Schork Oil Outlook: Ethanol Losing Favor With Everyone

National Review and the Washington Post in agreement?

In a follow up to The Schork Report's Tuesday discussion on ethanol, yesterday numerous news outlets reported that Sen. Dianne Feinstein (D-Calif.), one of the ethanol industry’s harshest critics, conceded that the extension of the full 45 cent/gallon tax credit for U.S. ethanol blenders will likely make it into the final tax package.

On the same day, the liberal (let’s be honest) Washington Post ran an opinion piece, titled, "Wasting tax dollars on ethanol" and the conservative National Review ran a similar piece, "Ethanol: Let Protectionism Expire," each calling for the elimination of the 45 cent per gallon ethanol tax credit as well as the 54 cent/gallon tariff.

Both articles (as well as numerous others) cited last July’s report from the Congressional Budget Office in which the CBO concluded that biofuel tax credits reduced federal excise tax collections by about $6 billion below what they would have been if the credits had not been in effect for fiscal year 2009.

Bottom line, outside of the Corn Belt, ethanol is losing favor on both the Left and Right.

The Post’s opinion mentioned the CBO’s estimation that the cost to the taxpayer of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for corn ethanol and $3.00 for cellulosic ethanol on an energy equivalent basis. The article in National Review spoke of the costs too, as well as the de minimis impact on ethanol demand.

After all, the Energy Independence and Security Act of 2007 expanded the Renewable Fuels Standard to require that 36 billion gallons of ethanol and other fuels be blended into gasoline, diesel, and jet fuel by 2022. In other words, by virtue of government fiat, U.S. ethanol producers have a guaranteed market regardless of whether or not the tax credits are extended.

As analyzed in today’ issue of The Schork Report, the U.S. government is paying the industry to abide by the law the government created. Nevertheless, costs to the taxpayer and government mandated rent-seeking aside, the argument to eliminate the credits and abolish the tariff just might be moot.

We suppose Congress will just have to get serious about fiscal discipline elsewhere.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.