Truths About Tariffs

Written by Brian Hicks
Posted May 10, 2006

Here in the United States we certainly should feel, for lack of a better word - special.

And the reason is simple...

Our elected officials are always looking out for our best interest. Especially when it gets close to election time!

Last week, Maryland's best and brightest bureaucrats took time out of their busy schedules to let us know how they intend to help reduce gas prices before the summer driving season hits.

The finest of the folly, Lt. Governor Michael Steele, told reporters that he's trying to conserve gasoline by making more use of fuel-efficient state police cruisers instead of his SUV when traveling on state business.

He also made sure to alert the press that he voluntarily left his SUV parked on State Circle while walking to the news conference.

Steele proposed some long-range steps to deal with the problem, including more research on alternative fuels and higher efficiency requirements for automobiles.

This guy should get a freakin' medal for coming up with such brilliant, ground-breaking ideas!!!

Of course, in the meantime he suggested the safe 'quick-fix' standby of the week - lifting the tariff on imported ethanol.

Truths About Tariffs

Last week, the latest in a series of half-assed solutions to high gas prices made its way into American homes when D.C. began its assault on the $0.54 cent-per-gallon tariff on ethanol imports.

The argument is that domestic ethanol producers won't be able to meet demand this summer. And that will only increase gas prices.

Is there any truth to that?

Well, if you don't take into consideration the facts that desperate politicians are conveniently leaving out - sure, why not?

In the meantime, we need to look at this situation, not only as voters - but as investors. And that's why I'd like to share with you what they won't.

A little over a week ago, the Energy Information Administration (EIA) released its latest data which showed that U.S. ethanol production grew to 302,000 barrels per day in February. This is enough ethanol to meet the new MTBE replacement demand while continuing to supply existing markets.

The EIA data also shows a significant increase in ethanol stocks. Because ethanol producers have been building stocks over the past several months in anticipation of the MTBE transition, there's currently about 25 days of supply in working inventory.

The tariff currently exists as an offset to the tax incentive gas refiners receive for each gallon of ethanol they blend - regardless of country of origin. So really, if you remove the tariff, exporting countries like Brazil will have access to that incentive. In other words, the American taxpayer ends up subsidizing Brazilian ethanol production.

Of course, just as a safety precaution, having access to a bit more ethanol in the short term - even if that means getting it from outside the US, isn't necessarily a bad idea. But even with the tariff in place, historical data shows that imported ethanol has entered the country when needed and competed effectively in the marketplace. February's data indicates that more than 25 million gallons of ethanol were imported.

But again - as investors, we have to look at how this will impact ethanol stocks.

So how are domestic ethanol stocks looking today?

Well, we currently have two ethanol plays in the Green Chip Stocks portfolio. One is up about 10 percent, just in the last week - putting us up a total of 116 percent so far for the year. And our other ethanol play just hit a record high yesterday. On that one, we're up a total of 266 percent.

Non-Believers...Run And Hide, Run And Hide!!!

Will the tariff be lifted?

Who knows?

Will it squash domestic ethanol momentum?

Not a chance!!!

The demand for ethanol is massive. And with or without imports, the market will continue to provide for ethanol investors.

Last Thursday, after Energy Secretary Sam Bodman announced that the Bush administration was considering the possibility of lifting the tariff, shares of Archer Daniels Midland Co. (ADM:NYSE), the biggest U.S. ethanol producer, dropped more than 7 percent. Those who still haven't figured out that ethanol is in a bull market that's not likely to end anytime soon, were quick to puff their chests.

Of course, these non-believers were also quickly deflated after, only one trading day later, ADM started to rebound with a vengeance. In fact, just yesterday the stock hit another record high.

The point of all this - election-time hype can't cloud the true value of ethanol's potential. And the market will prove this time and time again.

Tariff or not - ethanol demand will remain strong, domestic ethanol producers will continue to cash in - and so will we!

And if you're still skeptical, visit Green Chip Stocks now.

The proof is in the portfolio!!!

Until next time...

Jeff Siegel
Managing Editor, Green Chip Stocks