Petrol Cheaper Than Ethanol?

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Bill Georgevich reporting

Yes, it's true. The corn-sourced distilled ethanol that is mixed with gasoline is now more expensive than plain old gasoline. Gasoline blenders have always used more ethanol than required because it was cheaper than gasoline. Not any more. With today's lower oil prices, ethanol will be blended with gasoline by decree from Congress for cleaner air, another finger pointed at a misguided national strategy for alternative fuel.

On a purely voluntary basis, gasoline blenders have always used more ethanol than the required minimum because increasingly high oil prices made ethanol an attractive fuel in its own right. This month with oil under $50/bbl and wholesale gasoline under $1/gal and ethanol at $1.60/gal it makes no economic sense to blend ethanol with gasoline. The national blending requirement will become binding for the first time in 2009. Gasoline blenders will have to use 11.1 billion gallons of ethanol because that is what the law tells them, not because it makes economic sense.

In our last program I shared what it cost the Saudis to extract 1 barrel of oil - $2/barrel or less 4 cents/gallon. Well, I stand corrected. The oil minister of Saudi Arabia was just interviewed by 60 Minutes' Leslie Stahl, and he told her on Dec. 7 of 2008 that it cost LESS than $2/ gallon.

This means that with US current laws, gasoline will be more expensive because of the mandatory blending with ethanol than by itself! This would be inconceivable in the summer of 08 and I don't think Americans have really taken it all in yet. As we talked about on several programs, oil commodity speculators poured billions into futures contracts that artificially raised the price of oil for years finally resulting in the $4+/gallon fiasco of the summer of 2008. When money left the stock market it fled the commodity markets as well forcing oil and gas prices to get closer to their actual Fair Market Value.

The other fear that drove prices up artificially was the notion that the Saudis had somehow reached peak oil production. They have consistently heartily denied this and demonstrated to 60 minutes in Dec. 08 how they intend to actually double their output at least for the next decade.

Today drivers are relieved to get was is essentially a $200/month economic stimulus package but they're also outraged that the stories about India, China, and the rest of the "increased demand" for oil really was only increased demand by speculators!

We also promised on our last program some insight as to what this means for renewables. The magic number for renewables to be competitive is for oil to sell at $35/barrel. It hasn't got there yet so the question we will explore next time is what happens now that gasoline is cheaper and how best to take advantage of it for clean energy. In the meantime, all those who told us that the era of cheap oil is over will have to eat those words at least for now.