News - American Energy Alliance

Biofuel, Biokraftstoff, Biocarburants: Bad News in Any Language

September 23, 2013 by AEA Leave a Comment

This is Part 1 of a three part series comparing biofuel mandates in the United States and the European Union. Part 2 will be published tomorrow.

Biofuel mandates are harmful for a whole host of reasons, not the least of which is that they raise food prices. In the U.S., for instance, the Renewable Fuel Standard (RFS) makes corn, America’s most abundant crop, more expensive by requiring refiners to blend increasing amounts of corn-based ethanol (and other biofuels) into gasoline.

The European Union also mandates rising biofuel volumes in gasoline. Unsurprisingly, they also have higher food prices as a result. Indeed, a new study by the European Commission Joint Research Centre (JRC) finds that EU biofuel policies make vegetable oils nearly 50 percent more expensive in Europe and 15 percent higher worldwide.

U.S. and EU biofuel policies are similar and provide for useful comparisons. Unfortunately, America and Europe have both experienced the negative effects of energy central planning, including higher food prices, increasingly unattainable mandates, and the unintended consequence of fuels that produce more pollution, not less. Part 1 of this three part series examines higher food prices in the U.S. and EU as a result of biofuel mandates.

Biofuel Subsidies Raise Food Prices

America and Europe offer similar subsidies for biofuels. For example, both subsidize biofuel production in the form of regulatory mandates. Enacted in 2008, the Renewable Energy Directive (RED) requires 20 percent of the EU’s energy use and 10 percent of the EU’s transportation fuels to come from renewable energy sources by 2020. Similarly, the U.S. RFS requires oil refiners to blend 36 billion gallons of biofuel into gasoline by 2022. EU’s RED, like America’s RFS, gives biofuel producers guaranteed market share in the form of repeat customers.

RED compels fuel suppliers and refiners to purchase biofuels regardless of whether it makes economic sense. This distorts the EU’s economy in particular and the global economy in general, resulting in higher food prices and diminished well-being. EU’s Joint Research Committee (JRC) explains that global vegetable oil prices are “strongly driven” by their use as food. When more vegetable oils are used for fuel, less are available for food. The result, JRC finds, is 48 percent higher prices for vegetable oils in the EU and 15 percent higher prices globally.

The spread between EU and global prices illustrates how government mandates distort markets. As JRC explains, RED hits EU food prices especially hard because while the EU uses more than half of its vegetable oils for biofuels, the rest of the world uses just 17 percent of vegetable oils for biofuel production. The more feedstock (such as vegetable oil) we divert from food to fuel through inefficient government mandates, the more expensive that feedstock becomes. In other words, the bigger the mandate, the more it hurts.

The EU biofuel mandate should serve as a cautionary tale for the U.S. Passed by Congress in 2005 and expanded in 2007, the RFS requires blending greater and greater amounts of biofuel into gasoline, most of which is corn-based ethanol. Corn is the most abundant crop in America, but about 40 percent of the U.S. corn crop is now used to make ethanol. Not surprisingly, burning large amounts of your country’s largest crop to produce fuel makes food more expensive.

For instance, as IER explained recently, corn prices averaged less than $2.50 a bushel before the RFS became law. In 2008, due largely to government-engineered demand for ethanol, corn prices surged to about $7 a bushel. While the recession lowered these prices, they rebounded furiously to over $8 a bushel in 2012. Even with a record crop driving down corn prices this year, corn costs about $4.25 a bushel, which is still 70 percent higher than before Congress passed the RFS.

The RFS has a disastrous effect on sectors of the economy that depend on affordable corn. Feedlot owners, who use corn to fatten animals for slaughter, are being squeezed by rising feed costs. As the following chart from The Wall Street Journal shows, about 2,000 of the nation’s 77,120 feedlots shuttered operations in 2012, up 20 percent over the previous year. Over the last decade, the number of feedlot owners has fallen by 20 percent, with the biggest impact on small operators with fewer than 1,000 cattle. U.S. feedlots have lost money for a record 27 straight months, as the cost for feedlots to fatten their animals has soared from less than $80 per 100 pounds of weight added in 2010 to nearly $120 in June, 2013, an increase of about 50 percent.

Source: The Wall Street Journal

Any way you slice it, government biofuel mandates increase food costs. In Europe, where much of the biofuel supply is produced with vegetable oils, the price of vegetable oils is twice as expensive as it would be without the mandate. In America, where corn-based ethanol rules the roost, rising corn prices are devastating feedlots that rely on affordable corn.

Conclusion

Europeans are finally reversing course. The European Parliament voted recently to slash the biofuel mandate by 40 percent amid concerns about rising food prices and environmental damages. With Europe finally awakening to the deleterious effects of government biofuel mandates, how long will it take us?

IER Policy Associate Alex Fitzsimmons authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: biofuel, EU, European Union, RED, Renewable Energy Directive, Renewable Fuel Standard, rfs

AEA Launches Phase Two of Anti-Carbon Tax Initiative

September 17, 2013 by AEA Leave a Comment

WASHINGTON — The American Energy Alliance begins today the second phase of a $750,000 initiative with a series of radio advertisements holding Members of Congress accountable for supporting a carbon tax and thanking those who have opposed one.

This phase of the initiative will include two weeks of radio spots in Arizona, Florida, Illinois, Iowa, Michigan, Minnesota, and New York. The ads urge listeners to contact Representatives Bruce Braley (D-Iowa), Cheri Bustos (D- Ill.), Ann Kirkpatrick (D- Ariz.), Patrick Murphy (D-Fla.), Rick Nolan (D- Minn.), and Bill Owens (D-N.Y.) to let them know a carbon tax is a bad deal for Americans. The ads also ask listeners to call and thank Representatives Dan Benishek (R-Mich.), Rodney Davis (R-Ill.), and Steve Southerland (R-Fla.) for opposing a carbon tax.

Below are the “No Carbon Tax” ads:

Rep. Bruce Braley (D-Iowa): Audio, Fact sheet
Rep. Cheri Bustos (D- Ill.): Audio, Fact sheet
Rep. Ann Kirkpatrick (D- Ariz.): Audio, Fact sheet
Rep. Patrick Murphy (D- Fla.): Audio, Fact sheet
Rep. Rick Nolan (D- Minn.): Audio, Fact sheet
Rep. Bill Owens (D- N.Y.): Audio, Fact sheet

Below are the “Thank You” ads:

Rep. Dan Benishek (R-Mich): Audio, Fact sheet
Rep. Rodney Davis (R-Ill.): Audio, Fact sheet
Rep. Steve Southerland (R-Fla.): Audio, Fact sheet

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Filed Under: Press Releases

Opposition to Controversial FERC Nominee Grows

September 16, 2013 by AEA Leave a Comment

WASHINGTON — The American Energy Alliance was joined today by thirteen other free-market organizations in a letter to the U.S. Senate Committee on Energy and Natural Resources, calling on committee members to oppose the confirmation of Ron Binz as Chairman of the Federal Energy Regulatory Commission (FERC) by taking a “principled stand against the costly energy future that he represents.”

In recent weeks, growing concerns about how the Obama Climate Action Plan and a potential Binz chairmanship at FERC would force a hidden energy tax on lower- and middle-income families and small businesses have aligned the groups — most of which have never opposed a nominee for confirmation in the past — to draw the line on Ron Binz, who is scheduled to appear Tuesday morning before the senate energy panel.

