INDUSTRY POLICY: by Patrick J. ByrneNews Weekly
Develop ethanol to cut the foreign debt
, June 24, 2006
About half of Australia's $19 billion trade deficit is the result of oil imports. A first step towards cutting imports would be the development of a domestic ethanol fuel industry, writes Pat Byrne.Rodrigo de Rato y Figaredo, head of the International Monetary Fund (IMF), told the National Press Club in Canberra that Australia had to cuts its current account deficit (CAD) from 5.6 per cent to 4 per cent to ensure Australia's economic stability. The CAD measures how much Australia has to borrow overseas to finance part of its domestic expenditure and its trade deficit.
His warning last week came a fortnight after that of Standard and Poor's, the international credit-rating agency. Its credit-rating of the Australian economy determines Australia's cost of borrowing overseas, and therefore domestic interest rates. It warned that Australia's spiralling foreign debt could cost Australia its coveted AAA credit rating.Banana republic
Australia's rating was downgraded 20 years ago to AA+ after the then Federal Treasurer, Paul Keating, said the economy was in danger of becoming a "banana republic". That was when the CAD was 6 per cent of gross domestic product. Today, it is entirely due to low world interest rates that the CAD is not above 6 per cent.
Standard and Poor's only restored Australia's AAA credit rating in 2003.
When Australia is forced to bring down the foreign debt and CAD to manageable levels, it will have to adopt industry policies. A first step towards cutting imports would be the development of a domestic ethanol fuel industry.
A recent major conference on ethanol, held in Brisbane, highlighted that about half of Australia's $19 billion trade deficit is the result of oil imports. Bob Gordon of the Renewable Fuels Association pointed out that Australia now has almost $10 billion net in oil imports. The volume of imports is set to rise as domestic production has peaked and is falling.
At the same time the price of oil has risen and is likely to stay high long into the future.
Consequently, many countries are rapidly developing ethanol industries and flex-fuel motor vehicles that can run on a variable combination of petrol and up to about 85 per cent ethanol.
The United States now has 97 ethanol plants, with nine being upgraded and a further 33 under construction. Every 10 days, a new or upgraded plant is coming into production. The US is currently producing 17 billion litres annually, rising to 30 billion litres by 2012.
The New York Times
rates ethanol as one of America's best chances for replacing petrol and reducing carbon dioxide emissions. The US Natural Resources Defense Council claims that ethanol, along with other strategies, could replace by mid-century the petrol Americans would otherwise use.
Sweden is moving rapidly towards replacing petrol with ethanol. By 2009, 50 per cent of its service stations will be providing E85 fuel for flex-fuel cars.
Both the Swedish and US governments are offering a range of incentives to promote biofuels and fuel-efficient vehicles. These include lower taxes on hybrid and flex-fuel cars, fuel tax concessions, and even free city-parking.
In Brazil, which has led the world in developing an ethanol industry, flex-fuel cars were first introduced in 2003. This year, they make up 80 per cent of all new vehicle sales.
President of the US National Corn-Growers Association, Gerald Tumbleson, told the Brisbane ethanol conference that there are more spin-offs expected from an ethanol industry, including higher value-added products, such as plastics, fibres and a range of industrial products.
Australia's Federal Government has set a target for ethanol production. It plans a mere 350 million litres by 2010, less than one per cent of the petrol fuel market. To date, ethanol contracts from three of Australia's big oil producers suggest this meagre target is not going to be met.
The response of the Industry Minister, Ian Macfarlane, to suggestions of mandating ethanol has been to argue that it should instead be left to market forces. He says, "If you mandate something ... you remove the competitive forces that operate in a market ... and the motorist ends up paying more."
This argument ignores incentives being put in place by governments around the world to build ethanol industries. In many cases, the price of ethanol-petrol fuel is lower than petrol. In Victoria, United Fuels is selling E10 fuel 4¢ a litre below unleaded fuel.
Macfarlane's response reflects the Federal Government's current industry policy – the policy of having no policy.
The warnings about the foreign debt are now on the record. When the markets take fright, precipitating an economic crisis, the Federal Government is going to be forced to have a real industry policy. Of necessity, ethanol industry will be a high priority.