OPEC President Blames Ethanol For High Oil Prices

OPEC president Chakib Khelil blamed speculation and ethanol for rising oil prices.

Khelil also linked the diesel fuel market to the rise in oil prices.

"This crisis originates from the introduction of ethanol onto the market, which contributed to reduced diesel production," said Khelil.

Less diesel fuel production in turn increased oil prices across the board, said Khelil, highlighting the impact of biofuels on oil markets.

Source : OPEC chief insists speculation behind price rises

I am having a hard time following his logic here but the facts are easy enough to check. Since ethanol has been used as a motor fuel for over 100 years I assume that what he means by the introduction of ethanol would be when the U.S. first set mandates for it's use. The first mandate was established in 2005 and began with the mandated use of 4 billion gallons of renewable fuels in 2006.

According to the EIA diesel fuel refining has increased since 2005 even as overall refining has decreased.

Diesel Refining
Total Crude Refining

So I don't totally know what to make of his comments. I think that they are just a general expression of OPEC's animosity towards renewable fuels. It reminds me of a quote out of the organization back in 2005.

"Our competitors, the alternative energy providers, are intensively pursuing research programs aimed at reducing the domination of oil and gas in the global energy market," Abdullah Salatt, Qatar's representative to OPEC, said. "Likewise, we should have our own independent programs."

Source : OPEC sees threat from 'alternative energy'

So while the rest of the world looks for solutions to the energy problems we all face, OPEC will be looking for ways to keep us addicted to their product.

March Ethanol Production Jumps Higher

March ethanol production increased to 730,674,000 gallons, almost a 100 million gallons higher than the February production number. Of course the February number is somewhat misleading due to the fact that February this year had two less days than did March. Looking at the barrels per day produced shows that March production was 561,000 BPD compared to February at 518,000 BPD.

March 2008 - 730,674,000 gallons
February 2008 - 631,050,000 gallons
January 2008 - 664,356,000 gallons
December 2007 - 636,762,000 gallons
November 2007 - 602,592,000 gallons
October 2007 - 588,756,000 gallons

January 2007 - 488,082,000 gallons

Source: - Energy Information Administration

Ethanol Co-Products and E. Coli

In January 2008, researchers at Kansas State published a study that that concluded ethanol co-products (distillers grains) increased the prevalence of E. Coli in cattle.

The results indicate that there is a positive association between DDG and E. coli O157 in cattle, and the findings should have important ramifications for food safety.

In the days that followed there were numerous news articles that tried to link the increasing use of distillers grains to the increases in meat recalls over the last few years.

Then in March 2008 the very same researchers published a follow up study that concluded that feeding cattle distillers grains did not increase the prevalence of E. Coli.

Unlike our previous studies, we found no evidence to indicate that dietary inclusion of distiller’s grains or corn processing methods have a significant effect on the prevalence E. coli O157 or Salmonella in cattle feces.

Following the release of this study there were hardly any news articles covering the story. The only articles that I saw at the time were in agricultural news outlets.

Now there has been another study published, this time by researchers at the University of Nebraska at Lincoln that concludes that there is no link between distillers grains and meat recalls.

At this point, there is no scientific evidence that feeding DG, at least at levels being used commercially, is the cause of a food safety crisis! Additionally, there is no scientific evidence to suggest that the feeding of DGs is the cause of the 2007 recalls.

Now the question is whether or not the media will cover this story or will they just leave everyone with the impression established after the first study was published that the food supply isn't safe and that it is because of distillers grains.

Study : Does Feeding Distillers Grains in Rations Increase E. coli O157:H7?

Is Institutional Speculation Driving Up Food Prices?

Last week, Michael W. Masters testified before the Senate Committee on Homeland Security and Governmental Affairs on the effects of institutional speculation on commodity markets.

You have asked the question “Are Institutional Investors contributing to food and energy price inflation?” And my unequivocal answer is “YES.”

These institutional investors, which he calls index speculators, include corporate and government pension funds, sovereign wealth funds, university endowments and other institutional investors. Over the last five years these index speculators have poured large sums of money into the commodity markets, increasing demand and pushing prices higher.

Today, Index Speculators are pouring billions of dollars into the commodities futures markets, speculating that commodity prices will increase. Chart One shows Assets allocated to commodity index trading strategies have risen from $13 billion at the end of 2003 to $260 billion as of March 2008, and the prices of the 25 commodities that compose these indices have risen by an average of 183% in those five years!