“FERC and Commissioner Binz together are an essential piece of this administration’s costly energy vision. The Obama Climate Action Plan stresses the need for new subsidies for electricity transmission to help remotely sited renewable energy compete with easy-to-site conventional generation. This administration knows that FERC is the best way to socialize those costs, to subsidize their favored energy sources, and reward their corporate cronies,” the letter states.

Citing the failed German experiment with similar policies that turned electricity into a “luxury good,” the coalition reminds Senators that “not since the time of FDR has electricity in the U.S. been considered a luxury for Americans.”

Given FERC’s tremendous authority — from ensuring just and reasonable electricity rates to permitting natural gas pipeline infrastructure and LNG export terminals — the coalition voiced alarm that Binz (who has recently called natural gas a dead end) would “not be constrained by Congressionally-mandated boundaries, but would act to carry out President Obama’s plan to make electricity rates ‘necessarily skyrocket.'” With respect to pipeline permitting and LNG export terminals, Ron Binz could “make those processes more burdensome . . . threatening to dim one of the brightest spots in the economy right now.”

The American Energy Alliance is joined in the coalition letter by the following:

The 60 Plus Association
American Commitment
American Tradition Institute
Americans for Prosperity
Caesar Rodney Institute
Competitive Enterprise Institute
Family Business Defense Council
Freedom Action
Frontiers of Freedom
Independence Institute
National Center for Public Policy Research
National Taxpayers Union
Positive Growth Alliance

To read the full letter, click here.

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Filed Under: Press Releases Tagged With: Federal energy regulatory commission, ferc, Presidtn Obama, ron binz

Lies, Damned Lies, and NRDC's Magic Math

September 13, 2013 by AEA Leave a Comment

An old adage often attributed to Mark Twain identifies three kinds of lies: “lies, damned lies, and statistics.” In a recent blog post, the National Resources Defense Council (NRDC) shows why this axiom stands the test of time.

NRDC claims that “AB 32, [the California Global Warming Solutions Act] including the Low Carbon Fuel Standard, will save California consumers and businesses $50 billion over the next decade in fuel costs.” This statement is not just misleading, it is just plain wrong. The LCFS will increase the cost of fuel, not decrease it.

What is the LCFS?

In 2006, the California Legislature passed and Governor Arnold Schwarzenegger signed AB 32, the Global Warming Solutions Act, which set a goal of reducing California’s greenhouse gas emissions to 1990 levels by 2020. Pursuant to the state’s emission reduction target, in Jan. 2007 Governor Schwarzenegger signed Executive Order S-01-07 establishing the Low Carbon Fuel Standard (LCFS). The LCFS requires fuel providers to reduce the carbon intensity of gasoline and diesel fuel 10 percent by 2020.

Mandating a low carbon fuel standard is one thing; implementing one is something else. The implementation of the LCFS will make fuel more expensive and may even increase greenhouse gas emissions. The simple truth is that there is no cost-effective way to reduce the carbon intensity of fuel.

Erroneous conclusions follow flawed assumptions

Given that the LCFS mandates certain types of fuel instead of allowing people to choose their preferred fuels, it is easy to see how the LCFS would increase fuel costs. But the NRDC argues the exact opposite —that the AB 32 measures, including the LCFS, will save Californians $50 billion in fuel costs by 2020.

NRDC, however, is less than transparent about where the $50 billion figure comes from. The source link they provide merely refers readers to another NRDC blog post. From there, NRDC links to two studies. The first, the California Air Resource Board’s (CARB) 2008 AB 32 Scoping Plan, merely claims that all of California’s energy efficiency programs have saved more than $50 billion over the last 30 years, not that AB 32 in general, or the LCFS in particular, would save consumers $50 billion over the next decade.

As IER has previously discussed, the Scoping Plan is not based on sound economics. For CARB to find benefits from the LCFS, they “chose to assume that alternative fuels could be produced at prices at or below the pretax wholesale cost of petroleum fuels on an energy equivalent basis,” as IER Senior Fellow Dr. Robert Michaels explains. In addition, here is IER Senior Economist Dr. Robert Murphy expounding on CARB’s flawed reasoning:

Yet all serious economists on both sides of the issue understand that government policies to reduce emissions carry large, upfront costs, in terms of forfeited growth and lower incomes. Moreover, unilateral policies implemented at local levels will have virtually no impact on global emissions, and hence on climate change. California’s AB 32 will impose serious harms on its economy, with virtually no offsetting environmental benefits. Its Economic Supplement reaches the opposite conclusions by assuming that government experts have spotted billions of dollars in cost-saving measures that the actual businesspeople stubbornly refuse to implement.

In short, CARB’s Scoping Plan provides no evidence that the LCFS will reduce costs to consumers. If anything it will increase them because ethanol is more expensive than regular gasoline on an energy equivalent basis.

NRDC also cites a study from the Environmental Defense Fund (EDF) which claims that AB 32, including the LCFS, could save Californians as much as $39.2 billion in fuel costs by 2020. However, NRDC fails to point out that this finding is based on a hypothetical, sudden, and dramatic price shock occurring in 2020 that doubles the price of gasoline and lasts for an entire year. Under this doomsday scenario, oil and natural gas prices double suddenly on January 1, 2020. The alleged savings come from reduced demand for fossil fuels due to AB 32 measures. Absent this large price shock, the fuel savings from AB 32 do not occur. Instead of disclosing this important caveat, NRDC passes off a doubling of gasoline prices as a foregone conclusion. Even so, it is unclear how NRDC comes up with the remaining savings to reach $50 billion.

NRDC fails to identify another key assumption in the EDF study. EDF’s projected energy savings due to a large price shock can be broken down into two broad categories: importation effects and retail effects. The importation effects are “the avoided value of energy imports, which is the difference between California energy demand and in-state production” and the retail effects are defined as “the avoided payments by energy consumers, such as drivers buying gas, airlines purchasing jet fuel, and industrial facilities obtaining boiler oil.”

In EDF’s report, importation effects comprise $29.6 billion out of the total $39.2 billion in fuel savings. EDF finds that in the event of a large price shock, Californians would spend $29.6 billion less on imported oil and natural gas with AB 32 measures in place, including the LCFS, than without AB 32 measures.

EDF weighs predicted shifts in consumer demand against projected in-state fuel production to determine projected importation costs. This assumption is critically flawed. If EDF is going to include these importation effects, it has to consider the foregone value of the energy that California is not producing. EDF does not want to consider the billions of dollars California is forgoing by not allowing more offshore oil and natural gas development or the development of the Monterey Shale.

California has long been a leader in oil and natural gas production and even today does not lack energy resources. There are an estimated 9.8 billion barrels of undiscovered, technically recoverable oil reserves off the coast of California, according to the Bureau of Ocean Energy Management (BOEM). That amounts to more than 11 percent of America’s total oil resources in the Outer Continental Shelf (OCS).

The Golden State is also blessed with abundant oil resources in shale formations. The Monterey Shale formation, for example, is estimated to contain 15.4 billion barrels of recoverable petroleum, which is more than the massive Bakken and Eagle Ford shale formations combined. But California prohibits energy producers from tapping these vast resources.

