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Mitt Romney’s Ethanol Problem

by Brian McGraw on August 23, 2012

in Blog

While I’ll be the first to admit I would prefer Mitt Romney’s energy policies to those of President Obama, especially his appreciation for increased energy production on public lands and the OCS, I found his newly released energy policy white paper slightly humorous in parts.

On the top of page 19:

• Focus government investment on research across the full spectrum of energy-related technologies, not on picking winners in the market;

• Support increased market penetration and competition among energy sources by maintaining the RFS and eliminating regulatory barriers to a diversification of the electrical grid, fuel system, or vehicle fleet;

On the bottom of page 19:

Instead of distorting the playing field, the government should be ensuring that it remains level. The same policies that will open access to land for oil, gas, and coal development can also open access for the construction of wind, solar, and hydropower facilities. Strengthening and streamlining regulations and permitting processes will benefit the development of both traditional and alternative energy sources, and encourage the use of a diverse range of fuels including natural gas in transportation. Instead of defining success as providing enough subsidies for an uncompetitive technology to survive in the market, success should be defined as eliminating any barriers that might prevent the best technologies from succeeding on their own.

I’m not sure what the Renewable Fuel Standard is other than a subsidy for an uncompetitive technology allowing it to survive in the market.

I guess you can’t win them all.

Pressure Grows on EPA to Suspend Ethanol Mandate

by Marlo Lewis on August 13, 2012

in Blog, Features

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The worst drought in 50 years has destroyed one-sixth of the U.S. corn crop. The USDA’s World Agricultural Supply and Demand Estimates (WSDE) report, released Friday, projects the smallest corn crop in six years and the lowest corn yields per acre since 1995.

As acreage, production, and yields declined, corn prices spiked. Last week, corn futures hit a record high of $8.29-3/4 per bushel.

If corn prices remain  high through 2013, livestock producers who use corn as a feedstock will incur billions of dollars in added costs. “These additional costs will either be passed on to consumers through increased food prices, or poultry farmers will be forced out of business,” warn the National Chicken Council and National Turkey Federation.

Even before the drought hit, corn prices were high. Prices increased from $2.00 a bushel in 2005/2006 to $6.00 a bushel in 2011/2012, notes FarmEcon LLC. A key inflationary factor is the Renewable Fuel Standard (RFS), commonly known as the ethanol mandate. Since 2005, the RFS has required more and more billions of bushels to be used to fuel cars rather than feed livestock and people.

Suspension of the mandate would allow meat, poultry, and dairy producers to compete on a level playing field with ethanol producers for what remains of the drought-ravaged crop. That would reduce corn prices, benefiting livestock producers and consumers alike.

EPA Administrator Lisa Jackson has authority under the 2007 Energy Independence and Security Act (EISA) to waive the RFS blending targets, in whole or in part, if she determines that those requirements “would severely harm the economy or environment of a State, a region, or the United States.” The pressure on her to do so is mounting. [click to continue…]

Ethanol Added $14.5 Billion to Consumer Motor Fuel Costs in 2011, Study Finds

by Marlo Lewis on July 19, 2012

in Features

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Today, FarmEcon LLC released RFS, Fuel and Food Prices, and the Need for Statutory Flexibility, a study of ethanol’s impact on food and fuel prices. FarmEcon prepared the study for the American Meat Institute, California Dairies Inc., Milk Producers Council, National Cattlemen’s Beef Association, National Chicken Council, National Pork Producers Council, and National Turkey Federation.

The study argues that the Renewable Fuel Standard (RFS), commonly known as the ethanol mandate, is detrimental to both non-ethanol industry corn users and food and fuel consumers. The program should therefore be reformed. The RFS has “destabilized corn and ethanol prices by offering an almost risk-free demand volume guaranty to the corn-based ethanol industry.” Consequently, food producers who use corn as a feedstock “have been forced to bear a disproportionate share of market and price risk” when corn yields fall and prices rise. This has become painfully obvious in recent weeks as drought conditions in the Midwest depress yields and push corn prices to record highs.

Appropriate reform* would assure food producers “automatic market access” to corn stocks “in the event of a natural disaster and a sharp reduction in corn production.” Ethanol producers should “bear the burden of market adjustments, along with domestic food producers and corn export customers.” The study also recommends that the RFS schedule “be revised to reflect the ethanol industry’s inability to produce commercially viable cellulosic fuels.”

