USD panel clashes on gas prices

USD panel clashes on gas prices by Randy Dockendorf Soaring demand, not the threat of OPEC nations, is the main reason behind rising fuel prices, a panel said April 28 at The University of South Dakota.

However, the panel noted OPEC controls one-third of the world's oil production. And much of the world's oil reserve lies in the Middle East, making that volatile region a key in long-term oil supplies, they said.

Wednesday's panel included USD economics professor Ralph Brown and Dennis Johnson, along with Brian Jennings of the American Coalition for Ethanol (ACE) and Jeff Fox of the South Dakota Ethanol Producers.

"OPEC is not regaining control. In fact, they produce less than they did in the 1970s," Johnson said. "OPEC can flex its muscle from time to time, but it tends to cheat (on its quotas)."

That doesn't reduce OPEC's impact on the world market, Jennings said.

"OPEC announced it will cut production by 1 billion barrels a day, which could lead to oil prices of $38 a barrel. That would raise gas prices 15 cents a gallon (at the pump)," he said.

World demand for oil has grown nearly 8 percent in the past six years, Johnson said.

"The United States is the biggest consumer of oil by far, followed by Japan and China. We import substantially larger amount than our domestic production. Fifty-five percent of our petroleum is imported," he said.

Johnson said it's inaccurate to say the United States has reached historic highs. "The price of gas in 1981 would come to $2.80 a gallon in 2003 dollars, so we are far from hitting the same price," he said.

The panel disagreed sharply on whether ethanol can ease the fuel crunch.

Johnson noted the United States uses 125-130 billion gallons of fuel a year but produced only 3 billion gallons of ethanol in 2003. Jennings countered that ethanol is used in 30 percent of all gas, which he said is crucial considering the United States has less than two days' supply of gas in storage.

In comparing subsidies, Jennings said ethanol receives $1.5 billion annually, whereas $25 billion was spent for the defense of oil shipments, tax breaks and the support of oil production.

Ethanol produces an economic boost, Jennings said. An ethanol plant produces $14.2 million in a one-time construction boost, $56 million direct spending annually, and creates 50 direct jobs and 697 area jobs, he said. An ethanol plant typically raises corn prices 5 to 10 cents a bushel, he added.

Brown disputed the value of the $200 million in ethanol incentives over the past 20 years. "If the subsidies cost more than benefits, it's a waste of resources," he said.

Brown said unleaded gas and ethanol are often only 1 to 3 cents in difference at the pump.

And ethanol will not remove price shocks caused by OPEC cutbacks because domestic fuel prices are set by world prices and are independent of imports or exports, he said.

Brown questioned whether South Dakota's economy benefited from ethanol. South Dakota Department of Labor statistics in September 2003 showed 300 jobs created in the state's ethanol plants, but the state likely lost $21.1 million in highway revenue and 295 road construction jobs because of ethanol tax breaks, he said.

To become an effective energy source, ethanol product must grow by 18 times, requiring three times the corn production, Brown said. Corn would cover 83 percent of the nation's harvested acres.

The best energy strategy is to raise the gas tax 50 cents a gallon, take away all subsidies for fuel and ethanol, and eliminate clean-air standards, Brown said.

Johnson agreed. "Tax the problem, not subsidize a solution. Then you get into a mess

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with special interests."

Fox disputed the oil industry's figures on ethanol as outdated or selective. "Anytime you have something new, it takes time to develop technology. We are learning new things every four to six months," he said.

Incentives get plants on line and are limited to a maximum number of gallons, Fox said. "We are competing with other states for the industry," he told Brown.

Plant construction has brought $1.4 billion alone to South Dakota, Fox said. "Why do you want to turn these jobs away?" he said.

Gasoline would cost $5 a gallon without petroleum subsidies, Fox said. And ethanol critics do not point out ethanol cost 90 to 95 cents a gallon six months ago. Ethanol's price is tied to gasoline, not corn, he said.

"We are going to have high gas prices until we get refinery capacity increased and consumption decreased," Fox said.

As the forum concluded, State Sen. Frank Kloucek, D-Scotland, said the ethanol critics failed to touch on real-life issues surrounding oil, including the war in Iraq.

"Your (economic) theories are excellent, but your practicality sucks," he said.

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