Ethanol, oil, corn duke it out in “The Battle of the Benjamins”

June 12, 2014 |

benjaminsbioenergy1-125x125Corn producers, ethanol producers and crude oil refiners: locked in a rollercoaster of commodity prices, and a battle for market share and profits. 

As the EPA readies to unleash its view of the future volumes of renewable fuels — who’s winning, who’s losing the “Battle of the Benjamins”?

In their 1987 album release Document, the alternative rock band R.E.M accomplished the improbable feat of predicting, in their song It’s the End of the World As We Know It, the basic theme of roughly 50% of the press releases that cross The Digest’s desk each day. Those releases generally promise:

a) Here’s the new biobased product that will change everything, or:

b) Here’s the policy change that, if not made, will ensure global economic, social or environmental destruction.

The policy din has been at all-time highs in recent months over the Renewable Fuel Standard. Taken as a whole, they promise that if we do nothing, we’re doomed, if we do anything, we’re doomed, and there’s less wiggle room than inside a black hole.

What’s the RFS battle, really really truly all about? So far as we can tell, it’s about gasoline prices. Yes, the Obama Administration believes in an all-of-the-above energy strategy. Yes, the Obama Administration believes in battling climate change through renewable fuels. But what the Obama Administration really believes in is the Eternal Political Law that sayeth: “Thou Shall Not Inflict Pain at the Pump in an Election Season, or Verily Thou Shalt Lose the Senate.”

What’s the relationship between oil prices and gasoline prices?

Accordingly, this chart from the Agricultural Marketing Resource Center at Iowa State, is a highly interesting one. It comes from analysis of the gasoline and ethanol markets by biofuels Economist, Robert Wisner, University Professor Emeritus at Iowa State University. One sharp cookie who ought to be on your regular reading list, if he isn’t already. More about the AMRC here.

In this chart, Dr. Wisner looks at the relationship of gasoline prices and crude oil since 2003.

wisnerfigure2_15C0A92013D2F

He writes: “During the period from January 2003 to August-2006, there was a close relationship between these two sets of prices.”

Then, something happened. Since 2006, gasoline prices have begun to seriously lag behind crude oil prices. Today, RBOB gasoline is selling for roughly around $3.00 per gallon, but based on the evolution of crude oil prices, it would be selling at around $5.00 per gallon if it had continued to track the oil price.

What’s causing gasoline prices to lag behind oil prices?

Dr. Wisner writes:

“Possible causes of motor fuel and aviation fuel prices lagging behind crude oil prices might include (1) rising prices for chemicals and other non-fuel products made from petroleum, (2) possible increased competition in the refining industry as a result of biofuels and the resulting decline in the petroleum industry’s motor fuel market share, and (3) possible increases in efficiency of the petroleum refining industry.”

To that, we’d add: retarded demand for gasoline as a result of increased average fuel economy and reductions in driving by US consumers. Which, generally, themselves could be understood as responses to high oil prices.

Of those four, the most likely major contributors are rising prices for other products in the barrel, and competition from alternative fuels and fuel-efficient cars. To confirm that theory, let’s look to see if fuel prices are also lagging oil prices on the diesel and jet side.

Do diesel and jet fuel prices also lag behind oil price increases?

wisnerfigure3_E7FBCD6805E22

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We see the same story – fuel prices are lagging crude oil prices — though the impact is relatively light in jet fuel.

All of which could tell you three things.

1. To the extent that profits that are not available via fuel sales, they are being wrung out of the chemical markets — you can see a good reason for all the interest in biobased alternatives in the chemical sphere at the moment.

2. To the extent that jet fuel prices track oil price increases more than diesel and gasoline, you can see why aviation is so keen on biobased alternatives.

3. To the extent that the availability of biofuels are holding down gasoline prices and profits, you can see that the debate about the Renewable Fuel Standard has its roots in money.

What about those “fat-cat corn farmers” we always hear about from critics of farm policy — are they getting fatter and catter?

