It’s not often I come out swinging in defense of the oil industry.
Not that I’m particularly anti-oil. I’m just pro-progress. And relying on an outdated internal combustion engine is something we do, not because we’re too stupid to move beyond it but because it is in the best interests of our elected officials.
In any event, we recently learned that the EPA has decided not to finalize the 2014 Renewable Fuels Standard before the end of the year. Renewable fuel advocates see this is as good news, as it delays any possible reduction in mandatory blending.
You see, because the gasoline market has been so saturated with ethanol, the EPA decided nearly a year ago to relax a mandate that forces refiners to blend more biofuels (mostly corn-based ethanol) into their products. Many suspected the new rules would solidify a reduction in the mandate.
That has yet to happen. In the meantime, there is a growing chorus of Americans who believe it’s time to scrap the whole mandate altogether.
Government at its Worst
American Petroleum Institute president and CEO Jack Gerard responded to the recent EPA decision by saying…
The rule is already a year overdue and the administration has no intention of finalizing this year’s requirements before the year ends. It is unacceptable to expect refiners to provide the fuels Americans need with so much regulatory uncertainty. This is an example of government at its worst.
The Renewable Fuel Standard was flawed from the beginning, horribly mismanaged, and is now broken. The only real solution is for Congress to scrap the program and let consumers, not the federal government, choose the best fuel to put in their tanks.
He’s absolutely right.
In an effort to provide a hedge against rising gas prices and an over-reliance on foreign oil, the renewable fuels mandate was put into play in 2007. The problem is, now that the fracking revolution has provided the U.S. with a wealth of new oil, using biofuels as a hedge doesn’t seem to make much sense.
Of course, even with the fracking boom well underway, we won’t always be awash in oil. As I’ve written in these pages before, there is increasing evidence that due to steep and fast decline rates, the shale revolution may not have the longevity that so many claim.
Still, the renewable fuels mandate remains to be little more than an exercise in bureaucratic buffoonery. Big Ag gets paid, politicians get fat campaign contributions, and consumers get sold the illusion of “cheaper gas.”
Just your typical day in Washington, I suppose.
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A Big Fat Gift for Big Ag
Bob Dinneen of the Renewable Fuels Association said the following in a recent press release…
… it is clear that one of the reasons we find ourselves in this position is that the oil industry has steadfastly refused to make the investments in infrastructure or allow their marketers to offer higher ethanol blends like E85 or E15.
So why exactly is it the responsibility of the oil industry to invest in infrastructure that doesn’t benefit it? Because the government said so.
Dinneen also said the Renewable Fuels Standard must be allowed to be the market-forcing mechanism it was designed to be.
Whatever happened to supply and demand being the force that underlines market movements?
The bottom line is that the Renewable Fuels Mandate was little more than a big fat gift to Big Ag. It has not resulted in lower prices for consumers (as was promised), and it has actually turned out to be an environmental nightmare — not the clean, green dream of a more environmentally sustainable fuel.
In fact, while ethanol advocates rant and rave about the economic benefits of ethanol, they rarely discuss how much of your hard-earned cash is being pilfered by way of exorbitant subsidies for the industrial agriculture machine, which irresponsibly grows an abundance of corn with dangerous pesticides and GMO concoctions that are also heavily subsidized.
Corn-based ethanol is no better for the planet than 87 octane, and it hasn’t saved you a penny at the pump.
Domestic Oil and Gas
The question for investors, of course, is how do we play this?
Well, we don’t.
Biofuel producers will live and die by the Renewable Fuels Mandate. No one knows exactly how this will pan out next year, but with the continued bounty of black gold that frackers keep pumping out, an increase in average fuel economies for new cars and trucks, and the slow but steady rollout of electric cars, the biofuel industry only has one leg to stand on. And that leg is lodged squarely in the wallets of the people we elect.
Of course, that’s one hell of a leg to stand on. Certainly it’s enough to keep this welfare scam going. But from an investment perspective, it’s just too speculative and too shady to play.
If you want to invest in transportation fuels, stick with the domestic oil and gas plays. And if you want to invest in real solutions to the outdated internal combustion engine and the air and water pollution with which it blankets the planet, get yourself a pair of good walking shoes, a bus pass, or an electric car.
To a new way of life and a new generation of wealth…
Jeff Siegel
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Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.
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