Oil Companies and Ethanol Plants: Slash, Burn and Buy

Oil Companies and Ethanol Plants: Slash, Burn
and Buy
by David Blume, Author
With all of the corporate bailouts and economic disasters our country is facing at present, it really is easy
to welcome the wallet-relief provided by currently low transportation and heating fuel prices. As the saying
goes, "Why look a gift horse in the mouth?" It isn't comfortable to consider that the relatively calm waters
international oil prices present could be covering an insidious undertow that is quietly dragging our
renewable and alcohol fuel industry down to the OPEC equivalent of Davey Jones's Locker where it will
lay submerged until the big oil pumps finally do run dry.
In some places around the country today we are paying US $1.89 a gallon for gas (or even less).
However, it is important to point out that with that short term windfall comes the ominous realization that
nearly 25% of our Alcohol fuel producing industry will be going belly-up soon. That is correct. Many
investor-backed as well as entrepreneurially driven Alcohol plants currently producing in the US may be
bankrupted by the end of February 2009.
It is very likely that 40 of the nearly 200 alcohol fuel plants we have working now will be victims of what I
refer to as big oil's slash, burn and buy strategy to collapse, consume and control our fledgling alcohol
fuel industry.
The obvious poster child for this tragedy is VeraSun. Declaring bankruptcy recently in a federal court in
Delaware, VeraSun represents a considerable failure for the alcohol fuel industry. Having fallen from the
vanguard of ethanol plants funded by venture capital, its collapse is having a rip-tide effect through the
investment (and sadly) the farming community as well. Once a mighty force for alcohol expansion
VeraSun is now reduced in value to pennies on the dollar. [Editor's note, for more on the takeover bid,
read RenewableEnergyWorld.com's Wednesday story, Ethanol Industry Eyes Valero's Bid for Verasun.]
How did this happen? What is the sleight of hand big oil is using to lull us to sleep at the wheel, while it
methodically implements the conquest and enslavement of America's independent and sustainable
energy future?
Here's the answer. Oil companies are using the commodities futures trading system to artificially drive up
the price of corn while depressing the price of alcohol, essentially gaming the futures market. The impact
of artificially high corn prices is that plants like VeraSun (that aren't built and supported by farm-owners,
but rather by capital investors) had to pay high prices to compete with big oil to buy corn and make fuel.
Meanwhile, the futures price of alcohol was driven down by big oil's fuel monopoly-easy since they buy
over 99% of alcohol fuel produced.
Although VeraSun recently named the company that has offered to buy it out of bankruptcy and as I had
predicted, it's an oil company. Big oil recently spent a billion dollars conducting a fictitious food vs. fuel
campaign, contributing to devaluation of US $6 billion dollars' worth of alcohol plants by more than 90%.
Big oil is now quietly spending a fraction of the $125 billion they made in profit last year to buy up alcohol
fuel plants for pennies on the dollar.
It is sad that VeraSun and some other independent distillery companies face bankruptcy, but the real
market losers are our farmers. While oil companies bought futures contracts for corn at $6 a bushel,
farmers were subjected to a quadrupling of prices for oil-based crop inputs such as fertilizer.
With the federal court ruling in the VeraSun bankruptcy, a legal precedence is being set that now allows
plant owners to reject contract commitments for grain and corn purchases they have made with working
farmers. For the first time ever for any company, there may be an escape from paying for the futures
contracts that are bought. The problem with this is that farmers have of course already borrowed money
(based on futures pricing) to pay for higher input costs in producing the supposedly higher-priced corn.
Unlike the plant owners, they won't get to avoid their debts and as that crunch goes on.
I think that there is a real chance that big oil will buy up the alcohol plants, reject the futures contracts,
bankrupt the farmers and then be able to buy their land.
If the oil companies gain control of even a quarter of the alcohol production infrastructure and land for the
crops, there will be no end to the disruption they can cause in markets, they could even potentially
bankrupt the rest of the industry. If you think that it's a nightmare that big oil controls our energy, think
what life would be like if it controlled our land and food, as well.
Oh no, I hear another bailout in the makings! Unfortunately, I think that the only way to avoid this
catastrophic scenario is for us to provide alcohol fuel plants with a bail-out plan. However, as I have
recommended for the auto industry bailout, there should be conditions. While a number of initiatives
should be addressed to ensure the alcohol fuel industry's long-term growth, implementing these bailout
conditions in the short term will make the ethanol business more secure and less likely to need any future
assistance:
•
All alcohol fuel plants should be required to install the equipment necessary to handle non-corn
energy crops.
•
By 2010 plants should be required to diversify their crop inputs, limiting corn to 50% of the total.
This would insulate them from further manipulation by oil companies and start the country, especially the
Midwest, on the path of sustainable agriculture.
•
By 2011 all plants should be required to run at least 90% on renewable fuel, not fossil fuels.
Corn Plus has already converted its plant to run on biomass, reporting a 6:1 energy return compared to
the usual 1.5:1 of coal-based alcohol fuel plants.
•
The bailout should include loans to provide energy to alcohol fuel plants using biomass-fired
combined-heat-and-electricity facilities. This would reduce alcohol price volatility, since alcohol production
would largely be decoupled from the prices of oil, coal, and natural gas.
Even though I am an advocate for smaller alcohol fuel plants for many reasons (security, local economy
strength, true energy independence among others), the larger plants need to be protected for the health
of the industry and the United States. Without an effective alcohol industry to compete with big oil, the sky
would be the limit on gasoline prices.
I have already gone on record predicting that we can expect gas prices to rocket by March 2009. I have
also stated that there will be a concerted effort to blame the new administration for this occurrence. This
will happen because oil companies and OPEC are afraid that President Obama will carry out his
campaign promises to reduce oil imports and address climate change.
There is already a big oil campaign going on to portray the oil companies as back in control of energy
prices that somehow got out of control last summer due to "speculators." You might have caught the 60
Minutes Infomercial they ran for OPEC and the Saudi family recently, (wow take a guess at what that cost
to purchase and produce).
Big oil is already floating articles that say that putting money into alternative fuels will be a waste of
taxpayer dollars and will raise rather than lower the price of auto fuel. Expect this chorus to become a
propaganda flood during the first 60 to 90 days of President Obama's administration, with the aim of
discouraging Congress from doing anything substantial to cut our oil use via any alternatives not
controlled by big oil (oil shale, tar sands, coal-to-gas).
It will be in the oil companies' best interests to avoid attention until after the first round of legislation from
the new administration. Traditionally, new presidents can get almost anything passed in the first 60 days
or so. The oil companies would prefer to not have the gun sights of legislators trained on them during this
period. Once the first flush of legislation is introduced, it will be autumn before another major bill could be
introduced to interfere with the oil companies. They will hope to have the ethanol industry and enough
legislators bought up by then.
I urge citizens everywhere to contact their Congressional representatives, the Department of Justice,
Antitrust Division and the Federal Trade Commission, Bureau of Competition to express their concern
regarding the Valero acquisition of Verasun and to help mandate protectionary and regulatory programs
for the formation of a truly independent renewable energy and fuel producers market. (Note: email is not
always secure. Mark confidential information "Confidential" and send it via postal mail).