Critics who have been taking shots at the national ethanol mandate finally got their way this month when the federal government reduced the amount of ethanol that gasoline producers must purchase next year.
The EPA proposal to reduce the biofuels mandate by 2.94 billion gallons in 2014 drew howls of protest from agricultural groups that accused the government of giving in to big oil interests. Opponents of the mandate, on the other hand, complained that it didn’t go far enough to reduce ethanol consumption. No one, it appears, was happy.
The requirement that gasoline producers use corn-based ethanol has been a lightning rod of controversy nearly since it was enacted by Congress in 2005 and then strengthened in 2007.
Some scientists questioned whether substituting corn-based ethanol for gasoline produces an environmental benefit, given that land in recent years has been taken out of conservation to grow corn. Economists criticized the fixed mandate for raising corn prices since producers have to buy more ethanol even if prices are rising. Livestock producers have complained bitterly that the mandate raises feed prices. And some hunger advocates have linked U.S. ethanol policy to high food prices that leave people around the world hungry.
Everyone, it seems, has forgotten the program’s original seemingly beneficial goal: to wean the U.S. economy from oil. In recent years, advocates have used a second strong argument to support the program—the beneficial impact on the mostly rural economies that are home to ethanol plants. The budding biodiesel industry supports 62,000 jobs, some of which are imperiled by the reduced mandate.
No one disputes that the Renewable Fuels Standard (RFS) has led to rapid growth in ethanol production. It tripled tripled between 2005 and 2011, reaching a high of 13.9 billion gallons, then dropping to 13.3 billion gallons in 2012. This created demand for nearly 5 billion bushels of corn. It also made ethanol the No. 1 use of corn, surpassing livestock feed and exports. Click here to view a slideshow of ethanol stats.
Ethanol Takes a Pounding
An Associated Press investigative report
, released a week before the EPA announcement, brought national attention once more to the environmental trade-offs. The article highlighted the 5 million acres of "fragile and erodible" land that has been taken out of conservation to grow corn and other crops. It cited a study published by the journal Science concluding that plowing over conservation land "releases so much greenhouse gas that it takes 48 years before new plants can break even and start reducing carbon dioxide."
But the ethanol standard had also come under fire for the last two growing seasons from world hunger advocates who questioned whether food should be diverted to create fuel when so many people around the world are starving. That argument has its share of detractors, given that field corn, which is fed to livestock, not humans, is grown for ethanol production.
, founder of the New England Complex Systems Institute, a research organization, linked U.S. ethanol policy, along with commodity deregulation, to political instability around the world in a presentation at a Chicago Council conference in Washington D.C. earlier this year. He attributed the Arab spring of political uprising to unstable food prices, caused in part by burning fuel for food.
"The original [ethanol] legislation was created when people didn’t know what the impact would be" on prices, he said. "Now we know."
An academic study by agricultural economists at UC Davis and UC Berkeley concluded that corn prices between 2006 and 2010 were about 30% higher than they would have been, had ethanol production remained at 2005 levels. The authors also write that it’s "highly questionable" whether ethanol produced from corn makes the U.S. less dependent on fossil fuels or reduces greenhouse gas emissions.
Other academics think the impact of the ethanol mandate on corn prices is far less. Bruce Babcock, speaking at the Federal Reserve Board of Kansas City’s annual ag outlook meeting, said it only increases corn prices by 25 cents per bushel. He added that gasoline producers would buy some ethanol even if they weren’t required. "If you don’t have the mandate, ethanol would still be 9% to 10% of the nation’s fuel supply."
It’s easier to argue the detrimental impact on the livestock industry, since field corn would otherwise be used to feed livestock. In recent years, livestock producers have been hit hard by extremely high feed prices that put some companies out of business. Even though feed prices are much lower today, the cash-constrained industry is not out of the economic woods yet.