EDF can’t include “the avoided value of energy imports” without considering the value of oil that California could be producing but is not. In the last two years alone, oil production is up 40 percent in the United States—California could be leading the way but for policies that restrict energy development.

EDF assumes that offshore California and the Monterey shale will remain under lock and key when, in fact, a spike in oil and gas prices could cause California to open up energy development. Significantly mitigating California’s energy imbalance by unlocking offshore resources and the Monterey shale could dramatically undercut importation costs, the primary driver of EDF’s projected fuel savings. This would make much of the $39.2 billion savings—not to mention the illusory $50 billion—essentially evaporate. Yet NRDC makes no mention of this important assumption.

In short, neither CARB’s Scoping Plan nor EDF’s report provide any evidence that California’s LCFS would reduce costs for California motorists.

LCFS raises gasoline costs, provides negligible climate benefits

Contrary to NRDC, a more sober analysis of the evidence suggests that the LCFS imposes net costs on Californians, not benefits.

A study by the Boston Consulting Group (BCG), for instance, finds that the LCFS could raise gasoline costs by as much as $1.06 per gallon by 2020. BCG estimates that between five and seven of California’s 14 fuel refiners could cease production by 2020, potentially compromising the security of the state’s fuel supply. These refinery closures could result in the loss of as many as 51,000 jobs.

Another study finds that CARB dramatically underestimates the impact of the LCFS on diesel prices. The California Trucking Association (CTA) finds that the LCFS could raise wholesale diesel prices by $1.47 per gallon in 2020, whereas CARB claims the LCFS raises diesel prices by just 20 cents in 2020. When combined with California’s cap-and-trade scheme, another AB 32 measure, CTA finds that the LCFS raises diesel prices by $2.22 per gallon by 2020, a 50 percent increase.

Studies also find that a national low carbon fuel standard, as some have proposed, would raise fuel costs. CRA International, for example, finds that a nationwide LCFS would raise fuel prices by as much as 140 percent in 2015. The study explains that such a national mandate would reduce motor fuel supplies or cause fuel producers to purchase carbon dioxide offsets, either of which would raise energy costs.

In addition to raising fuel prices, the LCFS also fails to significantly impact global warming. Because global warming is a global issue, unilateral emission reductions by California or even the entire country would not significantly reduce global temperatures. Energy-related global carbon dioxide emissions are projected to increase by 46 percent by 2040, according to the Energy Information Administration (EIA). Developing countries such as China and India are expected to account for more than 70 percent of the increase in energy-related CO₂ emissions. As a result, using assumptions based on the Intergovernmental Panel on Climate Change (IPCC), even if the U.S. stopped all carbon dioxide emissions immediately, it would reduce the rise in global temperatures by just 0.17 degrees Celsius by the year 2100. Furthermore, if California completely ceased emitting carbon dioxide it would reduce the rise in global temperatures by 0.0113 by 2100. Such a negligible reduction calls into question the reasoning for imposing the LCFS.

Proponents of California’s LCFS assume that renewable fuels—such as corn-based and cellulosic ethanol—reduce the carbon intensity of transportation fuel. In fact, evidence suggests that some renewable fuels actually do more harm than good from an environmental standpoint. A study published in Science, a peer-reviewed journal, finds that corn-based ethanol nearly doubles greenhouse gas emissions over the next three decades and continues to increase emissions for the next 167 years. The Energy and Resources Group of the University of California, Berkeley finds that “if indirect emissions [resulting from the production of ethanol] are applied to the ethanol that is already in California’s gasoline, the carbon intensity of California’s gasoline increases by 3% to 33%.” This has led environmental groups such as the Union of Concerned Scientists to caution, “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.” That hardly sounds like an improvement over conventional gasoline.

Conclusion

Despite their claims, NRDC offers no evidence that California’s LCFS reduces gasoline prices. In fact, ethanol is more expensive than gasoline, and has been for years. So-called “advanced renewable fuels” that NRDC touts, specifically cellulosic ethanol, are not new and virtually nonexistent. Policymakers in Sacramento and Washington do not need to impose mandates such as the LCFS and the federal Renewable Fuel Standard (RFS) to increase energy security. The domestic energy boom (on state and private lands) is taking care of that just fine.

IER Policy Associate Alex Fitzsimmons authored this post.

Filed Under: Facts, News, Products and Power, Threats Tagged With: AB 32, California, low carbon fuel standard, NRDC

Senator Begich Lawyers up

September 11, 2013 by AEA Leave a Comment

WASHINGTON — The American Energy Alliance responded today to a series of letters from a Washington D.C. law firm representing Sen. Mark Begich (D-AK) who complains that a current advertisement sponsored by AEA “mischaracterizes” the senator’s past support for carbon tax legislation and threatens legal action for the continued airing of the ads. On Sept. 5, 2013, attorneys with Perkins Coie, LLP, notified station managers in Alaska that continued airing of AEA’s ad, entitled “Games,” could be cause for “loss of [the] station’s license.” Attorneys for the American Energy Alliance responded to the charges, and the Alaska stations were satisfied that the AEA advertisement did not run afoul of federal laws that prohibit “false, misleading or deceptive advertising.” All Alaska stations continue to run the AEA ad.

In his response letter, AEA President Thomas Pyle addressed two primary claims made by Senator Begich’s attorneys and campaign staff, namely that Begich has not supported a carbon tax and that AEA represents outside interests interfering in the state.

“That you felt the need to attempt to suppress the advertisements with threats and intimidation from your lawyers rather than publicly disclaim your past support for a carbon tax is telling,” Pyle wrote. “The American Energy Alliance will continue our current advertising initiative to inform Alaskans . . . of the impacts of harmful energy policies emanating from Washington and the role you play in shaping them. Moreover, we will seek additional opportunities in the future to do the same.”

Pyle took issue with Begich’s characterization of AEA as an “outsider group,” noting the senator’s willingness to host other “outsiders” who are opposed to economic development in Alaska — so long as those “outsiders” were raising money for the Begich re-election effort.

“Your campaign hosted a recent fundraiser in Fairbanks, charging guests as much as $120 per person to meet Senator Maria Cantwell (D-WA), [who was there] to help raise money for the Alaska Democratic Party and Alaska’s junior senator . . . Your willingness to invite an ‘outsider’ like Senator Cantwell to help swell your campaign coffers, all the while knowing of her well-documented history of championing legislative efforts to limit the development of Alaska’s vast natural resources and drive up the cost of energy for your constituents, exposes the height of hypocrisy that corrodes our system of representative democracy and always, eventually returns to haunt public officials.”

Pyle pressed further: “You certainly know your record, Senator. And you certainly know that elected officials are held to account more for their recorded votes than for their campaign rhetoric or the threatening missives and petty litigious needles threaded by their Washington-based lawyers. In any event, your record stands, and Alaskans are better informed citizens when organizations like the American Energy Alliance remind them of it.”

Pyle’s letter concludes: “The American Energy Alliance would welcome a public apology to your constituents for your earlier votes in support of carbon taxes and your pledge that going forward your voting record will match your rhetoric on this vitally important issue for Alaska’s economic well-being. Be assured that we will not be intimidated into backing away from our mission to foster an informed electorate of the voting records of their elected officials and call for engaged democratic participation in the American political tradition.”

