December 26, 2008

Grocery Manufacturers Association: Trust Us On Ethanol Facts

I have been on the Grocery Manufacturers Association (GMA) website hunting a quote I saw sometime back and happened across a document titled 'Food to Fuel Fact Sheet'. While glancing through it I noticed this section.

Food-to-fuel policies have little impact on gasoline prices. Because ethanol displaces a small fraction of the US gasoline supply and a tiny fraction of global crude supplies, changes to food-to-fuel mandates and subsidies would have little or no impact on gasoline prices. Overall, ethanol production in 2007 displaced less than 4 percent of the nation’s gasoline supplies in 2007, when relative energy values are considered. In fact, one study found that the ethanol tax credit and the ethanol mandate will increase gasoline consumption by more than 600 million gallons by 2015.

The last line is what caught my attention since I have never seen this study or even a summary of it anywhere. So I followed the reference to this article in the Chronicle Online by Cornell University. In the article it explains just how they think the ethanol tax credit and the ethanol mandate will increase gasoline consumption.

Now introduce a tax credit alongside the mandate: Because the ethanol price premium, due to the mandate, exceeds the tax credit, there is no incentive for blenders to bid up the price of ethanol as before. And market prices of ethanol cannot decline due to the mandate. Instead, blenders will offer a lower total fuel price -- ethanol plus gasoline -- to consumers to take advantage of the tax credit offered to them by the government. The lower price increases gasoline consumption and thus increases the market price of gasoline and oil.

So on one hand they are saying that ethanol doesn't reduce the price of gasoline. On the other they are saying that ethanol will increase the consumption of gasoline by reducing the price. My guess is that I was supposed to just trust the information they were providing as well reasoned fact without checking the reference materials and thus uncovering their attempt at deception.

1 comment:

Jimmy said...

What an interesting argument they make? I also don't see a lot of sense in it. Let me see if I get it right. If the government provides mandates and subsidies to ethanol producers, their product (ethanol) will be cheap, and therefore consumers will be able to afford it. What happens if it's blend with gasoline? Again, it goes without saying that the price will still go down. All this will lead to high consumption, and will eventually send prices skyrocketing. Well, this is all what the law of demand and supply. But the argument ignores other facts. I agree with you that it doesn't make any sense for them to argue that ethanol doesn't reduce the price of gasoline. I think they are confused. I've recently been trying to have a crack on this issue in my blog GMO Africa. It's a very interesting debate.

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