Pretty tame stuff. An argument for flexibility to avoid the RFS’s worst market distortions and the cellulosic farce rather than an abolitionist manifesto. Nonetheless, the study paints a fairly damning picture of the RFS as a whole:

  • Increases in ethanol production since 2007 have made little, or no, contribution to U.S. energy supplies, or dependence on foreign crude oil. Rather, those increases have pushed gasoline suplies into the export market.
  • Current ethanol policy has increased and destabilized corn and related commodity prices to the detriment of both food and fuel producers. Corn price volatility has more than doubled since 2007.
  • Following the late 2007 increase in the RFS, food price inflation relative to all other goods and services accelerated sharply to twice its 2005-2007 rate.
  • Post-2007 higher rates of food price inflation are associated with sharp increases in corn, soybean and wheat prices.
  • On an energy basis, ethanol has never been priced competitively with gasoline.
  • Ethanol production costs and prices have ruled out U.S. ethanol use at levels higher than E10. As a result, we exported 1.2 billion gallons of ethanol in 2011.
  • Due to its higher energy cost and negative effect on fuel mileage, ethanol adds to the overall cost of motor fuels. In 2011 the higher cost of ethanol energy compared to gasoline added approximately $14.5 billion, or about 10 cents per gallon, to the cost of U.S. gasoline consumption. Ethanol tax credits (since discontinued) added another 4 cents per gallon. [click to continue…]

MIT Study Debunks RFA/Vilsack Claims on Ethanol, Gas Prices

by Marlo Lewis on July 17, 2012

in Features

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Back in May, I discussed a study conducted for the Renewable Fuel Association (RFA) by Iowa State University’s Center for Rural and Agricultural Development (CARD). The study claims that from January 2000 to December 2011, “the growth in ethanol production reduced wholesale gasoline prices by $0.29 per gallon on average across all regions,” and reduced average gasoline prices by a whopping $0.89 per gallon in 2010 and $1.09 per gallon in 2011. Ethanol boosters like the RFA and USDA Secretary Tom Vilsack tout this study as proof that federal biofuel policies benefit consumers and should be expanded.

The CARD researchers, Xiaodong Du and Dermot Hayes, attempt to determine the consumer benefit of ethanol by inferring what motor fuel prices would have been over the past decade had there been no increase in ethanol production. Ethanol now constitutes roughly 10% of the motor fuel used by U.S. passenger vehicles. Du and Hayes conclude that without ethanol, U.S. motor fuel supply would be significantly smaller and pain at the pump significantly greater.

This procedure, I argued, is ridiculous. First, it assumes that refiners are like deer caught in the headlights and do not respond to incentives. Even if motor fuel prices increase by up to $1.09/gal nationwide over a 10-year period, we’re supposed to believe refiners would not increase output and take advantage of this opportunity to sell more of their product at higher prices. But that’s exactly what refiners would do. In the process, supply would come back into balance with demand, pushing fuel prices down.

Second, the CARD study ignores the opportunity costs of ethanol policy. Capital is a finite resource. Dollars that refiners are mandated or bribed to invest in ethanol production are dollars they cannot invest in gasoline production. The CARD study implausibly assumes that all the refining capacity diverted by federal policy into ethanol production would have been left idle in a free market and not used to produce gasoline instead.

Admittedly, the CARD study is full of math I don’t understand. But two experts in the field — MIT energy economics professor Christopher Knittel and UC Davis agricultural economics professor Aaron Smith — have just produced a technical critique of the CARD study. Titled “Ethanol Production and Gasoline Prices: A Spurious Correlation,” the researchers make several telling points, some of which are funnier than the standard fare found in the ‘dismal science.’   [click to continue…]

EPA Continues the Cellulosic Ethanol Folly

by Brian McGraw on May 29, 2012

in Blog

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Last week the EPA dismissed a petition by the American Petroleum Institute seeking relief from the cellulosic ethanol mandate, which requires that oil refiners blend 8.65 million gallons of ethanol into the fuel supply by the end of 2012:

“In all cases, the objections raised in the petition either were or could have been raised during the comment period on the proposed rule, or are not of central relevance to the outcome of the rule because they do not provide substantial support for the argument that the Renewable Fuel Standard program should be revised as suggested by petitioners,” EPA told API, American Fuel & Petrochemical Manufacturers, Western States Petroleum Association, and Coffeyville (Kan.) Resources Refining & Marketing on May 22.

“EPA’s mandate is out of touch with reality and forces refiners to pay a penalty for not using imaginary biofuels,” Bob Greco, API’s downstream and industry operations director, said on May 25. “EPA’s unrealistic mandate is effectively an added tax on making gasoline.”

Greco said the Clean Air Act requires EPA to determine the mandated volume of cellulosic biofuels each year at “the projected volume available.” However, in 2011 EPA required refineries to use 6.6 million gal of cellulosic biofuels even though, according to EPA’s own records, none were commercially available, Greco said.

EPA has denied API’s 2011 petition to reconsider the mandate and continues to require these nonexistent biofuels this year, he indicated. Greco called the action “regulatory absurdity and bad public policy.”

