22/9 24 June, 2005 Dr Conall - Australian Automobile Association


22/9 24 June, 2005 Dr Conall - Australian Automobile Association

Our Ref: 22/924 June, 2005Dr Conall O’ConnellBiofuels Taskforce SecretariatDepartment of the Prime Minister and Cabinet3-5 National CircuitCANBERRA ACT 2601Dear Dr O’Connell,Constituent MembersThe Australian Automobile Association (AAA) welcomes the opportunity to providea submission to the Biofuels Taskforce that has been established to examine thelatest scientific evidence on the impacts of ethanol and other biofuels on humanhealth, environmental outcomes and automotive operations.The AAA serves as the federal secretariat of the state and territory motoring clubs,its members being the:• National Roads and Motorists’ Association Limited (NRMA);• Royal Automobile Club of Victoria (RACV);• Royal Automobile Club of Queensland (RACQ);• Royal Automobile Association of South Australia (RAA SA);• Royal Automobile Club of Western Australia (RAC WA);• Royal Automobile Club of Tasmania (RACT);• Automobile Association of Northern Territory (AANT); and• Royal Automobile Club of Australia (RACA).Through these organisations, the AAA represents the interests of over 6 millionmotorists and, indirectly, all Australian motorists at the national and internationallevels.The AAA and constituent clubs are not opposed to biofuels generally and inparticular the use of ethanol blends in the Australian fuel mix provided there is nodetrimental affect on motorists. We consider that there are 4 conditions that mustbe applied to provide adequate protection for consumers;1. A maximum limit must be applied based on advise from vehiclemanufacturers (and any independent testing conducted) to ensure enginesor fuel supply systems are not damaged, experience undue wear or vehiclewarranties voided. For example the AAA supports the work undertaken bythe vehicle manufacturers to provide the comprehensive list of vehicles thatare able to satisfactorily operate on the 10% ethanol limit already in place.2. There should be no mandating of biofuels content in the Australian fuel mixto allow consumer choice and to eliminate any practicality problems withnationally mandated levels.Page 1

3. There should be labeling at point of sale to provide consumers withinformation that relates to the suitability of the use of biofuels to theirvehicle including any impact on fuel economy or potential implications onvehicle warranty.4. The use of biofuels should not increase petrol prices or the cost of motoring(noting in particular the lower energy content of some biofuels, e.g. E10,and the resulting negative impact on fuel economy.)As you can see these conditions are based around the need to provide adequateinformation to allow motorists to make an informed choice when purchasing fuel.National polling conducted for the AAA on ethanol shows the level of concern andlack of adequate information on ethanol in particular. Copies of the full results ofthe national polling have previously been provided to the Biofuels Taskforcesecretariat.In our 2003 national study of motorists’ attitudes and priorities one-third ofmotorists indicated they ‘shop around’ for quality when buying fuel. The study alsoindicated that ethanol is a confusing issue for many motorists and one about whichmany motorists feel uneasy with nearly two thirds of motorists have reservationsabout buying petrol containing ethanol as shown in the following graphic.An update of this research in early 2005 showed some small change with 25% (upfrom 22%) of motorists happy to buy petrol containing ethanol. However 56%(down from 63%) of motorists still have doubts about ethanol.While most of the motorists’ main reservation is the potential for damage to theirvehicle some are also wary because they feel uncertain or ill-informed. A majorityof those who believe their car can accept ethanol blended fuel nonetheless havedoubts about buying it.The Commonwealth’s decision to legislate on labeling and set a 10 per cent capon the level of ethanol that can be added to petrol; along with the development of afuel quality standard represents a logical and necessary approach to fuel ethanoland should assist in improving consumer confidence in E10.In addition to the concerns raised by motorists the information provided by vehiclemanufacturers’ show that a large percentage of the in-service passenger car fleetcannot operate on E10. In our submission to the Senate Standing Committee onPage 2

Environment, Communications, Information Technology and the Arts enquiry onthe Fuel Quality Standards Amendment Bill in September 2003 we providedevidence that showed more than one third of the existing passenger car fleet couldnot use E10.I acknowledge that this analysis is now out of date and I recommend that theBiofuels Taskforce conduct a similar analysis to determine the proportion of theexisting car fleet that may not be able to operate satisfactorily on biofuels.In regard to the AAA position that the use of biofuels should not increase petrolprices or the cost of motoring (Point 4, above) we would like to include reference tothe brief internal analysis we undertook in early 2003 on the economics of ethanol(see Attachment 1).As can be seen from the analysis (which can be easily updated using currentexchange rates and ethanol prices), oil prices would need to rise to overUS$90/barrel for ethanol blends to be economical from a motoring perspective.Under this scenario, we have assumed that ethanol prices do not rise in line withincreases in oil prices. However, this assumption is probably unrealistic since oilprices and ethanol prices are likely to be positively correlated as the fuels are tosome extent substitutable. Thus in reality, oil prices will have to rise to even higherlevels before ethanol blends possibly become economical from a 'cost of motoring'point of view.I would like to re-iterate that the AAA and our constituent clubs support the use ofbiofuels provided there is no detrimental affect on motorists. If you have anyfurther questions on this matter I may be contacted on (02) 6261 4405 or you maycontact the AAA’s Technical Director, Mr. James Hurnall on (02) 6261 4408.Yours sincerely,Lauchlan McIntoshExecutive DirectorAttachmentPage 3

