Schork Oil Outlook: Taxing Clean Fuels

The U.S. administration and the Congress’ disposition regarding “climate change” is fairly clear cut.

Last week the U.S. Senate passed the federal land management bill by a substantial 4:1 margin. According to an article on Bloomberg (March 19th),this one bill combined 160 environmental bills that were pending before Congress for the last several years. The bill will assign 2 million acres of public land as federal wilderness areas. More importantly, the bill will of course ban coal, oil and gas development on 1.2 million acres in Wyoming. Not only that, but because these lands would be designated as wilderness areas, no new roads or buildings would be allowed to be erected.

That means the development of geothermal, wind and solar projects would also be verboten.

Fair enough, but here at The Schork Reportwe take note that the current administration has no qualms about maintaining the previous administration’s tax on importing fuels that are allegedly good for the environment. According to the White House transcripts from last week’s meeting (March 14th) between Brazilian President Luiz Inacio (Lula) da Silva and President Obama…

President Obama: I know that the issue of Brazilian ethanol coming into the United States has been a source of tension between the two countries. It’s not going to change overnight, but I do think that as we continue to build exchanges of ideas, commerce, trade around the issue of biodiesel, that over time this source of tension can get resolved.

President LULA: I can’t also understand while the world is concerned with climate change and with carbon emissions that bring greenhouse effect, (inaudible) fuel gets tariffs, and clean fuel also gets tariffs. I have discussed this with Angela Merkel, with Tony Blair when he was Prime Minister, with President of France, Sarkozy, with former President Bush.

Lula has a point of course. The White House (and Euroland) appears to be in a hurry to tax domestic sources of “dirty” hydrocarbons, but are content to drag their collective feet on lifting the tax on imports of foreign sources of “clean” fuels.

To wit, ethanol imports into the United States from Brazil have stagnated. According to the EIA’s final count for 2008, shipments from Brazil rose 2.9 percent. However, overall imports to the United States rose 18 percent. In other words, Brazil’s share of the U.S. market shrank by 549 bps last year to 37.3 percent.

On the other hand, imports from the U.S. Virgin Islands and countries in the Caribbean Basin Initiative (CBI), which are not subject to U.S. import taxes, have flourished. For instance, imports from the U.S. V.I., which were virtually non existent in 2007, surged to 1.07 MMbbls last year. Consequently, market share surged from 0.6 percent to 8.7 percent year-on-year. At the same time, imports from CBI countries increased 13.3 percent last year and captured 53.4 percent of the U.S. market.


Meantime, domestic production ticked lower in December as poor margins discouraged output. On average, U.S. distillers churned out 656.2 Mbbl/d of product at the end of last year. That represents a decline of 1.8 percent or 12.3 Mbbl/d from November. On the other hand, because of the addition of an additional calendar day in December, cumulative production did rise to a record 20.3 MMbbls. For 2008 as a whole, ethanol production averaged 602.1 Mbbl/d, up 179.4 Mbbl/d (42.4%) from 2007. All told, a total of 219.9 MMbbls of fuel alcohol was produced domestically in 2008. Of course, PADD II (Corn Belt) accounted for the bulk of the output, i.e. 29 out of 31 barrels. However, we also saw production in the Rockies (PADD IV) and West (PADD V) double to 4.01 MMbbls and 4.6 MMbbls respectively. Production in the Gulf Coast (PADD III) and East (PADD I), which had been virtually nil, increased to 3.95 MMbbls and 1.7 MMbbls respectively.

Bottom line, despite a sharp increase in demand from discretionary gasoline blenders in 2008, greater imports and production translated into greater supplies of ethanol. Month-on-month supplies dropped 6.6 percent in December to 14.2 MMbbls. Regardless, supplies last December still outpaced December 2007 by 3.71 MMbbls or 35.3 percent.

Finally, according to the USDA’s World Supply and Demand Estimates (WASDE), U.S. corn ending stocks for 2008/09 are projected 50 million bushels lower this month as higher ethanol use more than offsets a reduction in exports. Corn use for ethanol is projected 100 million bushels higher on indications of improving blender incentives and higher ethanol use. Blender margins have become increasingly favorable since late February as gasoline prices have risen relative to those for ethanol. A continuing recovery in weekly production of gasoline blends with ethanol is also supportive of ethanol demand.

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