Economist Urbanchuk says ethanol helping to keep price of gas down

While the corn ethanol industry continues to face heat for contributing to rising food prices, could it be helping to keep oil prices down? During today's OnPoint, John Urbanchuk, an economist and director of the Agriculture and Biofuels Practice at the global consulting firm LECG, LLC, explains why he believes the addition of ethanol in gasoline is having a significant impact on the price at the pump. Urbanchuk gives his short-term outlook for energy and food prices and discusses the impact an RFS waiver would have on food and corn prices. He also explains why he believes removing, or decreasing the ethanol import tariff could be damaging to U.S. industry.


Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is John Urbanchuk, an economist and director of the Agriculture and Bio-Fuels Practice at the global consulting firm, LECG. John, thanks for coming on the show.

John Urbanchuk: Thank you very much, Monica.

Monica Trauzzi: John, lots of talk going on here in Washington and around kitchen tables around the country relating to high energy prices and food prices. You recently wrote a report contending that if it weren't for ethanol we'd be paying even more at the pump. Explain the numbers there and the logic behind that.

John Urbanchuk: Well, you need to keep in mind that ethanol is playing a key role in expanding the nation's motor fuel supply. Ethanol displaces gasoline and gasoline's made from crude oil. So if you take a look at last year, I think we produced six billion gallons of ethanol. This year it's going to be about nine billion gallons of ethanol. That works out to about 2.4 or 2.5 percent of the nation's motor fuel supply. So if you didn't have that ethanol, you'd have to go out and make 2.4 or 2.5 percent more gasoline, which means you'd have to have more crude oil and as a consequence in the short term, we don't have one, the supply of crude oil and probably don't have the refining capacity to turn that crude oil into a product to get it to the market. So the short term impact, let's say within a year, would be gasoline prices that are about 25 to 30 percent higher than they are now just because of that short supply.

Monica Trauzzi: You say that ethanol is helping to keep the price of oil down slightly, but aren't we just feeling it in our pocketbooks when we go to the grocery store?

John Urbanchuk: Well, it's undeniable that food prices are increasing, as are all other prices and there are a large number of reasons for that. Looking at it objectively, energy prices are probably the most important contributor to food prices. I mean, stop and think about it. It makes some sense. One, it takes a tremendous amount of energy for transportation ‘cause you've got to move a product from the farm to the factory for processing. It takes energy to process. It takes energy to package. It takes energy to make all the packaging materials. It takes energy to transport the food from the factory to the retail outlet. And then to refrigerate and store the stuff. So energy plays a really, really key role in all of those aspects. It plays I think a larger role than any one individual food commodity. A lot of the criticism obviously is directed toward corn. We use corn to make ethanol in the United States and the critics say that corn prices are at the levels they are because we're using it to make ethanol and as a result the corn prices are pushing up prices for livestock, meat and poultry products, which in a fact is a problem for the livestock, meat and poultry industry, but that's just one ingredient, one raw material if you will. If you take a look at the foods within the CPI basket, when you go to the grocery store, the stuff that you buy, the foods that are directly impacted by bio-fuels, ethanol and bio-diesel -- that's corn and soy bean oil, only account for about 25 or 26 percent of the dollar of food that you spend. So there's a lot of other things that go into that. So I believe it's unfair and unjustified to lay all the blame or even a predominance of the blame for rising food prices at the feet of the bio-fuels industry.

Monica Trauzzi: EPA is currently deliberating a waiver request for the renewable fuel standard that Governor Rick Perry of Texas requested because he feels his state is going to suffer economically as a result of the RFS. Lots of meat producers and dairy producers there. What do you think the waiver would do for the price of gasoline and the price of food? Would we see an impact there?

John Urbanchuk: Well, you rightly point out this year the renewable fuel standard requires nine billion gallons of renewable fuels to be used; that's 2008. Governor Perry has requested a 50 percent waiver, which would amount to 4.5 billion gallons of ethanol. That works out to the equivalent of about 1.6 billion bushels of corn. I suspect that the waiver, if granted, would probably not do an awful lot to reduce the price of corn. And even if it did, I mean the impact on consumers would take quite some time to be felt. But I don't think it would have a significant impact on reducing corn prices. What it would do because what we talked about earlier is by removing 4.5 billion gallons of ethanol or you would be losing fuel. You'd have to find another source for so that the short term impact would again be to raise prices at the pump for consumers.

Monica Trauzzi: How much are the Midwest floods factoring into all of this? Senator Bingham had recently said that once the agricultural department releases the stats on how the Midwest crops were impacted by the floods, it may be appropriate for EPA to consider waiving the RFS. How can we possibly meet the standard if a lot of the crops were damaged?

