Iran, ethanol roil energy prices

May 1, 2006
After falling during four consecutive sessions, crude futures prices rebounded above $72/bbl during intraday trading Apr. 28 in the New York market.

Sam Fletcher
Senior Writer

After falling during four consecutive sessions, crude futures prices rebounded above $72/bbl during intraday trading Apr. 28 in the New York market, as Iran ended a 30-day grace period still defying the United Nations Security Council over its nuclear program.

Crude prices began slipping Apr. 24, as traders locked in profits from the previous rally, then dropped below $73/bbl for the first time in a week on the New York Market Exchange, after President George W. Bush on Apr. 25 stopped filling the US Strategic Petroleum Reserve in an effort to reduce retail gasoline prices. By Apr. 27, the crude futures price was down to $70.97/bbl from an Apr. 27 record of $75.17/bbl, also triggered by the Iranian crisis.

The President's program
Bush said he would direct the Environmental Protection Agency to waive required use of reformulated gasoline (RFG) in metropolitan areas with high pollution levels, to ease refiners' transition to ethanol from methyl tertiary butyl ether as an oxygenate blend in RFG. He wants EPA to investigate whether the number of localized fuel blends, or boutique fuels, can be reduced.

Critics said the plan would release slightly more oil into a market where US refineries were operating at 88.2% of capacity during the week ended Apr. 21, the highest level since January. The chance that any waivers will change the tight gasoline market "is fairly small," said Jacques Rousseau senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. "EPA could not change the date for the elimination of the RFG oxygenate rule, because it is written in US law as part of the Energy Policy Act of 2005, and only Congressional legislation could change it," he said. Congress is unlikely to reopen the energy act to debate.

EPA can grant RFG waivers based on "a demonstrated and unanticipated supply shortage," as happened in 2005 after Hurricanes Katrina and Rita. "Not only is the current gasoline crisis more of a price than a supply issue, but the event causing the shortage also is not unanticipated," Rousseau said.

The ethanol factor
Bush listed ethanol as both a cause of high gasoline prices—due to supply disruptions in the switch from MTBE—and a cure, through greater use of alternative fuels. "That seems to be some strange of form of economic homeopathy, but not one which we would think of as being particularly logical," said Paul Horsnell, Barclays Capital Inc., London.

"Ethanol currently makes up just 3% of US fuel supplies, and yet producing that amount requires 14% of US corn production. The production of US ethanol takes place with a tax credit of either 51¢ or 61¢/gal, depending on the size of the ethanol producer. Even with the help of those subsidies and other grants, ethanol is not exactly cheap at the current price of $2.64/gal for wholesale futures," Horsnell said. "In effect the US taxpayer is laying out extra money for the ethanol twice, once through financing the subsidy and once through the increase in pump prices."

US ethanol producers are protected against foreign competition with an import tariff of 59¢/gal outside free trade zones. Horsnell said, "Most notably the tariff is levied on Brazilian ethanol," which the US expects to import in large volumes since domestic ethanol supplies aren't sufficient to meet anticipated demand. "Suspicions that the use of ethanol is more about the protection of US farming than the promotion of alternative fuels per se might have been allayed if that tariff were to be abolished, but it has so far remained," said Horsnell.

The switch to ethanol is straining logistical systems to the breaking point, since it cannot be transported through pipelines because it absorbs water and impurities. "When one factors in the energy component used in the production of the corn and in the fertilizers used in intensive Midwest agriculture, plus the energy component required to produce the ethanol out of the corn, the energy efficiency and environmental basis for even more ethanol use seems to us to become a bit questionable," Horsnell said.

Ethanol is competing with coal, coke, and grain for "very limited rail time," said analysts at Enerfax Daily. "Electric utilities powering air conditioners rely on coal, especially from the coal-rich Powder River Basin in Wyoming. Derailments in 2005 on lines out of that basin…caused coal shortages in the eastern US that utilities said are still not fully resolved," they said. Shipments of coal and ethanol to East Coast consumers will travel over the same railroad network.

(Online May 1, 2006; author's e-mail: [email protected])