As the price at the pump continues to rise, how will the introduction of more ethanol into the fuels market affect consumers' wallets? During today's OnPoint, Mark Cooper, director of research at the Consumer Federation of America, discusses his new report, "Big Oil v. Ethanol: The Consumer Stake in Expanding the Production of Liquid Fuels." Cooper explains why he believes the oil industry is waging a war against the ethanol industry. He talks about the effect refining capacity has had on oil prices and blames the oil industry for not expanding or strengthening its refining capacity. He also addresses the challenge of creating the appropriate infrastructure for getting E85 to consumers.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Mark Cooper, director of research at the Consumer Federation of America. Mark, thanks for coming on the show.
Mark Cooper: Thanks for having me.
Monica Trauzzi: Mark, you recently wrote a report called "Big Oil Versus Ethanol: The Consumer's Stake in Expanding the Production of Liquid Fuels." You say that major oil companies have declared a war against ethanol basically. And you really paint big oil as this omnipotent presence in the battle to get ethanol to the mainstream. Explain what you mean here.
Mark Cooper: Well, there's really two parts to that story, what big oil has or hasn't done and what ethanol can do. Over the last 10 years, 20 years actually, we've suffered a terrible shortage of refineries and everyone knows it. They're paying it at the pump today and there's a lack of analysis in the newspaper which says there's a refinery shortage. Well, how did we get in this mess? We got in this mess because oil companies merged. They closed 50 refineries in the last 20 years. They have not built any new refineries. They have not expanded the existing refineries sufficiently to meet consumer's needs. They created a tight market. Last year they said they would build a couple more million barrels a day of capacity. And Congress looked at the situation and they passed the bill, the Senate did, which would stimulate ethanol production. The oil companies turn around and say, "Wait, we are going to cut back on our refinery expansion, if you promote ethanol."
So they're basically in a situation where they want to control the market capacity so that they can control price. That's why I say they've declared this war on ethanol. Ultimately they can determine how much ethanol gets to the gas station, because they set the contracts and the terms under which their brand of stations will sell ethanol. A combination of refiners telling Congress not to promote ethanol and controlling the flow to the consumer at the pump is, for us, a war that they've declared on ethanol.
Monica Trauzzi: OK and I want to get into some of those points more specifically that you just made. The president and Congress are both calling for expanded biofuels production. Won't the market eventually dictate what happens with ethanol and oil? Why does big oil have to have such a big presence?
Mark Cooper: Well, big oil likes the market they have today. Let's be clear. This week they're going to be reporting their first half of the year profits. They're going to be up, and they're going to be way up because refining in the U.S. has become extremely profitable. Three times more profitable than refining in the rest of the world. That's a result of strategic behavior by oil companies. You know every capitalist likes to get out from under competition. These folks have achieved that. There's only a handful of big refiners. They refine in different parts of the country, so they've made a tight market. They don't have to collude, there's so few refiners that they just have to look out there and see what's happening. They like this situation because they make more and more money the tighter the market is.
Monica Trauzzi: So they haven't built new refineries in 30 years why?
Mark Cooper: Well, it's not in their interest. They've closed 50 refineries. I mean when they merged, and there are documents from the companies would say we have to tighten this market up to raise the rate of profit. So they had 50 refineries that had already been permitted. They talk about we can't get permits. These were refineries up and running that they chose not to keep in operation because they wanted to raise their rates of profit. The President offered them military bases to build new refineries on. They said, "No thanks." And they've only tried to build one new refinery in 30 years, so basically they haven't tried because this is a situation that increases their profit. It's a rare thing in America when you have this kind of market power, but they've got it.
Monica Trauzzi: We recently had Lynn Westfall from the Tesoro Corporation on our show and they're a refiner. He says that increasing refining capacity is an unclear investment for the refining industry. They wouldn't see returns from a new refinery for about 20 years. And part of the risk they say is due to ethanol and the risk that ethanol might pose for them. So how do you respond to that?
Mark Cooper: Well, let's be clear, ethanol has only very lately become a risk, the last couple, three years. The previous 15 years, while they were tightening the market, there was no risk, there was no threat. They were getting shorter and shorter. We now have refinery capacity of 17.5 million barrels a day. We consume about 21 million barrels a day. We simply cannot meet our needs. If this were a competitive market, in a competitive market you don't get to pick and choose whether or not you're going to build a factory. If you don't have spare capacity when there's an accident, and you try and put your price up and your competitors don't have the same problem, they'll steal your customers.
