Predicting and diagnosing the trajectory of oil prices has become something of a cottage industry in the past year. But along with all of the excess crude flowing from the oil patch, there is also an abundance of market indicators that while important, tend to produce a lot of noise that makes any accurate estimate nearly impossible.
Telsa Motors Inc.’s plan to cut jobs in China underscores the electric-car pioneer’s struggles in the country, a crucial market for the developing technology.
During an 18-month stretch, from June 2013 to December 2014, American-made ethanol was riding high. The industry produced 13.9 billion gallons and was making 63 cents per gallon, for an annual profit of $8.8 billion.
Then oil prices collapsed. The results have not been good for ethanol. Sales have been squeezed and profit margins have almost disappeared entirely. Ethanol producers must keep their price below the rate of gasoline, and that has become difficult. After gasoline fell below $2 per gallon in some places, ethanol was squeezed right out of the market. Instead of buying ethanol, refiners purchase Renewable Identification Numbers (RINs), which give them credit for putting ethanol into their blends. RINs have gained 36 percent in the past year, to 71.9 cents a gallon on the New York Mercantile Exchange, which shows how they have become a popular method of avoiding ethanol purchases.
As a result, major refiners are either throttling back or closing some of their higher-cost operations completely. The Valero Energy Corporation and Green Plains Renewable Energy, which together make up about 15 percent of U.S. ethanol capacity, have reduced their operations, according to Bloomberg. At a typical mill in Illinois, profit margins have virtually vanished after netting $1.33 per gallon only a year ago, according to AgTrader Talk, an Iowa consulting company. As a result, U.S. ethanol output fell 4.6 percent to an annualized rate of 14.5 billion gallons, from a record of 15.2 billion gallons, for the week ending Feb. 20, according to the Energy Information Administration.
All this illustrates how vulnerable ethanol will be if the Environmental Protection Agency ever gets around to publishing its “renewable fuel mandate” for last year or this. The EPA is supposed to issue a number each year for the amount of ethanol that will be incorporated into gasoline sales, in accordance with a 2007 law. But last year, with gasoline consumption actually declining because of economic weakness and improved fleet mileage, it became obvious that ethanol consumption could not reach the mandated level of 14.2 billion gallons without going over the mythical “blend wall” of 10 percent, at which point ethanol might damage some older engines. Most cars sold since 2004 can tolerate higher blends, and there are pumps where 85 percent ethanol is available. Still, the EPA has remained reluctant to abandon its conservative position and has tried to reconcile the 10 percent figure with declining gasoline consumption. Even the current 14.5- billion-gallon annual target would exceed the blend wall, and the EPA is in danger of sticking the country with too much ethanol. Inventories already stand at 21.6 million barrels, the highest level since 2012.
Added into all this is the price of corn, which remains the most widely used feedstock for U.S.-made ethanol. Last year the price of corn reached $8 per bushel and averaged $4.43 for the year. Ethanol refiners were still able to absorb the price because gas prices remained so high. But now gasoline prices have fallen by 50 percent, while the price of corn has only declined 19 percent, to $3.75 per bushel. Ethanol refiners say corn must reach $3.25 per bushel before they can make any money.
Chuck Woodside, CEO of KAAPA Ethanol and former president of the Renewable Fuels Association, says 2015 is looming as a critical year for ethanol. “We’re coming off a phenomenal 2014, and the industry as a whole did well,” he told the Kearney (Neb.) Hub newspaper. But “there are a lot of things yet to be determined about 2015.” Among them are how much drivers will increase their gasoline consumption (taking advantage of lower prices); whether more E15 and E85 pumps can be installed around the country; and whether the EPA will ever make up its mind on the Renewable Fuel Standard. There is even some question now of whether the EPA or Congress has the authority to set the RFS.
“The price of diesel has not fallen commensurate with the price of oil,” Woodside added. That only drives up the costs for ethanol plants, which use diesel-burning trucks and railroads to transport the product.
One bright spot has been the export market, in which American ethanol has been gaining ground. Demand has come particularly from Brazil, where 25 percent of all vehicles must run on 25 percent ethanol. Brazil has been under pressure to slow deforestation in the Amazon Basin, where most of its sugarcane ethanol is produced. China has also been a growing market for American ethanol products.
