API, NPRA, and ethanol

April 21, 2003
The chemistry of vehicle fuel is complex, the politics contentious. Few subjects are more important to US consumers, more challenging for government decision-makers, or generally less understood.

The chemistry of vehicle fuel is complex, the politics contentious. Few subjects are more important to US consumers, more challenging for government decision-makers, or generally less understood. The muddle only deepens when the oil and gas industry's two main trade associations affected disagree over an important question involving gasoline.

That's the situation now, as Congress revives the comprehensive energy legislation it failed to pass last year. The issue is ethanol. The trade associations in conflict over ethanol are the American Petroleum Institute and National Petrochemical & Refiners Association.

Economics vs. politics

If the economics of vehicle fuel prevailed, ethanol wouldn't be an issue. It wouldn't enjoy a 52¢/gal exemption from the federal excise tax on gasoline. It wouldn't be a fuel additive. With ethanol distilled from grain, however, economics yields to politics.

Contrary to the claims of promoters, mainly grain distillers and the farm-state politicians they support, ethanol does little for energy supply and the environmental performance of vehicle fuel. It costs twice as much to make as gasoline and contains two thirds the chemical energy. It boosts gasoline octane but also raises vapor pressure. It enhances combustion but also aggravates ozone smog. It benefits only grain distillers and farmers but raises costs generally by depriving the Highway Trust Fund of revenue, lowering the energy concentration of gasoline, and raising the costs of distribution.

The Senate version of last year's failed energy legislation contained a mandate that would in effect guarantee ethanol a fuel market more than twice its current size by 2012. The proposal had broad, bipartisan support because of its appeal in farm states. And it has resurfaced in the new effort to enact a comprehensive energy bill.

API supports the ethanol mandate. NPRA opposes it. API is pragmatic. NPRA is right.

API conditionally supports the ethanol mandate as a tradeoff for two other policy objectives. One of them is repeal of the federal requirement for oxygen in reformulated gasoline, required in areas unable to meet standards for ozone pollution. The other is a national phase-down of methyl tertiary butyl ether in gasoline, refiners' preferred source of oxygen in gasoline.

At least 16 states plan to ban or restrict use of MTBE, which has leaked into water supplies. API supports a coordinated, national withdrawal of MTBE from gasoline as preferable to the piecemeal approach now fragmenting the fuel market. NPRA opposes a national ban on MTBE.

Repeal of the oxygen mandate for reformulated fuel is essential. The requirement isn't necessary. Refiners can achieve the environmental goals of gasoline reformulation without adding oxygen. As MTBE loses political acceptability, the oxygen-free option becomes very important to refiners. The only other viable option is ethanol, which must be splash-blended into gasoline near the point of consumption and until then requires separate transportation and storage facilities. Some refiners, in fact, will prefer ethanol. What's important is that they have the choice. Because the choice implies less than maximum market growth for ethanol, however, the insatiable farm lobby demands compensation. Hence the ethanol mandate.

This isn't energy policy. It's agricultural welfare, bought by the notoriously generous political contributions of Archer Daniels Midland Co., the dominant ethanol producer. Last year's proposal for a 5 billion gal/year ethanol mandate emerged only months after enactment of crop-insurance and farm bills providing a total $191 billion in subsidies over 10 years. It should have been laughed away.

API doesn't escape this political muck by insisting that an ethanol mandate be accompanied by a system of credits and trades. Such a system would just arbitrage costs that never should be imposed.

Political pragmatism can't make an ethanol mandate good energy or environmental policy. It can't make an ethanol mandate good for consumers or taxpayers. And API's resort to pragmatism complicates discussion of an already difficult and regionally divisive issue.

Oppose mandate

The oil and gas industry should oppose an ethanol mandate. It should support repeal of the unnecessary oxygen mandate for reformulated gasoline. And it should ask why states are responding to leaks of MTBE, most of which haven't threatened public health, by banning the substance instead of fixing the leaks.

The industry should take these positions because they're good for energy policy, good for the environment, and good for consumers. That's all the pragmatism anyone should need.