Ah, grasshopper, these are the so-called “subsidized, protected corn farmers — creature of Washington subsidies and protections for more than a century, since organizations like The Grange first demonstrated the power of farmers to topple politicians over fiscal and agricultural policy.” But are they really the inevitable beneficiries of the Renewable Fuel Standard?

To look at that, we’ve selected out some data from the Agricultural Marketing Resource Center’s table of corn and ethanol profits since 2005. Looked at this way, it’s quite interesting.

corn-vs-ethanol

Right away, you see that ethanol producers and corn growers are locked in their own battle over profits, as fuel and corn prices swing and not always in sync with each other.

You can see why ethanol producers are thrilled right now. They’ve been able to capture margins not seen since the 2006-07 period, while corn farmers were generally dominant in the 2008-2012 period when the poor economy held down fuel prices and drought caused corn prices to soar.

Do gasoline prices track ethanol prices or corn prices?

As it turns out, ethanol prices track gasoline prices, not corn prices. Here’s Dr. Wisner’s chart of that.

wisnerfigure5_8C5D6F1893852

So, what conclusions can we draw?

1. Ethanol producers benefit in every way from high gasoline prices — they generally cause ethanol prices to rise and either offer protection against rising corn prices, or huge profits. Plus, the opportunity to establish E85 as a stronger alternative fuel channel, as the spread between ethanol production costs and gasoline prices grows.

2. Biobased chemical producers may be more RFS-dependent than they think.  It could be that holding back on ethanol mandates could cause gasoline prices to rise, and consequently take pressure off chemical prices, causing some biobased intermediates to lose favor.

3. If high oil prices persist, drivers are likely to shift to driving less, or more fuel-efficient vehicles — causing more pressure on gasoline prices. That may cause downward pressure on ethanol prices. Suggesting that alternative fuels and fuel efficiency strategies may be in competition with themselves as much as gasoline.

4. If high oil prices persist, a resulting relative drop in fuel prices (if they continue to lag) could put more pressure on squeezing profits out of chemicals, and will cause pressure on drop-in fuels that directly compete with gasoline or diesel prices.

5. Rising sugar prices and falling fuel prices are a recipe for disaster for renewable fuels. Suggesting that the most important topics for the future of renewable fuels are: global obesity, the nature of high-efficiency engines, and rainfall.

Some good news for ethanol producers.

In that vein, interesting news arrived from USDA in their WASDE report, out yesterday. USDA commented on corn, as follows:

Projected corn production for 2014/15 is unchanged at a record 13,935 million bushels. The projected U.S. corn yield remains at 165.3 bushels per acre as a slightly slower-than-normal mid-May planting progress is expected to be offset by very favorable early season crop and weather conditions. U.S. crop conditions in the most recent Crop Progress report are the best in 4 years for the aggregated 18 reported states and better than any time since 2007 for the Corn Belt. The projected range for the 2014/15 season-average farm price is unchanged at $3.85 to $4.55 per bushel and below this month’s lower projected 2013/14 range of $4.45 to $4.65 per bushel. The 2013/14 price range is lowered 10 cents per bushel at the midpoint based on prices reported to date and the recent decline in nearby cash and futures prices.

Meaning? Big harvests — if the rain falls. Low corn prices. High ethanol crush spreads likely.

The Bottom Line

High oil prices? You’d think they are a boon to renewable road transport fuels, but not really. They drive down gasoline prices relative to oil, so far as the data shows, making a field day for biobased chemicals, and possibly for drop-in aviation fuel. So, think companies like Virent, Gevo and Amyris, in that respect. Should oil prices moderate just a little, we are likely to see increased gasoline demand — and more room for ethanol blending. But a big drop in oil prices? That would ultimately cause gasoline prices to fall quickly, and crush the crush spread between ethanol and oil.

Which is to say: Low oil prices, no momentum for renewables. Rising oil prices, but not catastrophe — a good thing for fuels. Major price  increases, think chemicals. That’s how the Battle of the Benjamins appears to be working out.

The underlying charts from Dr. Wisner’s analysis can be found here. A worthy read.

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