To read Pyle’s full letter to Begich, click here.

To read the threatening letter from Begich lawyers to Alaska TV stations, click here.

To read the response letter from AEA attorneys, click here.

To view the AEA carbon tax ad currently running in Alaska, click here.

To read the fact sheet supporting the AEA ad, click here.

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Filed Under: Press Releases Tagged With: Alaska, carbon tax, Senator Mark Begich

KiOR's Troubles Deepen

September 11, 2013 by AEA Leave a Comment

On these pages we have already described the absurdity of the EPA’s cellulosic ethanol mandate, which is literally impossible for refiners to satisfy. EPA’s 2013 mandate was based on their projections of the cellulosic ethanol output coming from two particular plants, one of them being a KiOR plant based in Columbus, Mississippi. Yet unfortunately for refiners—who will face penalties for not obeying the mandate—KiOR missed its second-quarter production forecast by a whopping 75 percent.

This shouldn’t have really been a surprise, because back in early April it was apparent that KiOR already had a history of botched projections. Now, at least one investor is piping mad about the whole affair. In late August a KiOR investor filed a lawsuit, hoping it will become a class action suit. According to the press release put out by the investor’s attorney:

According to the complaint, KiOR made false and/or misleading statements regarding the company’s business operations and prospects. Specifically, the complaint alleges that, throughout the Class Period, the company and certain of its officers and directors made false and misleading statements regarding the timing of projected production levels of biofuels at the company’s Columbus, Mississippi facility. Further, the complaint alleges that, despite numerous setbacks and missed production targets, KiOR continued to reassure investors that the company remained on schedule to produce commercially meaningful levels of biofuel. As a result of these false and misleading statements and omissions, KiOR shares traded at artificially inflated prices during the Class Period.

The complaint goes on to argue that the investor lost money when share prices collapsed in the wake of KiOR’s announcement of its woefully deficient 2^nd quarter production.

Normally a story such as this would have nothing to do with federal energy policy. Yet there is a history of the government’s “green energy” agenda interacting with dubious companies, to say the least. This sordid affair is just another example proving that government and business don’t mix.

Filed Under: News, Products and Power, Renewable Fuel Standard, Threats Tagged With: cellulosic ethanol, KiOR, rfs

Fact Check: Fuels America's RFS Ad Campaign

September 9, 2013 by AEA 1 Comment

Fuels America trotted out a series of stale, debunked talking points in a recent advertising campaign extolling the virtues of the Renewable Fuel Standard (RFS). This is one of the latest attempts by the ethanol lobby to conceal the truth about ethanol as Congress considers changing or repealing the federal ethanol mandate, which requires refiners to blend greater and greater amounts of ethanol into gasoline. The Institute for Energy Research (IER) has compiled a list of claims and corresponding facts to set the record straight.

CLAIM: “We’ve been dependent on oil for more than a century, and our environment is paying the price…Renewable fuel is clean and innovative, and can ensure a healthier future for our planet.”

FACT: Let’s unpack both parts of this claim. America has, indeed, used oil for more than a century—just like we have used ethanol for more than a century. Some of the earliest internal combustion engines, dating back to the early 1800s, were designed to run on biofuel. Henry Ford designed the first Model T to run on either gasoline or ethanol. Even cellulosic ethanol is not new, as Robert Rapier explains:

Almost 200 years ago, in 1819, French chemist Henri Braconnot first discovered how to unlock the sugars from cellulose by treating biomass with sulfuric acid (Braconnot 1819). The technique was later used by the Germans who were the first to commercialize cellulosic ethanol from wood in 1898 (EERE 2009).

So the world’s first commercialization of cellulosic ethanol took place 114 years ago. First commercialization in the U.S. took place in 1910 — 102 years ago. The Standard Alcohol Company built a cellulosic ethanol plant in Georgetown, South Carolina to process waste wood from a lumber mill (PDA 1910). Standard Alcohol later built a second plant in Fullteron, Louisiana. Each plant produced 5,000 to 7,000 gallons of cellulosic ethanol per day from wood waste, and both were in production for several years (Sherrard 1945). So actual production 100 years ago was up to about 2.5 million gallons of cellulosic ethanol per year. [emphasis added]

The last part is important. Cellulosic ethanol production was higher a century ago than it is today. That’s because over time, affordable oil displaced expensive ethanol, a trend that continues to this day. Despite the RFS requiring refiners to blend 5 million gallons of cellulosic ethanol in 2010, not a single drop was produced for commercial use. EPA raised the mandate to 6.6 million gallons in 2011, but again no cellulosic ethanol was produced. In 2012, despite an even higher 8.65 million gallon mandate, ethanol producers managed to eke out just 20,069 gallons. Cellulosic ethanol is not only not new, but it’s also not here.

Fuels America’s claim about the environmental impact of oil is also misleading. A study out of Stanford University finds that burning ethanol adds 22 percent more hydrocarbons to the atmosphere than gasoline, according to Scientific American.

The environmental benefits of ethanol are so questionable that the Union of Concerned Scientists, an 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.” That does not sound like the “healthier future for our planet” that Fuels America claims.

CLAIM: “Oil companies control 90% of our fuel supply. That’s dangerous for our national security and for our economy. But thanks to the Renewable Fuel Standard, we have a choice: a safe, domestic alternative in renewable fuel.”

FACT: This is a truly puzzling statement. We suppose Fuels America is trying to say that 90 percent of transportation fuel is petroleum and 10 percent is ethanol. While that’s an accurate statement, it isn’t what Fuels America wrote.

The statement that “thanks to the Renewable Fuel Standard, we have a choice” is simply not true. As noted above, Americans have been able to choose ethanol for more than a century. Ethanol was used in the first internal combustion engines in the early 1800s. To suggest that ethanol could not exist without the RFS ignores history and reality.

It’s also important to note that U.S. oil imports are dramatically falling. Since 2005, oil imports have fallen from 60 percent to 40 percent of our total oil supply. Net oil imports are falling primarily because domestic oil production is increasing, U.S. oil consumption is holding steady, and America is exporting greater amounts of petroleum.

U.S. liquid fuels production rose 39 percent from 2005 to 2012, according to data from the Energy Information Administration (EIA). Biofuels accounted for 32 percent of the increase, while petroleum contributed about 68 percent. Meanwhile, U.S. petroleum exports almost tripled over the same period. Increased domestic petroleum production, not the RFS and ethanol, is the driving force behind America’s growing energy security.

Fuels America is on weak ground complaining about America’s reliance on foreign oil, since we are producing more oil now than we have in almost 24 years. Their real issue is that their products do not have more market share. Even with the federal mandate requiring refiners to purchase their products, ethanol accounts for just 10 percent of the domestic motor fuel supply. Fuels America’s purported concern for national security is nothing more than narrow self-interest.

The RFS, Not Domestic Oil, Is “Dangerous” to the Economy

Despite Fuels America’s claim, what is truly “dangerous” to the U.S. economy is the Renewable Fuel Standard. The RFS increases food costs by diverting about 40 percent of the U.S. corn supply, America’s most abundant crop, to ethanol production. Before the RFS became law, corn prices averaged less than $2.50 a bushel. Due mainly to growing demand by the ethanol industry, corn prices surged in 2008, around $7 a bushel. Although the recession lowered those prices, they rebounded strongly hitting over $8 a bushel last year, remaining above $6 a bushel for the past 2 years. Prices have begun to fall due to the approaching blend wall and a very strong crop this year. The record crop is expected to bring corn prices down to around $4.25 a bushel, which is still 70 percent higher than before the ethanol mandate.

