Archives March 2008

With the infinite wisdom of the White House and U.S. Congress, food prices are now directly tied to the price oil. The price of corn-based ethanol is now determined by the price of gasoline that it substitutes in motor vehicles and that price is established by supply and demand for oil. The price of gasoline at your local gas station or convenience store is based on the price of oil. And now that the price of corn is rising because it is tied directly to oil, the price of other grains and subsequently, prices along the entire food chain are rising.

Corn Prices have increased 166% since 2005. The rising price of corn that is used to produce corn ethanol is causing farmers to direct their limited resources to grow more corn, which means other grains such as wheat or soy become scarce and their prices rise. The growing scarcity of grains for food products is raising price across the food chain. Developing a renewable energy solutions based on diverting food as a substitute for expensive gasoline forces food supplies to become scare and expensive.

It is the supply and demand for gasoline and diesel fuels that establishes the price at the pump. When corn ethanol is substituted for gasoline, prices tend to gravitate towards a mean price that continues to rise to keep pace with the escalating price of crude oil now over $110 per barrel. Corn prices are inextricably linked to oil prices and in turn; corn prices impact other grain prices that means it cost more to feed your family or to feed livestock and forces those prices higher.

The rise in corn prices is illustrated in Figure 1.

Figure 1 Corn Prices

Irrespective of the timing of Peak Oil, a long-term energy strategy is required. The days of cheap oil are over. Remember how oil production in Alaska helped ease the U.S demand for foreign oil a couple of decades ago. Oil production in Alaska declined by nearly 75 percent from its peak in 1987 according a Washington Post article back in 2005. In November 2007, the Petroleum News indicated production in Alaska is expected to decline further in the future. The U.S. depends on oil production in the Gulf of Mexico for about 25% of our supply, according to the Department of Energy which is why the impact from Hurricane Katrina was so devastating.

Diminishing supply and rising demand suggests oil prices should continue to remain elevated. The rising motor vehicle usage in China (China Motor Vehicle Registration)
and India continues to influence the demand for oil.

Figure 2 Vehicle Registrations in China

Figure 2 and Figure 3 illustrate the rising use of motor vehicles in developing countries. This trends should continue and in turn, increase the demand for oil.

Figure 3 Automobile Sales in India

Maybe we should look to some leading countries in the development of alternative energy strategies. Perhaps we can learn from Norway’s HyNor Project. Solar photovoltaic projects being lead by Germany
and Spain.

So the next time you fill your tank or when you’re at your local food store and find that your wages don’t quite cover your food bill, ask your local Congressional representative for better planning on alternative energy strategies and solutions. Investment and research into solar, wind, electric vehicles, and hydrogen energy could provide real solutions by addressing energy needs, climate concerns, the environment, and food prices.

Oil continues to trade above $100 per barrel with the NYMEX CRUDE FUTURE closing at $101.84 on the last day of February 2008 and the US House of Representative passes legislation to raise $18 billion in new taxes for Big Oil to foster development of alternative energies. While President Bush plans to veto the legislation and Republicans claim the legislation unfairly impacts the oil industry, let’s look at the numbers. The legislation calls $18 billion tax over the next ten years so the impact amounts to $1.8 per year. The oil demand is approximately 20.6 million barrels per day according the to latest data from the Energy Information Administration. With oil at $100 per barrel the US will spend about $2 billion a day on oil and that equates to over $750 billion a year. In comparison to the total amount of oil we use, the tax is about 2/10th of one percent.

Figure 1 US Oil Supply and Demand

Well maybe that’s not a fare comparison. The bill, H.R. 6, the CLEAN Energy Act. would roll back two tax breaks for the five largest U.S. oil companies and offer tax credits for energy efficient homes and gas-electric hybrid vehicles.
According to the CNN article, the money to be collected over the 10-year period would provide tax breaks for solar, wind and other alternative energies and for energy conservation. The legislation was approved 236-182, and is expected to cost the five largest oil companies an average of $1.8 billion a year over that period, according to an analysis by the House Ways and Means Committee. So in other words this bill just repeals tax breaks given to Big Oil to become more competitive in the global market.

Figure 2 Oil Prices and World Rig Count

So what is the $1.8 in tax impact on Big Oil? Let’s just look at the impact this would have if just Exxon Mobil Corp (XOM) had to endure the tax only. Exxon Mobil generated $404 billion revenues in 2007, which means if Exxon had to face this tax only, it would be less than ½ of 1% of revenues. Considering that some states impose a 6% sales tax on consumers, a tax impact of 0.2% on the largest oil companies seems rather innocuous.

If the world has to depend upon OPEC oil production, questions do arise over the expansion of oil production and OPEC’s willingness to supply oil despite oil over $100 per barrel. As figure 3 illustrates production among OPEC nations is faltering. Could this be a prelude to Peak Oil?

Figure 3 OPEC Oil Production

The bottom line is that without incentives and further research on alternative energies, the world continues to be held hostage to oil and hydrocarbon fuels which are directly linked to rising CO2 levels and climate change.