The U.S. House of Representatives recently voted 389-34 to make gasoline "price-gouging" a federal felony.  The Wall Street Journal followed the vote with an editorial acknowledging that the "irony here is that if there is any extortion or swindling going on in the oil marketplace, Congress is the guilty party. Understanding Prices at the Pumps (Part II)

The U.S. House of Representatives recently voted 389-34 to make gasoline "price-gouging" a federal felony.  The Wall Street Journal followed the vote with an editorial acknowledging that the "irony here is that if there is any extortion or swindling going on in the oil marketplace, Congress is the guilty party.  It is Congress that ordered service stations across America to switch last month to ethanol additives that have both raised prices at the pump and exacerbated shortages in recent weeks."

Undoubtedly there are numerous factors that go into the price that we consumers pay at the pump for a gallon of gasoline.  Last week we posted part one of this two part series that examines this issue in an attempt to offer a layman's guide to gasoline pricing.

Recently CFIF Corporate Counsel & Senior Vice President Renee Giachino completed her interview with Tom Tanton, Senior Fellow with the Institute for Energy Research.  What follows are excerpts from the interview that aired on "Your Turn – Meeting Nonsense With Common Sense" on WEBY 1330 AM, Northwest Florida's Talk Radio.

GIACHINO:  I'd like to welcome back to "Your Turn" Tom Tanton.  Mr. Tanton is a Senior Fellow at the Institute for Energy Research.  Our loyal listeners may recall that Mr. Tanton was with us on the last program to try to give us a better understanding of the issues and a layman's guide to gasoline prices.  We are very pleased to have him come back.  Tom thanks again for joining us this afternoon.

TANTON:  I am glad to be with you.  I hope the fires in Florida are not causing too many problems for your listeners and that they are starting to get them under control.

GIACHINO:  Fortunately, we are not having fires in our area at this time.  We had most of our fires several weeks ago.  Finally we have received some rain.

We all know what hurricanes can do to gas prices.  What do these fires mean?  We know that they had to shut down some highways in Florida.  Does that simply cut down on supply and so there is another shortage and opportunity for us to see a spike at the pumps?

TANTON: I think events like that with respect to gasoline prices are probably not much input.  It might affect demand a little because people are staying in their homes and not driving because freeways are closed. 

But it is important from a more global perspective.  Much of the fires in Florida are the result of a long-term and recessive drought.  Many people who are complaining about gasoline prices are pointing to ethanol and this came up in our last interview session.  These people are pointing to ethanol as a home-grown source of fuel.  Ethanol, however, is made from corn or sugar cane.  U.S. ethanol is made from corn.  Most corn is grown without irrigation and if we have a year or two of drought we have a supply risk for that ethanol, just as we have for gasoline supplies. So my point is that we cannot look to ethanol or any of the other alternatives as a panacea.  They do come with other risks, some of which can be managed and others of which are unmanageable.  Ethanol or any other fuel alternative must be viewed as a supplement, not a supplanting fuel.  In other words, we need a diverse mix and not a replacement.

GIACHINO:  We already have our first call.  Go ahead caller, it's your turn.

CALLER:  Last time we spoke you established that ethanol gets about only 65% of the energy that an equal amount of gasoline gets.  Is that correct?

TANTON: That's right.

CALLER:  Is that when you are talking about 100% ethanol or 85% ethanol?

TANTON:  That's at 100% pure ethanol.

CALLER:  Just like the Indy cars then.  So what about this fuel that you can get from coal?  What type of coal can you get and do you have to mine for it or is it strip mining?

TANTON:  The liquid fuels that you can get from coal can be derived from pretty much any sort of coal.  One would not want to use anthracite because that tends to be of higher value.  But pretty much any bituminous or sub-bituminous coals that are available either by deep mines or strip mines would be useful.  It's important to point out that the liquid fuel that is derived from coal goes through an intermediate step of synthetic gas just like biomass fuels.

