Ethanol: Another Chapter in Scamnation
September 15, 2013

 

 

Dear readers, this Sunday afternoon I urge you to take a ten minutes to read Gretchen Morgenson and Robert Gebeloff’s front-page piece in today’s New York Times, “Wall St. Exploits Ethanol Credits, and Prices Spike” (http://www.nytimes.com/2013/09/15/business/wall-st-exploits-ethanol-credits-and-prices-spike.html).

Morgenson and Gebeloff expose the latest incarnation of the ethanol ripoff and the status of this government-created mess.

Please permit a personal polemic. I’ve pounded tables for years about ethanol as a massive scam. Our national policy diverts 40% of the U.S. corn crop (14% of the global corn crop) in order to produce a fuel that requires almost as much energy to produce as it supplies. Our ethanol mandate has starved millions of people; I’ve watched it with my own eyes in many countries in my travels. A 2011 study by the National Academy of Sciences estimates that, since 2007, the expanding U.S. biofuels subsidy has fueled 20%-40% of the increase the world has seen in the prices for agricultural commodities. In a country like Guatemala, that means that tortilla prices double and egg prices triple. (Source: http://www.nytimes.com/2013/01/06/science/earth/in-fields-and-markets-guatemalans-feel-squeeze-of-biofuel-demand.html)

Ethanol damages engines, too — ask any user; I’ve seen it myself throughout the US, and Popular Mechanics concurs: http://www.popularmechanics.com/cars/alternative-fuel/biofuels/e15-gasoline-damage-engine.

Corn ethanol has poisoned our planet while it has lined certain private and politically connected pockets with billions. It has succeeded in raising our costs, for minimal net energy gains.

Morgenson and Gebeloff focus on just one aspect of the ethanol boondoggle, but it’s a crucial one:

“the rapidly growing role of Wall St. banks in gaming the ethanol credits market. Ethanol credits (or RINs, as they’re called) were created by the Environmental Protection Agency and Congress as a way to assure the inclusion of ethanol in gasoline as an energy-saving measure. But gasoline producers who couldn’t or didn’t want to include ethanol could buy credits from those who did. Unfortunately, the market for the credits was almost completely unregulated … and Wall St. abhors a profit vacuum. So in stepped the speculators, amassing millions of credits and making a killing on the wide spread between the bid and ask prices of the credits. Predictably, this drove the price through the roof: the credits, which cost 7 cents each in January, peaked at $1.43 in July and now are trading for 60 cents.”

The bottom line? Consumers will pay at the pump, say the authors. Congratulations to Gretchen and her colleague for exposing this next chapter in a continuing shameful national ethanol scam.

We shouldn’t be under any illusions about the geopolitical effects of our national ethanol policy, either. The following excellent summary and comment came to me this morning from a prominent industry insider. He offers much food for thought:

“Ethanol was a bad policy, primarily to buy and reward grain-state votes. It spurred grain planting to meet the mandate, but not fast enough, so prices called out for more. The poor were hurt overseas and Arab Spring ensued.

The US didn’t back down. Brazil and Argentina planted like crazy, boosting their economies and saving Argentina one more year from default. Then came the drought. Prices spiked higher – but not as high as if acres had not been added for ethanol. RINs took some pressure off and allowed ethanol corn back into the feed market. High grain prices benefitted farmers worldwide – whether they planted corn, wheat, rice, or oil palm. Record crops were planted this year.

Global urban dwellers at the low end suffered again. Who knows what role Egypt and Arab Spring played in Syria? Food inflation plus Arab Spring scared China’s new leaders. The purge of oil oligarchs there has begun, along with a major push for alternative energy (solar, wind, nuclear, gas – anything).