As regular readers of this blog will know, the whole problem with the EPA’s non-flexible mandate is that there is no commercially available cellulosic ethanol, thus making it impossible to meet the mandate. The EPA’s justification for this policy is that they need to maintain an incentive for companies to begin producing cellulosic ethanol, despite many past failures. The oil refiners are also required to purchase these cellulosic ethanol waivers, effectively giving the government money instead of purchasing the non-existent fuel. [click to continue…]

Ethanol Reduced Gas Prices by $1.09/gal. – Or Didn’t You Notice?

by Marlo Lewis on May 16, 2012

in Blog, Features

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Iowa State University’s Center for Agricultural and Rural Development (CARD) has just updated its 2009 and 2011 studies of ethanol’s impact on gasoline prices. CARD claims that from January 2000 to December 2011, “the growth in ethanol production reduced wholesale gasoline prices by $0.29 per gallon on average across all regions,” and that in 2011 ethanol lowered gasoline prices by a whopping $1.09 per gallon.

I’m no econometrician, but this study does not pass the laugh test. We’re supposed to believe that ethanol has conferred a giant boon on consumers even though gasoline prices have increased as ethanol production has increased, and even though gas prices hit their all-time high when ethanol production hit its all-time high. If that is success, what would failure look like?

CARD’s argument boils down to this. The gasoline sold at the pump today is E-10 — motor fuel blended with 10% ethanol. Ethanol thus makes up 10% of the motor fuel supply for passenger cars. If there were no ethanol, the motor fuel supply would be 10% smaller, and gas prices would be $1.09 per gallon higher (p. 6).

Well, sure, if we assume a drop in supply and no change in demand, prices will rise. But this scenario tells us nothing about what really matters — whether ethanol’s policy privileges, especially the Renewable Fuel Standard (RFS), a.k.a., the ethanol mandate, benefit or harm consumers.*

Note first that even in the absence of government support, billions of gallons of ethanol would be sold each year anyway as an octane booster. So a scenario in which 10% of the motor fuel supply simply disappears does not correspond to any policy choice Congress is actually debating or considering.

More importantly, CARD assumes that if the motor fuel supply were 10% smaller, refiners would not increase output to sell more of their product at higher prices. In other words, refiners would not engage in the economically-rational, profit-maximizing behavior that would bring supply back into balance with demand, thereby moderating the initial price increase.

Why wouldn’t they? There are only two possible explanations. One is that refiners don’t want to get rich, which is absurd. The other is that refiners operate like a cartel, colluding to restrict output in order to charge monopoly rents. CARD gives no sign of endorsing this view, and repeated investigations of the U.S. refining industry by the Federal Trade Commission repeatedly fail to find evidence of such anti-competitive scheming.

CARD’s analysis also ignores the opportunity costs of ethanol’s policy props. Capital is a finite resource. Every dollar refiners are forced or bribed to spend on ethanol is a dollar they cannot spend to produce gasoline. Government cannot rig the market in favor of ethanol without discouraging gasoline production. It is ridiculous to assume that all of the resources (e.g., refining capacity) commandeered by federal policy over the past decade to boost ethanol’s market share would have been left idle and not used to make gasoline in a free market.

In short, CARD’s analysis abstracts from the most basic economic realities we were all supposed to learn in Econ 101: resources are finite, choices have opportunity costs, and incentives (prices) matter.

I leave it to econometricians to quantify the repercussions, but this much is clear. In a free market, refiners would have blended less ethanol and produced more gasoline than they did in the market rigged by the RFS and other pro-ethanol policies. CARD — or, more precisely, CARD’s sponsors, the Renewable Fuel Association (RFA) — would have us believe that refiners would produce no more gasoline in a free market than they would in a market politicized by mandates and subsidies. That assumption is so unrealistic that any analysis based upon it is inappropriate and even fraudulent if used as a justification for maintaining or expanding government support for ethanol. [click to continue…]

Ethanol Still Not Lowering the Real Cost of Gasoline

by Brian McGraw on March 29, 2012

in Blog, Features

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In the wake of high gasoline prices, the ethanol industry is making the rounds in Washington, and they want you to believe that the Renewable Fuel Standard has lowered gasoline prices by up to $.89 per gallon. This would be remarkable, if it were true. The ethanol industry relies on a study produced by the Center for Agricultural and Rural Development at the University of Iowa. Here is the abstract:

This report updates the findings in Du and Hayes 2009 by extending the data to December 2010 and concludes that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. The Midwest region experienced the biggest impact, with a $0.39/gallon reduction, while the East Coast had the smallest impact at $0.16/gallon. Based on the data of 2010 only, the marginal impacts on gasoline prices are found to be substantially higher given the much higher ethanol production and crude oil prices. The average effect increases to $0.89/gallon and the regional impact ranges from $0.58/gallon in the East Coast to $1.37/gallon in the Midwest. In addition, we report on a related analysis that asks what would happen to US gasoline prices if ethanol production came to an immediate halt. Under a very wide range of parameters, the estimated gasoline price increase would be of historic proportions, ranging from 41% to 92%.

