By Larry Marsh, Kansas City Star Midwest Voices columnist 2009
Congress is in a difficult dilemma.
On one hand, it needs to keep gasoline prices low to avoid burdening already overburdened consumers during this recession.
On the other hand, it needs to protect green jobs and give alternative energy a chance.
Whenever the price of gasoline drops too low, it forces ethanol and other alternative energy companies into bankruptcy. Their products just can't compete with cheap gasoline.
Last fall VeraSun Energy Inc. went bankrupt after investing over a billion dollars in ethanol production. This past week MGP Ingredients Inc. permanently pulled out of ethanol production after unsustainable losses.
One way out of this dilemma is to let the free market decide how much green job protection is appropriate.
As the economy improves and demand rises, gasoline prices will begin to rise. This is natural and healthy for promoting alternative fuels such as ethanol or electric cars.
The key is to prevent sudden gasoline price dips from forcing alternative energy start-ups into bankruptcy.
Any future financial crisis in Asia, Europe or elsewhere in the world could cause a sudden drop in demand and a fall in gasoline prices.
Here is a three-point plan for a self-adjusting price floor for gasoline that will start out low to avoid hurting consumers during the current recession, but will rise along with the demand for gasoline as the recession ends to provide the protection needed to promote green jobs and protect alternative energy:
(1.) Initially set the price floor at $2.50 per gallon for pure, regular, unleaded gasoline at 87 octane, with corresponding floors for midgrade and premium. Prorate for ethanol mixtures. Since about 46 percent of fuel sold at gas stations in the United States is E10 (gasohol) containing 10 percent ethanol, the actual price at the pump would be a bit less.
(2.) At midnight each day if the average price of pure gasoline is more than one dollar above the price floor, the price floor will automatically rise by 25 cents.
(3.) Require that the price floor never be lowered for the next 10 years.
If after this recession ends, the average price of pure gasoline has risen just above $4 a gallon, then the price floor for pure gasoline will have risen to $3.25.
The actual price at the pump could be a lot less if it is mixed with cheaper ethanol. This would happen if Congress got rid of the 54-cent-a-gallon import duty on ethanol.
Virtually all cars in Brazil can use E85 which is 85 percent ethanol and a lot cheaper than gasoline when gas prices go sky high. However, gas mileage with ethanol is about 25 percent less than with gasoline.
There are currently six million flex-fuel cars in the United States, but there are very few gas stations selling E85. Wal-Mart has been working with Murphy Oil Company to possibly devise a plan to sell E85 at Wal-Mart service stations.
A flex-fuel mandate for new cars would also help us break our dependence on pure gasoline. A used car can be converted to flex-fuel for about $100 in parts including a new computer chip controlling the air mixture, new fittings on the fuel lines and replacing rubber seals with non-rubber seals.
Similar self-adjusting price floors (SAPFs) can be set for diesel, heating oil and similar products.
Consumers will be able to plan ahead knowing that the price of gasoline, heating oil and other petroleum products will not be allowed to fall significantly for the next 10 years from current levels.
Potential investors in alternative energy will know that they have 10 years to obtain a good return on their alternative energy investments without having to worry about being undercut by price dips in petroleum products.
This plan will encourage the automobile companies to initially offer more fuel efficient vehicles and strive to continue improving the fuel efficiency of their products for the next 10 years.
Uncertainty is a major factor in inhibiting both short-term expectations and long-term investments in alternative energy. Both families buying fuel efficient cars and companies investing in alternative energy need to know that the era of cheap oil is over.
The United States can take the leadership in reducing greenhouse gas emissions by working with other countries to simultaneously set self-adjusting price floors (SAPFs) for all carbon emitting products.
As an added benefit for the economy as a whole, if deflation begins to pose a serious threat, SAPFs can be used on other key products as well to fend off the deflationary threat.
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Also see:
Define energy independence in terms of both oil price and quantity
Carbon tax better than trying to pick alternative energy winner
Deprive petro-dictators of oil money with a price floor on crude oil imports
Law professors propose new gas tax with categorical tax rebates
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"Today, gasoline prices
"Today, gasoline prices continue dropping but the decline is far slower." The price for regular unleaded is 12% lower than before. Way back then, people drive less bcoz of higher gas prices, and some drove the most fuel efficient cars (car performance chips).
Larry, this would work...
...in an autocracy like Russia or China where the government can turn the economy on a dime, and shut down their stock markets on bad days.
you call it a free market
you call it a free market solution to artificially set price minimums for gasoline?