And the problem with this sort of trading is that it because this is long term investing, it essentially removes large stockpiles of the commoddities being invested in.

Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell.

And this is effecting the food supply by removing large quantities of key commodity from the market.

Let’s turn our attention to food prices, which have skyrocketed in the last six months. When asked to explain this dramatic increase, economists’ replies typically focus on the diversion of a significant portion of the U.S. corn crop to ethanol production. What they overlook is the fact that Institutional Investors have purchased over 2 billion bushels of corn futures in the last five years. Right now, Index Speculators have stockpiled enough corn futures to potentially fuel the entire United States ethanol industry at full capacity for a year. That’s equivalent to producing 5.3 billion gallons of ethanol, which would make America the world’s largest ethanol producer.

Turning to Wheat, in 2007 Americans consumed 2.22 bushels of Wheat per capita. At 1.3 billion bushels, the current Wheat futures stockpile of Index Speculators is enough to supply every American citizen with all the bread, pasta and baked goods they can eat for the next two years!

And this speculation has also had an effect on the price of oil and ultimately the price we pay at the pumps for gasoline.

In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators' demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

Source : Testimony of Michael W. Masters (PDF)

This goes a long way to explaining some questions that I have had about the current food price situation. Looking at and comparing recent crop production numbers of not only corn but other crops as well indicated to me that supply is not the issue. So that only leaves demand as the driver of food price inflation and honestly it is hard to see how demand could have increased at such a pace without some form of artificial demand being created.

Recap Of Recent Food Price Studies

While almost every other news article it seems is trying in some way to blame ethanol for rising food prices, there have been several studies and reports published recently that conclude that other factors are having a much larger impact. Just to show the growing body of research I would like to recap those recent studies so that they can be seen in one place all together.

The opposition to ethanol production relies on the logical argument that the greater demand for corn from ethanol production raises the price of corn and all the food items that are made from corn. So the University of Wisconsin at Madison study published in April 2008 that focused on the effects of ethanol production on the price of corn seems like a good place to start. The study concluded that ethanol production was a factor in rising corn prices but not the only factor.

Since ethanol production capacity essentially doubled between the first two quarters of the last and current marketing years, the model results above suggest that ethanol’s contribution to the price rise was about 41 cents per bushel, ceteris paribus. This would have resulted in an average 2007/2008 first quarter price of $2.95 per bushel had nothing else changed. While this is a significant year over year increase, it is substantially less than the actual price appreciation between the start of 2006/2007 and the start of the 2007/2008 marketing year. As a result, while ethanol production has had a significant and positive impact on corn price, it does not fully explain price level changes in the 2006/2007 marketing year.

Whereas the study predicted that if ethanol were the only factor influencing the price of corn, the corn price would have been $2.95 per bushel, the actual cost was $3.34 per bushel. So ethanol increased the price of corn by 41 cents and other factors increased it by 39 cents. So according to this study ethanol was responsible for roughly half the increase in corn prices over the time period examined.

So the logical argument that ethanol production is raising food prices by raising the price of corn could only be half right at best.

The study by Texas A&M published in April 2008 concluded that ethanol production has had little impact on food prices, but has effected certain food items.

This research supports the hypothesis that corn prices have had little to do with rising food costs. Higher corn prices do have a small effect on some food items.

The study also plainly states that some of the food price increases that have been blamed on ethanol production are incorrect.

Important food items like bread, eggs, and milk have high prices that are
largely unrelated to ethanol or corn prices, but correspond to fundamental supply/demand relationships in the world.

The most recent study released by the University of Nebraska at Lincoln concludes that ethanol production is having a small part in overall food price increases.

The evidence available suggests that the ethanol industry alone is responsible for perhaps 30-40% of the increase in grain prices over the past two years, while these high grain prices themselves are responsible for no more than a 4% increase in U.S. food prices. This implies that ethanol is responsible for a 1-2% rise in US food prices.

Those are the studies that have come out in the last couple of months that deal specifically with ethanol's effect on food prices. The Federal Reserve Bank of Kansas City issued a report in March 2008 that detailed the various factors that are driving food price inflation. In their report they point to robust food demand, record high crop prices, and accelerating costs for labor and energy for fueling the steep increase in food prices.

University Of Nebraska Studies Ethanol's Effect On Food Prices

Researcher Richard K. Perrin of the University of Nebraska at Lincoln just finished a study on ethanol's effects on food prices. Like other studies published recently it concludes that ethanol's effect on food prices is pretty limited.

