The PJ Tatler

The Illusory Cut in the Ethanol Mandate

On the surface, the EPA’s announcement that it was recommending the first cut in ethanol production since the mandate was passed in 2007 would appear to be good news. But in reality, it’s a temporary blip in what promises to be an ever expanding use of food in our fuel, driven by corn growers and subsidy-hungry bio-fuels companies.

It appears that the oil industry finally got through to the bureaucrats at EPA about the dangers of mixing too much ethanol with gasoline. There a decrease in fuel efficiency of up to 30% as well as damage to internal combustion engines when the mixture goes above 10%:

Raising the ethanol content of gasoline beyond 10%, however, can have some nasty consequences for people’s pocketbooks and even their safety. Use of E-15 could decrease fuel efficiency by as much as 30%.

Gasoline with high ethanol content can also decrease corrode fuel lines, and severely damage the car’s engine. For older cars, engine damage can occur even with 10% blends. In 2009, Lexus was forced to issue a massive recall of 2006-2008 model vehicles after reports that ethanol-blended gasoline was corroding fuel injection systems, creating a fire hazard.

And then there are the chainsaws. Testing by the Department of Energy found that use of E-15 in small-engine equipment such as lawn mowers, chainsaws, and boats not only damages engines, but also led to “unintended clutch engagement caused by high idle speeds.” Reports are already circulating of ethanol-fueled chainsaws restarting on their own, which is hardly comforting. And while EPA has blessed the use of 15% ethanol-gas in newer cars, it is auto makers or refiners who may end up being held liable in court should something go horribly wrong.

Auto makers were so apprehensive about the prospects of liability that they joined with trade groups for food producers and refineries in a legal challenge to the new rules. This challenge, however, was rejected by a federal appeals court, and in late June the Supreme Court declined to hear the matter.

This appears to be the major reason that the EPA relented and cut back on the mandates.

Bloomberg:

For months, lobbyists for refiners such as Valero Corp. (VLO) and Exxon Mobil Corp. (XOM) have warned that a U.S. law requiring increased use of ethanol would result in a mandate to add more of the fuel than they could safely blend into gasoline.

While that claim was mocked by executives at renewable fuel producers such as Poet LLC and a joint venture of BP Plc (BP/) and DuPont Co. (DD), yesterday the refiners got their way.

The so-called “blend wall” was cited by the Environmental Protection Agency as the key reason to propose the first cut in requirements for renewable fuels since they were mandated by a 2007 law.

“EPA is proposing to place the nation’s renewable energy policy in the hands of the oil companies,” Bob Dinneen, the president of the Renewable Fuels Association, which represents ethanol makers such as Abengoa SA. (ABG)

Refiners, fast-food restaurants, motorboat makers and chicken farmers have all pushed the EPA to scale back the ethanol mandate, saying it risks ruining engines by forcing more ethanol to be blended into gasoline and is acting to push up demand for corn. Gasoline demand is falling, and rising requirements for renewable fuels are ramping up the percentage of those fuels in the total mix.

The EPA proposal to require 15 billion to 15.52 billion gallons of renewable fuels such as corn ethanol and biodiesel in 2014 was a rare victory for the oil industry under President Barack Obama, and one the biofuel industry said could set back investments in their plants. That proposal compares with 18.15 billion gallons set in the legislation, making it the first time the legal mandate would be cut after years of annual increases designed to boost the industry.

Corn prices have nearly tripled since the mandate went into effect in 2007, leading to increased food prices for Americans, according to a study published last year:

For more than half a century, from 1950 through 2005, U.S. consumers benefited from gradually declining food prices. Since 2006, however, prices have sharply risen, with a typical family of four now paying $2,055 more in food bills than would be the case if costs had kept to the 1950-2005 trend line.

Rapidly rising corn prices, caused primarily by ethanol subsidies and mandates, are the most important factor in rising food prices.

“Fuel ethanol production capacity, based almost entirely on corn as a feedstock, exploded from 2006 to 2009,” the study reported. “Demand for corn to supply the new plants also exploded. Corn production did not keep up with the higher demand, and corn prices have more than tripled since the mandates came into effect.”

And the rise in corn prices here has radically impacted the price of food around the world:

“Ethanol is corn. Corn is food. When you’re pulling into the gas station and you’re filling your tank of gas, 10 percent of what you’re putting into the tank is food. It could be eaten by people instead,” said Bar-Yam.

“Today, the amount of corn that is being used is about 50 percent of all the corn that the U.S. produces,” Bar-Yam continued. That amount is up from 15 percent before 2005. As a major exporter of corn globally, the consumption of food as fuel drives food costs higher by reducing it as a source of food, Bar-Yam explained.

His findings show that the amount of corn used to produce one gallon of ethanol fuel would feed one person for a day, and the U.S. diversion of corn for ethanol could feed as many as 570 million people worldwide annually.

There are alternatives to corn being used for biofuels, including the use of switchgrass, corn husks or algae. Brazil has made some promising progress in converting switchgrass to energy, although the process is still largely experimental.

But for the foreseeable future, corn will be the crop of choice to be converted into ethanol. And while the “blend wall” has been reached, that may change if economic activity were to pick up substantially and gasoline use began to climb again. Pressure would begin to mount on the EPA to restore the original timetable for the mandates and even more corn would bypass human consumption to be burned as fuel in our cars.