Without ethanol, would gasoline have been priced higher? Would we have natural gas-driven trucks a la Boone Pickens? Would fracking be even bigger around the world? The spike in prices this year was a reaction to the shortage in corn caused by the drought last year. Rather than pay high prices for corn, blenders bought stockpiled RINs. The real story of the market was the explosion from $0.02 per RIN, when nobody wanted them, to $0.07 in August 2012 when the short corn crop became clear. This surge attracted the Wall Street players. They benefited when corn prices spiked again in Jan-Feb on the perception that South America crops would not clear the market before US crops came in in August-September.

Now corn prices have moderated. The possibility that RINs rule will be changed is a critical risk in this market now as the downside from $0.60 is much bigger than the upside…. RINs prices spiked in February, but the RFS standard is now a hot potato in Congress. If the article helps spark a change in RFS mandates, it will have served its purpose.”

Many thanks to my friend for his comments. And to the New York Times for giving the issue prominent disclosure.

Please remember that this all starts in the corn-farmed, politically charged Iowa caucuses. Which means, it is our sick and rotten political system that produces these behaviors. That will likely continue until we repeatedly and mercilessly pound the politicians who have sold our nation down a river of ethanol.

Thank you for 10 minutes on a bully pulpit. Feel free to forward if you concur.

David R. Kotok, Chairman and Chief Investment Officer

Category: Energy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Ethanol: Another Chapter in Scamnation”

  1. Moss says:

    Look no further than family farmer and Senator Chuck Grassley. In the end however it is our ethically bankrupt bankers who trample the spirit of every law, regulation and relationship possible in the pursuit of profit. Ethanol is not the problem it is simply the tool. Just like a triple A rating put on junk bonds.

  2. doug says:

    As for damage caused, don’t overlook watercraft. It has been quite an issue on the water.

    • Huge, especially with saltwater boats. My mechanic told me that O2 sensors, fuel filters, spark plugs are much more rergularly replaced since Ethanol came along.

      The next boat may have to be a diesel!

      • dsawy says:

        If people were really concerned with increasing auto fleet mileage in the US, we’d be going to diesels in lots more applications than pleasure watercraft.

  3. theexpertisin says:

    Excellent observations from Mr. Kotok. We have gas stations near us that sell non-ethanol product, and they are constantly busy. Perhaps the many here who run boats intuitively run away from ethanol. knowing the harm it causes engines on their craft.

    My modest auto fleet often runs on non-ethanol fuel, and I perceive a difference from the standard ethanol-laced stuff.

  4. BuffaloBob says:

    It is not only boat motors. My local hardware store has a 6 week back-log to rebuild carburetors on weed wackers, hedge trimmers, chainsaws, etc. that have been destroyed by ethanol. Now they are talking about making us buy 15% ethanol instead of the current 10%.

    What is the investment play here? I am going to find out who makes the carburetor rebuild kits.

  5. dsawy says:

    If you want to know the real source of the ethanol issue, you need to go back to the EPA requiring oxygenates in gasoline in the Los Angeles basin in the late 80′s.

    The first oxygenate was MTBE. It worked, it reduced some pollutants out of cars with carbs (it does little to nothing in cars with close-loop electronic fuel injection fuel systems), and then the environmentalists started pushing this oxygenate into the national fuel stream. Obviously, if it cleaned up LA’s air, it would do some good everywhere else too, right?

    Wrong. But the worse thing about MTBE was what it did to ground water. Engineers warned the EPA that MTBE is highly mobile in soil. Whereas leaking underground fuel tanks might have caused ground contamination before, once MTBE was added to gasoline, these plumes from these leaking tanks would race down into the groundwater. Well, the environmentalists were not be be stopped. MTBE was made mandatory in the LA basin. I remember the first load of MTBE gasoline I put in my vehicle and the strange smell it had.

    The engineers didn’t lie or exaggerate. In places like Santa Monica, within 10 years, one-third of the groundwater sources were showing evidence of MTBE contamination.