John Urbanchuk: Well, we don't know the full extent of the damage yet and probably won't know until the harvest. But the indications that we've gotten from the Department of Agriculture and the plantings report that came out at the end of June – in March there was a perspective plantings report which said this is what we think we're going to plant. Then they do a survey at the end of June and release those numbers and it pointed out that we planted more corn than we thought we would. The initial reports of damage to the crops were probably greater than it appears now. You take a look at the crop progress reports suggests that the crop is doing quite well. We're not going to have a record crop this year. We just didn't plant enough acres for that compared to last year. But we're going to have a really, really good crop I believe. That's going to help. In fact it has helped bring corn prices down. Corn prices are down almost $2 a bushel from their highs in the past 30 days. As we move through the growing season into the harvest, those prices are likely to come down even more. So the conditions that existed when Governor Perry requested the waiver with regard to what we thought the crop was going to look like compared to what they are now and how the crop is developing are somewhat different.

Monica Trauzzi: Why not just wait for second generation bio-fuels? Wouldn't we avoid this big fight? Why can't we just impose a standard once these come along and are more viable?

John Urbanchuk: Well, the problem with that is that the second generation bio-fuels aren't here quite yet. The first commercial plant's being built now. It's not really running. So we really don't have the experience in second generation bio-fuels. So we still have a little bit of waiting to do with regard to that, but more important the renewable fuel standard part of the energy bill sent a significant message to everyone – consumers, to the investment community that we were serious about looking for alternatives to petroleum. Now keep in mind, there are a lot of alternatives, but the one that's here right now is ethanol and bio-diesel and made from the feed stocks that we currently have. That industry is here and producing. If we send a signal that says that wait a minute, we're thinking that maybe that's not the way we want to go, which is what I believe a waiver would do, that's going to send a chill through the investment community and it's very likely that the money to build that second generation industry won't happen and we really need that to happen now because in 2017 when we max out in terms of ethanol made from corn starch and that second generation becomes much more important, that industry is going to have to be in place to step up and that's going to require that dedication now. The waiver sends the wrong signal to the investment community, to consumers that we're really not interested. We're really not serious about alternatives. Unfortunately, and it's really unfortunate, if you look at the history of energy policy in the United States we send these mixed messages and this is just the wrong time to be doing that. Strategically it's just a bad decision.

Monica Trauzzi: What about reducing or removing the ethanol import tariff? Wouldn't that bring more competition, more supplies into the U.S. and ultimately be better for the consumer in the long run?

John Urbanchuk: Well, we are importing ethanol from Brazil right now with the tariff. There's an interesting report that came out yesterday that looked at relative prices of ethanol in the United States versus Brazil and what we find is that that while ethanol prices in the U.S. have begun to weaken a little bit as oil prices have come down, keep in mind that the ethanol price is determined not by the price of corn, but by the price of gasoline because it's sold into that market. On the other hand, Brazilian ethanol prices are actually starting to firm so that Brazilian ethanol is actually more expensive in the United States without consideration of the tariff than domestically produced ethanol. Removing the tariff would have another negative impact and that is that what it would do is it would send a signal to people developing ethanol plants and building ethanol to invest in Brazil and not in the United States. It's important for people to remember that the bio-fuels industry has been a very, very important stimulus to rural economic development in the United States. The plants, ethanol plants and bio-diesel plants for the most part are built in rural areas and they have been a major contributor to revitalizing a lot of economic communities. It's important to have those jobs and that economic development here. If we remove that tariff then what happens is you send a signal to developers don't make the investment here; let's ship another industry offshore and that again, to me is the wrong signal to send. We need to create the investment here. We need to give that industry, bio-fuels industry, which is if not an infant, it's a young adolescent, still the time to grow and develop and to compete with petroleum.

Monica Trauzzi: A lot of people would say and in the meantime the American consumer continues to pay.

John Urbanchuk: Yes, but the American consumer is continuing to pay largely because of our dependence on imported petroleum. Until we can lessen that dependence – I don't know that we're ever going to get away from that – but until we lessen our dependence on that and provide a greater portfolio of energy solutions to the American consumer, we're still going to be paying. The question is how we do it and where the benefits for that payment go. It doesn't make more sense if you're going to pay for those dollars to stay in the American economy or to go abroad to countries that increasingly don't like us.

Monica Trauzzi: Final question here. What do you see is the short term outlook for energy and food prices?

John Urbanchuk: Well, I think for the, that's a really difficult question with regard to energy, ok. We've seen some weakening of energy prices. I suspect that we're going to see continued relatively high energy prices. They may not go up to the $140 a barrel range. They may stay in the $120 a barrel range for the rest of the year. That implies gasoline prices – some were in the area of about $3.50 to $4.00 at the pump and that's going to continue to be a drag on the American consumer. Food prices I think we're like to see food prices continue to increase as we will other prices, as the impact of higher energy prices begins to flow through. We're starting to see now at the consumer price level for food and for other products, the impact of those energy prices. We've got energy prices increasing on year over year basis in the 25 to 30 percent range and that's having an impact throughout the entire system; food as well as others. So I suspect that we'll continue to see food prices, my own feeling is that we're likely to see a CPI for food increase average for 2008 somewhere in the area of about 5.5 to 5.75 percent for the year, which is high by the historical comparison, but I think that that as we move through 2009 we'll see some moderation in that.

Monica Trauzzi: We're going to end it right there. Thanks for coming on the show.

John Urbanchuk: Well, thank you, Monica. I appreciate it.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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