Category Archives: markets

The Cost of Ethanol-laced Gasoline

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A number of corn State Senators, Chuck Grassley (R, IA), Joni Ernst (R, IA), Deb Fischer (R, NE), Pete Ricketts (R, NE) and Roger Marshall (R, KS), have written about the financial benefits of ethanol in our gasoline.

Expanding E15 availability lowers gas prices by 20 to 40 cents per gallon on average.

Compared to what, though? See below.

And

E15 is a net positive. We know E15 will lower prices at the pump….

Again, compared to what?

I won’t go into the production costs of cars whose fuel-related seals must be designed to handle the corrosive nature of ethanol, nor will I address the maintenance costs of cars burning ethanol-laced fuels, even with those corrosion-resistant (but only resistant) seals, nor why the percentage of ethanol in gasoline tops out at 15% before ethanol’s corrosive nature overwhelms even these toughened up seals.

I won’t mention, either, the increase in the cost of food, including meat, from the diversion of corn away from the grocery store or the production of animal feed toward the production of ethanol. I’m only going to mention the immediate fiscal costs to the consumer of ethanol-laced gasoline, taking corn-based ethanol, corn being the primary source today for ethanol production, as my illustration.

It costs $1.74 in 2001 currencyto produce a gallon of ethanol from corn, and it costs 95 cents to produce a gallon of gasoline.

A gallon of E15 gasoline consists of 85% gasoline, and 15% ethanol. According to my 3rd grade arithmetic, the costs embodied in that gallon are 85% of $0.95 plus 15% of $1.74, or a skosh under $0.81 plus a skosh over $0.26. That’s $1.07 per gallon of the hybrid fuel. Using my 3rd grade arithmetic again, that’s $0.12 per gallon more than for unadulterated, and much easier on the car, gasoline.

That’s not cheaper fuel for our cars; it’s much more expensive. Those Senators bragged that

Expanding E15 availability lowers gas prices by 20 to 40 cents per gallon on average. That could mean around $400 per year in savings for a US household—precious dollars that could be spent on other needs.

The irony in that isn’t lost on me, even if it seems lost on those Senators. Instead of those 30 cents per gallon (to take the middle of their range) in ethanol-laced gasoline, not having to spend that baseline of 12 cents extra per gallon at all, all year long, would save roughly $160 per US household—precious dollars that could be spent on other needs, like food, including meat, made cheaper by no longer diverting corn to making alcohol. (OK, a little mention.)

Yet Another Reason

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The European Union is moving toward passing legislation that would allow it to curb imports of heavily subsidized foreign products. The legislation doesn’t single out any particular nation; although, the Peoples’s Republic of China is infamous for such subsidies.

Those subsidies allow PRC businesses to sell their products at less than their cost of production in order to sell at lower prices than European businesses can due to their own, unsubsidized, costs of production. That allows the PRC to put those businesses out of business and to seize nearly all of the market share. In the aggregate, this cascades into steadily increasing PRC influence over European economies.

Naturally, the PRC wants to continue this domination, so it’s threatening countermeasures if Europe continues with the impudence of defending itself.

Chinese authorities could initiate anti-discrimination and supply-chain security investigations into the EU’s “overcapacity instrument,” a social media account run by China’s state broadcaster said Friday, citing unnamed sources.
If the EU advances the tool, China will take immediate action and deploy comprehensive countermeasures, it added.

Of course, that retaliation wouldn’t matter if Europe’s nations were doing no business with the PRC or with businesses domiciled there.

The PRC keeps providing reasons for discontinuing business with or within it. It’s time for the EU and for Europe’s nations individually to act on at least some of those reasons, for their own economic survival.

The PRC’s Economic Arsenal

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The People’s Republic of China is stepping up its economic war on us, adding additional weapons to its arsenal. Those weapons include

a blacklist for foreign firms it deems hostile, a law authorizing punishment of any company that helps enforce U.S. sanctions on Chinese targets, a rule ordering Chinese parties to ignore those sanctions outright, and expanded powers for its antitrust regulators to kill cross-border merger deals on national-security grounds.

Two responses come to mind. One is that Mark Zuckerberg, Meta’s boss and controlling shareholder, should simply ignore the PRC’s order to unwind its acquisition of Manus. Meta should, instead, proceed with what it has already collected via Manus. The unwinding is strictly a matter between Manus and its government masters. To the extent the PRC then takes economic or legal action against Meta, that should finally demonstrate even to Zuckerberg the lack of utility in doing any sort of business within the PRC.

The other response is that all the players should proceed as though the PRC’s threat to sue or its actual suing have no effect. Such suits, occurring as they will within PRC courts, can have no effect outside the PRC’s borders. In the event the PRC then acts against those intermediate businesses with operations inside the PRC, see above.

Mistake

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President Donald Trump (R) is pushing Congress to include in its next budget enactment a 50% increase in the US quota contribution to the IMF, a dollar increase of some $55 billion.

The mistake is in this:

the cost to US control over IMF resources, which Treasury conceals with its claim in the budget that the “equiproportional” quota increase “would be fully offset by a reduction in” the use of debt, “all of which will keep the IMF’s overall lending capacity constant.” What Treasury doesn’t disclose is the hit to US power when the IMF gets more of its resources from equity than debt.

That hit comes from voting on IMF lending which depends on the fund’s use of debt via New Arrangements to Borrow which it does in order to raise lendable monies. This is loosely akin to a bank’s need for extending savings accounts to customers in order to raise funds to lend to other customers.  It takes approval by 85% of IMF voting shares for the IMF to borrow, and the US has had, heretofore, 16% of the voting shares, giving us veto power over IMF’s borrowing.

So long as the IMF has to borrow to lend, the US can exercise a large measure of control over IMF lending. But the US quota increase would shift the IMF’s ability to lend to those quota funds, and with that shift, the US would lose its current voting veto power, IMF could lend without serios oversight.

One upshot of all this, if it is passed, is an increase in the People’s Republic of China’s ability to borrow from the IMF and thereby to prop up its own internal excessive borrowing. And helping out an enemy nation like that is a very serious mistake.

Regulating Reputational Risk

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Progressive-Democrat ex-Presidents Barack Obama and Joe Biden used their banking regulators to “encourage” banks to do no businesses that might inflict “reputational risk” on the bank’s soundness and to end existing business relationships with such enities. Those reputation-damaging businesses—according to those administration men—centered on such Nasties as payday lenders, gun retailers, and crypto.

By focusing on reputation risk, supervisors attempt to understand and anticipate public opinion regarding issues and events and then to attempt to directly connect this public opinion regarding issues and events to an institution’s condition in ways that have proven nearly impossible to assess or quantify with accuracy[.]

Those are the words of the Federal Deposit Insurance Corporation and Comptroller of the Currency bosses as they work on a rule that would bar regulators from “reputational risk” evaluations. If regulators can’t quantify what it is they want to regulate, they have no business trying to regulate it—that’s on top of regulators need to be limiting on their regulatory activities in the first place.

Reputational risk assessments in particular are entirely subjective, and that just excuses and enables administrations of whatever stripe to regulate out of business any enterprise of which the regulators or their political bosses disapprove.

The market is fully capable of assessing reputational risk, and it should be left free to do so without government “assistance.”