David R. Kotok
Cumberland Advisors, April 22, 2015
I stopped at a local Sarasota Sunoco gas station yesterday to fill up my car. A sign read “Non-ethanol fuel for sale here.” The pump was off to one side and did not have an automated payment mechanism. But it was there, and that is something new in and of itself.
The price difference between the non-ethanol fuel and the ethanol 10% or more fuel, at roughly the same octane rating, was $0.37 per gallon. So I was offered a market-based, apples-to-apples comparison in terms of price and octane.
My Hyundai dealer says that buying the non-ethanol fuel will extend the life of my car’s engine. I drive a Genesis and like the car a lot. The dealer recommends paying the higher gas price in exchange for better-operating machinery. Others who have boats or mowers say the same. They despise ethanol because it is caustic to their machines. I cannot find a single person who says ethanol improves operating efficiency or engine durability.
As I filled the gas tank with non-ethanol fuel, I asked myself, “Is this price differential also a metaphor for the subsidy that the United States of America and its taxpayers have been providing to the ethanol political lobby for years?” Some of the ethanol subsidies were direct cash payments as high as 51 cents per gallon. Some have been eliminated, but other forms of ethanol mandates still exist. Does the $0.37 per gallon price difference reflect an embedded industrial complexity that has now more or less permanently altered the pricing structure?
If every sort of ethanol subsidy were repealed and there were zero subsidies in any form, would ethanol exist? It appears that the answer is no.
This is not the first time my car has been filled with non-ethanol fuel. It will not be the last time, either. I’m not opting for non-ethanol fuel to protest a lousy policy, although that might be an acceptable motivation. I’m electing to use non-ethanol fuel because it is better for my automobile.
I believe that ethanol is one of the sickest political diseases fostered by the United States, with impacts throughout the world. Our federal budget statistics show that billions of dollars have been expended to subsidize ethanol. Our politicians campaign early in Iowa out of fear for the Iowa corn farmer. Those scurrilous politicians will do whatever they can to placate farmers who are looking for preservation of ethanol policy so they can enjoy a subsidy paid for by the rest of us.
So here is a three-part challenge. First, consult the person who maintains your vehicle’s engine and ask about the perils of using ethanol-laced gasoline. Satisfy yourself that those perils are real.
Second, consult with those who in the past few years have gone hungry because of what has happened with food prices due to our American ethanol policy. The impacts may not be as extreme today, but they have been in the past. In my personal experience in Zambia with a Global Interdependence Center worldwide food and water program, I saw maize-based economies suffer huge food-price inflation caused by the ethanol policy created in Washington, DC. At its peak, the ethanol policy of the US starved millions of poor people around the world.
Third, let’s look for truth in politics. Now I immediately admit that this is a tough thing to find. But we have a clear metric now. Let’s see what the presidential candidates say when they visit Iowa. Will they talk about ethanol policy or be silent? Will they support subsidies to fatten the “Ag” giants at the expense of the rest of us? We have a metric now.
My gas tank is filled with non-ethanol fuel. It cost me $0.37 per gallon more than the ethanol fuel. My engine runs better, and I now have a reminder at the gas pump to think about my vote and actions as a citizen. And I have a metric to measure the actual cost difference and the translation of a macro-subsidy to the retail price of ethanol vs. non-ethanol gasoline.
At least I now have a choice and can avoid ethanol toxicity. In years past I had no choice.
David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors