While the free market philosophy and oil company opposition have stalled mandating ethanol use in fuel, high fuel prices are likely to force the Federal Government to face reality on bio-fuels, writes Pat Byrne.
As high fuel prices of around $1.50/litre become the conversation barbeque-stopper, federal MPs fear a voter backlash over soaring fuel prices that have wiped out this year’s income tax cuts.
The Government is looking for a policy package over the next few weeks, but there is no quick-fix solution.
So far, its plan extends to a $1,000 subsidy for the $1,600 conversion cost to liquid petroleum gas (LPG) and subsidising service stations to store ethanol-blended fuels.
The Government is looking at converting one million Australian cars to LPG at a cost of $1 billion, but supply constraints have limited conversions to only 60,000 per year. The aim should be to have cars coming off the assembly line with an LPG kit in place, as Ford proposed some years ago.
LPG could make up 14 per cent of the market by 2010. However, to have Australian cars running on 20-30 per cent alternative domestic fuels by 2020, a significant bio-fuels market will be needed.
The Government has had an agreement with three oil majors – Caltex, Shell and BP – to supply 532 megalitres (one megalitre = one million litres) of ethanol by 2010. A report on progress hasn’t been released, probably because it shows that the oil companies have hastened so slowly that the target won’t be reached.
This has created uncertainty that is causing the financial institutions to restrain funding investment in ethanol plants.
While the Government is still ruling out mandatory ethanol use in fuel, the public outcry over the soaring price of fuel is likely to force a rethink.
Should it mandate ethanol use (or higher fuel-emission standards), the Federal Government will also need to reverse its decision to scrap the fuel excise concession on ethanol as early as 2011. The exemption should remain as a production incentive until about 2015, to be phased out by 2020.
The independents, like Liberty and United Fuel, are already providing ethanol fuel blends at 3¢-4¢/litre less than unleaded fuel.
In contrast, Shell is providing its Optimax Extreme 100-octane fuel, which achieves its octane rating from using five per cent ethanol, at 8¢-13¢/litre more than Shell’s unleaded range.
It costs less than $250 to convert a car to run on flex-fuel, which can be up to 85 per cent ethanol.
Assuming that a voter/consumer backlash eventually does force the Federal Government to get serious about its ethanol industry policy and to stare down the oil majors, then current policy will benefit grain farmers, not sugar-cane farmers.
The nature of the sugar industry is such that cane has to be harvested when the sugar content is at its peak, and processed within a day, or else the value of the cane rapidly falls as sugar content degrades quickly. This gives the mills enormous market power over farmers in an industry recently deregulated under National Competition Policy.
Over the past 18 months, the corporate mills have stood over farmers to have them sign two-to-three year farm contracts. These contracts offer a price for cane based on its sugar content alone. The mills have flatly refused to give farmers a price for other valuable products derived from sugar cane.
In some cases, the leftover fibre is burned to produce “green” electricity that is then sold very profitably into the state grid. Inevitably, sugar cane will be used to produce high value-added ethanol.
In one case recently, a farmer had signed his own one-year contract with the mill, which had demanded a three-year contract and none of the benefits governments had promised would flow to farmers in a deregulated market. The mill accepted cane the following week and advanced bins for the following day’s cane supply, thus indicating that the farmer’s contract had been accepted and that his cane should be burned ready for harvesting. After the cane was burnt, the mill advised that his cane would not be processed by the mill until another contract was signed.
While state and federal governments continually demand that cane growers become competitive with Brazilian growers, they ignore the fact that Brazilian mills pay their growers for sugar, ethanol and “green” electricity produced from their cane product.
Under National Competition Policy, Australian growers have been denied the bargaining power needed to gain a share in value-adding, which mainly goes to the corporate multinational mills.
Against a powerful mill, a single farmer is like a flea trying to bargain with an elephant.
When public pressure finally forces the Government to adopt a realistic ethanol policy, it should also exempt agriculture from National Competition Policy and so restore market power to farmers so that they can bargain a fair farm-gate price for their world-class products.
– Pat Byrne