04 January 2009

Madoff's Ethanol Accounting

AG sent me this interesting article on ethanol. Besides the typical debate over how bad it is ("Mike Vis... siphons out enough of his corn to feed 91 people for a year. This batch will fuel vehicles in Houston for 21 seconds;" also see this recent post.), the author fails to point on the inconsistencies of the ethanol program. Start with this:
Exxon Mobil Corp. and other refiners get a 51-cent tax refund [1] for every gallon of ethanol they blend with gasoline, or $4.5 billion this year [2]. Biofuel advocates include Archer Daniels Midland Co. of Decatur, Illinois, the world’s biggest grain processor; Deere & Co. of Moline, Illinois, the largest maker of tractors; and Wilmington, Delaware-based DuPont Co., which makes seeds [3].

The companies say concern about ethanol’s effect on the food chain is overblown. While ethanol production consumed a record amount of last year’s corn crop, so did exports, said Doyle Karr, a DuPont spokesman.

“In a year when we had as much grain as ever going into ethanol, we had as much export as ever leaving the country to feed people,” he said [4].

[snip]

Ethanol also lowers pump prices. The U.S. Dept. of Energy said on June 11 that a gallon of gasoline, then more than $4, would have cost as much as 35 cents more if it didn’t contain the biofuel [5].

[snip]

Matt Hartwig, a spokesman for the Renewable Fuels Association, a Washington trade group, disputed that assessment. Increased demand, investor speculation and higher transportation costs all had more effect on food prices than biofuels, he said. Ethanol may save U.S. families more than $500 a year when lower pump prices are taken into account, he said [6].

Critics also ignore dried distillers’ grains, a byproduct of the ethanol process that can be fed to pigs and cattle, he said. Each bushel, or 56 pounds, of corn yields 2.75 gallons of ethanol and 18 pounds of the grains [7].

“It’s also a food source,” Hartwig said.
I will now help out with some accounting:
  1. Compare [1] 51 cents/gallon subsidy and [5] gas would cost 35 cents/gallon more. As you can see, we are spending 51 cents to save 35 cents. Awesome! In other words, a good chunk (perhaps half) of 16 cents/gallon is going to the folks in [3].

  2. Compare [2] $4.5 billion in subsidies with [6] $500/family savings. Given 100 million households, that's [holy cow!] $50 billion in savings. Thanks Mr. Hartwig! You've multiplied our "investment" by over ten times! Did you work for Mr. Madoff?. (There's a mistake -- intentional, I think, in Mr. Hartwig's math -- unless "may save" means "those traveling faster than light can save".)

  3. The statement in [4] does NOT mean that ethanol has not driven up prices. The fact that more food was exported does not invalidate the possibility that those exports would have been higher without ethanol sucking up so much production. (It's like me giving you $1 of $100. Sure you've got more than you had before, but you could have MUCH more of that $100.)

  4. [7] shows us how to make 56 pounds of food into 18 pounds of food. What a deal! Thanks ethanol guys!
ps/The good news is that the subsidy drops to 45 cents/gallon this year. The bad news is that the current 10.5 billion gallon production mandated by Congress will increase to 15 billion gallons by 2015 -- unless sanity visits DC!

Bottom Line: Ethanol is about giving money to farmers, lobbyists and ag companies. It's NOT about helping consumers or lowering gas prices.

hattip to AG

6 comments:

  1. > "Mike Vis... siphons out enough of his corn to feed 91 people for a year. This batch will fuel vehicles in Houston for 21 seconds;"

    This stunt exploiting innumeracy is often used in the ANWR debates (and many other places), and it drives me nuts. If you're going to compare the cost to the benefit, either put both in gross terms, or both in per-person terms, rather than allowing people to be impressed by the population of the United States (or of Houston) and confused into thinking it has something to do with what you're talking about. I have no idea how many miles people in Houston drive in 21 seconds, or, for that matter, whether you're replacing an all-corn diet for those 91 people.

    Every seven minutes, a mathematically literate person ignores an assertion that "every {amount of time}, a {noun} is {verb}ed" as utterly uninformative.

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  2. dWj -- you are COMPLETELY right. (I forgot to point out the nonequivalent units.)

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  3. David,

    The claim by the RFA's spokesman, Matt Hartwig, that ethanol "may save U.S. families more than $500 a year when lower pump prices are taken into account" is a rather loose interpretation of a back-of-the-envelope calculation made by Merrill Lynch's London-based energy analyst, Francisco Blanch. Essentially, Blanch -- pressed by a WSJ reporter to answer the question, "how much of a difference is biofuels making to the world price?" -- divided the share of world biofuels production (not just U.S.) in total petroleum consumption (around 1.5%) by the short-run elasticity of demand (0.05), decided the resulting number (30%) was too high to be credible, and settled on 15% as the percentage by which oil prices were being reduced as a result of a very small percentage of world petroleum demand being satisfied by biofuels. That was it: there was no "study".

    Now, take total U.S. consumption of petroleum (7.55 billion barrels a year), and multiply it by a high price of oil, say $135 per barrel, and you get annual expenditure on oil of $1,000 billion per year. Take 15% off that, and you have a savings of $150 billion for the country as a whole. Divide that by 300 million people and you get $500 per person, not per family.

    Do I believe that causal relationship? Not for a minute. But I thought you might be interested to know how (I think) it was derived.

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  4. And then of course, there are the externalities (such as the Gulf Dead Zone) resulting from corn (which requires more fertilizers than other crops) and the demand for high fructose corn syrup resulting from our protection of the domestic sugar market

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  5. @ Ron -- thanks for the explanation. That's total BS (but probably a good exam question for econ students :)

    @ TT -- externalities! Don't get me started :(

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  6. I see at least two flaws in the RFA's (and Merril Lynch's) logic:

    (1) It uses the short-term elasticity in the denominator, but totl ethanol production in the numerator, as opposed to a short-term surge in supply, such as would occur through the sudden release of strategic stocks. The actual short-term increase in global biofuel supply could only have been equivalent (over any given period over which the short-term elasticity was relevant) equal to a fraction of 1% of total oil demand.

    (2) It ignores the supply-side response. As numerous other commentators have pointed out, it may be that OPEC adjusted its supply as biofuel production increased. Indeed both U.S. biofuels production and world oil prices increased strongly in 2007.

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