But refiners now agree that the best solution to the ethanol surplus would be to increase the number of pumps around the country that can dispense the E85 blend. That would produce a demand that would easily absorb all the ethanol American refiners could produce.
For the past seven weeks, the U.S. has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, pushing supplies to their highest point in at least 80 years.
In the 1976 movie “Network,” the news anchor Howard Beale, sopping wet and on the edge, invited viewers to stick their heads out their windows and yell that they were mad as hell, and they weren’t going to take it anymore.
To listen to our audience, all Fuel Freedom has to do is poke our heads into the modern window to the world, Facebook, and hear people venting about what they’re mad about. Lately, that’s the price of gas.
When we posted yet another rising-gas-prices story to our Facebook page last week, we asked our followers to tell us what gas prices were where they lived. More than 70 people chimed in, from all over the country, to let us know. ($3.87 in Pasadena, really?) They also shared their unvarnished feelings about the impact that the recent price spike has had on their family budgets.
I followed up with one of the mad-as-hellers, Ann Kooi of Pahrump, Nevada. Her husband Larry drives 150 miles round-trip, east to North Las Vegas and back, for his job as a heavy-equipment mechanic. He has to fill up his Kia Soul every other day, bringing his total gasoline bill to almost what it was last year before prices plummeted, roughly $75 a week.
“When the price of gas goes up, it hurts us bad, big time,” said Ann, 59. “We rob Peter to pay Paul.”
She and Larry, 60, know it would be easier to move to Las Vegas, but they feel they’re priced out of the market. They had rented an apartment in the city for $500 a month, but Ann says their rent went up and they couldn’t afford to stay.
The price of gas in Nevada averaged $2.826 a gallon Tuesday, up from $2.219 a month earlier, according to GasBuddy.com. Nationally, it was $2.453, compared with $2.060 a month earlier. It has to be said that prices were much higher one year ago: $3.45 in Nevada and $3.463 nationally.
But the average national price for E85 ethanol blend, we should point out, was just $1.96 on Tuesday, according to E85Prices.com.
It’s the volatility, the unexpected price shock, that makes it impossible to predict how much cash you’ll need to get to payday. And consumers everywhere are frustrated by the multiple factors, and lack of warning, that went into the latest spike.
“They find every excuse in the book to raise the prices. And they keep us in limbo, and we can’t get ahead, no matter how hard we try,” Ann said.
Tell us your story about what the rising price of gas has cost you, and tell us what you’re prepared to do about it.
If you want to be profiled in a “Share Our Story” post, send your contact info to [email protected].
Orange County drivers, excited about cheap gasoline just a few weeks ago, are suddenly feeling the pinch as prices reverse course, rising 43 cents a gallon in the past week and more than $1 in the past month.
Consumers are not happy about it.
(Photo: David Sommars, on Flickr)
Although “all of the above,” as a slogan, was mostly created to bolster the domestic production of oil and gas, “all” meant then what it means today: A diversified energy policy that harnesses all that we have to offer.
Long term, Fuel Freedom Foundation believes in an “all of the above” strategy, including EVs. In the near term, the group believes one way to give consumers fuel choice is converting existing cars to use gas, ethanol or methanol.
Reuters reports that crude oil rose sharply on the last trading session of February, posting its first monthly gain since June.
Brent crude LCOc1 rose $2.53 to $62.58 a barrel. February’s 18 percent gain was the biggest monthly percentage rise since May 2009.
The Wall Street Journal reports that the oil-field services company Baker Hughes saw its rig count fall by 33 this week, to 986, dropping below 1,000 for the first time since 2011. The count is off 31 percent from the same time a year ago.
And yet:
… analysts caution a reduction in the number of U.S. oil rigs in use doesn’t immediately translate to a fall in output, which is currently running at a multiyear high of 9.3 million barrels a day.
The Greeks are going broke…slowly! The Russians are bipolar with respect to Ukraine! Rudy Giuliani has asked the columnist Ann Landers (she was once a distant relative of the author) about the meaning of love! President Obama, understandably, finds more pleasure in the holes on a golf course than the deep political holes he must jump over in governing, given the absence of bipartisanship.