But these lower prices are coming too late for some. Feedlot operators, who fatten cattle for slaughter, are closing operations at escalating rates. Last year, about 2,000 of the nation’s 77,120 feedlots exited their business, up from 20 the preceding year. The number of feedlot operators has dropped 20 percent during the past decade with the biggest impact on small operators with less than 1,000 cattle. Feedlot operators have been squeezed by rising prices for young cattle and high feed costs that have outstripped prices paid to them by meatpackers.

In addition to increasing food costs, the RFS also makes fuel more expensive. A recent study by the Energy Policy Research Foundation Inc (EPRINC) finds that failure to reform the RFS will cause E10 prices to spike as high as 50 cents to $1.00 per gallon in 2014. EPRINC attributes the increase to “constraints in cost effective opportunities to blend larger volumes of renewable fuels into the U.S. gasoline pool,” otherwise known as the blend wall. Another study by NERA Economic Consulting finds that by 2015 the RFS could raise diesel costs by 300 percent, gasoline prices by 30 percent, and reduce take-home pay for American workers by $580 billion.

The fact is that ethanol is consistently more expensive than gasoline. This is primarily because ethanol is less energy dense than gasoline. A gallon of ethanol contains about 33 percent less energy than a gallon of conventional gasoline. Indeed, last year E85 (ethanol that contains up to 85 percent ethanol) was 70 cents higher than regular gasoline on a miles-per-gallon basis, according to AAA’s Daily Fuel Gauge Report. Even with a record corn harvest driving corn prices down this year, E85 still costs about 20 cents more than regular gasoline.

If Fuels America were truly concerned about “dangers” to the economy—as opposed to their personal economic fortunes—they would oppose the federal ethanol mandate.

Conclusion

Fuels America’s ad campaign is just another push by the ethanol lobby to mislead Americans about the Renewable Fuel Standard. As Growth Energy’s “You’re No Dummy” campaign reveals, the ethanol industry is getting increasingly desperate and offensive in their attempts to preserve their cherished handouts. The RFS amounts to a massive subsidy for ethanol producers; it creates guaranteed demand through repeat customers. But as IER has explained numerous times, the RFS raises energy costs, damages vehicle engines, and burns food to produce fuel—all of which harm the American people. It is time to repeal the RFS.

IER Policy Associate Alex Fitzsimmons authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: cellulosic ethanol, corn, ethanol, Fuels America, Renewable Fuel Standard, rfs

New Initiative Targets Carbon Tax Supporters

September 4, 2013 by AEA Leave a Comment

WASHINGTON — The American Energy Alliance begins tomorrow a new $750,000 initiative with a series of radio and television advertisements holding Members of Congress accountable for their votes on the controversial issue of a carbon tax. The first phase of the initiative will include two weeks of statewide broadcast and cable television spots targeting Sen. Mark Begich (D-Alaska) and statewide radio spots targeting Sen. Kay Hagan (D-N.C.). Other efforts will be announced in the coming weeks.

“Congress has now had numerous attempts to go on record in support of a carbon tax, and the American Energy Alliance has been watching closely to see where elected officials stand on the issue. When Members of Congress refuse to protect taxpayers from energy and tax policies that will harm American families and small businesses, undermine an economic recovery, and do nothing to achieve the purported benefits to the environment, they deserve to hear from their constituents,” AEA President Thomas Pyle said of the organization’s newest initiative.

“A well-funded propaganda campaign has arisen to support various carbon tax schemes, but the American people demand sensible policies guided by the facts. A carbon tax isn’t a tax on carbon, because carbon doesn’t pay taxes. In reality, it’s a tax on people who will pay for it every month in their utility bills, every week at the gas pump, and every day with increased tax burdens and shrinking discretionary income.”

The Alaska television spot, entitled “Carbon Games,” will begin airing on Sept. 5 in the state’s three major markets: Anchorage, Fairbanks, and Juneau. The North Carolina radio ads will air statewide via markets in Asheville, Charlotte, Fayetteville, Greensboro, Winston-Salem, Greenville, New Bern, Raleigh-Durham, and Wilmington. The initial financial commitment for phase one of the AEA initiative exceeds $250,000.

To view the “Games” television spot, click here .
To read supporting documents for the “Carbon Games” ad, click here.

To hear the North Carolina radio ads, click here.
To read the supporting documents for the North Carolina ad, click here.

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Filed Under: Press Releases Tagged With: AEA Ad, carbon tax, Kay Hagan, Mark Begich

How Big Ethanol Hopes You're a Dope

September 3, 2013 by AEA 1 Comment

Growth Energy recently unveiled a national ad campaign to tell “the truth about ethanol” and the Renewable Fuel Standard (RFS)—the federal mandate that requires oil refiners to blend ethanol into gasoline. But the ethanol lobby has a curious definition of “truth,” as many of their claims are incomplete, misleading, or outright false.

NASCAR doesn’t use ethanol because it is a “high performance” fuel, but because it is “product placement”

Graphic from Growth Energy:

Growth Energy proudly declares that NASCAR uses ethanol. This should not be a surprise, however, because Growth Energy and the National Corn Growers Association are official sponsors of NASCAR. As a NASCAR official confirmed to Delaware Online, ethanol’s relationship with NASCAR amounts to a “sports product placement agreement.”

When we see LeBron James wearing Nikes, Phil Mickelson swinging Callaway golf clubs, or people in the TV show The Office using Apple products, we should not be surprised because these are all paid product placement. The fact that NASCAR uses ethanol does not say much if anything about ethanol, other than the fact that NASCAR is paid to use it.

Ethanol increases ozone air pollution

Graphic from Growth Energy:

When Growth Energy says that ethanol is “clean burning,” they fail to mention that burning ethanol increases air pollution, particularly ozone. As Scientific American explains:

Because burning ethanol can potentially add more smog-forming pollution to the atmosphere, however, it can also exacerbate the ill effects of such air pollution. According to [Stanford University environmental engineer Mark] Jacobson, burning ethanol adds 22 percent more hydrocarbons to the atmosphere than does burning gasoline and this would lead to a nearly two parts per billion increase in tropospheric ozone. This surface ozone, which has been linked to inflamed lungs, impaired immune systems and heart disease by prior research, would in turn lead to a 4 percent increase in the number of ground level ozone-related deaths, or roughly 200 extra deaths a year. “Due to its ozone effects, future E85 may be a greater overall public health risk than gasoline,” Jacobson writes in the study published in Environmental Science & Technology. “It can be concluded with confidence only that E85 is unlikely to improve air quality over future gasoline vehicles.”

More recent research has reached a similar conclusion that ethanol increases ozone pollution. The Union of Concerned Scientists, an 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.” That does not sound “good for the environment.”

