March 13, 2008

Valero CEO Speaks Out Against Ethanol



Valero CEO Bill Klesse Blames Ethanol For High Food PricesValero CEO Bill Kless spoke out against ethanol at a National Petrochemical and Refiners Association conference in San Diego.

(Reuters) - Using corn to produce ethanol will make food so expensive in poor countries that it will cause more misery than global warming, the chief of the biggest U.S. refining company claimed this week.

"Corn and ethanol production and the resulting high prices will impact the world in a much more acute negative way than greenhouse gas emissions and climate change ever will," Valero Energy Corp Chief Executive Bill Klesse said on Tuesday at a refining conference in San Diego.

Many economics have noted that rising energy prices can have a larger impact on retail food prices than rising commodity prices. The report published by the Federal Reserve earlier this week outlines the extent to which energy prices effect food prices.

Historically, food prices have surged during times of higher crude oil prices. Moreover, research shows that energy prices are quickly passed through to higher retail food prices, with retail prices rising 0.52 percent in the short-term for every 1 percent rise in energy prices (Reed et al.). As a result, a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices.

Given the recent pace of crude oil price increases and the fact that energy costs play into rising food costs, the attempt to shift blame away from the oil companies and on to ethanol is understandable.

But I don't think that is really what this is all about. Yeah if you read the article he is mad that the oil companies have been getting a lot of negative attention lately, but I think the real issue here is that ethanol is cutting into their profits and lowering gasoline demand. Valero's stock price has dropped by about a third since July 2007 and they are considering selling off about a third of their North American refineries.

In other words, ethanol lowered gasoline consumption in 2007, and according to the EIA petroleum consumption is expected to drop by 90,000 barrels per day in 2008, and the petroleum industry doesn't like it. And they are coming out swinging.

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