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How much alternate fuel would need to be produced in order to remove the current competition for the "last barrel"?

Commodity markets are easily spooked as each sector thinks their demand is inelastic and drives up the price in a panic situation.

For example, there was going to be a electric power generation crisis in the US starting about 20 years ago, but the ease and speed of bringing natural gas-fired power stations online changed the dynamics.

So, if, for example, ethanol production increased to 10% of gasoline demand would this change the market dynamics, just like the loss of 10% of refining capacity caused by the hurricanes did last year.

There are already dozens of ethanol plants being planned and built in the US.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sat Jul 8th, 2006 at 07:21:42 PM EST
Interesting question.

Right now the market is very nervous about supply security.  Clearly there is no front end shortage which is easily proven by looking at the shape of the curve.
Aug futures closed at $74 while Jan 2007 are $77.  In a tight market the premium is at the front.

The crude price is being held up in fear that one wrong move in the AG or a Nigerian revolt or Venz political problem or Mexican political problem and we will have a real shortage.  I don't see the price retracing too far until we see crude backing up such that production is trimmed back somewhere other than in Saudi.  I believe it would take a demand drop of 5-10% worldwide to seriously crimp Saudi production enough that they use the price weapon to enforce shared sacrifice on the other OPECers.

Gasoline prices are a little different.  Right now the gas crack is wide -- approaching $20/bbl compared to $6 this time of year in the 90's.  That premium would evaporate with as little as 1-2 MMBD of alternatives hitting the market (about 10%-20% of US mogas demand).   At that level you'd be backing out almost all our imports of gasoline and blending components.  Those export refiners would sell down the US market to their marginal cost of production.  

About 1 MMBD of MTBE has been backed out of the mogas pool in the last couple of years.  That's part of the supply problem.

Most of the ethanol plants are pretty small.  That industry talks in terms of 50 million gallons/year plant size.  Or 1.2 MM bbls/year which is just 3300 bbls/day.  Small potatos in the US gasoline mkt.

by HiD on Sat Jul 8th, 2006 at 08:49:28 PM EST
[ Parent ]
In the past 6 years (since 2000), suppliers have had all the incentives to produce more, and are finding it surprisingly difficult to do so.

Apart from BP, whose production increase is linked to its purchase of half of TNK in Russia, all the majors are seeing their production stagnate or decline.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jul 9th, 2006 at 05:18:45 AM EST
[ Parent ]
This presupposes that the oil companies want to increase their production.

Their profits are rising nicely at current levels. Why incur the added expenses of exploration and increased capacity. I know we don't think much of their abilities to plan for the future (BP aside), but why expand now when one can harbor one's resources and reap the benefit of higher prices in the future.

If oil goes to $100 then the companies show a 25% increase in value with no effort on their part. This is a better return than pumping oil currently yields.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Jul 9th, 2006 at 09:24:27 AM EST
[ Parent ]

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