No Runny Eggs

The repository of one hard-boiled egg from the south suburbs of Milwaukee, Wisconsin (and the occassional guest-blogger). The ramblings within may or may not offend, shock and awe you, but they are what I (or my guest-bloggers) think.

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The Next Fuel Shoe To Drop?

by @ 5:19 on June 17, 2008. Filed under Corn-a-hole.

I wrote yesterday about the likelihood of a dramatic increase in corn prices due to the damage done by the floods.

I found this article today, where a commodities analyst is claiming that due to the crop loss from the flood, corn could go to $16/bushel.

What????? It wasn’t that long ago that corn at $4/bushel was nearly laughable. Today, corn futures have moved to over $7.90/bushel.

Well, I got to thinking….we use some of this corn to make ethanol. Most states require an ethanol blend for automobile fuel. What’s the impact of increasing corn costs going to be on our fuel costs?

To date, the financial impact of adding ethanol to the fuel has been a benefit to consumers. Even today, ethanol sells (OK, I’m not mucking this with all the subsidies it gets that we pay for via other taxes…let’s just keep this simple) for under $2.90/gallon. The easy math says that if your average fuel is around $4/gallon and ethanol is less than that, then blending the ethanol is having some impact of bringing the total price down on a gallon of fuel.

Now let me scare you:

Look at what has happened to the price of corn futures in the past month:
In less than two weeks, the price of corn has moved up 18%. With corn a major ingredient of ethanol, these price increases should have an impact on the price of ethanol….and they have.   Just look:

During that same two weeks ethanol futures have increased 13%. But corn is only at $7.90, what happens if it goes to $16/bushel? A quick back of the envelope says that $16 corn would easily translate to $5 ethanol.

Hmmmmm, now unless our fuel cost per gallon exceeds $5/gallon, the ethanol additive will actually increase the overall cost per gallon!

One more reason to shelve ethanol: Acts of God (read that floods, hail, drought, etc.) have a much more dramatic effect on agriculture than on drilling or mining.

Drill here, drill now, pay less!

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