CALLER:  To convert fuel from coal where would that be comparative with gasoline? At what price?

TANTON:  If you take out the tax effects and the subsidy effects, liquid fuels from coal would be competitive at about $40-45 per barrel of oil equivalent.

CALLER:  I'm considering myself going the European way with the small diesel engine and getting around at 40-45 miles per gallon largely because of the durability of it and because of the adding of all of the ethanol and the MTBE they keep on messing with the gasoline and so I think you can get a more consistent fuel mileage with the diesel.  Do you agree?

TANTON:  Diesels in general have better fuel mileage than gasoline cars but they have a different performance level as well so there is a trade-off as between performance and acceleration versus overall mileage.

CALLER:  As we spoke last time, I am for drilling everywhere possible domestically and continue our research until we have a true competitor with gasoline and do not believe that ethanol is.  Do you see anything coming down the road that would be truly financially competitive without government support?

TANTON:  I don't know. I got out of the technology forecasting business years ago when I found out that the technology forecasting business was abysmally failing.  I agree that the best thing to do would be to let technologies compete and mature on their own without subsidies.  I see a number of possibilities, but nothing I would want to bet the farm on.

CALLER:  Yes, that's how I see it too.  Thank you sir.  I'm going to keep listening.

GIACHINO:  Thank you for your call.  Tom, when we talk about the cost of soaring energy prices so far we consumers have felt that mainly at the pump.  Do you think that will start to change?  Will we start to see higher prices in our homes and businesses and how far off do you think that might be?

TANTON:  I think it was "yesterday" that you will start seeing it in other aspects of your life.  For example, if the amount of your discretionary income spent on energy doubles then that is that much less that you will have for other things – going to the movies, out to dinner, whatever that happens to be.  It is an immediate impact and it is already occurring as the result of higher prices.  But there is a flip side to that as well.  Look at the retirees and the pension funds that actually own the stock in these companies. For sure, their income is increasing as well.  So they can go out and have that nice dinner or whatever that effect is.

Yes it will start impacting other parts of the energy arena as people make substitutions that will likely affect the price of natural gas that we use to heat our homes and power our electricity generators.  So those prices are likely to be affected as well.  But note that oil prices have started a decline as well from a high of $75.  So there is a downward trend and things are starting to re-equilibrate.  Equilibrium is an important thing that is never actually achieved but it is a movement that occurs as the result of dynamic market forces.  But we don't want actual equilibrium because then everything is static and nothing happens.

GIACHINO:  We are talking with Tom Tanton, Senior Fellow with the Energy Research Institute.  Their website is

We've got another call.  Go ahead, it's your turn.

CALLER:  What about shale oil in the west?  Is that a viable alternative?

TANTON:  Shale oil is a viable alternative.  To some extent it is viewed negatively by some environmental types but also by some financial types because shale oil was a centerpiece of the disastrous Synfules Corporation's efforts back in the Carter years.  But shale really is a promising resource for hydrocarbons as is tar sands.  They are similar in nature and processing.

CALLER:  Yes, the main thing was that they were so hard to process and get and now they have come up with a process that is much cheaper and easier to get the oil.  What I understand is that there is a huge reserve out in the west in the badlands.

TANTON:  That's correct, although I would not refer to them as the badlands..  Compared to Florida, I guess you can be a little more pejorative, depending on how much you like Florida.  But it is a vast resource and technology has improved dramatically and it is one of those very promising new resources.

CALLER:  Thank you.

GIACHINO:  We're talking with Tom Tanton.  He is a senior fellow with the Institute for Energy Research and he is a principal of T2 and Associates, a firm that provides consulting services to the energy and technology industries and he has over 35 years experience in the energy, economy and environmental fields. 

We have another call.  Go ahead, it's your turn.

