How Congress Messed Up Ethanol

How Congress Messed Up Ethanol
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The year was 2007. America was importing more than half its oil. President George W, Bush jumped aboard the bandwagon, saying that America was “addicted to oil” and promised to make fuel from switchgrass.

Congress responded with the Energy Independence and Security Act of 2007, which was mainly aimed at increasing the use of biofuels. At the time, U.S. consumption of biofuels – almost all ethanol – was 4.7 billion gallons. The law mandated that this consumption should rise gradually to 36 billion gallons by 2022. Moreover, over 21 billion gallons were to come from non-cornstarch products – sugar, biodiesel or cellulose, fuels that barely existed at the time.

This was indeed an ambitious goal. The amount of corn ethanol was limited by the 10 percent “blend wall,” whereby refiners and automakers argue that if ethanol exceeds 10 percent of the gasoline mix it begins to damage engines by eroding aluminum parts in the fuel chain. Back in 2007 when ethanol production was less than 1 percent of gasoline consumption this, didn’t seem to make much difference. But as farmers converted their land to corn production and output rose, it began to be a problem.

The other thing that Congress didn’t count on was that gasoline consumption would actually decline. As it turned out, 2008 was the peak at 142 billion gallons per year. The figure almost immediately went into decline and has recently settled at around 135 billion gallons. This has been accompanied by a decline of total miles driven from 3.05 trillion miles (again peaking in 2008) to the more recent 2.97 trillion. When accompanied by better fuel mileage in recent models, this has resulted in a 5 percent decline in gasoline consumption.

The biofuels mandate and falling gasoline consumption were destined to collide. In 2014 ethanol production exceeded 14 billion gallons, which put it well over the 10 percent “blend wall.” Refiners complained that they could not absorb the huge corn ethanol crop. Caught in the middle, the EPA delayed publishing its 2014 “Renewable Fuel Standard” for over a year. This figure represents the amount of ethanol that refiners are supposed to absorb for that year.

Now ethanol producers and some environmentalists claim the “blend wall” is a fiction made up by the oil companies. “The blend wall is a false narrative that the oil companies have been able to impose on the country,” says Bob Dineen, head of the Renewable Fuels Association. “The EPA’s decision has turned our most successful energy policy on its head.”

But the American Petroleum Institute argues that the latest Renewable Fuel Standards issued by the EPA have exceeded motorists’ ability to absorb them. “EPA’s final rule relies on unrealistic increases in sales of higher ethanol fuel blends despite the fact that most cars cannot use them,” says Bob Greco, downstream manager at API. “Motorists have largely rejected these fuels.”

Ethanol supporters point out that many gas stations offer E-15 (15 percent ethanol) without any adverse results. Since 2000 most cars have been redesigned with rubber parts so that ethanol does not attack them. There are 7 million “flex-fuel” vehicles on the road that can use any blend of ethanol – even though most drivers are unaware that they have that capacity. E-85, which is 85 percent ethanol, is being sold successfully in the Midwest. Advocates argue that if E-85 were more widely available it would be consumed more because of the price. The Department of Agriculture recently announced a $200 million program to finance gas pumps in 21 states that can dispense E-85.

To add to the mayhem, the 2007 law mandated 21 billion gallons of non-corn ethanol by 2022 at a time when the fuel barely existed. The expectation was that mandating something would make it happen faster. In particular, cellulosic ethanol was expected to blossom. As usual, several Congressmen had an ambitious entrepreneur in their district who promised him a revolutionary industry with a federal mandate. In one case it was the legendary Silicon Valley investor Vinod Khosla who promised “We can replace most of our gasoline needs in 25 years with biomass.” Khosla built Range Fuels, a cellulosic plant in rural Mississippi that received a hefty loan guarantee from the Department of Energy and operated for three years before going bankrupt.

Meanwhile, the EPA was telling refiners that they had to buy cellulosic ethanol to meet the mandates even though there was none available. This ghostly charade went on for three years with plenty of hefty fines imposed before the EPA finally called it off.

So what could Congress have done differently? The simples answer would be to mandate ethanol consumption by percentage rather than a flat amount. If the annual RFS were automatically set at 10 percent of gasoline consumption there would be little argument. But instead, the ethanol industry has argued it is being sandbagged because the EPA has not kept faith with Congress’s early estimates. The absurdity of trying to dictate consumption numbers 10 years in advance is all too plain.

As far as cellulosic ethanol is concerned, Congress should simply allow it to be part of the overall market. Poet, the Midwestern refinery, and DuPont Chemical have just opened cellulose processing plants that they claim will produce about 30 million gallons a year. This is of course is a drop in the bucket compared to the 14 billion gallons of corn ethanol now being produced. But if cellulosic ethanol is really cheaper – which it should be – it will find its own way without mandates.

Corn ethanol acts as an oxygenator in gasoline, raising its octane rating. It would probably continue to be added even if Congress took away the mandate today. What causes problems is trying to micromanage the economy to the point of predicting how much ethanol should be consumed 10 years in advance. If Congressmen were that good at predicting the future, they should be in another business altogether.

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