Gas Prices, Gouging, and Food versus Fuel

A few newsworthy items to cover: Gas prices, gas gouging legislation, and food versus fuel.

Gas Prices on the Rise

Surprise! It seems that gas prices are rising:

Gas prices on the rise again, analyst reports

Gas prices are on the rise again, just as Americans hit the highways for Thanksgiving.

Gas prices rose about 5 cents per gallon nationwide compared to two weeks ago, industry analyst Trilby Lundberg said Sunday.

Of course if you read this blog, you knew this was coming. I have made this case in two recent essays, and I have been saying this at The Oil Drum for about a month:

A Case Study in Cluelessness

This Week in Petroleum 11-15-06

Gasoline inventories are being sharply pulled down for three primary reasons. First, demand has picked up as prices have fallen. Second, gasoline imports fell off as prices dropped and European refiners saw profit margins fall on exports to the U.S. Third, we are in the middle of fall turnaround season, when refineries shut down for maintenance. All of these factors are causing gasoline inventories to free fall, and that situation can’t continue, regardless of how the elections turned out, unless 1). Imports make up the difference; 2). Prices rise to slow demand; 3). We start rationing product; or 4). We just keep going like this until stations start to run out of gas.

Keep a close eye on the inventory report this week for a hint of which direction prices are headed in the short term.

Price Gouging and Fuel Supplies

A couple of days ago the following article was highlighted at The Oil Drum:

Congress seen passing price-gouging law

Some excerpts:

WASHINGTON – The head of the Federal Trade Commission predicted Thursday that Congress would pass a gasoline price-gouging law despite her warnings that the country doesn’t need one and it might cause fuel shortages.

FTC Chairwoman Deborah Platt Majoras said she has warned Congress publicly and privately about the dangers of such a law.

Majoras said she understood the public’s frustration and concern but said an upcoming FTC report on the price spikes found that consumer demand was up at the time.

“There is a distinction between a market determination you don’t like and a market failure,” she said.

Testifying in May before the Senate Commerce Committee, Majoras said retailers might let the gas run out rather than raise prices and risk facing prosecution. She noted the price spikes after Hurricane Katrina last year resulted in more fuel getting to market.

I commented on the story:

I think this is likely with the new political climate, but this is very short-sighted. What they don’t seem to realize is that if prices are frozen during a Katrina-like crisis, then rationing is the only other option. I think most people would prefer to pay more for their gas (rationing by price) than for everyone to be told they are only getting 75% of the gas they would like.

I generally get some negative feedback any time I write anything in defense of the oil industry (like this example), but one poster provided the following feedback:

Several years ago the Canadian province of Prince Edward Island implemented a similar scheme to set fixed gas prices for specific periods in an attempt to prevent price “gouging.”

The outcome was as described in the RR blockquote. Gas prices did not rise; there was also no gas available anywhere on the island and no plans to import any.

The legislation was repealed.

Anyone who understands the first thing about economics knows that this has to be the outcome. If you can’t raise prices when demand is high, then we have gas lines, rationing, and ultimately no gas. I don’t know if this is the solution they want, but it’s what they will get.

Food versus Fuel

Many ethanol advocates argue that increasing the amount of corn that is going toward ethanol production is not an issue. However, it is certainly an issue for the people who have relied on those corn imports, and are now watching the price rise. Today, Tyson Foods weighed in on the subject:

Tyson Foods Sees Higher Meat Prices

“The best thing I can say about fiscal 2006 is, it’s over,” Richard L. Bond, president and chief executive officer, said in a statement.

Bond said the price of corn, which is used as animal feed, is going up because of demand from ethanol plants that are springing up to provide alternative fuel sources to oil.

Corn prices recently reached 10-year highs.

“I believe the American consumer is going to have to pay more for protein. We are at new levels on corn that are not likely going to be retrenching back to ’06 levels,” Bond said in a conference call with analysts.

Bond said meat producers, processors and retailers will have to pass the higher grain price on to consumers because they cannot absorb it in their profit margins.

“Quite frankly the American consumer is making a choice here. This is either corn for feed or corn for fuel, that’s what’s causing this,” Bond said.

Of course food versus fuel is a serious issue going forward. How could it not be? Some people will pay more for food so we can put inefficiently produced ethanol in our vehicles, and some people will have to start making some tough choices as budgets are stretched.