A free market solution is gas is based upon supply and demand. If alternative fuels cannot compete and you have to artifically force gasoline over $4 for anyone to even consider alternative fuels then that is as far from a free market solution as possible.
Ethanol based on corn is a dead idea. It cannot survive without government subsity and it terribly inefficient. If we can come up with sugar or rice based ethanol in America then that is another story.
Natural Gas and hydrogen powered vehicles will need of course the automakers on board and ways to easily fuel the vehicle in cities and towns across america.
Electric will take time as the cost, speed and length between recharges just doesn't work yet with American driving habits. Hybrids have again shown to be terribly overpriced for very little value. Unless you live and work in an urban setting with very little highway driving. For people who have long commutes or drive long distances for personal reasons would get no real benefit out of a hybrid.
But overall a fals floor price of nearly $4 would kill the average working person in America. How on Earth can someone making minimum wage afford constant $4 gas? We saw huge decreases in demand for gas with $4. We saw higher prices for EVERYTHING in storys due to fuel costs. a false bottom price would kill the economy
that's probably why
the columnist didn't propose a "fals [sic] floor price of nearly $4."
Someone needs to learn how to read.
Let's deliberately miss the point
You've claimed here, I believe, to operate a business. I want you to invest seven years' equivalent in profits to develop a new product. The country needs it, and the demand depends on the price of gasoline.
A) The price of gasoline for the next seven years will be at least three dollars per gallon. I guarantee that.
B) Oops! Maybe it'll be two dollars a gallon. Or, hey, maybe ten. NOW it's a buck. But I see one-seventy-five as a distinct possibility in six months.
Make your irrevocable decision....NOW! No, I'm not going to tell you whether you have to make it in the face of A or B.
Also the free market has many defects, one of which is that it is absolutely unable to incorporate real future costs into current pricing. Not uncertain costs, costs we know will exist at some point in the medium term, i.e., the price of oil when the well starts running dry.
edith, edith, edith...
A) The price of gasoline for the next seven years will be at least three dollars per gallon. I guarantee that.
B) Oops! Maybe it'll be two dollars a gallon. Or, hey, maybe ten. NOW it's a buck. But I see one-seventy-five as a distinct possibility in six months.
Make your irrevocable decision....NOW! No, I'm not going to tell you whether you have to make it in the face of A or B.
Also the free market has many defects, one of which is that it is absolutely unable to incorporate real future costs into current pricing. Not uncertain costs, costs we know will exist at some point in the medium term, i.e., the price of oil when the well starts running dry.
gas stations do not make much money on gas sales. They make their money on cokes and candy, etc. You raise prices of gas and demand falls off. Fewer customers means less incidental sales.
A minimum price of gas would be accomlished through HUGE TAXES, plain and simple. It would have nothing to do with alternative fuels. It would to do with giving the government and the church of global warming power over every American.
Plus the author is still not figuring in how huge gas prices would affect those who are hit hardest and that is the working poor. Some single mother who has to drive across town to get to ger job now has to pay 2-3 times what she did before to get to work...heck may be cheaper to just go on welfare.
not to mention
the church of energy independence, so our petrodollars aren't flowing into the Middle East.
1
the church of energy independence, so our petrodollars aren't flowing into the Middle East.
without any doubt...but the common myth is that we get mostg of our oil from the Middle East. We get most of our oil from Canada and South America. But the Middle East is the boogey man so it works.
The problem with most of the "green movement" ideas are that they are based upon the idea of cutting off or severely reducing oil usage before the alternative fuels are available.
So in essence such as Larry's plan...in the 10-20 year span it will take to upgrade the national grid system to be able to have national alternative fuels, Americans will have to suffer through $4 gasoline and high taxes in hopes of forcing conservation and reducing usage.
What we need is a simultaneous plan. One where alternative fuels and ideas are funded and developed and then let the market system take over. If a natural gas powered SUV is developed that does everything a gas powered one does but is greatly cheaper and costs $10 to fill the market will take over and people will flock to them.
But you cant force people to suffer through high taxes, etc while people think up alternative fuel ideas. And while it would reduce dependence but the bottom line is much of our industry uses oil for production. There would still be a need.
In my mind we start with something like natural gas for vehicles while we develop more advanced ideas such as hydrogen, etc. And while the nation reduces oil usage driving natural gas or whatever powered vehicles we then can develop power alternatives such as wind, solar, tide, etc.
