U.S. biofuel expansion has cost developing countries $6.6 billion in higher food costs, estimates Tufts University economist Timothy A. Wise in Fueling the Food Crisis, a report published by ActionAid. A 10-minute video interview with Wise about his research is available here.

The 2007 Renewable Fuel Standard (RFS), established by the Energy Independence and Security Act (EISA), exerts long-term upward pressure on grain prices by diverting an ever-growing quantity of corn from food and feed to auto fuel. This is great for corn farmers but not good for U.S. consumers and harmful to millions of people in developing countries, many of whom live in extreme poverty.

“Commodity prices are a small percentage of the retail price of food in the US” because “we heavily process our food,” notes Wise. In contrast, in developing countries, ”commodity prices are a bigger percentage of the retail price, in part because people buy whole foods more often than processed foods.” Even small commodity price increases ”can have a big impact on local market prices in developing countries.”

As it happens, during the same period that U.S. ethanol production and corn prices increased, many developing countries became more dependent on grain imports to feed their people and livestock. The recent drought-induced spike in U.S. corn prices is “just the latest episode in a devastating, protracted global food crisis that has pushed millions into poverty and hunger around the globe over the past 6 years,” argues the ActionAid report.

To assess the impact of biofuel expansion on developing countries, Wise used a conservative estimate of ethanol’s contribution to corn prices and multiplied that by the quantity of U.S. corn imported by those countries. A summary of key findings follows:

• Net Food Importing Developing Countries, among the most vulnerable to food price increases, incurred ethanol-related costs of $2.1 billion.
• Thirteen developing countries incurred per-capita impacts greater than Mexico’s (where tortilla prices have risen 69% since 2005), and they include a wide spectrum of large and small countries from all regions of the developing world – Colombia, Malaysia, Botswana, Syria.
• North African countries saw large impacts, with $1.4 billion in ethanol-related import costs, led by Egypt ($679 million). Other countries experiencing social unrest – Tunisia, Libya, Syria, Iran, Yemen – also suffered high impacts, highlighting the link between rising food prices and political instability.
• Central American countries felt impacts nearly those of Mexico, scaled to population. The region has seen its dependence on food imports rise over the last 20 years, and corn imports cost an extra $368 million from 2006-11 due to U.S. ethanol expansion. Guatemala saw the largest impacts, with $91 million in related costs. In 2010-11 alone, U.S. biofuel expansion cost Guatemalans $28 million – an amount nearly equivalent to U.S. food aid to Guatemala over the same period.
• Latin American partners to trade agreements with the United States saw high costs, as import-dependence grows. The six-year ethanol-related cost of corn imports was $2.4 billion for Latin American nations involved in NAFTA, CAFTA-DR, and the bilateral agreements with Panama, Colombia, Peru, and Chile.

A new study by the Energy Research Policy Foundation, Inc. (EPRINC) further debunks the popular talking point of USDA Secretary Tom Vilsack and the Renewable Fuel Association (RFA) that ethanol reduced gasoline prices by $0.89/gal in 2010 and $1.09/gal in 2011.

As noted previously on this site (here and here), Vilsack and the RFA tout a study by Iowa State University’s Center for Agricultural Research and Development (CARD), which concluded that if ethanol production had remained at year 2000 levels, the U.S. motor fuel supply would have been billions of gallons smaller and, thus, significantly pricier in 2010 and 2011. Subsequent studies by FarmEcon, LLC and MIT/UC Davis spotlighted CARD’s unrealistic assumption that the refining industry would not have increased gasoline production to meet consumer demand in the absence of policies mandating and subsidizing the blending and sale of increasing quantities of ethanol as motor fuel.

The EPRINC study (Ethanol’s Lost Promise: An Assessment of the Economic Consequences of the Renewable Fuel Mandate) shows, in addition, that if ethanol output had remained constant at the year 2000 level, refiners could have made up for the shortfall without importing or even refining “a single additional barrel of crude oil.” The Renewable Fuel Standard (RFS) has increased ethanol production by about 400,000 barrels per day (bbl/d) since 2000. A “remarkably small operational adjustment” in refineries’ product mix – a 1.8% increase in gasoline production — could have covered an ethanol shortfall of 400,000 bbl/d in 2011.

Figure Explanation: The figure shows how much additional gasoline would be produced if yields were 1, 2 or 3 percentage points higher, given actual crude oil runs through U.S. refineries for the given year. The orange dotted line shows the increase in gasoline production if yields were raised by 2.3 percentage points – this is the range in which gasoline yields moved during 2000 to 2011. Finally, the red and bluelines are the amount of ethanol that would be missing from the market if ethanol blending was capped at 400,000 bbl/d. The chart demonstrates that a 400,000 bbl/d ethanol shortfall could have been covered in 2011 had gasoline yields been just 1.8 percentage points higher, from 45% to 46.8%. A 46.8% gasoline yield is equal to or lower than the gasoline yield during 3 of the past 11 years. It is also well under the 2.3 percentage point range in which yields bounced during 2000 – 2011.