13 thoughts on “Gas Prices, Gouging, and Food versus Fuel”

  1. on choice of rationing type, the rich will always get more because they have more power to manipulate the system. But at the end of the day, you are making a choice of which social structure you wish to support.

    one choice says the rich can buy as much fuel as they want because they can. This implies they can use it as they want to for good or bad. This choice leaves the poor stranded because can barely afford food let alone fuel. The other choice says that everybody gets a subsidized price but you are limited to how much you can have. This eases the burden on the poor and gives them more options.

    The first option will force lower income people in towards public transportation rich areas. The end result will be increased slums, increased food prices (difficulty getting food into urban spaces), reduced access to medical care and a host of other urban centric ills. This migration will also cause significant economic problems as significant amounts of suburban and rural property is abandoned with the attendant decrease in value.

    But it will have the benefit of reducing carbon emissions and energy use at the cost of significant drop of quality and length of life.

    The second option has the advantage that it helps preserve some aspects of a non-urban culture. You still have some degree of mobility, the pain is spread across all economic levels albeit different types of pain, and it can help ease the transition across shortages of high-energy-density liquid fuel supplies.

    If managed properly, the second option can also reduce carbon emissions by reducing the size of rations.

    The rationing model can also help with reducing emissions by decreasing the rations for vehicles with poor gas mileage and increasing the rations for those with high gas mileage. Yes, it’s a carbon tax but a very direct and visible one.

    The loss of goods is a very popular strawmen to raise whenever people talk about rationing. And it’s probably a valid concern with long-term rationing such as we experienced during wartime and other countries experienced under dictatorships. But what comes right down to it, a few grad students could track all of the oil and gas supplies in the country. They could tell with paper and pencil where the supplies are messed up. We know refinery capacity, we know how much oil shipped or produced in the country. That gives us a gasoline yield and if that gasoline isn’t getting to the end user, you can find a culprit. When you find the culprit, you make it really visible so that the public irritation can be taken out on the appropriate corporation or business.

    Other food versus fuel discussion, just like cheap oil, we have been living off of cheap factory farmed protein. No, I am not going to advocate tofu or any form of soy as anything but animal foods. Most forms of soy have no redeemable qualities in terms of flavor or mouth feel.

    What I do advocate is increased local animal protein production. Yes, this means farms and more expensive higher-quality food. And if the community doesn’t have enough land for its farms, and it needs to make that land somehow through either land reclamation or affiliations with towns that have enough land.

    The last thing I want to see is some place like Boston, New York, or DC sponging off the countryside around them. If urbanites want food, then they have some hard choices to make.

    I always appreciate your writing. Thanks for the articles.

  2. Robert said, “Of course food versus fuel is a serious issue going forward. How could it not be?”

    It sure is Robert, but the ethanol industry is in a state of denial on the subject since it first started surfacing last summer.

    I’ve tried to correspond with several players in the ethanol cartel, and they all refuse to even respond or discuss the issue.

    Food v. Fuel and GMO corn

    Another aspect of the food v. fuel issue they don’t want to discuss is the use of genetically modified (GMO) corn. The ethanol cartel is now makng big plans to increase ethanol production by using GMO seed corn.

    But, Japan and the Western European countries won’t accept food or meat produced with GMO corn, and the third world countries to whom we send GMO food accuse us of using them as guinea pigs.

    How does the Wang and Shapouri studies get a positive EROEI on corn ethanol? By counting the energy in the co-products of which distiller’s grains (DG) is the primary one.

    But, if an ethanol plant uses GMO corn to make ethanol, what does that make the DG from that plant? Answer: GMO distiller’s grains of course.

    U.S. cattle feeders can’t use GMO corn if they want to export their beef, so how can they use GMO DG to feed that same beef?

    Well conveniently, U.S. ethanol plants don’t differentiate between the GMO corn and non-GMO corn that comes into their plants, and because of that, cattle feeders have no way of knowing whether they are buying DG made with GMO or non-GMO corn.

    That’s going to make Japan and the Western European countries real happy (not) when they find out that the meat they have been eating has been fed with GMO grain products, won’t it?

    And if the ethanol industry can’t sell their DG from GMO corn for cattle feed, what does that mean for the numbers Wang and Shapouri came up with?

