Editorial: Ethanol’s new rescue cry

March 23, 2009
Every time fuel ethanol blows off its economic moorings, as state-sponsored energy always does, Congress obliges with new support.

Every time fuel ethanol blows off its economic moorings, as state-sponsored energy always does, Congress obliges with new support. The latest rescue, enacted in 2007, is looking expensive and probably unfeasible. Plant economics, meanwhile, have soured. Predictably, the ethanol industry wants new help.

Ethanol’s history should make fans of government support for noncommercial energy cautious. Since 1978, fuel ethanol made from grain has enjoyed various, generous tax breaks, without which it would not be commercial. Because ethanol boosts octane, it already had a natural market after federal regulations phased lead out of gasoline in the mid-1970s. But that wasn’t enough.

In the 1980s Congress passed several inducements to ethanol plant construction, imposed a protectionist import fee, and increased the gasoline excise exemption and income tax credit for blenders. In the 1990s, new requirements of oxygen in gasoline played to an ethanol advantage, although the additive required yet more special help in the form of relaxation of volatility limits. It also had to compete with methyl tertiary butyl ether, which could be processed into gasoline at the refinery and didn’t need subsidization.

Fortunes brighten

Ethanol’s fortunes brightened with passage of the Energy Policy Act of 2005 (EPACT). The law removed the oxygenate requirement for reformulated gasoline but compensated ethanol producers in two important ways. It didn’t limit MTBE suppliers’ damage exposure in lawsuits over water supplies found to contain the oxygenate. And it set a mandate for renewable fuels, mainly ethanol, phasing up to 7.5 billion gal in 2012.

MTBE quickly exited the market, replaced by ethanol. Construction of ethanol plants boomed. By 2007 overcapacity and a predictable leap in grain prices were squeezing plant economics. So Congress rescued ethanol again with the Energy Independence and Security Act, raising the renewable fuel standard immediately to sop up the surplus and escalating it to 36 billion gal by 2022, of which 15 billion gal can be from grain. Much of the balance is expected to be ethanol made from cellulose. But that material has yet to be produced commercially despite governmental research assistance in effect since the 1970s.

The governmental help ethanol has received is unprecedented. Ethanol boosters habitually argue that subsidization is a matter of fairness, given historic subsidies for oil and gas. In fact, oil and gas never have received help approaching levels enjoyed by ethanol on a per-energy-unit basis (OGJ, Mar. 2, 2009, p. 18). Their use certainly isn’t mandated by Washington, DC.

The ethanol industry’s new cry for rescue results from failure by Congress to anticipate markets or otherwise think about what it was doing when it hiked the renewable fuel standard to zany levels in 2007. The portion of the gasoline market limited to 10% ethanol blends soon will be saturated. That leaves the fleet of flex-fuel vehicles, which can use the 85:15 ethanol-gasoline mixture known as E85, to absorb incremental volumes as the ethanol mandate rises.

The Energy Policy Research Foundation Inc. (www.eprinc.org) sees problems. The price of E85 must be low enough to overcome mileage disadvantages if flex-fuel motorists are to buy it, EPRINC points out in a study. But the price of ethanol has to be high enough to ensure supply. As mandates rise, refiners will have to push E85 by discounting price. Meanwhile, they’ll incur new costs as they cut crude runs and handle growing amounts of ethanol.

EPRINC thinks refiners might have to recoup $1/gal of ethanol sold in transport fuel. “This cost can only be recovered through higher prices for E10 and distillate and, depending on a wide range of factors, could easily drive gasoline and distillate prices up by 10-25¢/gal over the next 2-3 years as compared to a scenario with the fuel mandates,” it says.

Ignoring warnings

Ethanol’s friends in Congress have ignored all such warnings when they’ve rescued ethanol in the past. They’ll probably ignore the cost hikes along with warnings about harm to vehicle engines now as they answer the ethanol lobby’s appeal for a blend cap in normal gasoline above 10%.

The story has no end. Neither do the costs.