R-Squared Energy Blog

Pure Energy

How Oil Prices Impact Almost Everything

There is a very informative story in the Dallas Morning News today covering what I recently discussed in The Ripple Effect:

Shoppers pay as oil costs trickle down

Ripple effect, trickle down effect – it all amounts to the same idea: There are few aspects of modern life that aren’t dependent upon oil. From the article:

“So far we haven’t seen much percolation of energy prices through to retail. That’s so far,” said Stephen Brown, director of energy economics for the Dallas Federal Reserve Bank. But some increases are inevitable.

And they’ll show up in products that most people don’t associate with black gunk from the ground. For Kevin Brown, an economist with the American Chemistry Council, the iconic product is a plastic bottle of shampoo. Aside from the water, 100 percent of the value of the ingredients comes from oil- or natural-gas-based products.

“That bottle is made of high-density polycarbonate. The cap is made from another plastic. The label is a composite of plastic resin and paper. The ink on that paper is petroleum-derived. The glue on the back is petroleum-derived. Now let’s look inside the bottle, at the surfactants, emulsifiers and fragrances,” he said.

“It’s all petrochemistry.”

He has calculated the value of the petro-ingredients of a variety of products: Tires, 62 percent (from the artificial rubber to carbon blacking); a vacuum cleaner, 30 percent (many plastic parts); lipstick, 100 percent (from the paraffin wax to the dyes and fragrances). Even paper, which mostly grows on trees, owes about a quarter of the cost of its materials to petro-products needed to convert pulp into pages, he said.

It may be a bigger challenge to find alternatives for the oil in tires and plastics than to find alternatives for oil as a fuel.

The article also discusses sky-rocketing asphalt prices. Not only is the cost of asphalt going up because the price of oil is going up, but many refiners are installing cokers to turn asphalt into liquid fuels. That will continue to take place until the price of asphalt is such that some refiners start to decide there is more money in the asphalt market than by further processing it.

This all points to more inflation, as the cost of oil works its way through to price increases throughout other sectors. This is also why I am not optimistic that the economy is going to recover soon – we simply have not seen the effects of $130 oil.

June 16, 2008 Posted by | inflation, oil prices, plastics | 18 Comments

Food Riots

As I have been arguing for years, this is not going to have a happy ending. Some day we will look back on this ethanol mandate fiasco as one of the greatest mistakes ever in American energy policy:

Riots, instability spread as food prices skyrocket

(CNN) — Riots from Haiti to Bangladesh to Egypt over the soaring costs of basic foods have brought the issue to a boiling point and catapulted it to the forefront of the world’s attention, the head of an agency focused on global development said Monday.

“This is the world’s big story,” said Jeffrey Sachs, director of Columbia University’s Earth Institute.

“The finance ministers were in shock, almost in panic this weekend,” he said on CNN’s “American Morning,” in a reference to top economic officials who gathered in Washington. “There are riots all over the world in the poor countries … and, of course, our own poor are feeling it in the United States.”

What could be behind this? Of course higher energy prices are partially responsible. But I think there’s more to it:

In the United States and other Western nations, more and more poor families are feeling the pinch. In recent days, presidential candidates have paid increasing attention to the cost of food, often citing it on the stump.

The issue is also fueling a rising debate over how much the rising prices can be blamed on ethanol production. The basic argument is that because ethanol comes from corn, the push to replace some traditional fuels with ethanol has created a new demand for corn that has thrown off world food prices.

Jean Ziegler, U.N. special rapporteur on the right to food, has called using food crops to create ethanol “a crime against humanity.”

“We’ve been putting our food into the gas tank — this corn-to-ethanol subsidy which our government is doing really makes little sense,” said Columbia University’s Sachs.

Former President Clinton, at a campaign stop for his wife in Pennsylvania over the weekend, said, “Corn is the single most inefficient way to produce ethanol because it uses a lot of energy and because it drives up the price of food.”

Not everyone is buying that, though:

Some environmental groups reject the focus on ethanol in examining food prices.

“The contrived food vs. fuel debate has reared its ugly head once again,” the Renewable Fuels Association says on its Web site, adding that “numerous statistical analyses have demonstrated that the price of oil — not corn prices or ethanol production — has the greatest impact on consumer food prices because it is integral to virtually every phase of food production, from processing to packaging to transportation.”

Couple of things. First, the RFA is not an environmental group. It is the ethanol lobby. Might as well say the National Mining Association is an environmental group. Second, how does the rate of food inflation compare to other items that depend on oil for every phase of manufacture and distribution? How about plastics, for instance? The RFA and other ethanol apologists should stop trying to deflect blame and own up to the issue.

Again, I don’t deny that fuel prices are fueling inflation. But that is due to tightening supplies. This food inflation problem is partially self-inflicted by our misguided energy policies.

April 14, 2008 Posted by | ethanol, food prices, inflation, Renewable Fuels Association | 38 Comments