The evidence available suggests that the ethanol industry alone is responsible for perhaps 30-40% of the increase in grain prices over the past two years, while these high grain prices themselves are responsible for no more than a 4% increase in U.S. food prices. This implies that ethanol is responsible for a 1-2% rise in US food prices.

Source : Ethanol and Food Prices - Preliminary Assessment

Below, in the related posts, are some of the other recent studies and reports that have concluded that other factors are having a larger effect on food prices than is ethanol production. In light of this growing body of research one has to wonder what the real reason is for the opposition to ethanol production by certain groups.

Using Ethanol To Increase Food Profits

Over the last week it has been reported that the Grocery Manufacturers Association has begun a public relations campaign to link ethanol with high food prices. The Roll Call first broke the story on Wednesday and since then has been commented on by some of my favorite blogs such as here, here, here, and here. And they all did a very good job of explaining the situation and I would encourage everyone to read those reports.

The one thing that I would like to add to the debate is how this is such a win/double win situation for food manufacturers. If they can convince the public that ethanol is the cause for high food prices they can basically write their own check. They will be able to raise food prices to any level they like, justified by costs or not.

And if they succeed in getting the ethanol policy reversed they win even bigger. High food costs will by that point already be established and food manufacturers input costs will be lowered. So they will be getting high prices for their products and have lowering input costs allowing them to write an even bigger check to themselves.

What has happened to the price of wheat?

Quietly, with little or no fanfare, over the last two months the price of wheat has gone down. So quiet in fact that I doubt anyone has noticed. I know I hadn't until I saw this small quote in a recent article .

Over the winter, wheat prices soared to nearly $13 a bushel, but lately they have dropped below $8. With soybeans still high, that could be another factor pushing some farmers away from planting corn, Mr. Reed said.

As soon as I saw it I went over to the Chicago Board of Trade and started looking for numbers. And as this chart of wheat futures shows wheat topped $13 per bushel in the middle of March and is now trading at less than $8 per bushel.

So the big question is, have the retail prices for things made from wheat, such as bread gone down any?

Well, according to the Department of Labor, it hasn't. The average price for a pound of white bread in March was $1.350 and for April it was $1.373.

So the months of being told that ethanol production was leading to higher wheat costs as farmers switched from growing wheat to growing corn for ethanol (which didn't happen see here) has lead to bakers being able to keep bread prices high even though wheat prices have fallen without anyone questioning it.

PetroAlgae Develops Algae Oil Extraction System

PetroAlgae is a Florida company involved in the development of algae oil for use as a feedstock for biodiesel. They have been working in all phases of the process from selecting the best algae species and development of suitable growing systems. But the part of their work that caught my attention was that they had developed a system to extract the oil from the algae.

One of the problems that has faced this new industry is how to extract the oil from the algae once it is grown. You can image that trying to squeeze oil from a slimy wet substance would pose problems. But they say that they have developed a system that works.

Once the algae is harvested, technicians run it through a series of machines, including a high-powered centrifuge, to break down the cells and separate the oil from the water, alcohol and solids.

The only byproduct, they say, is a high protein meal like substance that can used as livestock feed.

Source : WKYC.com

Green Star Products Releases Algae Demonstration Report

Green Star Products,Inc. has released a report on their 2007-2008 algae demonstration facility.

The report is pretty interesting and details how the research has progressed and what they have been able to achieve on the way to their goal of commercial production of biodiesel from algae oil.

Full Report (PDF)
Full Report (HTML)

Corn Prices Aren't High Enough

At least not to some in the pork industry.

The percent of the corn crop planted in the U.S. as of May 4 was 27; this compares with 45 percent last year and 59 percent for 2003-2007. With the big decline in corn acreage, indicated by the March 3rd planting intention, we need at least normal yields or the pain of high corn prices will be even more severe. If now looks like we will need to get corn prices high enough to close some ethanol plants for some period. With the current prices for gasoline, that would probably be between $7-8 per bushel. Source

The article also notes that pork is experiencing "unbelievable strong demand" and that prices are up. But I guess that isn't good enough. They want strong demand, high prices and low feed costs. The real question is are they willing to push up corn prices, hurting consumers in the meantime, to achieve their goals.

Makes me wonder if there is any kind of price rigging going on with corn prices.

The Real Reason For High Egg Prices

There is an article in the news today that talks about the rising cost of eggs. The article is filled with interesting information.

