Sorry Ethanol Lobby, RFS Does Not Promote “Free Markets”

Growth Energy, an ethanol industry group, issued a misleading statement yesterday in response to news that refiners requested a partial waiver of the 2014 Renewable Fuel Standard (RFS). The headline reads, “Big Oil Files Waiver to Cap Ethanol, Block Free Market Competition.”

There is nothing “free market” about requiring someone to purchase a product, but that is exactly what Growth Energy claims. The RFS requires refiners to blend increasing amounts of ethanol into gasoline, with the goal of blending 36 billion gallons by 2022. This mandate amounts to a subsidy for ethanol producers, one that distorts the market and ultimately harms consumers.

Tom Buis, CEO of Growth Energy, claims, “Biofuels are a clean burning, reliable and sustainable alternative and it is time we start recognizing their cost savings and numerous benefits and end our addiction to a fossil fuels and Big Oil’s price gouging.” Let’s unpack these claims one at a time.

First, Buis describes ethanol as “clean burning,” but fails to point out that ethanol can emit more greenhouse gas emissions than conventional gasoline. A study published in Science finds that corn-based ethanol nearly doubles GHG emissions over the next three decades and continues to increase emissions for the next 167 years. The Union of Concerned Scientists, a liberal environmental group, cautions, “If done wrong, the production of biomass for biofuels like ethanol could destroy habitats, worsen water or air quality, limit food production and even jeopardize the long-term viability of the biomass resource itself.”

Second, far from providing “cost savings,” ethanol is actually more expensive than conventional gasoline. Ethanol contains about 33 percent less energy than conventional gasoline, which means that fuel economy declines as ethanol content rises. Indeed, the BTU-adjusted price of E85 (ethanol that contains up to 85 percent ethanol) is about 16 cents higher than regular gas. At this time last year, when both corn prices and gas prices were higher, E85 was about 70 cents more expensive than E10.

Third, Buis offers scant evidence to support his “price gouging” accusations. As the Institute for Energy Research (IER) explains, less than five percent of gas stations are owned by the “big oil” companies that Buis decries. In reality, the price of gasoline is determined largely by the price of crude oil, a commodity traded worldwide. U.S. monetary policy that increases the money supply through quantitative easing provides a ripe environment for hedge funds to bet on commodity prices, including crude oil.

Congress passed the RFS under the assumption that gasoline use would rise indefinitely, but consumption has actually declined in recent years. With consumption stagnant, the only way refiners can add increasing amounts of ethanol is by blending more than 10 percent into gasoline. But most cars are not certified to run on gas with more than 10 percent ethanol, prompting several car companies to warn that damage due to improper fueling voids any warranties. This problem is called the blend wall.

In a free market, the blend wall would never be an issue. Refiners would adjust ethanol volumes in response to supply and demand. But under the current system, refiners are left with little choice but to increase exports or reduce production, both of which would raise gas prices on American motorists. In fact, NERA Economic Consulting finds that by 2015 the RFS will increase diesel costs by 300 percent, gasoline prices by 30 percent, and reduce take-home pay for American workers by $580 billion.

Recognizing the imminent blend wall, the Environmental Protection Agency (EPA) signaled a willingness to reduce required ethanol volumes in 2014. In response, the American Fuel & Petrochemical Manufacturers (AFPM) and the American Petroleum Institute (API) asked EPA to use its authority to reduce the 2014 mandate by 3.35 billion gallons. This would be a tangible first step toward a freer market and lower gas prices.

IER Policy Associate Alex Fitzsimmons authored this post.