Ethanol Games

As climate change generates floods in Colorado, it is sucking the water out of vast sections of the mid- and south-west. The segment of Ogallala Aquifer that sits in Kansas and north Texas is bone dry, unlikely even into the distant future to become recharged through rainwater, which itself is in very short supply. And the grain crop you really don’t want to plant (as it was in this same area) in water-impaired areas, especially if all you’re going to do with that grain is use it as a the source of fossil fuel, is water-absorbing corn… not to mention that if you really want that resultant ethanol, try vastly more efficient sugarcane.

But in the middle of the first decade of this millennium, our government began passing a series of laws – some of which have ended – to require ethanol as a clean-fuel additive and as a subsidy to corn-growing agricultural states (adding a prohibitive tariff to Brazil sugarcane-based ethanol), particularly valuable to those states that supported the election of the Bush administration. “The federal government created the market in special credits tied to ethanol eight years ago when it required refiners to mix ethanol into gasoline or buy credits from companies that do so. The idea was to push refiners to use the cleaner, renewable fuel, or force them to buy the credits.

“A few worried that Wall Street would set out to exploit this young market, fears the government dismissed. But many people believe that is what happened this year when the price of the ethanol credits skyrocketed 20-fold in just six months, according to an analysis of regulatory documents and interviews with more than 40 people involved in the market, including industry executives, brokers, traders and analysts.” New York Times, September 14^th. Banks began stockpiling the credits, not to improve impact of burning fossil fuels… but to take advantage of a loophole and embrace a new market.

And since Wall Street has long since focused on making money by trading and moving money and assets around – as opposed to using their financial acuity to create and finance new businesses and long-term values (so very “old world” today) – and since these credits are tradable instruments…. The spike in the value of these energy derivatives has distorted the marketplace. “While banks are by no means the largest player in ethanol credits, Wall Street’s activity in this market reflects a larger effort by financial institutions to exert their influence over loosely regulated markets for basic commodities, from aluminum to oil. The opacity of the ethanol credit market makes it difficult to determine the extent to which large financial actors have profited.

“The banks say they have far less influence in the market than others are suggesting, and are doing nothing wrong. But the activities, while legal, could have consequences for consumers. In the end, energy analysts say, the outcome will be felt at the gas pump — as the higher cost of the ethanol credits gets tacked onto the price of a gallon of gasoline. (The credits, which cost 7 cents each in January, peaked at $1.43 in July, and now are trading for 60 cents.)…

“The Valero Energy Corporation, a refiner that owns thousands of gas stations, says the squeeze in ethanol credits might cost it $800 million. PBF Energy, also a refiner, puts its bill at about $200 million. A review by The [NY] Times of a federal registry of nearly 1,500 businesses and individuals in the renewable fuel market found big Wall Street banks as well as a handful of people with troubled legal histories among the participants. Several high-profile cases of fraud have emerged…

“Price movements on other commodities futures are limited by the exchanges on which they trade as a check on speculation. But the biofuel credits are not traded on an exchange: their prices are unbridled. And, unlike in the broader financial industry, no formal qualification or license is required before a broker can start trading.” NY Times. Congress also miscalculated fuel consumption patterns and over-compensated. Consumers began buying more fuel-efficient cars and traveling less as prices at the pump skyrocket. Demand for fuel moderated. Hence, ethanol credits just piled up.

So the legislation did not have the intended environmental impact, extracting way too much valuable water from places where droughts have become chronic. They made the rich richer and will continue to pressure rising costs at the pump, further decreasing the effective buying power of average Americans, which has fallen every year since 2002. Generally, this legally-distorted system is redistributing income from those who really need it to those who don’t. Winner: speculators and the companies that serve them. Loser: the American consumer. Stupid laws favoring the rich. A dash of fraud. No regulation. A perfect storm.

I’m Peter Dekom, and once again the playing field is tilted in favor of big business and against the rest of us.