Most of America carries 20 percent spare capacity in the manufacturing sector. The oil companies are running at 90 percent or 95 percent capacity. They don't have that spare capacity because they know that if they're short, unlike most other businesses which would fear raising prices, they just all raise their prices. And they've been doing that. The American public really understands. The last seven years we've had a price spike six of the last seven years.
Monica Trauzzi: But ethanol production is growing?
Mark Cooper: Yes.
Monica Trauzzi: We're hearing all these stories about even grocery bills going up because of all the corn that's going into making ethanol. So it's not all bad in a sense that the ethanol industry is going. It's not as though the oil industry is absolutely stopping ethanol from becoming mainstream.
Mark Cooper: Well, it hasn't stopped them, but the growth of ethanol is really in sharp contrast to what we've seen in the refining sector. And it's a real lesson in real capitalist economics. Because if you think about it everyone looks out there and over the next two or three years ethanol production, the planned construction, would triple production capacity. And so people say, well, why don't the farmers just change their minds and not build it? But in a competitive market, you look out there, you see a profit that can be made and you say, well, I'm going to build it. Hey, maybe the other guy will start building it because that's what real competition does. You want to get that advantage and that's why it produces abundance. So we now see the farmers expanding their capacity, but they still have a problem, they do have two get it into the mix. They have to get it into the gas stations, especially if we move to E85. All of that takes infrastructure that the oil companies control.
Monica Trauzzi: And that is a big problem, getting those E85 pumps ...
Mark Cooper: Absolutely.
Monica Trauzzi: ... at the gas stations. If the consumer starts to demand E85 though won't gas companies have no choice but to put those pumps at their stations?
Mark Cooper: Well, in every market there's a tug between the supply side and the demand side, and if the choices are not there, if they're harder to find, so people are slower to buy the cars. There's two sides to every market. And in a market like gasoline, where you're so concentrated, think about it, Exxon Mobil, Chevron Texaco, Getty, BP, Arco, Amoco, those are a lot of companies who are a very small number of companies. And so the average consumer only has a couple of choices. So the supply side can in fact slow down the expression of consumer demand. The automakers would love to build more E85 cars but they can't sell them until people have confidence that they can get the fuel. And the Senate bill actually looked at this question of how do we make sure that there are the pumps? So there really is a battle here. And for the consumer point of view who's been looking at three dollar gas, most of the increase this year is definitely due to the refining sector. It's not OPEC. Expansion of ethanol scares the big oil. It really does, because it would replace the capacity that they have failed to build over the last couple of decades.
Monica Trauzzi: But what does it mean for the consumer's wallets? I mean are they going to see a difference if we do jump to ethanol? Is there going to be a difference in price?
Mark Cooper: Well, from our point of view, it costs about the same to produce a gallon of ethanol as it does to produce a gallon of gasoline. It's really important, if you look on the stock markets today, if you look at the production costs, they're about the same. So we're not claiming a big cost savings because it's cheaper to produce ethanol. But what we are looking at in our report is this change in the market structure. Most of the price increase this year had nothing to do with the cost of crude, nothing to do with the cost of gasoline. It had to do with a supply shortage, a supply shortage that reflects the failure to invest over a couple of decades. If you change that tight market condition, if you have lots of producers, and farmers are not part of the oil cartel - I say we really like ethanol because, one, agricultural raw materials compete against crude. And today it's corn, we hope it will be cellulosic in the future. Two, ethanol plants compete against refineries. And three, farmers are not members of the oil cartel. And so those farmers are out there building their plants, adding this capacity. And it's capacity that the oil companies would like to control, but they can't control it as well as the refinery capacity. That's why we see this big war between big oil and ethanol.
Monica Trauzzi: What would the rapid expansion of ethanol production do to oil markets?
Mark Cooper: Well, I honestly - if you look, a lot of people now understand that the price of crude is set by the price of gasoline in New York. That is, when the price of gasoline goes up, OPEC sees, wait a minute, there's more money to be had in the American market. Right now they see the refiners taking that money. Today the refiners are getting a dollar a gallon. They used to get fifty cents a gallon at this time of year. So that fifty cents, called a rent, an economic rent, is what OPEC is looking at. And so there's a competition between oil companies and OPEC for that extra rent. If the farmers come in and loosen the market here so they can't drive the price of gasoline up every year that takes a little bit of the steam out of the market for pushing up that price. If there were a big global industry in ethanol you would see more spare capacity that we think, in the long term, would lower prices for consumers.
Monica Trauzzi: All right. We're going to end it right there on that note. Thank you for coming on the show.
Mark Cooper: OK, thank you.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
[End of Audio]