Normally when prices go up, buyers can stop making purchases until prices moderate. But ethanol producers by law have to keep buying more corn, putting even more upward pressure on corn prices and making it even more difficult for livestock producers to feed animals.
Speculators Make a Killing
In recent years, the country’s ethanol policy has come under fire for promoting Wall Street speculation.
When the program began, the government created tradable ethanol credits known as RINs. Gasoline producers who didn’t want to use ethanol could buy the tradable credits instead. Speculators stepped in to make money on the spread between bid and asking prices on the credits. Meanwhile, the oil industry hit a "blend wall" and demand for credits accelerated, causing the price of credits to skyrocket during 2013.
From a macro-economic perspective, an even bigger event transpired during the last several years, putting a damper on the national will to develop alternative energy. The spread of fracking technology has revolutionized oil and natural gas drilling, putting the nation in a position of energy power. Suddenly, alternative energy production doesn’t look as compelling.
"The bloom is off the rose," said Michael Boehlje, an agricultural economist from Purdue University, at a Federal Reserve Board of Chicago meeting on agriculture policy shortly after the announcement. The EPA decision will take some steam out of the ethanol industry. "We probably won’t see any more new plants."
The decision to set ethanol volumes at less than 10% of projected gasoline consumption effectively puts a lid on the amount of ethanol that will be used by American motorists. The oil industry had complained that it had reached a "blend wall" and that requiring the use of more ethanol in gasoline would impair vehicle performance.
Have We Hit a Blend Wall?
"The so-called blend wall is a crisis manufactured by the oil industry, which is interested in eliminating the competition so they can continue reaping even greater windfall profits," said Sen. Debbie Stabenow (D-Mich.), chairwoman of the U.S. Committee on Agriculture, Nutrition and Forestry. The proposed rule would cost thousands of good-paying, clean energy jobs and mean less competition at the pump."
Jeff Lautt, the CEO of POET, one of the nation’s leading ethanol producers, didn’t rule out the option of suing the EPA, given that its proposal is below the levels required by law. He questioned why EPA would lower the mandate when the country is looking at a possible record crop.
"The proposed reduction from EPA is troubling as it not only cuts grain ethanol use below the levels set by Congress; it cuts them below the 13.8 billion that was met in 2013. The Renewable Fuel Standard was created to provide a choice to consumers outside of oil-based fuel."
The oil industry successfully argued that requiring it to blend more ethanol was a bad idea because car owners would avoid the product. They note that older model (pre-2001) car engines can’t handle fuel that contains more than 10% ethanol. But changing over gas stations to sell a 15% blend (E85) could have cost the industry as much as $300 million, according to some reports. Only 3,000 of the 100,000 filling stations in the U.S. sell E85, which sells at a discount to other blends because drivers get 25% fewer miles to the gallon.
Advocates, on the other hand, argued that increasing the mandate would force automotive companies to design more cars that could accept higher blends. Currently, only flex-fuel cars and some 2013 vehicles are candidates for fuel with a higher ethanol percentage. "We need higher blends of ethanol," said Secretary of Agriculture Tom Vilsack in the wake of the announcement.
The ethanol mandate has produced a rift in agriculture, to be sure. Organizations representing crop producers generally derided the EPA decision, saying it would reduce demand for corn at a time when industry profits are expected to decline due to much lower corn prices. On the other hand, the USDA recently announced that farm income will reach an all-time high of $120.6 billion in 2013.
The industry will have two months to raise its concerns during the comment period for the proposal, which was made on November 15th. Agricultural economists are already weighing in.
"It is a mistake to put the RFS that low," said Wally Tyner, a Purdue agricultural economist, who recommended that the federal government create an incentive for refiners to blend and sell more fuel with a 15% blend.
Tyner said that refiners have an incentive to produce more E85—ethanol prices are falling compared with gasoline. Plus, they may be able to get additional revenue from blending credits. The consequence of setting the RFS at 13.01 billion, he said, would be to "destroy that incentive."