    Cheers,

    Gary

  3. one choice says the rich can buy as much fuel as they want because they can.

    It’s not just the rich, though. True, the rich can often buy their way out of lots of inconveniences. But in this case, I suspect a lot of ordinary people, when faced with rationing or higher prices, will choose higher prices.

    What if I live 40 miles from my job and work unpredictable hours such that car pooling is impossible? If I pay more for gas, it hurts, but if I can’t get gas I might lose my job. That is the situation for many people whose gas dependence is not very elastic. They will get their gas, because those whose needs are elastic will cut their consumption as prices go up.

    Cheers, Robert


  4. It’s not just the rich, though. True, the rich can often buy their way out of lots of inconveniences. But in this case, I suspect a lot of ordinary people, when faced with rationing or higher prices, will choose higher prices.

    What if I live 40 miles from my job and work unpredictable hours such that car pooling is impossible? If I pay more for gas, it hurts, but if I can’t get gas I might lose my job. That is the situation for many people whose gas dependence is not very elastic. They will get their gas, because those whose needs are elastic will cut their consumption as prices go up.

    Granted, there may be people like you and I that travel irregular hours but the vast majority of the people travel regular hours towards common collections of businesses.
    Another choice for this mythical person would be to change their job. Find a job where they could work regular hours. the primary problem here will be business owners putting up a fuss because they can no longer devalue and employees time by making them work long hours for no additional pay.

    as for what people would choose, again, that depends on the type of society they want. Americans have been rather stupid in that they make choices which enabled the rich and powerful become more rich and powerful and their own world becomes impoverished. I call this the lottery hallucination. Every person that buys lottery tickets believes that they will get rich from it. But the vast majority lose significant amounts of their own money for nothing. they would have been better off just putting that money in the bank.

    but let’s say that people choose higher prices. This means the market will raise the value of high gas mileage vehicles and drop the value of gas pigs. This means that the well-to-do will have their high mileage vehicles because they can afford them and the poor will have gas pigs it that’s all they can afford. Which means, they get a double whammy from price and from vehicle.

    A secondary effect will be in extracurricular activities and access to services such as public libraries and health clinic’s. Those uses of gasoline will be stripped out from a low income families life first. Which means they will lose opportunities in education, healthcare, and socialization. can you imagine having to decide between having enough gas to get to work versus taking your child, your partner, or yourself to the doctor. That’s not a choice I want anybody to have to make. this problem will show up if you have high prices or rationing. It really doesn’t matter whether you can’t get gas or you literally have no money for gas

    Maybe a third and better solution would be letting the market determine price but set up a income-based subsidy for both vehicle and fuel. Give low income people the opportunity to get a good high high mileage vehicle and then the impact of fuel prices will be reduced on them. Pay for it by a fuel tax with a tax rebate based on income. sometimes tax as social policy is a good idea when markets fail to meet societal needs.

  5. I note that anonymous is making the exact opposite argument used by proponents of CAFE standards:  new-car buyers would absorb the extra cost of more-efficient vehicles, and the poor would get the benefits when they bought those same vehicles a few years later after trade-in.  Either rich new-car buyers getting efficient vehicles (and changing the vehicle mix away from guzzlers) is a good thing, or it isn’t.

    My own piece which relates peripherally to this topic needs another round of fact-checking, so it may not be ready until the weekend.  (I’ve got to go back over the claims from the “Billion-Ton Vision” to make sure I’m not counting some things twice.)

  6. Give low income people the opportunity to get a good high high mileage vehicle and then the impact of fuel prices will be reduced on them. Pay for it by a fuel tax with a tax rebate based on income. sometimes tax as social policy is a good idea when markets fail to meet societal needs.

    I don’t want to give the wrong impression here, because I am not advocating the position I described. I am just explaining that this is what will happen, and the politicians need to understand this.

    I have advocated a higher gas tax/rebate system on a number of occasions. I do believe we use far too much gas, and it may take a rationing system to reign that in. But I don’t think the politicians calling for a profits cap clearly understand that this will be the result.

    Cheers, Robert

  7. Robert,

    Check this from today’s AgriNews:

    Where will the corn come from?

    There are now more ethanol plants operating, under construction, or in the planning phase than Iowa’s farmers will be able to supply corn for. If they are all built, the requirement for corn will exceed harvest capacity by 123%. (And that’s in the good years with adequate rainfall.)

