lecgworldoilpriceimpactupdate - IMPACT OF ETHANOL ON WORLD...

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1 IMPACT OF ETHANOL ON WORLD OIL DEMAND AND PRICES John M. Urbanchuk Director, LECG LLC May 27, 2008 Biofuels expand the supply of motor fuel and reduce pressure on world crude oil supplies needed to refine gasoline. In a market environment of increasing demand for fuel led in large part by significant economic growth and development of the transportation sectors in China and India, and constrained global production, this means that a relatively small shortfall in supply can translate into a significantly larger short-term increase in price. This paper examines the impact of the production of 485 million barrels (20.4 billion gallons) of ethanol globally on the demand for crude oil needed to refine the gasoline displaced by ethanol use. When adjusted for energy content, 485 million barrels of ethanol are the equivalent of 320 million barrels of gasoline. If ethanol were not available for use, the world’s refiners would need an additional 1.9 million barrels of crude oil per day (700 million barrels), or 2.2 percent of current world production. Given the inelastic demand for crude oil, a shortfall of this small magnitude would likely result in a short-term price increase of 27.5 percent. Using current prices as a guide (West Texas Intermediate crude of $130 per barrel for the week ending May 23, 2008), without ethanol to expand the available fuel supply crude oil prices would be $35.70 per barrel higher than they are currently! Looked at another way, world ethanol production is keeping crude oil prices 27.5 percent lower than would otherwise be the case. World ethanol production reached 16.9 billion gallons in 2007 and is projected to total nearly 20.4 billion gallons this year. 1 This represents a near doubling of ethanol production in just five years. As shown in Table 1, 12 countries reported annual production in excess of 100 million gallons with the two largest producers – the U.S. and Brazil -- accounting for nearly 78 percent of global ethanol production. The growth in global ethanol production has been the result of increased interest in biofuels as a result of sharply rising oil and gasoline prices. The market for ethanol in the U.S. has benefitted from the decision of refiners to voluntarily remove MTBE from the market and from the Renewable Fuels Standard provisions of the 2005 and 2007 federal energy bills. Global ethanol production is expected to continue expanding as world crude oil prices increase to new record levels and remain high. In the U.S., the Energy Independence and Security Act of 2007 requires that 36 billion gallons of renewable fuels, largely ethanol, be used in the nation’s motor fuel supply by 2022. According to the Renewable Fuels Association, the U.S. ethanol industry has current capacity to produce more than 8.5 billion gallons of ethanol and 1 F.O. Lichts World Ethanol & Biofuels Report. Vol. 6, No. 17. May 8, 2008
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This note was uploaded on 02/17/2009 for the course ECON 4514 taught by Professor Shuie during the Spring '08 term at Colorado.

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lecgworldoilpriceimpactupdate - IMPACT OF ETHANOL ON WORLD...

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