Watching Government: Favored fuel

Dec. 10, 2001
It's a good time to be in the fuel ethanol business.

It's a good time to be in the fuel ethanol business. Environmental regulators in more than a dozen US states want to ban the clean-fuel additive methyl tertiary butyl ether from gasoline because of groundwater contamination concerns. And ethanol remains the only other commercial option to meet today's federal clean fuel rules.

That troubles the oil industry. It has an ambivalent relationship with ethanol producers, typically large Midwest corn processing companies. Fuel ethanol can be a refiner's best friend: It is a great gasoline extender because it can replace up to 10% of a gallon of gasoline by volume. But fuel ethanol also has its problems: higher volatility, little production outside the Midwest, and shipping constraints that limit its delivery options to rail or barges.

Fuel shortages

Unless the federal government can be more flexible, there could be regional gasoline shortages, refiners say. Even with federal subsidies ethanol can be more expensive to make than gasoline. And aside from its cost, there are also worries there may not be enough ethanol to replace MTBE, although fuel ethanol producers say they can meet demand.

Time is running short. California still has not decided whether it should extend its Jan. 1, 2003, deadline to ban MTBE. The federal government, meanwhile, seems ready to help ethanol producers take advantage of the situation.

The Environmental Protection Agency last June denied California's request to dump the oxygenate requirement from the reformulated gasoline (RFG) rule. That standard effectively guarantees refiners must use MTBE or ethanol to comply with the rule. EPA later said it wants to be more flexible about the RFG program in general. But the administration clearly wants Congress to do the dirty work and decide whether the oxygen standard should stay in the rule.

"Ethanol and biofuels are fuels of the future for this country," President George W. Bush said last month to a farm conference. "Since the beginning of my administration, I have strongly supported ethanol and biofuels. And the energy plan I sent to Congress back in the spring supports biofuels. The House passed an energy plan. Now it's time for the Senate to act and pass an energy plan. It's in our national security interests to do so. I look forward to signing a national energy bill."

Assured role

Lobbyists on both sides of the ethanol issue say it is too soon to say whether there is enough political will to get a comprehensive bill passed.

Serious debate is expected to take place early next year. But lobbyists are certain of one thing: Ethanol will be included in some way.

A pending proposal by Senate Majority Leader Tom Daschle (D-SD) would allow states to waive the oxygenate requirement and ban MTBE provided that EPA eventually requires 5 billion gal of "renewable" fuel in the gasoline pool by 2012. That would mean ethanol production would have to at least double from today's 1.8 billion gal/year level (see related story, p. 31).