If we go to E85prices.com, we see that as of March 29, 2012 the average nationwide price-spread between E85 and E10 is 14.7%, with E85 costing an average of $3.31/gallon and E10 costing an average of $3.89/gallon. Ethanol has less energy content than gasoline, so a direct price comparison is not appropriate. The generally accepted metric is that E85 must be priced about 28% lower than E10 in order to break even, meaning that the cost per mile driven is equal between E85 and E10. [click to continue…]

Ethanol Industry Hurting from Loss of Tax Credit

by Brian McGraw on February 29, 2012

in Blog

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The expiration of the Volumetric Ethanol Excise Tax Credit (VEETC) at the end of 2011 has led to a number of ethanol plants shutting down, and others operating in the red:

After predicting they would survive the end of a major federal subsidy without problems, it looks like officials at the nation’s ethanol producers may have been too optimistic.

Since the subsidy ended Dec. 31, ethanol profit margins have declined sharply, even slipping into negative territory. Experts see no quick turnaround in sight.

Now that the subsidy has disappeared, the ethanol downturn is being felt nationwide, including in Minnesota. The state’s $2 billion-plus industry ranks fourth in the nation in capacity and production.

At the Al-Corn Clean Fuel ethanol plant in southeast Minnesota, CEO Randall Doyal sees how the loss of the subsidy has hurt this business. He said his profit margin — the difference between the cost of making the corn-based fuel and what he can sell it for — has disappeared.

“Since the first of the year it’s been even-to-slightly negative,” Doyal said.

It’s not exactly satisfying to see economic activity being shuttered during a time of high unemployment, as undoubtedly hard-working individuals at these plants are temporarily out of work. But those who support aligning our energy economy more closely with market principles are in a minority, so we don’t necessarily get to choose when and where some of these decisions (that can be painful in the short run) are made. [click to continue…]

E85 Sales Hit by Ethanol Tax Credit Expiration

by Brian McGraw on February 1, 2012

in Blog

January marked the first month that the ethanol industry had to stand on its own feet was only supported by a massive taxpayer mandate for their product, rather than tax preferences, tariff protections, and a mandate.

Do not fret, as sales for E10 (10% ethanol 90% gasoline, commonly purchased at the pump) will hold remarkably steady, because this is the primary venue the rent-seekers use to dilute our nations gasoline supply with ethanol. I only slightly kid, as it makes sense to blend small percentages of ethanol into our fuel supply, though not in amounts exceeding 10 percent.

However, in the United States there are also niche markets for E-85, which is made up of 85% ethanol and 15% gasoline. E85 sales more accurately reflect what an actual competitor to gasoline would look like, as E10 blends only supplement regular fuel production. While there are a number of flex-fuel vehicles on the road (FFVs) capable of running on any blend of ethanol and gasoline, E85 sales have never taken off in the United States. This is because, after adjusting for the lower energy content in ethanol, it costs more money per mile traveled to fuel your vehicle with E85 than E10. It has always been this way and its unclear if it will ever change.

[click to continue…]

NYT Covers Fines for Non-Existent Cellulosic Ethanol

by Brian McGraw on January 10, 2012

in Blog

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A topic CEI has written about frequently gets covered in The New York Times, the bizarre requirement by the EPA that refiners spend up to $7 million on ghost “credits” from the EPA in lieu of purchasing cellulosic ethanol, which doesn’t exist:

When the companies that supply motor fuel close the books on 2011, they will pay about $6.8 million in penalties to the Treasury because they failed to mix a special type of biofuel into their gasoline and diesel as required by law.

But there was none to be had. Outside a handful of laboratories and workshops, the ingredient, cellulosic biofuel, does not exist.

In 2012, the oil companies expect to pay even higher penalties for failing to blend in the fuel, which is made from wood chips or the inedible parts of plants like corncobs. Refiners were required to blend 6.6 million gallons into gasoline and diesel in 2011 and face a quota of 8.65 million gallons this year.

That’s a good summary. Let’s look at one specific paragraph, where the coverage borders on editorializing in support of an agency under attack by the right:

Penalizing the fuel suppliers demonstrates what happens when the federal government really, really wants something that technology is not ready to provide. In fact, while it may seem harsh that the Environmental Protection Agency is penalizing them for failing to do the impossible, the agency is being lenient by the standards of the law, the 2007 Energy Independence and Security Act.

[click to continue…]

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