Yesterday The Hill‘s Energy Blog reported on a brief filed by the EPA in the U.S. Court of Appeals for the District of Columbia:

The documents filed Monday with the U.S. Court of Appeals for the District of Columbia reveal the reasoning behind EPA’s move to shoot down the American Petroleum Institute’s (API) challenge of the renewable fuel standard (RFS). EPA determined that enough advanced biofuels — generally understood to be made from non-food products — existed to meet that portion of the RFS for 2012.

“EPA reasonably considered the production capacity likely to be developed throughout the year, while API would have EPA rely narrowly and solely on proven past cellulosic biofuel production,” EPA said in its brief. “EPA reasoned that lowering the advanced biofuel volume in these circumstances would be inconsistent with EISA’s [the Energy Independence and Security Act of 2007] energy security and greenhouse gas reduction goals, and decided to leave the statutory advanced biofuel volume unchanged.”

The (main) question here is what the 2012 cellulosic biofuel requirements should be set at. The EPA is arguing that they took a reasonable look at capacity production and put out what they thought could be developed, while the American Petroleum Institute is only looking at historic cellulosic biofuel production. So who is being reasonable?

Bob Greco over at the Energy Tomorrow blog produced this graph:

The large blue bars indicate the original blending requirements under the Energy Independence and Security Act. To the EPA’s credit, they had nothing to do with the original blending requirements. The lighter turquiose-ish are the finalized numbers requested by the EPA, as they are allowed to adjust requirements to fit reality. The red number represents actual commercial cellulosic ethanol production, according to the EPA’s own numbers.

Until this April there was zero commercial production of cellulosic ethanol, when 20,000 gallons were produced.

So, again, we ask: who is being unreasonable? The EPA who somehow still maintains that 8.65 million gallons will be produced in 2012? Or the American Petroleum Institute? Even if the API requested that the blending requirement be reduced to zero, their final guess will be much closer to reality than the estimate of the EPA.

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.

On July 30, a coalition of meat, dairy, and poultry producers petitioned Jackson to waive the 2012 and 2013 RFS blending requirements. From the petition:

As detailed below, the extraordinary and disastrous circumstances created for livestock and poultry producers by the ongoing drought in the heart of our grain growing regions requires that all relevant measures of relief be explored and taken where possible. One of these measures must be the amount of grain utilized for the production of renewable fuel. The ongoing drought is taking an enormous toll on the nation’s corn crop. As we detail below, the 15.2 billon gallon  renewable fuel standard (“RFS”) in 2012 coupled with the prospect of a 16.55 billion gallon standard in 2013 will require the renewable fuels industry to utilize a major portion of the drought-limited available corn supply. The drought-induced reductions in the corn supply means that the mandated utilization of corn for renewable fuels will so reduce the supply of corn and increase its price that livestock and poultry producers will be forced to reduce the size of their herds and flocks, causing some to go out of business and jobs to be lost. In addition to this direct harm, these herd and flock reductions will ripple through the meat, milk and poultry sectors, causing severe harm in the form of more job and economic losses. This drought-induced harm exists now, will continue to exist into the latter part of 2012 and 2013, and could continue to be felt in 2014 depending on the policy choices made now.

On August 1, bi-partisan groups of 156 House Members  and 26 Senators sent letters to Jackson asking her to “adjust” the RFS targets in light of the drought and rising corn prices. The House letter argues, in part:

As you are aware, U.S. corn prices have consistently risen, and the corn market has been increasingly volatile, since expansion of the RFS in 2007. This reflects the reality that approximately 40 percent of the corn crop now goes into ethanol production, a dramatic rise since the first ethanol mandates were put in place in 2005. Ethanol now consumes more corn than animal agriculture, a fact directly attributable to the federal mandate. While the government cannot control the weather, it fortunately has one tool still available that can directly impact corn demand. By adjusting the normally rigid Renewable Fuel Standard to align with current market conditions, the federal government can help avoid a dangerous economic situation because of the prolonged record high cost of corn.

 On August 9, Secretary General of the U.N. Food and Agricultural Organization (FAO) Jose Graziano da Silva called for an “immediate, temporary suspension” of the mandate  to help avert a repeat of the 2008 food crisis.