AT WHAT WORLD OIL PRICE DOES IT BECOME ECONOMICAL TO BLENDETHANOL WITH PETROL?Petrol pricesRefined Australian ex-terminal petrol prices depend principally on the world oilprice - which for Australia is the Tapis crude oil price - and the exchange rate.(Tapis crude is generally about US$2/barrel cheaper than West TexasIntermediate which is the often quoted price of oil in the media).In Table 1, we have calculated an estimated terminal gate price of petrol (includingexcise but excluding GST) for a range of world oil prices.Table 1: World oil prices andterminal gate prices 1World oilprice($US/barrel)Petrolterminalgate price(cpl)13 60.4523 70.9426 74.0828 76.1830 78.2732 80.3734 82.4736 84.5640 88.7649 98.1954 103.4359 108.6770 120.2080 130.6990 141.1793 144.31100 151.65Ethanol prices and blending (with subsidy)Australian ethanol costs about 60-70 cents/litre delivered to the terminal. Thesefigures assume excise is fully offset by the production subsidy (38 cents/litre) andexclude GST.As can be seen from the figures of Table 1, if ethanol costs 70 cents/litre, it iseconomic for a retailer to blend on a per litre basis at world oil prices above$23/barrel.1 Assumes additional US$3 barrel refiner margin and 2.5 cents/litre for freight, wharfage insuranceto achieve import parity price; 3cents/litre margin at terminal and a $A/$US exchange rate of 0.60Page 1

In fact, at current world oil prices of around US$36/barrel, ethanol would be 14-24cents/litre less than petrol. Assuming the lower per litre cost of an ethanol blend ispassed on by the wholesaler to the retailer, in this case, a 10 per cent blend couldreduce the wholesale price to a retailer by between 1.4 and 2.4 cents/litre.However, this example assumes that the energy content of petrol and ethanol arethe same. In fact, a litre of ethanol has only 68 per cent of the energy content of alitre of petrol, so the volume of ethanol equivalent to a litre of petrol would cost 88-103 cents/litre. 2 This is the true value of ethanol compared with petrol.With ethanol priced at 88-103 cents/litre (in equivalent energy terms), we can seefrom Table 1 that ethanol prices and petrol prices would be comparable when oilprices are around US40-54/barrel. ie it would be economical to blend ethanol withpetrol when world oil prices are at or above these levels.Even then, this assumes that ethanol prices would not rise when world oil pricesrise. Since the products are to some extent substitutable, this assumption isunlikely to hold.Ethanol prices and blending (without subsidy)Without a subsidy, Australian ethanol would cost 98-108 cents/litre (ie 60-70cents/litre plus existing subsidy of 38 cents/litre). Leaving aside the energydifferential for a moment, it can be seen from Table 1 that blending would beeconomical only when world oil prices reached US$49-59 barrel. And with ethanolprices at this level, imported ethanol would be cheaper. Ethanol can be importedfrom Brazil at 50 cents/litre partly because of huge economies of scale andsubsidies in their own country.If the energy differential is taken into account – and from a consumer perspective itshould - the volume of ethanol equivalent to a litre of petrol would cost 144-151cents/litre. Again from Table 1, it would be economical to blend ethanol (at a costof 60 cents/litre) with petrol only when oil prices reached $US93/barrel. At 70cents/litre, world oil prices would need to hit US$100 for blending to beeconomical.SummaryWhether it is economical to blend ethanol with petrol depends on the world oilprice, ethanol prices, whether ethanol is subsidised or not and whether thedifference in energy content between petrol and ethanol is taken into account. Theworld oil price at which it is economical to blend ethanol is summarised in Table 2for a range of scenarios.Again, we should reiterate that for variations in world oil prices, we have assumedethanol prices to have remained in the 60-70 cents/litre range. This is unlikely tohold. In fact, ethanol prices, like all commodity prices, vary with supply anddemand, and higher oil prices are likely to result in higher ethanol prices.2 To adjust for energy content, multiply 60cpl by1/0.68=88cpl. Similarly, at 70cpl, adjusting forenergy content gives a price of 70/0.68=103cplPage 2

Table 2: World oil price and break-even point for blending ethanol with petrol(US/barrel)Same energy contentDifferent energy contentEthanol @60 cplEthanol @ 70cplEthanol @60 cplEthanol @ 70cplWith subsidy 13 23 40 54Without subsidy 49 59 93 100The most appropriate scenario for making a decision as to whether it is appropriateto blend or not, is to take account of the different energy content of petrol andethanol, and to expect that ethanol would not be subsidised. After all, a subsidy isa cost to taxpayers, and motorists are taxpayers. And from Table 2, we can seethat oil prices would need to reach at least US$93/barrel for blending to beeconomical at current ethanol prices.Page 3

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