Thursday, July 17, 2008

It's not ethanol - it's Iraq!...

Good news for ethanol defenders.  Since they are adamant in their assertion that energy is inflating food, not biofuel land use, the real culprit is the war in Iraq.  This brilliant post on The Oil Drum (read the comments too) offers the most cogent attempt to wrap logic around this cost of the war.
National Security Network took a look at the issue as well, with a focus on the risk premium. They comment that "some experts estimate" a risk premium of $30 to $40 barrel due to tensions with Iran/etc. That is what my 'off the top of the head' figure would have been for risk premium. But, guess what: even the best analysts, when pushed away from reporters, seem call this a guess, a swag or, at best, an "educated" or "informed" estimate. And, of course, the risk premium doesn't address the question of whether there would be more oil produced absent the US invasion and occupation of Iraq and sanctions against Iran. Nor does it address the question of how much of dollar's fall is due to conflict in Iraq and tension with Iran.

Back to a swag:

These, however, don't clearly answer the questions. Is the Iraq war premium $3?$2.30? $2? A buck? Twenty cents? Or, is there no premium at all? I find a $3 per gallon assertion absurd, just as I would find it absurd to assert that there is no premium at all. But, in terms of defensible analysis, in scratching my head, I return to the short answer:

    Two dollars a gallon is, perhaps, as good a swag as anyone's.* 

OK, what this suggests to me is those who support the war (as opposed to supporting the troops) thereby accept a significant price premium for gas.  And from that follows the possibility that ending our intervention could change the economics of oil.

Given the strong linkage of ethanol profits to oil  prices, foreign policy for corn growers gets a little murky, then.

*swag = scientific wild-*ss guess

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