Is Big Oil Curbing Ethanol Growth?

Includes: ADM, PBW, PEIX, XNL
by: Himanshu Pandya

There is a very interesting story in the front page of Monday’s Wall Street Journal about how Big Oil is proving to be an obstacle to the growth of Ethanol. The story can also be found online here.

However, before I get into the story let me first post my views on Ethanol:

If you have been following then you know that early last year I was very enthusiastic about ethanol, both as an investor (did pretty well with PEIX) and as an environmentalist. However, for a while now I just don’t think ethanol is the answer. There are too many shortcomings with ethanol (corn based) to be used as a fuel and let’s not get into cellulosic ethanol because I just don’t know when it will be feasible to be mass produced. Ethanol as an additive to gasoline is fine and should be promoted but filling up E85 at your local gas station just doesn’t make sense to me right now. Corn has turned into a cash crop and every farmer now wants to grow corn. Politicians (both sides) are behind it because they get votes from farmers and they can go on campaigning that are helping United States get rid of its addiction to Mid-East oil. The big three automakers (are they still big three?) in Detroit are behind it because they produce trucks and SUV’s that run on E85 and it doesn’t take any kind of technological marvel to produce automobiles that run on ethanol. How many people are really willing to pay extra for a gallon of E85? Now there is a need for ethanol but if people really think that one day we won’t need to import oil because of ethanol then they are just dreaming. Maybe it will be possible with cellulosic ethanol but we don’t know yet. The best way to utilize ethanol now is as an additive to make gasoline burn cleaner and this is already a practice in a lot of states. If the politicians are really serious about ethanol then pass laws at the federal and state level that make it mandatory in every state to add 10% ethanol in every gallon of gasoline. This way there won’t be a need for special infrastructure created to serve ethanol directly to consumers. Ethanol will be mixed with gasoline at an early stage by oil companies and then sent to gas stations for consumers to fill up. Once that’s done, do some independent studies and based on the results keep increasing the 10% limit.

Now forget about what I think because no matter what I think the story in today’s Wall Street Journal about Big oil doing it’s best to be an obstacle to the growth of ethanol is kind of sad.

Following is the summary of the WSJ article titled, ‘Fill up with Ethanol? One obstacle is Big Oil’ by LAURA MECKLER.

- Oil company policies are making it almost impossible for service stations to carry E85 ethanol (85% ethanol and 15% gasoline).
- The article also touches on the fact that the demand might not be there for E85 because it costs more and would limit service-station owners’ enthusiasm for spending on the equipment needed to offer E85 even if the policies of the oil companies were not a factor.
- Service Station franchises are required to purchase all the fuel from the oil company and since oil companies don’t offer ethanol the service stations can’t sell them either.
- Contracts sometimes limit advertising of E85 and restrict the use of credit cards to pay for it. Some require that any E85 pump be on a separate island, not under the main canopy.
- Exxon Mobil Corp.’s standard contract with Exxon stations bars them from buying fuel from anybody but itself, and it doesn’t sell E85.
- A ConocoPhillips memo to franchisees says the company doesn’t allow E85 sales on the primary island, under the covered canopy where gasoline is sold. Stations must find another spot.
- A Chevron Corp. agreement with franchisees also appears to discourage selling E85 under the main canopy.
- Chevron’s agreement with station owners recommends they install new pumps and tanks at their own expense if they want to stock E85. This is an additional cost for gas station owners.
- BP (so called the most environmentally friendly Big Oil) has guidelines for stations that carry the company name bar any mention of E85 on signs on gasoline dispensers, perimeter signs or light poles. The stations also can’t let buyers use pay-at-the-pump credit-card machines.

Disclosure: I don’t have a position in any ethanol or Oil company.

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