CALLER:  I am a proponent of ethanol.  And talk about subsidies, before we went to war with Iraq, our government was spending $55 billion for the oil companies to get $11 billion worth of oil from the Middle East.  And that of course is not considered subsidies but nonetheless that is a lot of money being spent.  Ethanol is going for $30 a barrel. It is a lot cheaper.  Of course if we had just small businesses making it it would be a lot cheaper still.

TANTON:  Well let me respond in a couple of ways.  First of all the subsidies to oil are considerably less than the subsidies to either ethanol or other renewable fuels.

CALLER:  Well respond to before the war and how much we are spending on the war is a tremendous amount to get the oil from Iraq.

TANTON:  That assumes that the war is being undertaken solely for the oil which I think is a bit of a disingenuous argument.

CALLER:  Of course it is about oil.

TANTON:  I'd like to talk about oil prices and not whether removing Saddam Hussein was good, bad or indifferent.

GIACHINO:  We can save that for another discussion.  Mr. Tanton, do you have another part to that response?

TANTON:  Just that the subsidies to other fuel types are considerably more than the subsidies to oil.  I am not sure having a lot of small producers of ethanol will drive the prices down.  In fact, the economy of scale tends to drive price up when you have a lot of small operators. And finally, one has to realize that producing 100 proof ethanol is only 50% alcohol and there is a lot of water in that alcohol that has to be removed in order to use it as fuel.

CALLER:  They tend to use 85% alcohol although down in Brazil they are using 100%.  If you are using a flex-fuel car you are not going to get the whole benefit of ethanol and that is if you want to be able to go back and forth between gas and ethanol.

TANTON:  Right, but that is still 100% ethanol and the E85 is 100% ethanol mixed with 15% gasoline.  There is no water in it.

CALLER:  But if we could get to where we were using 100% ethanol and not going back and forth with gas in order to even increase our performance, there is just so much out there that we could be doing with ethanol.

TANTON:  That's true but as I pointed out at the top of the show, if you were completely dependent on ethanol you would be subject to other natural and man-made disasters, not to mention droughts that would diminish the corn crop.

CALLER:  Sugar cane would be the best.  And you would want to have reserves, I would agree.  I guess Henry Ford first was going to use ethanol.  If we had done this all the time we would have extra reserves of gas too for those who use the flex-fuel.  For people to say it is not an alternative is wrong.

TANTON:  It's an alternative as a supplement, not something that would supplant.  We cannot go 100% to anything.  We have seen the problems of being 100% dependent on a lot of different sources throughout history.  Whenever we are overly dependent on any particular thing, including government intervention, then that causes problems for us all.

CALLER:  You would want to have reserves.  Thank you very much.

GIACHINO:  Thank you caller.  We have another call.  Go ahead, it's your turn.

CALLER:  I've been reading books and getting on the Internet and learning about the solar hydrogen generation.  This is very interesting stuff with a lot of hands on.  There are a fair amount of people making bio-diesel and hydrogen in their backyard and running their cars on it.  I was just curious about your thoughts about that?

TANTON:  There is basically two fundamental ways of using solar energy to produce hydrogen.  One is to use solar energy to produce electricity through a process called electrolysis – separating water into hydrogen and oxygen.  The other process is a high temperature, basically radiolysis, somewhat like what occurs in the top end of a nuclear reactor but it uses solar energy to produce hydrogen from water directly.  Both processes tend to be energy inefficient and they tend to be highly capital intensive.  That's not to say that as technology advances those two factors won't improve.  But they just don't make economic sense today.  They all are important technologies and approaches to put in the pipeline for some future date.

GIACHINO:  Well unfortunately we have run out of our time for this segment.  We'll have to invite Mr. Tanton back again sometime down the road and hopefully by then we will have seen a decline in gas prices and we will have something more happy to discuss.

TANTON:  They have gone down a nickel since last week.

GIACHINO:  Even going down a penny at this point is newsworthy.

TANTON:  That's right.

GIACHINO:  Thank you again for your time.

TANTON:  My pleasure.

To view part one of this interview series, click here.

May 18, 2006
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