Food and gasoline prices are on the rise. Ironically, critics tend to see the soaring costs as independent of one another. Grocers blame farmers for high food prices, farmers say food prices are reflective of higher transportation costs while the petroleum industry insist it’s all the fault of speculators who are buying an array of commodities anticipating demand will drive prices higher.
Actually, grocers and farmers like to blame the speculators as well. Be it low prices or high, futures and options traders are always convenient scapegoats. But this time the reptilian speculator is seen as mere agent of evil.
A chorus of critics suggests the dark catalyst for the current soaring food and fuel prices is America's ethanol boom. They blame it for everything from higher food prices to starvation in 3rd world countries. And the debate over whether corn should be used for food or fuel is far from over.
Just six months ago in December 2007, President Bush signed a sweeping energy bill. The measure demands higher fuel efficiency for cars and trucks and an aggressive mandate for biofuel production.
President George W. Bush: “The bill I sign today takes a significant step because it will require fuel producers to use at least 36 billion gallons of biofuel in 2022. This is nearly a fivefold increase over current levels.”
Many members of Congress that Bush thanked in 2007 have shifted their position on a renewable fuels mandate. In six months time, gas prices have skyrocketed … food costs have soared … global hunger has grown … and many lawmakers and pundits are pointing the finger at corn-based ethanol. In the past month, major congressional committee hearings have probed if and how ethanol may be driving high food and energy costs.
Rep. Greg Walden: “I understand that Chevron blends about 40 percent of its gasoline in the United States with ethanol. Is that driving gas up or not?”
Peter Robertson, Chevron: “Ethanol prices have been pretty volatile over the last couple of years but I think it's a very small part, frankly, of the price of gasoline. I think it's been already testified 70% of the price of gasoline is crude oil, 15% of the price of gasoline is taxes even though ethanol is about 5% of our gasoline that volatility hasn't had much of an effect.”
In an April hearing, oil company executives pointed towards crude oil and the growing power of speculators in the commodity markets as the root cause of high prices at the pump.
J.S. Simon: “When you look at the fundamentals of our business, Congressman, the supply-demand fundamentals, our assessment would be the price should be somewhere around $50, $55 a barrel. There is a disconnect. To me there's three factors that contribute to that. One is the monetary issue of the weaker dollars we've already talked about. The other is geopolitical risk and the third, we believe, is speculation.”
One executive claimed internal analysis of only supply and demand pegged the price per barrel of oil at $55. He elaborated that a weak dollar and speculation were overwhelming factors in more than $120 oil.
A recent study at Iowa State University in Ames, Iowa, claims a growing ethanol market has actually lowered gas prices by as much as 39 cents in the Midwest. But even if ethanol critics concede the renewable fuel isn’t driving gas prices higher, costs at the checkout counter are another story.
Prices for commodities like corn, beans and wheat have doubled and even tripled over the past year. Biofuel critics have drawn a direct link from ethanol to high corn costs to even higher grocery prices to worldwide starvation. A United Nations report blasted the use of food as an energy source and called American biofuel production a crime against humanity.
The connection between food, fuel, starvation and ethanol has led some farm-state lawmakers to push back hard.
Sen. Charles Grassley: “And I don’t think farmers can be responsible for the high cost of food. I went out this morning and bought a big box of Corn Flakes for $5. It would be about a nickel that the farmer gets out of this box of Corn Flakes.”
Iowa Senator Charles Grassley is a staunch defender of corn-based ethanol. In a recent press conference, Grassley characterized the renewable fuel as a scapegoat for economic problems.
Sen. Charles Grassley: “When a farmer gets so little out of a box of Corn Flakes don’t be blaming the farmer and ethanol for the high price of food. You know, I get the impression that people think that they’re eating this corn. This is what we make ethanol out of. I don’t know whether people that are complaining about corn increasing the price of food or not, maybe they think it’s the seed corn, I don’t know. But take one of these kernels here and chew on it. It’s not something that you would sit down to your kitchen table and eat.”
Farm-state lawmakers like Grassley have reached a boiling point following months of negative newspaper editorials and scathing magazine covers. But many biofuel critics claim there is truth behind ethanol forcing high costs in the supermarket.
Perhaps the strongest link is meat prices. Farmers and ranchers are paying much more for corn-based feed needs in the world of $6 corn. But evidence points to a stronger relationship with high transportation costs for all grocery items.