Friday, December 26, 2008

Interactions between ethanol, oil, and food prices

With the plummetting oil and food prices around the glode, we now have data needed in order to analyze what effect ethanol truly has on food prices. As the article below points out, food prices are tied more to oil prices than anything else. Ethanol production continues to expand even as food prices fall due to lower oil prices. All this should promt us to develop more regionalized and localized sustainable food systems that are less reliant on oil (fossil fuel) inputs.
Fact vs. Fiction on Food vs. Fuel - International Analyst Network: "At the height of the oil crisis, ethanol was responsible for keeping the price of oil 15% lower than where it would otherwise have been. This means that as vexing as some find annual ethanol subsidies of roughly $5.6 billion, the use of ethanol saved the U.S. economy in 2008 roughly ten-times that amount which otherwise would have ended up in the coffers of foreign oil-exporting countries - many of them hostile to us."


Anonymous said...

That estimate of 15% savings derives from a back-of-the-envelope calculation by an analyst for Merrill Lynch who, when pressed by a WSJ reporter last spring to hazard a guess as to how much a difference ethanol was making to the world oil market, divided the share of biofuels (all biofuels, not just U.S.) in total world petroleum fuel supply (about 1.5%) by the short-run elasticity of demand (0.05). That yielded a 30% price effect, but the analyst thought that the number sounded too high, so he cut the number in half. Real rocket science, that.

The estimate takes no count of the possible behavior of OPEC in response to increased biofuel production, and ignores the role of speculators (which the ethanol industry blames for the run-up in other commodities). We should give little to no credibility to that "15% lower figure” until it is subject to a more rigorous analysis.

It also does not explain why, while ethanol production increased sharply in 2007 and 2008, so did oil prices. Indeed, one could have made a plausible argument (using a similarly simplistic calculation), that there was a strong correlation between rising ethanol production and rising oil prices. See:

To quote the person who produced that regression:

“Anyone with even an introductory course in statistics would raise serious questions about whether this regression proves anything about the relationship of ethanol production and crude oil prices. All we can really say for sure was that in 2007 there was a strong correlation. The relationship is VERY likely to be spurious. However, we cannot rule out the possibility that OPEC is taking biofuels production into account in setting their production levels. Also, producing ethanol adds to oil demand for corn production, refining, and transportation. This is, however, an example of the kind of twisted statistics and logic used often by ethanol advocates to “prove” their points.”

And, by the way, in case you hadn’t noticed, the wholesale price of ethanol is now $0.80 per gallon GREATER than gasoline. So, if that gap is maintained through 2009, because of the amount that will have to be blended into the nation’s gasoline supply as a result of the Renewable Fuels Standard — 10.5 billion gallons — motorists will have to spend an extra $8 billion a year — on top of the $5 billion loss to the Treasury from the volumetric ethanol tax credits.

Such a deal!

Jeff Goettemoeller said...

Anonymous, I appreciate your injecting a little skepticism into the discussion. That article lacked citations to back up their numbers. Many of these relationships are difficult to figure with certainty. It does seem obvious, though, that food prices are down even as ethanol production remains steady. This goes against the rationale of much of the "food vs. fuel" anti-ethanol rhetoric. Many people are playing loose with the figures on both sides of the debate.