But there is good news! Many ethanol producers and advocacy groups, with enough love for America to encompass this past Valentine’s Day and the next (and of course, with concern for profits), have acknowledged that a vibrant, vigorous, loving market for E85 is possible, if E85 costs are at least 20 percent below E10 (regular gasoline) — a percentage necessary to accommodate the fact that E10 gas gets more mileage per gallon than E85. Consumers may soon have a choice at more than a few pumps.
In recent years, the E85 supply chain has been able to come close, in many states, to a competitive cost differential with respect to E10. Indeed, in some states, particularly states with an abundance of corn (for now, ethanol’s principal feedstock), have come close to or exceeded market-based required price differentials. Current low gas prices resulting from the decline of oil costs per barrel have thrown price comparisons between E85 and E10 through a bit of a loop. But the likelihood is that oil and gasoline prices will rise over the next year or two because of cutbacks in the rate of growth of production, tension in the Middle East, growth of consumer demand and changes in currency value. Assuming supply and demand factors follow historical patterns and government policies concerning, the use of RNS credits and blending requirements regarding ethanol are not changed significantly, E85 should become more competitive on paper at least pricewise with gasoline.
Ah! But life is not always easy for diverse ethanol fuel providers — particularly those who yearn to increase production so E85 can go head-to-head with E10 gasoline. Maybe we can help them.
Psychiatrists, sociologists and poll purveyors have not yet subjected us to their profound articles concerning the possible effect of low gas prices on consumers, particularly low-income consumers. Maybe, just maybe, a first-time, large grass-roots consumer-based group composed of citizens who love America will arise from the good vibes and better household budgets caused by lower gas prices. Maybe, just maybe, they will ask continuous questions of their congresspersons, who also love America, querying why fuel prices have to return to the old gasoline-based normal. Similarly, aided by their friendly and smart economists, maybe, just maybe, they will be able to provide data and analysis to show that if alternative lower-cost based fuels compete on an even playing field with gasoline and substitute for gasoline in increasing amounts, fuel prices at the pump will likely reflect a new lower-cost based normal favorable to consumers. It’s time to recognize that weakening the oil industry’s monopolistic conditions now governing the fuel market would go a long way toward facilitating competition and lowering prices for both gasoline and alternative fuels. It, along with some certainty concerning the future of the renewable fuels program, would also stimulate investor interest in sorely needed new fuel stations that would facilitate easier consumer access to ethanol.
Who is for an effective Open Fuel Standard Program? People who love America! It’s the American way! Competition, not greed, is good! Given the oil industry’s ability to significantly influence, if not dominate, the fuel market, it isn’t fair (and maybe even legal) for oil companies to legally require franchisees to sell only their brand of gasoline at the pump or to put onerous requirements on the franchisees should they want to add an E85 pump or even an electric charger. It is also not right (or likely legal) for an oil company and or franchisee to put an arbitrarily high price on E85 in order to drive (excuse the pun) consumers to lower priced gasoline?
Although price is the key barrier, now affecting the competition between E85 and E10, it is not the only one. In this context, ethanol’s supply chain participants, including corn growers, and (hopefully soon) natural gas providers, need to review alternate, efficient and cost-effective ways to produce, blend, distribute and sell their product. More integration, cognizant of competitive price points and consistent with present laws and regulations, including environmental laws and regulations, is important.
The ethanol industry and its supporters have done only a fair to middling job of responding to the oil folks and their supporters who claim that E15 will hurt automobile engines and E85 may negatively affect newer FFVs and older internal combustion engines converted to FFVs. Further, their marketing programs and the marketing programs of flex-fuel advocates have not focused clearly on the benefits of ethanol beyond price. Ethanol is not a perfect fuel but, on most public policy scales, it is better than gasoline. It reflects environmental, economic and security benefits, such as reduced pollutants and GHG emissions, reduced dependency on foreign oil and increased job potential. They are worth touting in a well-thought-out, comprehensive marketing initiative, without the need to use hyperbole.
America and Americans have done well when monopolistic conditions in industrial sectors have lessened or have been ended by law or practice (e.g., food, airlines, communication, etc.). If you love America, don’t leave the transportation and fuel sector to the whims and opportunity costing of the oil industry.