Growth Energy’s argument that ethanol has lower greenhouse gas emissions is also debatable. Lifecycle greenhouse gas emission studies are difficult and complicated to conduct. As a result, some say ethanol decreases greenhouse emissions, while others say that ethanol increases greenhouse gas emissions. A study published in Science that includes land use changes finds that corn-based ethanol nearly doubles greenhouse gas emissions over the next three decades and continues to increase emissions for the next 167 years. The Energy and Resources Group of the University of California, Berkeley finds that “if indirect emissions [resulting from the production of ethanol] are applied to the ethanol that is already in California’s gasoline, the carbon intensity of California’s gasoline increases by 3% to 33%.”

Lastly, it is disingenuous for Growth Energy to include the greenhouse gas emissions of cellulosic ethanol in its graphic because only miniscule amounts of cellulosic ethanol are produced. Currently, the U.S. consumes more than 133,000,000,000 gallons of motor gasoline a year. In contrast, in 2011, zero gallons of cellulosic ethanol were sold commercially; last year only 20,069 gallons of cellulosic ethanol were sold commercially; and so far this year only 129,731 gallons have been sold.

Ethanol has helped increase domestic fuel production, but not nearly as much as increases in domestic oil production

Graphic from Growth Energy:

If ethanol improves the economy, as Growth Energy argues, then there is no reason for the Renewable Fuel Standard to exist. If that is Growth Energy’s argument, we agree. The problem with the Renewable Fuel Standard is that as a mandate, its purpose is to force people to use something they would not otherwise use, or to use it in higher quantities than otherwise. By forcing people to use more ethanol that they would otherwise use, the Renewable Fuel Standard harms the economy, because “the economy” is simply a way for us to trade with each other and improve our situations through cooperation. If someone forces vegetarians to buy hamburgers, or non-smokers to buy cigarettes, that might look like “economic growth” and “job creation” but it doesn’t actually make Americans better off. By the same token, if the government forces people to use ethanol, that’s not genuine prosperity.

Growth Energy’s chart showing declining net oil imports is accurate, but it fails to state the biggest reason for the reduction in oil imports—increasing domestic oil production, not ethanol. Net oil imports are falling because U.S. oil consumption is holding steady, domestic fuel production is increasing, and the U.S. is exporting a greater amount of petroleum products. U.S. liquid fuels production rose 39 percent from 2005 to 2012, according to data from the Energy Information Administration (EIA). Biofuels accounted for 32 percent of the increase, while petroleum contributed about 68 percent. Because of increased domestic production and fairly flat demand, the United States is exporting petroleum. U.S. petroleum exports almost tripled between 2005 and 2012. Growth Energy’s chart is based on net imports, which are gross imports minus exports. Increased domestic petroleum production, not ethanol production, is the biggest force behind America’s reduction in imports.

Earlier in the year, EIA projected that monthly domestic oil production was on track to surpass net imports for the first time since 1995. EIA attributes this change primarily to “rising domestic crude oil production, particularly from shale and other tight rock formations in North Dakota and Texas.” America is indeed weaning itself off of foreign oil, but the ethanol industry does not deserve nearly as much credit as they claim.

Oil companies oppose the Renewable Fuel Standard because it hurts their business, and ethanol companies support the Renewable Fuel Standard because it requires the American people to use their product

Growth Energy writes, “For every gallon of renewable fuels that is blended into gasoline, it’s one less gallon of gasoline the oil industry can sell…It’s really quite simple. It’s all about money.” Growth Energy knows this statement is incorrect. They are correct, this is about money—that’s not the issue. The issue is whether “for every gallon of renewable fuel that is blended into gasoline, it’s one less gallon the oil industry can sell.” This is inaccurate because a gallon of ethanol is not the same as a gallon of gasoline. A gallon of ethanol contains 33 percent less energy than a gallon of gasoline and therefore it takes more gallons of ethanol to travel the same distance as using gasoline.

The argument about money applies equally to the ethanol industry. Of course oil companies do not want to be forced to sell their competitors’ products, in the same way Honda would not want to be forced to sell a certain percentage of Chryslers. But this is exactly what the Renewable Fuel Standard does.

Growth Energy and ethanol companies support the Renewable Fuel Standard because it forces oil companies to sell ethanol. Growth Energy, Cargill, ADM and other major ethanol producers could start their own gas stations and sell as much ethanol as people would like to buy, but that is not what they want. By supporting the Renewable Fuel Standard, Growth Energy wants to force people to sell Growth Energy’s products.

Subsidies for some energy sources does not justify subsidies for ethanol

Graphic from Growth Energy:

This chart is misleading for several reasons. The most obvious is that the chart conveniently excludes most of the Obama administration, when subsidies for green energy technologies skyrocketed. For example, according to the Energy Information Administration, between fiscal year 2007 and fiscal year 2010, subsidies for renewable energy almost tripled. In fiscal year 2010, biofuels received 3.5 times the subsidy level that petroleum liquids and natural gas received outside the electricity generation sector.

The chart correctly notes that the Volumetric Ethanol Excise Tax Credit (VEETC), which paid the ethanol industry to produce ethanol, expired at the end of 2011. According to the White House’s budget, in 2011, the VEETC was worth $6.5 billion and in 2012 it was worth $3.6 billion.[1] That’s nearly twice as much money as the oil and gas tax credits were worth over 91 years.

Another problem is the way oil subsidies are calculated. According to the report the chart is based upon, the only “subsidies” for oil and natural gas companies were “the expensing of intangible drilling costs and the excess of percentage over cost depletion allowance.”[2] These tax deductions are akin to those that businesses receive for depreciation (percentage depletion allowance) and research and development (expensing of intangible drilling costs). All businesses receive the domestic manufacturing tax deduction, but the oil and gas industry can only claim a 6 percent deduction of its profits, while all other manufacturers can deduct 9 percent. Large oil companies, however, are specifically excluded from some of the incentives that the small independent oil and gas companies receive, as IER explains in a recent analysis.

So-called subsidies for oil are much different than subsidies for ethanol. The VEETC, on the other hand, provided 45 cents for every gallon of ethanol blended with gasoline. Though the ethanol tax credit expired, the federal government continues to offer tax credits to biodiesel producers.

Lastly, ethanol has been used in internal combustion engines for nearly 190 years—ever since Samuel Morely experimented with ethanol mixed with turpentine. Ethanol is not a “new fuel” that needs subsidies to compete.

Ethanol damages engines, especially small engines

Graphic from Growth Energy:

Growth Energy tries to argue that higher ethanol blends won’t damage automobiles. This is false. EPA has only said that E15 is okay for cars model year 2001 and newer. Cars older than model year 2001 could be damaged, according to EPA’s waivers. But this assumes that EPA’s study of the impact of E15 is correct. A study by the Coordinating Research Council finds that 5 million cars could experience engine damage or failure from E15. As such, several automobile manufacturers will not warranty vehicles using E15.[3] Furthermore, AAA has called for a suspension of E15 sales, citing “consumer confusion and the potential for voided warranties and vehicle damage.”

But the problem with ethanol is not isolated to just automobiles. Ethanol poses even more problems for machines with small engines. As AAA explains, gasoline blended with even as little as 10 percent ethanol can accelerate engine failure in boats, motorcycles, lawnmowers, and other small engines. As a result, some boaters are turning to ethanol-free gasoline. A gas station owner in North Carolina, for example, says many customers are willing to travel across the county for gasoline that they know won’t harm their boats. The National Marine Manufacturers Association (NMMA), the trade group for the recreational boating industry, also opposes gasoline blended with more than 10 percent ethanol.

