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Spring. When a young man’s thoughts turn to gas and ethanol and Russia and Saudi Arabia and coronavirus…

Posted on 03/26/2020

 

By Ron Lamberty, American Coalition for Ethanol (ACE) Senior Vice President

Probably the two questions I’ve been asked most by reporters in the past month have been whether the Covid-19 outbreak would hurt the ethanol industry and “when will this thing be over?” The simple answers are “Yes,” and “How would I know?”

Of course, a steep drop in fuel use resulting from people staying home to avoid contracting or spreading the coronavirus will create extremely difficult economics for ethanol producers. When nobody is buying fuel, prices plummet. But gasoline and ethanol use didn’t drop as of the first few weeks of March — probably because people were “stocking up” by filling all their vehicles. And yet prices dropped like Wile E Coyote when he realizes he just ran past the Road Runner and off a cliff.

That precipitous drop in gas prices was only indirectly related to the coronavirus and as mentioned above, not at all related to a drop in demand. To maintain oil price levels during the pandemic, OPEC met in early March with a goal of agreeing to cut production to match the expected drop in global transportation fuel use. However, instead of Saudi Arabia taking its usual role of being the country doing most of the reducing, this time, the Saudis wanted other countries to take bigger cuts — including Russia. Russia isn’t an OPEC member, but is typically an ally and goes along with OPEC’s strategies. But not this time.

Instead, Russia boldly proclaimed they could sell oil for a decade at $30 a barrel, and Saudi Arabia essentially said “prove it" by cutting its own price nearly in half. Russia matched, and both pledged to ramp up production and see who can flood the market with more, cheaper oil. In a “normal” market, consumers typically respond to lower prices by driving more. Inventories tighten, and prices eventually go back up. Unfortunately, there is nothing normal about the current marketplace. On top of a market already flooded with artificially low-priced oil courtesy of a tough guy contest between a couple big oil producing countries, having no one to consume the bargain-priced fuels in April, May, and possibly longer makes a difficult market environment nearly impossible.

I suppose it is theoretically possible people who are avoiding air travel, mass transit, and carpools will instead drive their own cars to wherever they need to be, but more and more, the only place people need to be in the near future is… home.

Some have speculated Russia and Saudi Arabia’s motives may be even more sinister than pure oil egomania, and believe the two countries are seizing on the effects of the pandemic and adding to it,  to create a perfect storm that will put as many “marginal” oil producers as possible out of business. That actually only makes sense for Russia, since they reportedly have a break-even point somewhere around $30 a barrel, while Saudi Arabia’s break even is apparently over $80 a barrel.  

If there is any good news for ethanol, it’s that it may not drop as far or as fast as gasoline because of its value as a source of the octane, which is needed to make sub-octane v-grade base fuel useable in cars. It’s also true that the ethanol industry is more efficient than ever, and more able to adjust its output and market co-products in a way that will help the plant survive this unprecedented market downturn. Even so, we will see undoubtedly plant slow-downs and closures over the next few weeks and months.

I finally answered one of the “when will all this end?” questions saying it would be “July 17^th.” To her credit, she immediately realized I was mocking her question and brilliantly replied, “Yeah. That’s what I had, too.”

 

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