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By Robert Rapier on Jun 19, 2009 with 2 responses

Oil Companies Acquire More Ethanol Plants

As I noted in my essay Big Oil Buys Big Ethanol, I expected that we would see more oil companies buying up troubled ethanol assets. Per the Houston Chronicle, Sunoco has become the latest:

Oil companies shop for discounted ethanol plants

FULTON, N.Y. — When Sunoco closed this week on the acquisition of a bankrupt ethanol plant for pennies on the dollar, it became just the latest oil refiner to step into the alternative fuels market.

Traditional refiners under pressure to reduce emissions are finding new avenues to meet evolving environmental standards, and finding big bargains along the way.

However, I think the article largely misses the point of why these transactions are taking place:

The plant is close to Sunoco’s main operations in the Northeast where many of its 4,700 gas stations are concentrated, but the shift in U.S. energy policy was a big motivator.

The entry of traditional oil companies is part of a natural industry evolution, [Matt] Hartwig [of the Renewable Fuels Association] said.

I don’t think these transactions are taking place because oil companies want to go green, or because they see this as a fantastic growth opportunity. They are doing this merely because they have been required to put ethanol in their gasoline. To meet their commitments, they can either purchase ethanol from the ethanol producers, or they can buy their own ethanol plants. If you can acquire ethanol plants for pennies on the dollar, it is cheaper for them to go that route. If, on the other hand they thought the mandates were going away, I don’t think they would be jumping in.

But don’t be surprised if the top U.S. oil companies — Exxon Mobil Corp., Chevron Corp. and ConocoPhillips — don’t make the leap, Kment said.

“For them, a 50 million gallon, or even a 100-million gallon plant would only produce a drop in the bucket of their total needs,” Kment said.

But again, it isn’t about their total needs. It is about meeting the ethanol mandate, which they can do by producing “a drop in the bucket of their total needs.” This isn’t about oil companies trying to become ethanol companies. The scale of ethanol is far too small for that. Even if the oil companies bought up all of the ethanol capacity in the country, it would still be only a drop in the bucket. But it would enable to them to fulfill the government mandate.

  1. By Greg Schreck on July 12, 2011 at 11:04 pm

    Ethanol saves the US consumer 60 billion dollars a year in fuel costs. Oil companies dislike ethanol for this reason. Buying the plants gives them more control of market. When they own the majority of the ethanol plants they will drop the price of corn and make tons of money blending the ethanol with their gas. Watch the ethanol subsidies go away and then come back when the oil companies own the market, just like what happened in the bio-diesel market.

  2. By Robert Rapier on July 12, 2011 at 11:55 pm

    Greg, your comment is confused on so many levels. First off, I don’t know of any credible study that would suggest that ethanol is saving 60 billion dollars a year. There was a discredited study done a few years ago that treated demand as totally inelastic, and pretended ethanol disappeared overnight. Not a credible scenario. Further, if ethanol hadn’t been mandated, refiners would have built out more capacity. So the whole study was flawed.

    Second, how are oil companies going to drop the price of corn? That would be a neat trick.

    Third, the ethanol subsidies were already being collected by the oil companies. So, no, they won’t be coming back. And I don’t have the slightest idea of what you are talking about with your reference to the biodiesel market.


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