Forcing oil companies to blend greater and greater amounts of ethanol increases gas prices

Graphic from Growth Energy:

While it is true that on a per gallon basis, ethanol is less expensive than pure gasoline, that is not the correct measure. The real unit of comparison is not the cost per gallon, but the cost per unit of energy. Because ethanol contains about 33 percent less energy than gasoline, as ethanol content increases, fuel economy decreases. AAA’s Daily Fuel Gauge Report reflects this scientific fact; the BTU-adjusted price of E85, ethanol that contains up to 85 percent ethanol, is consistently higher than conventional gasoline. A year ago, regular gasoline cost about 70 cents less than E85 on a miles-per-gallon basis. Even with a record corn harvest driving down corn prices this year, E85 still costs about 20 cents more than conventional gasoline.

As for the study Growth Energy references, the Iowa State study claiming that ethanol production has suppressed the growth in gasoline prices is very misleading. It takes for granted the current refinery capacity and other infrastructure that industry uses to deliver gasoline to motorists, without realizing that federal policies over the years have distorted the development of these markets. Ethanol only survives in the market place at its current levels because it is propped up by artificial mandates and preferential tax treatment.

The regression analysis of the Iowa study doesn’t accurately capture the timeline that would have occurred had the free market been allowed to operate. Of course, a sudden disappearance of all ethanol would cause a bigger price spike in the Midwest than in the East Coast. That’s because the artificial federal support has displaced the development of oil-based gasoline delivery in the Midwest more than in other regions. The fact remains that ethanol (at its current market share) is very inefficient. Taxpayers and consumers would be richer if the government dropped its support programs for it. For a more complete explanation, see this analysis.

Even if the Wisconsin and Iowa State study is correct that ethanol decreased gasoline prices in 2011, blending increasing amounts of ethanol threatens to increase, not decrease, gas prices in the near future. A recent study by the Energy Policy Research Foundation, Inc (EPRINC) finds that E10 prices could spike as much as 50 cents to $1.00 per gallon in 2014. EPRINC attributes the increase to “constraints in cost effective opportunities to blend larger volumes of renewable fuels into the U.S. gasoline pool,” otherwise known as the blend wall. When the blend wall is hit, refiners must purchase Renewable Identification Number (RIN) credits, which allows them to not meet their required biofuel quotas. The value of RINs has skyrocketed by 2300 percent during the past year due to the approaching blend wall. The cost of the RINs is passed onto the distributor and then to the customer. Another study by NERA Economic Consulting finds that by 2015 the federal ethanol mandate could raise diesel costs by 300 percent, gasoline prices by 30 percent, and reduce take-home pay for American workers by $580 billion.

As we get closer to the blend wall, the impact of the Renewable Fuel Standard will become more and more severe.

The ethanol industry no longer receives direct subsidies; instead they have something better—a mandate that Americans use their product

Graphic from Growth Energy:

The ethanol tax credit may have expired, but the ethanol industry continues to enjoy what is arguably an even more attractive subsidy: the Renewable Fuel Standard (RFS). Passed in 2005 and expanded in 2007, the RFS requires oil refiners to blend increasing amounts of ethanol and other biofuels into the nation’s transportation fuel supply, with the goal of blending 36 billion gallons by 2022.

As Kevin Drum of Mother Jones observed soon after the ethanol tax credit expired, ethanol subsidies are “not gone, just hidden a little better.” The Congressional Budget Office (CBO) noted in 2010 that the ever-rising federal mandate would obviate the need for a tax credit: “In the future, the scheduled increase in mandated volumes would require biofuels to be produced in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included.” As Drum explains, “Demand for ethanol is driven by the mandates, not by the tax credit.”

By forcing refiners to purchase ethanol regardless of whether it makes economic sense, the RFS creates artificial demand for ethanol. Tax credits, on the other hand, make production more profitable, but don’t compel people to purchase the products produced. In other words, the RFS gives ethanol producers a much more valuable gift than tax credits—it gives them repeat customers.

Further, the U.S. oil and gas industry does not receive the federal subsidies that Growth Energy cites in the above graphic. The International Energy Agency (IEA) annually estimates global fossil-fuel consumption subsidies that measure what developing countries spend to provide below market cost fuel to their citizens. The IEA is a creation of the Organization for Economic Cooperation and Development (OECD), which represents the developed nations of the world. In 2011, IEA found fossil fuel consumption subsidies total $523 billion, 27 percent higher than the 2010 total of $412 billion. This increase is almost entirely due to the increase in international energy prices, particularly oil prices. Oil subsidies make up over half of the total fossil fuel consumption subsidies, while electricity makes up 25 percent, natural gas 20 percent and coal less than 1 percent.

Developing countries artificially lower energy prices to their citizens, paying the difference from their government resources. Such welfare transfers are akin to the U.S.’s Low Income Home Energy Assistance Program (LIHEAP), and are different from subsidies in the name of commercializing uneconomic energy sources such as on-grid wind or solar. The United States and other developed countries offer support to energy production in the form of tax credits, loan guarantees or use mandates, which are not included in IEA’s fossil fuel consumption subsidy calculations since they are directed towards production rather than consumption of the fuel. For a greater discussion, click here.

Conclusion

Millions of gallons of ethanol would be produced and used every year without the Renewable Fuel Standard since refiners would use it as an oxygenate. The problem is not ethanol per se, the problem is the Renewable Fuel Standard, which artificially increases the amount of ethanol required. The Renewable Fuel Standard increases gas and food prices, decreases fuel economy, and damages small engines. As such, it is time for Congress to repeal the mandate.

IER Policy Associate Alex Fitzsimmons authored this post.

[1] Analytical Perspectives: Fiscal Year 2013 Budget of the United States, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/spec.pdf, p. 253 footnote 2.

[2] Nancy Pfund & Ben Healey, What Would Jefferson Do, Sept. 2011, http://www.dblinvestors.com/documents/What-Would-Jefferson-Do-Final-Version.pdf p. 20.

[3] Ford and General Motors have approved the use of E15 but only for new cars starting in 2012 for GM and 2013 for Ford. http://thehill.com/blogs/e2-wire/e2-wire/259785-biofuels-industry-lauds-automakers-for-approving-higher-ethanol-fuel-blend

Filed Under: Facts, Products and Power, Renewable Fuel Standard, Threats Tagged With: ethanol, Growth Energy, Renewable Fuel Standard, rfs

Ethanol, Corn Prices, and RINs, Oh My!

August 26, 2013 by AEA 1 Comment

What do ethanol mandates, corn prices, and renewable identification numbers have in common? The answer is the Renewable Fuel Standard that was first passed in 2005 and then increased in 2007 when the Energy Security and Independence Act was enacted, requiring specified annual amounts of corn-based and cellulosic ethanol to be produced and blended into gasoline. The outcome of this poorly conceived legislation is skyrocketing corn and food prices, a blend wall where ethanol blended into gasoline has almost hit its 10 percent share, and skyrocketing prices for renewable identification number (RIN) credits that refiners must purchase if they cannot blend the required composition of ethanol-based fuels. The next question is: If a law is having bad outcomes, why isn’t it being repealed, or at least fixed? Unfortunately, to some, these higher prices and demand limitations aren’t a concern; they welcome higher prices and intend to find ways to increase ethanol’s share regardless of what the ramifications are to our cars, boats, lawn mowers, weed eaters, and anything else with a small motor.

