More on Unleaded Gasoline - Ethanol

Yesterday I posted a chart and a very brief comments noting the rise in gasoline prices at the Nymex. Today we are seeing additional gains in this crucial market with the price currently up 1.5% as crude oil soars back through the $90/bbl level.

With the news out this morning that jobless claims ROSE by a GREATER THAN EXPECTED AMOUNT, we are once again being treated to the PERVERSE scenario where BAD IS NOW GOOD.

What I mean by this is what I have been saying for so long now that I feel as if I am beating a dead horse at this point - namely - the US financial markets have now reached a point where they have become completely and totally dependent on EXPECTATIONS OF FURTHER LIQUIDITY by the Federal Reserve.

That is what is driving the stock prices higher this AM as well as a host of various commodity prices; traders have again become convinced that the pressure on the Fed to "do something" is increasing with the passing of each day as each new data release reinforces the notion that the economy is in the crapper and descending further into the bottom of the out house.

Ironically, the higher that these damnable hedge fund algorithms in control of all the hot money floating around the planet push the S&P 500, the lower the odds that the Fed is going to actually start another round of bond buying. Why should they when the hot money crowd is already goosing the price of gasoline back to near the $3.00/gallon wholesale price BEFORE anyone has even hinted that the next round of QE is imminent?

Imagine where the price of gasoline is going to go if indeed the Fed was foolish enough to actually announce a definitive start date for a QE3 or QE4 or whatever!

With some grain prices setting ALL TIME RECORD HIGHS and gasoline soaring under that scenario, any so-called STIMULATIVE EFFECT from a round of QE would be non-existent. In cruder terms, the Fed would have shot its wad and have nothing to show for it.

Keep in mind that the sole purpose of Quantitative Easing is purportedly to LOWER LONG TERM INTEREST RATES to spur increased consumer and business borrowing. How in the hell are consumers supposed to ramp up borrowing with both FOOD and ENERGY prices roaring higher? Answer - they are not. So go ahead and launch another round of QE and keep the hedgies happy but in the end it will accomplish absolutely nothing except further increasing the size of the Fed's balance sheet and generating another round of huge bonuses on Wall Street.

Back to unleaded gasoline however - here is the news from yesterday's EIA report (Energy Information Agency). GASOLINE USE HITS 13 YEAR LOW FOR MID-JULY! How do you like them apples? Demand for gasoline was the lowest for this time of year in 13 years. Why? The EIA cited the weak economy and improved fuel economy. Yet the price of unleaded gasoline has rallied to near the $3.00 level from all the way down at $2.47 at the end of June.

So why is unleaded gasoline continuing to rally and become even more expensive when US domestic demand has fallen off the cliff? Let me first state that there is some built-in risk premium to the futures market over the seemingly always present tensions with Iran. That alone does not explain the price rise however.

Interestingly enough, this surplus gasoline is increasingly being exported overseas!

This brings me to a topic dear to my heart, specifically railing against the idiotic product known as corn based ethanol. This product , while a boon for farmers growing corn, has been an unmitigated disaster for our livestock and poultry producers.

Some may not realize that currently, 4 out of every 10 rows of corn planted goes to producing a product that ends up being burned in our gasoline tanks. That's right, about 40% of all domestic corn demand is the result of a federally mandated ethanol requirement. This "green agenda" has destroyed our livestock and poultry industries. Dairy farmers, Beef cattlemen, hog producers, chicken and turkey producers, are all being financially devastated watching the cost of their feed bills soar into the stratosphere while the price that they are able to fetch for their finished product is either stagnant or unable to rise at a fast enough clip to compensate them for their increased feed costs.

Even with the horrific drought, if 40% more corn was available to use as feed or for our export markets, prices would not be at these current levels and these various live animal producers would be able to avoid being financially crippled.

Interestingly enough, with corn prices rallying to record highs, ethanol plant margins are collapsing with crude oil at current levels. Some of these plants are going to end up shuttering their doors as they close down due to cost constaints. Additionally, there is increasing chatter that politicians are coming under pressure to do away with this foolish federal mandate for ethanol. While I would personally love to see this, with our current tree-hugger in chief in office, I doubt it would escape his veto pen.

That being said, some are buying unleaded gasoline as corn moves ever higher with the thinking be that political pressure is going to be doing nothing but increasing as the impact of this drought worsens. Think of ethanol as a way to stretch a gallon of gasoline - you basically dilute the stuff to 90% strength or 85% strength by mixing white lightning into it. Take away the ethanol and you have to use that much more actual gasoline to end up with the same finished quantity of fuel.

That may be what is pushing gasoline higher - imagine that - we have reached a point in our nation's industrial history where gasoline traders are now essentially trading corn.

Another fine example of a government produced FUBAR event.