Tax on Oil Companies a Boost For Ethanol?

Includes: ADM, CVX, SUN, XOM
by: Mick Weinstein

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

How California Failed in Efforts To Curb Its Addiction to Oil

  • Summary: California's effort to convert some significant portion of its cars to run on alternative fuels has largely failed to date -- a case study in the challenges facing this process. Despite its pursuit of methanol, natural gas, electricity and hydrogen as methods of curbing gasoline use, even environmentally-conscious Californians haven't overcome the big obstacles: lack of infrastructure, performance shortcomings, and higher costs. Oil and auto companies have worked within the state's pollution limits, and the state hasn't found the means or model to promote broad adoption of alternative fuels against the oil/auto lobby, despite an effort with methanol in the '80s and natural gas in the '90s. Yet the hybrid market in California is the largest in the nation (26% of the total), and the question is if today's $75/barrel oil will push a renewed effort. Heavy ethanol use, however, could clash with the state's clear-air laws. An initiative is on the November California ballot to tax oil extractors heavily and fund ethanol and other alternative energy businesses with the proceeds. GM is among the (unlikely) promoters of E85 in California.
  • Comment on related stocks/ETFs: Paradoxically, this article is strongly positive for the ethanol stocks, because it shows that demand for ethanol from California could be a lot higher, despite the fact that the price of ethanol is already high and supply can't keep up with demand. See the earnings results just reported by Archer-Daniels Midland (NYSE:ADM). A heavy tax on the oil companies would incrementally hurt ExxonMobil (NYSE:XOM), Sunoco (NYSE:SUN) and Chevron (NYSE:CVX).