On the retail level, a dozen eggs in March cost $2.20 -- 34.8 percent more than in March 2007, when they sold for $1.63, according to the Bureau of Labor Statistics.

And as is usual in today's climate the blame was laid on ethanol production for driving up feed costs. But as I showed in a post a while back anytime you have two price points it is easy to figure out how much added corn costs have added to the increased price.

But in this case let's look at in a different way. As I noted in my previous post, according to the USDA it takes 4 pounds of feed to produce a dozen eggs. The price of a bushel of corn on the Chicago Board of Trade is $6.18 per bushel. At 56 pounds per bushel, that means that corn costs 11 cents per pound giving a total feed cost of 44 cents to produce a dozen eggs.

So even if the egg producer was getting his feed free in March 2007 the price at the retail level has risen more than the total cost of feed over that time period. So clearly corn costs alone can't explain the entire increase in the cost of eggs.

So what is causing the rapid rise in egg prices? The article gives a hint.

But the largest and most efficient egg producers, such as Cal-Maine Foods, Inc. of Mississippi, are cashing in.

Cal-Maine profits rose nearly $40 million, or 229 percent, in the three months that ended March 1 compared with the same quarter last year.

So while ethanol is taking all the blame for rising costs, egg producers are laughing all the way to the bank. Believing in some myths can be hard on the wallet.

Texas Energy Report 2008

Susan Combs, Texas Comptroller of Public Accounts released a new report on energy. The report looks at the various forms of energy and the part that I found most interesting, it also estimated the amounts of federal and Texas state and local subsidies for the different forms of energy.

The number one energy industry receiving subsidies at the Texas state level was the oil and gas industry. In 2006, the oil and gas industry collected $1.4 billion in state and local subsidies. The state paid out just $6.2 million for all forms of renewable energy with none going to ethanol.

At the federal level, ethanol subsidies totaled $4.7 billion in 2006. This number includes the blenders credit, corn subsidies, and all the money that went to ethanol research that year.

Subsidies at the federal level for the oil and gas industry totaled $3.5 billion.

Source : The Energy Report 2008

The thing that I find interesting about this report is the fact that people say that the ethanol industry is mature and should be able to stand on it's own without subsidies, but the oil and gas industry is over 100 years old and is still getting substantial subsidies at the federal level and at the Texas state level.

Study Examines Ethanol's Effect On Corn Prices

Professor T. Randall Fortenbery and graduate student Hwanil Park of the University of Wisconsin at Madison recently completed a study examining the effects of ethanol production on corn prices. It is an interesting study and the main conclusion is that ethanol alone can't explain the increase that has been seen in the price of corn.

Results show that increasing ethanol production has a significant impact on the national average U.S. corn price. The positive price change is consistent with previous research. However, in contrast to what is written in much of the popular press, results do not suggest the extremely high corn prices in spring of 2007 can be completely attributed to ethanol.

In fact according to the study, if ethanol production were the only thing driving corn prices, the price would have increased 41 cents from the first quarter of the 2006/2007 marketing year to the first quarter of the 2007/2008 marketing year. This would have resulted in a price of $2.95 per bushel. The actual price was $3.34 per bushel, so 39 cents of the increase came from other factors.

Source : The Effect of Ethanol Production on the U.S. National Corn Price (PDF)

Is China's Meat Consumption To Blame For High Food Prices?

Jim Lane editor of Biofuels Digest has written a very interesting report on the impact of China's increased meat consumption and how it is effecting grain supplies.

The report looks at changes in corn demand stemming from ethanol production and increased demand from China caused by higher meat consumption for the period from 1995 to 2008. Some of the key conclusions are as follows.

• Rising demand for grain in China, stemming from an increase in meat consumption, is overwhelmingly the cause of supply and demand imbalances in corn production.
  
• Given that the US population has grown 15 percent in the past 13 years, the 82 percent increase in US corn production left plenty for people, plenty for livestock, and plenty for ethanol.
  
• Chinese meat consumption is still 45 percent less than the average consumption in the US. An additional 277 million tonnes of grain would be needed to support China at parity with the US. That would take 68 million acres to grow.
  
• If the Chinese people had consumed the same amount of meat, per person, in 2007 as in 1995, there would have been enough grain left over to support 927 million hungry people with enough grain for an entire year,” said Lane.
  
• The growth rate for grain in China is so intense that, even if the US ethanol industry were completely shut down tomorrow, increased Chinese demand would soak up the excess grain by 2011.