Edith - would that be similar to, say a power plant?
I trust free market more than government controlled. I know, they built the interstate system (or did Alma say that?). I've read that the interstate system was initially planned for military purposes. I guess Ike thought the German autobahns were pretty good for moving military troops and supplies.
Crescent Oil Company's bankruptcy shows oil volatility damage
Crescent Oil Company's bankruptcy is further evidence of the damage done by volatility in the petroleum markets. See today's story "Some area gas pumps are running dry" By STEVE EVERLY and JOYCE SMITH at:
http://www.kansascity.com/637/story/1026294.html
more commentary on ethanol and trade
Don't forget Brian J. Donovan's extensive
commentary on ethanol and trade at:
http://voices.kansascity.com/node/3332#comment-15789
The problem, Larry
You mention Brazil, yet you don't mention that they are using non-grain crops to make their ethanol. In our country to date, we are using mostly corn, and I don't have the numbers, but corn uses a lot more energy to make ethanol than sugarcane. Now if our ethanol plants were switching over to cellulose-based, it wouldn't be utilizing a food crop to make energy. It makes no sense to use a staple food crop to make energy. It increases the price of corn which has a rippling effect in many of our food prices.
twas
and edith are both spot on in this thread.
Gas prices
You are sounding like big complex government gone out of control. The speculators got burned eventually in a free market after they triggered a financial collapse. There are two cartels in play in the oil industry OPEC, producers, and the non-competing oil companies who process the product. Free market got OPEC down to $40 a barrel but then cartel number two took over and the price of gasoline shot up 60 cents per gallon in about three weeks with no increase in the price of crude. There was not much the US could do about OPEC but allowing the hand full of conspiring processors to eliminate competition could have been stopped by a concerned government.
Freedom isn't free (not for the little people anyway)
Just what has our government been concerned with? Creating a "free" market in which individuals are free to buy and sell oil futures. It's the American way. I believe that the Enron loophole was specifically made to facilitate market speculation and after a disasterous year of $4.00+ gas and eight years after Enron sank congress hasn't closed the loophole yet. Makes you wonder about their priorities
If we don't protect the freedom of speech how will we know who the a$$#@les are?
Freedom's just another word for...
There's one problem with Rogue's drill baby drill philosophy and it's at the very root of his belief. When we sell an oil lease any oil discovered becomes the property of the oil company. It's not our oil anymore. The oil company can sell it to anybody they want to so, if China or India want it badly enough to bid up the price US oil goes to them. If Rogue & Co. refuses to pay the world price his SUV sits empty. Shall we tell BP-AMOCO they can't sell US oil outside the US? No, that would be interfering with the free market they worship.
This depression won't last forever and soon world demand will bid the price up above $3.00 and thr Rogues of the world will be paying $75-$100 to fill their SUVs again and pitching a bitch about it. We need a sensible enery policy that stabilizes our energy supply and prepares us for the inevitable future.
If we don't protect the freedom of speech how will we know who the a$$#@les are?
And having said that---
Larry, stick to what you know. Ethanol is a fully developed technology that can't survive without government subsidy, as opposed to a startup that needs seed money. Ethanol for fuel is stupid and inefficient. Unless you've been doing analyses for one of the ethanol producers and at least have the excuse of a fee, you're simply wrong on this one.
Enough
To heat 60 million homes, and power 60 million cars for 60 years according to DOE. Yeah, I have heard T. Boone's comment, he wants to sell his CNG, but he also agrees with drill here and drill now.
You want $4.00 a gallon gasoline that almost ruined us last summer? Just keep on listening to the morons out there preahing wind and solar that is at least 20 years away.
Drill here, drill now. Some fields in the Gulf can be on line in 6 months to a year according to the two most senior drillers operaing there.
Pass the pipe, Rouge
Why keep repeating the stupid line about being on line in six months? Sure, it's true--if you want to produce oil at $500 a barrel. You want it at $50 a barrel, you'll have to wait, oh, seven to ten years or so.
Energy
Sonofrogue: There is no way we can drill our way out of this problem. A statement by some crackpot environmentalist?? Nope, try T. Boone Pickens. The simplistic Republican BS about drilling offshore as the total answer to our dependence on tyrants and despots is simply that -- a simplistic response designed to appeal to the non-thinking.
Of Course
We could just develop our own reserves off shore and in the Artic.......nah, screw that too common sense and too easy.......