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$100 Oil and Congress Asks for Seconds

February 24, 2011


We are sitting on a powder keg.  As Colonel Gaddafi continues to violently and reprehensibly turn on his own people and unrest continues to shake the foundation of many of the world's most critical petro-states, the world oil market is set to erupt.  For the first time in 2 years, oil prices are back over $100 a barrel. It is unfortunate that against this type of backdrop some members of Congress seem intent on re-legislating decisions to expand the use of domestic renewable fuels like ethanol.  Just last week, members of the House voted to limit the availability and use of ethanol in gasoline.  As oil prices ascend over $100 a barrel, these members of Congress are asking for seconds. Many of the speakers at the RFA's National Ethanol Conference earlier this week in Phoenix were keeping a keen eye on the situation in Libya, Egypt, Bahrain, Saudi Arabia, and elsewhere and renowned analyst Tom Kloza with the Oil Price Information Service (OPIS) boldly suggested oil prices could top even $400 per barrel if the unrest spreads and shuts down key oil fields, refineries, and shipping routes.  That means gasoline prices of more than $5 per gallon are a possibility.  While these doomsday scenarios may seem a bit far-fetched, the reality of triple-digit oil prices in the near term and for months, if not years, to come is very real.  The consequences resulting from such a reality are frightening. The L.A. Times today reports on a number of the pitfalls of $100 oil and rising fuel prices for gasoline and diesel fuel.  Higher oil prices mean higher prices for food, clothing, and even toys.   Why?  It's simple:  Oil permeates every aspect of the production chain for all the goods we need and want.  Diesel fuel and petroleum-based fertilizers are critical to the continuing growth in American agriculture production.  Oil-based plastics and other chemicals are interlaced in all the goods we buy.  And, of course, rising prices at the pump make it more expensive to ship these goods as well as for consumers to simply get to the store. The Times article notes that some studies suggest each penny increase in gas prices "sucks $1.5 billion from household spending nationwide."  The AAA average gas price today is $3.23, up $0.55 from a year ago, or $82.5 billion based on this type of calculation. Consumer prices and the economy are not the only sectors that feel the impact.  According to U.S. Secretary of the Navy Ray Nabus in Reuters earlier this week, a $10 rise in oil price adds $300 million to the Navy's annual fuel cost.  Moreover, our reliance on imported oil is putting American armed forces in danger, Mabus noted.  "Reducing the U.S. military's dependence on fossil fuels could also save the lives of troops, Mabus said." So, what can be done?  The answers to that are clear, but the will to address these issues seems to be at a loss. When it comes to gaining some control over our energy future, we need to rapidly adopt all technologies that stabilize energy supplies while simultaneously conserving and greatly reducing our consumption of oil.  That means more efficient cars, new car technologies like plug-in hybrids, and to the extent we need more domestic energy, responsible increases in U.S. oil production.  And yes, that also means an aggressive ramp up in the use of American renewable fuels like ethanol. In 2010, the American ethanol industry produced more than 13 billion gallons of ethanol.  The use of that homegrown fuel displaced the gasoline refined from 445 million barrels of imported oil.  For perspective, that is more oil than the U.S. imported from Saudi Arabia last year.  Such a reduction in imports saved the country $34 billion and provided tens of billions of dollars in new and much needed economic activity. This only scratches the surface.  Current ethanol producers are constantly evolving, producing more fuel using fewer resources and providing a growing list of bio-based products that could replace some of those we get from oil.  Likewise, American farmers are producing a growing basket of feedstocks from which ethanol and other renewable fuels can be made. Responding to this productivity, advanced ethanol technologies that would use corn stalks, municipal solid waste, grasses and even algae are being developed to expand the supply of domestically-produced ethanol available. Unfortunately, we cannot turn back the clock to implement more forward-looking policies like the Renewable Fuels Standard that could have provided us with more options in the current situation.  But, we can take this opportunity to begin a grown-up discussion about our energy future. If I may be so bold, I have a couple of discussions items:
  1. Stop wasting time on frivolous debates that limit fuel options.  The House votes on two amendments designed only to hinder the growing use of ethanol is distraction and good deal of sour grapes.  Policies, like the RFS, have been put in place and are working to build a domestic industry that today is displacing 10% of the nation's gasoline.  Imagine where oil prices would be were it not for ethanol today?
  2. Get serious about advanced ethanol technology commercialization.  The Federal government has been far too slow in partnering with private industries to commercialize advanced ethanol technologies.  Recent loan guarantees provided by the U.S. Department of Agriculture are very encouraging.  We need to do more.
  3. Put all options on the table.  Congress will debate tax incentives for ethanol this year.  If they only choose to debate ethanol and leave other fuels out of the discussion, we will be right back to this point the next time unrest grips the Middle East.  We must prioritize and invest in those technologies that can provide us with longer term energy choice and security.
Oil price in excess of $100 may be the norm rather than the exception in the years to come.  The sooner we come to terms with that reality and act accordingly, the more economic and energy stability we can ensure.