Source : Meat vs Fuel: Grain use in the U.S. and China, 1995-2008 (PDF)And this is just looking at China's increased consumption of grains. Other developing countries are increasing their consumption of meat as well as their incomes rise creating more demand on world grain supplies.But the one thing that is clear from this is that scaling back biofuels production would just be a temporary cure. If ethanol production was ended there would be a temporary supply glut that would lower prices but in just a few years China's grain demand would once again outstrip supply.Eliminating the demand on grains created by ethanol production would be nothing more than a quick fix temporary solution. The only real longterm solution is finding ways to increase supply through increased yields, bringing idled farmland back into production and improved farming practices.

Fungus Could Be Key To Advanced Ethanol Production

Researchers at the Los Alamos National Laboratory and the U.S. Department of Energy have succeeded in sequencing the genome of a fungus that could hold great promise in the production of fuels from cellulosic materials.

The fungus was discovered during World War II when soldiers noticed that tents and uniforms were being destroyed by the organism while fighting in the South Pacific. The fungus, T. reesei was found to be very efficient at breaking down cellulosic materials into simple sugars.

“The sequencing of the Trichoderma reesei genome is a major step towards using renewable feedstocks for the production of fuels and chemicals,” said Joel Cherry, director of research activities in second-generation biofuels for Novozymes, a collaborating institution in the study. “The information contained in its genome will allow us to better understand how this organism degrades cellulose so efficiently and to understand how it produces the required enzymes so prodigiously. Using this information, it may be possible to improve both of these properties, decreasing the cost of converting cellulosic biomass to fuels and chemicals.”

Source : Press Release

Ethanol Production Continues To Increase

Ethanol production continued to increase in February even though total production for the month was less than in January. The amount of ethanol produced per day was higher in February but since there were two less days in the month, the monthly total is lower.


February 2008 - 631,050,000 gallons
January 2008- 664,356,000 gallons
December 2007- 636,762,000 gallons
November 2007- 602,592,000 gallons
October 2007- 588,756,000 gallons

January 2007 - 488,082,000 gallons

Source: - Energy Information Administration

Gov. Perry Seeks Relief From Skyrocketing Food Prices

Texas Governor Rick Perry issued a statement last week blaming ethanol for high food prices.

Seeking immediate relief from skyrocketing food costs, Gov. Rick Perry today asked the federal government for a 50 percent waiver from the federal renewable fuel standard (RFS) mandate for ethanol produced from grain.

"We appreciate the good intentions behind the push for renewable fuels. In fact we’re diversifying our state’s energy portfolio at a rapid rate, but this misguided mandate is significantly affecting Texans’ family food bill," said Gov. Perry. "There are multiple factors contributing to our skyrocketing grocery prices, but a waiver of RFS levels is the best, quickest way to reduce those costs before permanent damage is done."

This is a direct contradiction to the findings of a report issued by Texas A&M last month that found that ethanol production had little effect on food prices. The report goes on to further note that eliminating the RFS standard would do little to change food prices.

Relaxing the RFS does not result in significantly lower corn prices. This is due to the ethanol infrastructure already in place and the generally positive
economics for the industry. The ethanol industry has grown in excess of the RFS, indicating that relaxing the standard would not cause a contraction in the industry.

So why would Governor Perry propose relaxing the Renewable Fuels Standard when it would have little effect on food prices? Well, I think that this is probably more about protecting two key industries within Texas, livestock production and the oil and gas industry. The first clue comes from the Texas A&M report.

The net balance to the Texas agricultural economy is negative. While corn
and grain sorghum producers benefit from high prices, the livestock industry faces increasing costs. Because the livestock industry is bigger than the crop industry, the net balance is negative.

The next clue come from the fact that a couple of years ago Texas established incentives for ethanol and biodiesel production. The goal was to lure producers to the state. Then last year they ended that program because it was in competition with the state's oil and gas industry.

But some state lawmakers, including the influential chairman of the Appropriations Committee, said they were concerned that ethanol would compete with Texas' native oil industry – and would do so with an unfair, government-sponsored advantage.

"We virtually compete with ourselves when we start to subsidize those [alternative fuels]," said Rep. Warren Chisum, R-Pampa. (Source)

So it appears that Governor Perry is simply using the food prices issue as a way to lower the competition that the livestock industry and the oil and gas industry in Texas face. And while that may be good for Texas, as the Iowa State study pointed out last week, ethanol production has lowered the retail price of gasoline by 29 to 40 cents per gallon, it would not be good for motorists across the country.