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Crude joke: oil tops $122 a barrel

May 7, 2008

Like a broken record, the refrain of "Oil price sets a new record high today" can be heard across the globe as the price of oil soars past $122 per barrel on the New York Mercantile Exchange.

Oil Drum

The impact of record oil prices is being felt across the economy, both at home and abroad. Everything from hamburgers to hand towels will cost more as it takes oil to produce and transport virtually every item found on store shelves. As the Dallas Morning News observed last month, "Diesel fuel prices also reached a record $4.20 a gallon Monday, compared with $2.93 a gallon a year earlier. That's sure to add to truckers' costs and drive up the price of food, clothing and other goods shipped by truck."

Rising food prices – at home, in the restaurant and around the globe

The cost of energy plays a large role in determining the price of food. According to the Federal Reserve Bank of Kansas City:

"Surging energy costs will also translate into higher food prices in 2008. In January, energy prices soared as crude oil prices exceeded $100 per barrel. At the same time, gasoline prices breached the $3 mark, and diesel fuel costs soared. Futures prices indicate that energy prices should remain high."

In addition, the bank noted "...research shows that energy prices are quickly passed through to higher retail food prices, with retail prices rising 0.52 percent in the short-term for every 1 percent rise in energy prices (Reed et al.). As a result, a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices.

High oil prices also dramatically impact the ability of food aid organizations to deliver food to those in need around the world.

According to a 2007 Government Accountability Office report, transportation costs represent a significant share of food aid expenditures. GAO says, "For the largest U.S. food aid program, approximately 65 percent of expenditures are for transportation to the U.S. port for export, ocean transportation, in-country delivery, associated cargo handling costs, and administration." Delivery costs for food aid commodities are exacerbated because recipient locations are often in remote areas with poor transportation infrastructure.

Dragging down an already sluggish economy

On January 11, economics professors William D. Nordhaus and Kenneth Rogoff, of Yale and Harvard respectively, told the Washington Post’s Steve Mufson that oil prices moving from $80-$100 per barrel packs quite an economic punch to the stomach.

From the January 11 article entitled "Stimulus Unlikely to Counter Rise in Oil Prices": "The more-than-$30-a-barrel increase in oil prices over the past five months is like a $150 billion tax increase," said William D. Nordhaus, a Yale University economics professor. By paying more for oil, Americans have less left to save or spend. "It is clearly contractionary," Nordhaus said.

Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund, made a similar estimate. "The price of oil rising even from $80 to $100 a barrel is like adding $150 billion in taxes," he said. "It's quite a wallop."

Since January 11, oil price have risen more than $30 per barrel. Oil prices have doubled since January 2007.

Alternatives, conservation helping ease demand

Record prices are starting to slow demand for gasoline. Yet, the cooling demand is having no impact on prices as world demand continues to grow. Other alternatives – like ethanol and other biofuels – are helping to mitigate the surge in oil and gasoline prices.

Merrill Lynch analyst Francisco Blanch told Business Week this week that, "oil prices would be at least 15% higher than they are, if not for today's output of ethanol." That would put oil at more than $140 per barrel, instead of the current price of around $122.

Economist John Urbanchuk also highlights the role of ethanol in today's gasoline market. Urbanchuk told Reuters that if ethanol critics have their way and reduce the amount of ethanol used by half, the resulting loss of product from the marketplace would be devastating. "It would add a bit over $1.10 a gallon to gasoline in the short term because you've got to go out and replace that 4.5 billion gallons of ethanol."

Likewise, Iowa State University calculates the savings realized by American drivers as a result of ethanol use are significant. The Center for Agriculture and Rural Development at Iowa State University estimates that the growth in ethanol production and use has caused gasoline prices to be $0.29 to $0.40 lower than they might otherwise have been.

Dr. Mark Cooper, the Research Director of the Consumer Federation of America, in a recent report on the gasoline market stated, "America's gasoline and fuel consumers are facing what could become the most expensive Spring/Summer driving season yet, despite declining gasoline demand, record stocks, more refining capacity, and growing volumes of lower-priced ethanol. While these factors should contribute to lower prices, the falling value of the dollar, OPEC resistance to increasing production, and speculation on Wall Street that have pushed the price of crude oil above $100 per barrel maintaining the upward pressure on gasoline prices."

And last, but certainly not least, the Energy Information Administration is projecting that increased ethanol use will drive US petroleum use down by 210,000 barrels per day.

For more than 25 years, the Renewable Fuels Association has served as the "Voice of the U.S. Ethanol Industry." The RFA is the national trade association for the U.S. ethanol industry representing ethanol producers, marketers, and service providers.

Matt Hartwig
Renewable Fuels Association

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