Corn Prices

Corn is the biggest U.S. crop and it is grown on more than 400,000 farms with a total area harvested for grain as large as New Mexico. About 40 percent of the U.S. corn crop is used to make ethanol.

Before the ethanol mandate became law, corn prices averaged less than $2.50 a bushel. Due mainly to growing demand by the ethanol industry, corn prices surged in 2008, around $7 a bushel. Although the recession lowered those prices, they rebounded strongly hitting over $8 a bushel last year, remaining above $6 a bushel for the past 2 years. Prices though have begun to fall due to the nearness of the blend wall and a very strong crop this year. The Department of Agriculture projects that this year’s corn harvest will total about 14 billion bushels, about 30 percent higher than last year’s harvest of 10.8 billion bushels and more than 10 percent higher than the corn harvest in 2011 of 12.4 billion bushels. The record crop is expected to bring corn prices down to around $4.25 a bushel, which is still 70 percent higher than before the ethanol mandate.[i]

Source: The Wall Street Journal

But these lower expected prices are coming too late for some. Feedlot operators, who fatten cattle for slaughter, are closing operations at escalating rates. Last year, about 2,000 of the nation’s 77,120 feedlots exited their business, up from 20 the preceding year. The number of feedlot operators has dropped 20 percent during the past decade with the biggest impact on small operators with less than 1,000 cattle.[ii]

Feedlot owners buy roughly one-year-old cattle that weigh about 750 pounds and feed them a corn-heavy diet for 6 months bringing their weight up to as much as 1,400 pounds at time of slaughter. Last year, feedlots with 1,000 or more cattle sold 24.95 million animals, 12 percent less than the 28.29 million sold in 2000. On average, U.S. feedlots have lost money for a record 27 straight months, with the losses equaling an average of $141 per head of cattle over that period.

Feedlot operators have been squeezed by rising prices for young cattle and high feed costs that have outstripped prices paid to them by meatpackers. U.S. beef consumption last year was 15 percent lower per person than a decade earlier.

Source: The Wall Street Journal

The Blend Wall Nears

Because gasoline consumption has declined since 2005 and is remaining fairly flat resulting from high gasoline prices, a weak economy with fewer people working and more mandated fuel-efficient cars, in order to use more ethanol as the renewable fuel standard requires, the share of ethanol blended into gasoline needs to be increased from its current 10 percent share. The Environmental Protection Agency wants to increase it to 15 percent. However, car manufacturers will not warranty their engines when they run on a blend higher than the current 10 percent ethanol. Further, there are other small motors and products that cannot even use a 10 percent blend without destroying the motor.

Renewable Identification Numbers

Under the Renewable Fuel Standard, oil-and-gas companies are required to blend biofuels such as ethanol with conventional gasoline. By 2022, the standard calls for 36 billion gallons of renewable fuel to be mixed with transportation fuels. If refiners cannot blend the required amount of renewable fuel (ethanol), they must purchase credits known as Renewable Identification Numbers (RINs) with each credit allowing a refiner to reduce its blend amount by a gallon of ethanol. The increased costs are passed onto distributors, who then pass it onto consumers.

Renewable Identification Number credits have escalated in cost from a few pennies last year to as much as $1.40 this year. Major refiners have had to spend hundreds of millions of dollars on them, passing along their additional costs by raising fuel prices. It is estimated that the cost to consumers is about 10 cents per gallon. According to the National Policy Research Association, by next year, when the renewable mandate will increase to 18.2 billion gallons from 16.6 billion gallons currently[iii], the purchase of RIN credits is expected to increase the price of a gallon of gasoline by 20 cents to $1.[iv] And, according to a study by NERA Economic Consulting, exceeding the blend wall could result in diesel fuel costs increasing by as much as 300 percent and a 30 percent increase in gasoline costs by 2015.[v]

Unless the law is repealed or changed drastically when the 2022 mandate is reached at twice the 2014 level, there will be a large impact from these credits on consumer prices. This is only exacerbated by President Obama’s corporate average fuel economy standards, which are doubling by 2025 to 54.5 miles per gallon, thus reducing demand for gasoline further.

Why the Law Is No Longer Needed

When the renewable fuel standard was originally passed in 2005 and and then quintupled (from 7.5 billion gallons to 36 billion gallons) in 2007, the expectations for the U.S. oil market were for declining production. The success of hydraulic fracturing and directional drilling has turned those expectations around to the point that the United States will soon become the world’s largest producer of oil. These new drilling technologies have increased domestic oil production by 1.3 million barrels per day between 2005 and 2012. Due mainly to the production increase and a decline in gasoline consumption, imports have declined by 3.1 million barrels per day since 2005. Net imports (imports minus exports) now account for just 40 percent of consumption, down from 60 percent in 2005, and are expected to decline to 34 percent by 2019, according to the Energy Information Administration.[vi]

Thus, the stated goals of reducing overseas oil imports that the renewable fuels mandate was supposed to meet by 2022 have been surpassed by developments that were unimaginable when the bill was passed.

Conclusion

The Maine House Republicans have summarized the renewable fuel issue well:

“[E]vidence is mounting that ethanol is a failure in virtually every way. It takes more energy to produce it than the fuel provides. Food supplies around the world have been disrupted because so much of the corn crop now goes to ethanol. It costs taxpayers billions of dollars in subsidies at a time when our nation is already $12 trillion in debt. Even environmentalists have turned against it; research shows that ethanol production increases the amount of carbon dioxide released into the atmosphere.”

What’s missing from the above statement, however, is the increased cost Americans are now paying for their transportation fuels due to bad legislation. Because refiners cannot blend the required amount of renewable fuel into transportation fuels, they must purchase credits, which have increased by 2300 percent and which are passed onto distributors and consumers. Thus, our federal government has come up with what amounts to a hidden tax on gasoline!

[i] Wall Street Journal, A Corn Boom Starts to Wilt, August 11, 2013, http://online.wsj.com/article/SB10001424127887323446404579006594160246998.html

[ii] Wall Street Journal, Cheaper Feed Comes Too Late for Some Cattle Feeders, August 13, 2013, http://online.wsj.com/article/SB10001424127887323997004578642550438797168.html?mod=WSJ_WSJ_US_News_4

[iii] Energy Security and Independence Act of 2007, http://www.gpo.gov/fdsys/pkg/BILLS-110hr6enr/pdf/BILLS-110hr6enr.pdf

[iv] USA Today, Ethanol quotas pump money from your pocket, August 18, 2013, http://www.usatoday.com/story/opinion/2013/08/15/ethanol-mandate-energy-editorials-debates/2663215/

[v] Daily Caller, Industries spar over the future of renewable fuel subsidies, July 23, 2013, http://dailycaller.com/2013/07/23/industries-spar-over-the-future-of-renewable-fuel-subsidies

[vi] Energy Information Administration, Annual Energy Outlook 2013, http://www.eia.gov/forecasts/aeo/source_oil_all.cfm#ussupply