Gasoline Prices and the Ethanol Tariff1 After a steady increase over the previous year, on May 5th, 2006 average gasoline prices remained at $2.92 and in some states prices reached well above $3.00, according to the American Automobile Association.

Gasoline Prices and the Ethanol Tariff1 After a steady increase over the previous year, on May 5th, 2006 average gasoline prices remained at $2.92 and in some states prices reached well above $3.00, according to the American Automobile Association. These high prices generated public discontent and pressure on policymakers to act. “We have come to a tipping point,” said Sen. Joe Lieberman (D., CT.), “I hope we do something about the anger of the American people.” Sen. George Voinovich (R., OH) said “We’re in a crisis mode.” In his testimony at the House Energy Committee, Howard Gruenspecht, deputy administrator of the Energy Information Administration, said that world markets, political tensions, hurricanes, efforts to change gasoline blends and, perhaps, greedy petroleum companies had contributed to keeping prices high. A variety of initiatives were being discussed in Congress. In the Senate, a Republican proposal to send a $100 rebate to taxpayers was abandoned, but Senate Majority Leader Bill Frist said it “stimulated a lot of debate.” In the House, the Republican Party pledged to bring at least one energy bill to the floor each week until Memorial Day, the start of the summer driving season. That included a measure to drill for oil in the Arctic National Wildlife Refuge in Alaska that has repeatedly failed to make it through Congress. Another bill was asking for increased fuel efficiency standards. Senator Charles Schumer (D., NY) proposed to temporarily lift tariffs on imported ethanol. He said “It is not going to solve the whole problem, but it will certainly make a difference in a quick, easy and simple way.” He added “It makes no sense, when we are desperately short of ethanol, to have this tariff, which was done at the behest of agribusiness and Midwestern corn farmers.” His proposal received support from members of the Republican Party, such as the No. 2 Republican in the House, John Boehner (R., OH). Senate Budget Committee Chairman Judd Gregg (R., NH) estimated that lifting the “steep” tariff on ethanol would save consumers 8 cents a gallon. President George W. Bush also called on legislators to consider lifting the tariff. The effect of the price of ethanol on the final price of gasoline was due to the unintended consequences of the energy bill passed in 2005. The Energy Policy Act ended the requirement that gasoline include an “oxygenate” prompting the refiners to drop the chemical MTBE that was widely used and was a source of environmental damage. Refiners needed to replace this ingredient and they turned to ethanol, which is also high-octane but is less polluting. The current proportion of ethanol in the fuel mix at the pump was typically 10%. Without modifications, the current fleet of automobiles and trucks could use a 15% mix. Moreover, with suitable modifications of car designs, up to an 85% mix was technologically feasible. Such a mix was routinely used in Brazil. However, ethanol is expensive and energy-poor. Its price was up by $1.30 a gallon the previous year, in part because of heavy demand to replace MTBE. Ethanol has only about two-thirds as much energy as MTBE. It is produced domestically in 21 states, mostly from corn in Midwestern states such as Iowa, Illinois, Nebraska and South Dakota. In the Caribbean and Brazil, ethanol is produced more cheaply from sugar cane, which is more energy efficient. The Iowa Farm Bureau 1 This case was prepared from public sources by Professor Gerard Padró i Miquel. Copyright © 2004 by Gerard Padró i Miquel. estimated that a gallon of ethanol costs $.87 in Brazil and after ocean shipping charges it would reach the United States at $1.01. Since 1980, the United States has imposed a $.54 per gallon plus 2.5% tariff on imported ethanol. The only exception is ethanol from the Caribbean Basin Initiative countries: ethanol from these countries can be imported free of duties as long as the total quantity remains below 7% of the previous year’s total consumption of ethanol in the United States. This effectively sets a quota on ethanol imports. The tariff and quota system is estimated to raise the cost of imported ethanol to more than $1.60. The initiative to suspend the tariff was not well received by legislators from corn producing states. Sens. Charles Grassley (R., IA) and John Thune (R., SD) said lifting the tariff “would be counterproductive to the widely supported goal of promoting home-grown renewable sources of energy.” In the House, Speaker Dennis Hastert (R., IL) told reporters “I don’t see an economic plus in it right now.” Senate Minority Leader Harry Reid (D., NV) also opposed lifting the tariff. The Renewable Fuels Association (RFA), an ethanol industry group that includes the politically powerful Archer Daniels Midland Co., said in a letter to House and Senate members that “removing the tariff will have no impact on what American drivers are paying at the pump.” Bob Dinneen, president of the RFA said that removing the tariff “would be the equivalent of asking American tax payers to subsidize already heavily supported Brazilian ethanol.” The National Corn Growers association and the American Farm Bureau Federation also vigorously opposed the lifting of the tariff. Their lobbyists argued that only Congress has the authority to lift the tariff, but a spokesman for the Treasury Department said that in a state of emergency, the President would have the right to suspend it. In addition to considering lifting the ethanol tariff, Congress wanted to examine the role of the five largest oil companies in the price surge. In particular, the House Energy and Commerce Committee sent letters to obtain detailed information on the massive windfalls that high oil prices generated as a result of soaring gasoline prices. ExxonMobil Corp. was also asked about the compensation package received by Lee Raymond, its former chairman and CEO, who retired in late 2005. According to the Securities and Exchange Commission file, Mr. Raymond received well above $150 million between distributions and stocks. Letters were also sent to ConocoPhillips, Chevron, BP and Shell.

Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"