How crude oil rally can kill a poor drunkard

Crude oil prices are playing see-saw these days. Analysts are divided when it comes to predicting the prices of crude oil, linking it to a host of factors.

But I can tell you something: Crude Oil rally can kill a poor drunkard.

Let me explain. But take some background information first.

Ethanol fuel is widely used in Brazil and in the United States, and together both countries were responsible for 88 percent of the world's Ethanol fuel production in 2010. Most cars on the road today in the U.S. can run on blends of up to 10% ethanol, and the use of 10% ethanol Gasoline is mandated in some U.S. states and cities.

Since 1976 the Brazilian government has made it mandatory to blend ethanol with gasoline, and since 2007 the legal blend is around 25% ethanol and 75% gasoline.

In this context, the India government has been receiving requests, particularly from Sugar industry, to increase the percentage of Ethanol blending in petrol up to a limit of 10%.

So what has it got to do with spirit consumption?

Ethanol—obtained from molasses-- has dual use: It can be used as a bio-fuel and it can also be used in making liquor.

In the current scenario, India’s ethanol prices are pegged to fuel prices. When petrol prices go up, ethanol prices can also go up.

This is invariably good for sugar industry players who dominate the value-chain all the way from field to spoon. They can crush sugar cane and extract molasses, which can be used to make ethanol and get it sold to Oil Marketing Companies (OMCs) like Hindusthan Petroleum for Rs.27-30 a litre.

This is not good news for liquor industry: Once the OMCs start paying this kind of price, these liquor barons too have to pay this heavy price for ethanol. Invariably, their input costs can go up and they will be forced to pass on their burden to their dearest spirited consumers.

And if some of those customers are from the lower economic strata, the so called aam aadmi, how long will they be able to pay high prices for that peg?

Naturally, they may turn to clandestine local liquor producers operating in make-shift set up and would consume some hooch. The rest, I need not say.

India government had decided on August 16, 2010 to implement Ethanol Blended Petrol (EBP) Programme up to a limit of 10%. However, as per availability of supply of ethanol, presently only 5% EBP Programme is under implementation in 13 States and 3 UTs, out of the notified 20 States & 4 UTs.

However, due to non-supply of Ethanol in requisite quantity even for 5% blending level, OMCs or Oil Marketing Companies are unable to raise the implementation level.

Against an annual requirement of 105 crore litres of ethanol for blending upto 5% in the entire notified area, only 55.87 crore litres of ethanol could be contracted in 13 States and 3 UTs. Out of this, only 28.79 crore litres could be procured up to 31 July 2011.

Yes, deciphering this, one can say that bio-ethanol is scarce in supply. But still, the demand exists. And this means that many hooch brewers may end up in jail.

So, is there any solution?

Let the oil prices climb and attain a peak oil level, when blending ethanol too would prove to be too expensive. The government would then de-couple Crude Oil prices and ethanol prices and subsequently, ethanol prices would hit the ground with a thud.

Then, it would be party time, yet again!

As published in: http://www.commodityonline.com/news/How-crude-oil-rally-can-kill-a-poor-drunkard-41802-3-1.html