    So the EPA realizes that MTBE has to go. It’s years later now, and by this time, all new cars with gasoline engines have closed-loop EFI fuel systems. The days of the carb, much less a manual choke, are gone, gone, gone. There’s really no need for any oxygenate to be added to gasoline. Ah, but once the EPA has instituted a regulation, they’re going to make sure it persists forever. So the EPA casts about for a new oxygenate that doesn’t have the ground mobility of MTBE, and the nascent ethanol industry says “Hey, ethanol would work.” And there’s the start of ethanol in gasoline.

    We don’t need oxygenate in gasoline any more, much less ethanol.

    Ethanol could be made a positive issue in the fuel, if added in great enough quantities to increase the octane to a point where we could increase the compression ratio (and therefore the extraction stroke) on engines, but that’s never going to happen. Ferarri proved this with a car that got higher mileage and more HP on E-85 than on E-10. But ideas like this won’t come out of Detroit.

  6. johnnywalker says:

    Re diesel boats: Diesel engines are sturdy but heavier. Because diesel is less volatile than gasoline, diesel boats are much safer. That, to me, is the major advantage of diesel.

    Re dsawy: you seem equate the EPA with all environmentalists, and ignore the beneficial results of the environmental movement. I remember, for example, when lead was a gasoline additive. I also remember how bad the air in LA was before measures were instituted.to decrease emissions. I agree, however, about MTBE; anyone who understands organic chemistry would recognize that it is a bad choice for an additive.

    • dsawy says:

      I remember those times too.

      I also remember the statements by the environmentalists in SoCal when the chemical engineers told people what the problems with MTBE were. Complete dismissal.

      Well, they got what they wanted: MTBE. In the gasoline, then in the ground water.

      Sometimes, the environmentalists get so focused on their agenda that they ignore the unintended consequences.

      re: Diesels: to me, the benefit of a diesel engine is the increased efficiency. On larger cargo ships, there are now diesel engines that produce over 50% thermal efficiency. Gasoline Otto-cycle engines will never come close to that.

  7. CentralIowaFarmer says:

    Everyone likes to think that 40% of the U.S. corn crop goes to ethanol. It DOES go in, but only 17% of the total goes to produce ethanol (i.e. corn whiskey / alcohol). The rest goes out in by-products like DDGs (dried distillers grains) that are fed to cattle/hogs/poultry. No ethanol plant makes money without producing by-products.

    If you read the article quoted, it has nothing to do (well, very little to do) with ethanol policy. The article is focused on how the market is not an open market, it is similar to how Enron was trading energy.

    Pg. 2 of article: “The market in ethanol credits is exactly the kind Wall Street loves: opaque, lightly regulated and potentially very lucrative.”

    There is no exchange for the RINs market.

    The article is about the sins of Wall St.

    Never heard of a Marina that sells ethanol.

    I have seen people put diesel fuel into gas engines, and I’ve seen people put gas into diesel engines. Never really works out well.

    e-10 and e-15 works fine in most automobiles. Ethanol causes problems in small gas motors.

    We could change engines a little and make ethanol much more efficient as a fuel. (e-85 vehicles swap a few parts so that they don’t corrode, but compressions ratios in engines are left as – is.)

    Political parties have ruined things, not Iowa. I’d agree that the “first in the nation” status ought to rotate among 4-5 regions throughout the country. But still, the political process and gerrymandering promotes politicians with views at the extremes, rather than politicians that learn toward the center.

    Consumers pay because the markets are unregulated, not because ethanol is a scam.

    Most of the cost of a person’s “food” is transportation and/or handling costs. Lower transportation costs lowers the price of food everywhere.

    So many things wrong with Mr. Kotok’s polemic, I’ll stop here (for now). But I’ll reserve the right to more fully explain why the RFS is important, and why mandates are important when it comes to energy (mostly infrastructure). And why the infant ethanol had most of its subsidies lifted a year or two ago, and how the most severe drought in the past 50 years went generally unnoticed by the American consumer. (sigh)