Of Mideast turmoil, crazy oil markets, slowing gasoline demand . . . and the corn belt, including South Dakota

An old commodities and options trader like me (I was a floor trader on the Chicago Board Options Exchange for a decade, followed by a decade of brokering grain and livestock futures here in South Dakota) has a reflexive response to turmoil in the Middle East, said response being “get ready for the buying panic in oil.”

An event like the Israeli-Hamas war that just got underway generally resulted in a series of daily jumps in the oil markets, which were soon reflected in the price of gasoline. That practically axiomatic reaction hasn’t materialized during the recent crisis, though, as oil prices, despite an upside bounce since the Hamas massacre touched off hostilities, are actually down about $6 a barrel during the past couple of weeks. 

Calming as this may seem, the news doesn’t necessarily presage a period of relatively benign market activity. Indeed, after decades of volatility, hysteria-prone oil prices have long had a propensity for confounding analysts and traders. J.P. Morgan’s Jamie Dimon sees “far reaching impacts on energy and food markets” emerging from the latest eruptions of violence in Israel and Palestine.

Dimon’s cautionary take goes without saying, but what’s news here is that the usual energy market craziness that immediately follows a flare-up in the Middle East hasn’t materialized. 

One reason, of course, is that the conflict isn’t located anywhere near the centers of crude oil production (including the United Arab Emirates as featured on the UAE’s postage stamp in the above image from wikimedia commons) in the region.

That being a given, though, wary markets have always reflected the general sense that localized hostilities between Arabs and Jews can spread a renewed contagion of ancient hatreds throughout the Middle East and cause disruptions in the supply channels coming out of the oilfields there.

Ergo, a sharp buying spree in oil futures would generally follow.

So why haven’t we seen a reflexive rally this time? My sense is that the decline in gasoline usage has much to do with it.

On the demand front, Dimon’s own economists at J.P. Morgan say we’re at a 22-year low in gasoline consumption as the swift transition from internal combustion engines (ICEs)  to electric vehicles (EVs) is moving apace. According to the International Energy Agency, EV market share globally was just 4% in 2020.  In 2022 it was 14%. By the end of this year, IEA expects EV market share to increase to 18%. This is a four-year stretch of exponential growth and the momentum is likely to continue

So how has that affected oil consumption? Significantly. First off, consider that global oil production is about 93 million barrels a day. With EV demand growing as rapidly as it is, IEA says that oil consumption will be reduced by 5 million barrels a day by 2030. 

That may not seem like much, but it’s hard to keep prices up while consumption is trending down.

By the time EVs dominate our roads, gasoline demand will be a fraction of what it’s been. Of relevance to South Dakota, a drop in demand for gasoline means there will be a drop in demand for ethanol, which, of course, is largely dependent on corn for its production. About 45% of American corn is dedicated to ethanol production. 

Will the corn market be seriously affected? To the extent that corn is dependent on ethanol for so much of its market, of course it will. Searching the literature, I find differing conclusions about the magnitude of the effect on corn prices that the transition from ICEs to EVs will have. Some say it could “topple” the corn industry. Others conclude that prices might fall slightly, one calling for a 4% drop.

Oil industry giant BP says that oil and gas demand will drop “dramatically” by 2050, which basically means that demand for ethanol should drop correspondingly. Corn farmers are of course taking note of these projections and no doubt looking at other uses for the acreage that is currently dedicated to corn. 

That takes us to part 2 of this piece.

The sooner we get rid of the concept that bio-fuel production is a way of dealing with the climate crisis, the better off the world is. 

It’s time to reconsider the diversion of food production to industrial needs and think about using corn as food again. The world is a hungry place and it’s only growing hungrier. A lot of people are going without enough to eat and putting food into our fuel tanks does nothing to alleviate the world’s growing food insecurity problem, which The World Bank says is rising – now affecting more than 11% of the world’s population – because of global food price inflation.

As to the effects of bio-fuel production on the climate crisis, EPA says, “replacing fossil fuels with biofuels—fuels produced from renewable organic material—has the potential to reduce some undesirable aspects of fossil fuel production and use, including conventional and greenhouse gas (GHG) pollutant emissions, exhaustible resource depletion, and dependence on unstable foreign suppliers. Demand for biofuels could also increase farm income. On the other hand, because many biofuel feedstocks require land, water, and other resources, research suggests that biofuel production may give rise to several undesirable effects. Potential drawbacks include changes to land use patterns that may increase GHG emissions, pressure on water resources, air and water pollution, and increased food costs. Depending on the feedstock and production process and time horizon of the analysis, biofuels can emit even more GHGs than some fossil fuels on an energy-equivalent basis. Biofuels also tend to require subsidies and other market interventions to compete economically with fossil  fuels, which creates deadweight losses in the economy.”

For all the resources that we’ve allocated to bio-fuel production, ethanol being perhaps the most significant, we haven’t seen much in the way of deceleration of the climate change dynamic that seems to be affecting all of our lives these days.  

I have no doubt that South Dakota’s, actually all of America’s, farmers can find a way of putting their corn acreage into productive and profitable use by using it to grow food, not gasoline additives.  

Indeed, given the food insecurity situation on this planet, there is obviously demand for corn as an edible, not an additive. Marketing and distribution channels can be directed at getting corn to starving people. I hope the EV takeover is a catalyst for just such a transition back to farming as the global food source that it needs to be.  

John Tsitrian is a businessman and writer from the Black Hills.  He was a weekly columnist for the Rapid City Journal for 20 years.  His articles and commentary have also appeared in The Los Angeles Times, The Denver Post and The Omaha World-Herald.  Tsitrian served in the Marines for three years (1966-69), including a 13-month tour of duty as a radioman in Vietnam.