not rigorously quantitative. We estimate that there were no oil in the Persian Gulf, then U.S. combined peacetime and wartime defense expenditures could be reduced in the long run by roughly $27 to $73 billion per year (in 2004 dollars). If all motor vehicles in the U.S. did not use oil, U.S. military expenditures could be reduced by $6 to $25 billion per year, or $0.03 to $0.15 per gallon ($0.01 to $0.04 per liter) of all motor fuel. [Same]

The next installment (I think it's next, the numbering is not readily apparent) does yeoman work on summarizing all the possible "subsidies", and again the writing style is puzzling.  The data begs for columns.  Hidden in plain sight are the per-gallon totals I think more accurately reflect subsidy levels, except for one thing: they compare apples to fruit salad.

The oil industry, unlike ethanol, has more products in addition to gasoline.  To allocate all the subsidies to that one product makes no sense.  Here is what you get from a barrel of oil.

[Click to enlarge] [Source]

So if we use 51% as gasoline's share (allocated below), here is what the subsidy levels per gallon look like, using Todd's numbers.  I think this is fair because Todd counts home heating oil subsidies, for one example, in the mix, which don't have anything to do with the 140 B gallons of gasoline he divides by.  The last column using the energy difference between gasoline and ethanol (80%) for an energy equivalent number.

		DTN	Allocated	Allocated
	$B	$/gal	$/gal	$/eqiv gal
Oil (high)	133.2	$0.96	$0.49	$0.49
Oil (low)	280.8	$2.01	$1.03	$1.03
Ethanol	16.1	$1.24	$1.24	$1.55

 

It is fair to report the huge total number oil gets, but as I noted before most farmers still believe the bigger you are the more subsidies you deserve.  And oil is a really big industry.

So for this observer, I think the idea oil is getting "more" subsidies is an artful arrangement of fact.  At the very least, oil gives the taxpayer more energy bang for his/her subsidy buck.