    The same thing is true in Nebraska — they will soon have more ethanol plants than their farmers can grow corn for, except in Nebraska they will be depleting the Ogallala Aquifer to grow the corn.

    Makes you almost wish there were an “ethanol czar” in the government to match ethanol plant construction with farm capacity, doesn’t it? There will be some mighty disappointed investers in Cornbelt ethanol plants once they wake up to the fact that they are building ethanol plants in excess of available feedstock.

    Anyone in the ethanol industry who remains in denial about the food v. fuel issue needs to step back and look at the big picture.

    Regards,

    Gary

  8. the requirement for corn will exceed harvest capacity by 123%.

    Ethanol producers, most of whom just recently jumped into this business, are learning some harsh realities about using a commodity (corn) to produce another commodity (ethanol). Volatility will wipe a lot of them out, and since the corn requirement is greater than the demand, of course the upward pressure on prices will get much worse.

    Cheers, Robert

  9. “If all these plants are built, we’ll (use) 123 percent of the current Iowa corn crop, and there are at least seven plants operating or planned to operate just across Iowa’s borders,” Wisner said. “These plants will use a substantial amount of Iowa corn.”
    Gary,
    Notice that this is only 23% above the supply, which is a lot better than 123%. Obviously, the same principle holds: corn prices are likely to go up, and ethanol prices are likely to be determined by gasoline prices. As I see it, meat producers have a lot more flexibility to bid up corn prices (expect to pay more for your Big Macs) than ethanol producers, who have to keep prices low to sell E10 and E85. If hamburgers cost twice as much, they may sell fewer of them, but they will still sell some of them. But who will buy ethanol if it is more expensive (even after generous subsidies) than gasoline? So many of these new ethanol producers are going to get hurt. I wonder if Uncle Sam is going to put our tax dollars to work saving their sorry butts?

    I find it extremely disturbing that so many Americans think corn ethanol is a solution when it should be obvious that converting high value food into low(er) value fuel is an incredible stupid idea.

    E-P, I’d like to hear your comments on the Billion Ton Vision. At least that would involve converting worthless waste into fuel, with some nice side benefits to the environment.

  10. who will buy ethanol if it is more expensive (even after generous subsidies) than gasoline?

    Everyone will, if it’s a mandated part of the gasoline supply.  You’ll have no more choice than you have about paying for military protection of the Persian gulf.

    E-P, I’d like to hear your comments on the Billion Ton Vision. At least that would involve converting worthless waste into fuel, with some nice side benefits to the environment.

    I like it too, but I’m not sure the projections are realistic.  I’m in the process of recalculating the biomass yield numbers based on current figures, which cuts the total waste roughly in half.  Add some biomass crops and the result still looks good, though.

    Hope to be done tonight.

  11. Regarding ethanol as the cause of increased corn prices: There is a rush to judgement going on here that is unwarranted.

    Just becuase someone says that meat prices are higher due to higher corn prices does not mean that ethanol production is hte culprit. There are far more powerful forces at work.

    Are we claiming that Japan is producing our ethanol? If not then the near doubling of Japanese purchasing of US corn must not be an food vs. ethanol concern.

    Add to this a much increased rate of US corn purchase by Mexico, South Korea, Taiwan and Columbia and the argument that ethanol is the cause is not only on shakey ground, it is highly suspect. It may be the case that it plays a part in this case, but without actually looking at the data is is premature to conclude it one way or the other.

  12. Regarding ethanol as the cause of increased corn prices: There is a rush to judgement going on here that is unwarranted.

    No. The amount of corn going to ethanol has increased dramatically. Of course there are other demands for corn, but none has increased like the demand from ethanol.

    Here is a story from today:

    Ethanol demand boosting corn prices

    INDIANAPOLIS – The ethanol industry’s growing appetite for corn has pushed prices for the grain to their highest levels in a decade amid a surge that agricultural experts say could lead farmers next spring to plant their largest corn crop in 60 years.

    With a growing amount of corn being diverted from food products and livestock feed toward ethanol production, per-bushel prices have increased about $1 since mid-September.

    As of Tuesday, the average price of a bushel of corn was $3.45 — far above the $1.50 to $1.80 a bushel corn fetched at the same time last year, Hurt said.

    I wouldn’t call that unwarranted.

    Cheers, RR

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