Problems created by governmental meddling in energy markets soon will punish fuel consumers. Maybe then Congress will correct the mistakes it has made with renewable fuels.
Trouble was easy to see coming. The gasoline market hasn't expanded as much as was expected when lawmakers set volumetric mandates for ethanol from corn in 2005 then—2 years later—raised that requirement and added others for biodiesel and ethanol from cellulose. Now the law requires more grain ethanol than the gasoline market can absorb and more cellulosic ethanol than anyone profitably can make, even with generous subsidies.
The blend wall
Congress should have lowered the renewable fuel standards when warnings first emerged about the gasoline blend wall. The market is reaching that barrier now. Even as gasoline consumption stagnates, ethanol requirements keep rising. As a group, refiners and blenders can't meet the requirements at the 10% blending limit.
Lawmakers thought E85—a blend of as much as 85% ethanol and 15% gasoline—would boost demand for ethanol. They made tax credits available to makers and buyers of flexible-fuel vehicles, which have engine parts tolerant of the extra alcohol. The tax credits have been popular, especially for makers and buyers of fuel-guzzling sport utility vehicles and outsize pickup trucks able to use E85. But sales of the fuel have been abysmal, only partly because the material isn't universally available. Because of ethanol's energy deficit relative to gasoline, E85 requires inconveniently frequent refueling. And on an energy-equivalent basis it's more expensive than E10.
With the E85 boondoggle having failed, the Environmental Protection Agency has tried to nudge ethanol use by raising the blending limit on gasoline to 15%. But E15 is less popular than E85. While ethanol makers express confidence about elevated blending levels, vehicle and engine manufacturers warn about damage to their products at ethanol concentrations above 10%. EPA's approval of E15 amounts to a request that Americans jeopardize their vehicle and small-equipment engines to rescue bad law. This fits a pattern. Under recent management, EPA has been consistently unconcerned about the effects of energy regulation on consumers and the national economy.
Congress created the renewable-fuel problem, and Congress will have to solve it. It didn't respond to early signs that something needed to be done, such as the requirement that gasoline sellers pay penalties for not selling scarce cellulosic ethanol. Politicians must see little gain in redressing an obvious perversity that victimizes only refiners and fuel importers and blenders. But failure to act soon will cease to be a politically durable option.
Because Congress has delayed doing what it should, the prices of gasoline and diesel will rise. Testifying to an energy subcommittee of the House Committee on Oversight and Government Reform, Lucian Pugliaresi, president of the Energy Policy Research Foundation Inc., recently warned that the marginal cost to supply E10 gasoline will rise by about 18¢/gal next year and by twice that much by 2022. He called this outlook the "best-case scenario," assuming—contrary to most expectations—that enough advanced and cellulosic biofuel becomes available to keep E85 from falling subject to a cap on ethanol from corn. The marginal cost to supply diesel will rise even more.
Complex reasons
Reasons for the likely increases are complex. They relate to the rising need for refiners and importers to buy credits when they can't meet renewable-fuel sales requirements. As prices of those credits rise—as they already have begun to do—the cost of supplying the US fuel market will rise. An incentive will develop to reduce fuel output or export product to lower renewable-fuel obligations. US fuel supply thus will fall, and prices will rise.
Especially in a shaky economy, to let that happen would be negligent. Avoiding avoidable cost should be a goal on which members of both political parties can agree. The law containing the original ethanol mandate was called a triumph of legislative compromise. So the mistake was bipartisan. It demands bipartisan repair.