Ethanol's Victory Could Be Ethanol's Ruin

Updated with comment from Renewable Fuels Association.
Investors expect the Environmental Protection Agency to back down from a proposal to reduce the amount of ethanol blended into gasoline this year—but reducing ethanol content may be the only way to save the ethanol industry, an energy economist said in Chicago last week.
"The EPA has a method to save the ethanol scheme, but now they're being scared off by the very industry that would go down with it," Colin Carter, director of the Gianinni Foundation of Agricultural Economics at UC Davis, told about 65 people at the University of Chicago on Thursday.
In November the EPA proposed scaling back the amount of corn ethanol required in gasoline this year from 14.4 to 13 billion gallons, citing decreased demand for motor fuel and a constraint on the percentage of ethanol that can be blended into gasoline without voiding vehicle warranties—10 percent.
Corn growers, ethanol refiners and farm-belt politicians have pressured the EPA to abandon this plan, The Renewable Fuels Association threatened to sue, and market signals suggest the pressure is working.
"There's now a rumor—and it's showing up in the price of RINs—that the EPA is going to backtrack," Carter said.
But Carter believes this short-term victory for the ethanol industry could send gasoline prices soaring by 50 cents per gallon, enough to discredit and ultimately dismantle the government's ethanol policy.
Carter studies the impact of renewable fuel policies on prices at the pump. The ethanol scheme added about 15 cents to the price of each gallon of gasoline in 2013, he said, or about $20 billion total.
That price goes up dramatically if the percentage of ethanol in gasoline passes "the blend wall" —10 percent, he said. It reached 10 percent last year.
"The warranties on most cars are invalid if you go above a 10 percent blend," he said.
In 2007, the Bush Administration implemented the ethanol scheme—a series of annually mandated ethanol volumes— based on the assumption that the demand for gasoline would continue to increase, Carter said, but demand has dropped by about 6 percent.
As a result, the EPA has to force increasing volumes of ethanol on the market each year while the volume of petroleum declines—raising the percentage of ethanol past the 10 percent blend wall.
"If you require more than 10 percent, oil companies are going to export diesel. Because if you export it you don't have to blend it. If you sell it domestically you have to blend it. And how can they blend more than 10 percent? It's very very difficult to blend more than 10 percent. So that's going to send the price of gasoline higher."
So much higher, Carter said, that gasoline prices could spike, drawing negative attention to ethanol.
"If the EPA goes ahead with their proposal it could actually save the ethanol scheme because it's not going to draw the attention to the scheme that you would see if gasoline prices went up 50 cents a gallon," Carter said. "Yet the ethanol backers are fighting it."
The Renewable Fuels Association calls the 10 percent blend wall a fiction perpetuated by the petroleum industry. It contends that 75 percent of cars on the road today can safely burn up to 15 percent ethanol.
"EPA has apparently bought into the oil industry’s fictitious 10 percent ethanol 'blend wall' concept," the agency said in a January response to the EPA's proposal, "and the Agency’s proposal effectively halts the transformation of the liquid fuels marketplace just as it was beginning in earnest."
According to Carter, there's nothing fictitious about the economics of ethanol: "We have flex fuel vehicles that will burn E85 but nobody buys E85 because it's so expensive, so it's just very difficult to increase past that 10 percent."
Carter appeared at the University of Chicago with Mahdu Khanna, an agricultural economist at the University of Illinois who studies energy crops such as native grasses, switchgrass, miscanthus and energy cane. The ethanol scheme favors these energy crops, she argued, because they can grow on marginal land without impacting food prices.
"If we're going to meet these mandates we have to move to actually having dedicated energy crops," Khanna said.
But when the EPA backs down from the ethanol mandates, she said, it creates uncertainty for investors and farmers, undermining the potential of energy crops.
But Khanna and Carter agreed that cellulosic biofuels from energy crops are not ready to enter the market.
"We can't afford to use corn for ethanol but that's what we're doing," Carter said. "And we're using almost 50 percent of our acreage in the corn belt for fuel. And what scares me going forward is that every year they're increasing this target."
The Renewable Fuels Association cites economists who have a different view, both of ethanol's impact on gas prices and the outcome if the EPA backs down. Dawn Moore, communications director for the Renewable Fuels Association, sent the following comment via email:
It is clear that Colin Carter, Director of the Giannini Foundation of Agricultural Economics and a professor at UC Davis, has the facts upside down. More ethanol will NOT lead to rising gas prices.
The real winner if the Environmental Protection Agency proposal is restored to RFS statutory levels would be consumers. Energy Economist Philip Verleger found that ethanol saved consumers on average $1.00/gallon in 2012 & 2013. American drivers should be able to continue along this cost saving path.
On the other hand, if the proposed rule is finalized, demand for gasoline will increase and gas prices will rise. Marzoughi & Kennedy of Louisiana State University found that “…every billion gallons of increase in ethanol production decreases gasoline price as much as $0.06 cents. Adding ethanol to gasoline has the same impact on gasoline as a positive shock to gasoline supply.” Therefore if the EPA’s proposal becomes final, gas prices would rise more than $0.08/gallon, causing consumers to spend approximately $10.6 billion more on gasoline purchases this year.
Additionally, we must look to the future. If the EPA restores the RFS targets to their statutory level it will give cellulosic plants the stability and certainty they need to gain investors, expand, and grow. We need to clarify the facts here too, cellulosic isn’t just a pipe dream, cellulosic is here today with more plants coming online this year.
The bottom line here is that more ethanol will lead to LOWER gas prices and continued investment in next generation biofuels.

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