Also on August 9, the Govs. of Delaware (Jack Markell) and Maryland (Martin O’Malley), both Democrats, sent Jackson a letter in support of the industry coalition’s petition. From the Governors’ letter to Jackson:

In 2012, more than 40% of the U.S. annual corn supply was to be used to meet the RFS corn based ethanol requirements established annually by the EPA. If you were to exercise your statutory authority to waive the RFS standards for the next year, it would make more than 5 billion bushels of corn available to the marketplace for animal feed and foodstuffs, driving down costs and significantly lessening the financial impact to Delmarva’s [Delaware-Maryland-Virginia] poultry farms and consumers. While there may be some who question the true price impact of waiving the RFS standards for a limited period, those debates are quantitative, not qualitative, as it is not in dispute that a waiver would put downward pressure on corn pricing. Given the likely impacts to the poultry industry, not to mention the increased cost of food for consumers, of this dramatic increase in price due to the undersupply of corn, it is hard to imagine any scenario when exercising your authority would be more appropriate.

There is, alas, little chance Jackson will waive any part of the RFS. That would be asking an executive agency to put economic rationality ahead of political calculation in a presidential election year. President Obama today makes his fifth visit to Iowa this year. Iowa, with six electoral votes, is the heart of corn country. Supporting a waiver to lower corn prices would spoil the President’s photo ops.

Today’s Greenwire (subscription required) reports that the USDA has announced it will purchase up to $170 million worth of meat, poultry, and catfish to help producers who have been adversely affected by high corn prices. The fix on offer is not to scale back regulatory excess but to expand corporate welfare.  

The question answers itself. Of course not. But that is the effect of the Renewable Fuel Standard (RFS), more commonly known as the ethanol mandate.

Under the RFS (Energy Independence and Security Act, p. 31), refiners must sell specified amounts of biofuel each year. The “volumetric targets” increase from 4.0 billion gallons in 2006 to 36 billion gallons in 2022. The amount of corn ethanol qualifying as “renewable” maxes out at 15 billion gallons in 2015. Already, ethanol production consumes about 40% of the annual U.S. corn crop.

By 2022, 21 billion gallons are to be “advanced” (low-carbon) biofuels, of which 16 billion gallons are to be made from plant cellulose. But with cellulosic ethanol proving to be a complete dud, corn growners and ethanol producers are lobbying to redefine corn ethanol as ”advanced.” If they succeed, mandatory sales of corn ethanol could significantly exceed 15 billion gallons annually.

In any event, the RFS sets aside a large and increasing quantity of the U.S. corn crop each year for ethanol production regardless of market demand for competing uses — and heedless of the potential impacts on food prices and world hunger. No matter how much of the U.S. corn crop is ruined by drought, no matter how high corn prices get, no matter how many people in developing countries are imperiled, the RFS requires that billions of bushels of corn be used to fuel cars rather than feed livestock and people. This is crazy.

Corn futures hit their all-time high this week, exceeding $8.00 per bushel. Soybean prices are also at record levels. More than 1 billion of the world’s people live in absolute poverty (defined as an income of less than $1.25 per day). When prices for staple commodities soar, millions of people can be pushed to the brink of starvation.

As noted yesterday on this blog, simply adding some flexibility to the RFS, so that the volumetric targets automatically scale back whenever corn reserves fall below critical thresholds, could help alleviate the surge in grain prices. Predictably, the corn lobby and USDA Secretary Tom Vilsack oppose this modest reform.

Even if made more flexible, the RFS would still flout a bedrock principle of our constitutional system: equality under law. Why as a matter of law should ethanol producers get first dibs on the U.S. corn crop? Why should their interest legally trump that of every other industry and consumer affected by corn prices? Why should they have a legal privilege to jump to the front of the line ahead of meat, poultry, and dairy producers, or those who export grain to hunger-stricken countries?

The ethanol lobby claims the RFS does not limit the availability of corn for other uses. The numbers indicate otherwise. As corn use for ethanol increased from 1.6 billion bushels in 2005/2006 to 5.0 billion in 2011/2012, use of corn for feed declined from 6.2 billion to an estimated 4.6 billion bushels, and corn exports declined from 2.1 billion to an estimated 1.7 billion bushels (FarmEcon LLC report, p. 19). The RFS turns a large and growing share of a major commodity into the exclusive preserve of one industry. This is not the American way.

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.

Some other key points presented in the study:

• Ethanol typically sells for less per gallon than gasoline, but “engines do not run on gallons, they run on energy,” and a gallon of ethanol has only 67% of the net energy in a gallon of gasoline.
• Consequently, on a per-mile basis, ethanol is more expensive than gasoline. This accounts for the failure of E85 (motor fuel blended with 85% ethanol) to achieve significant sales. ”According to recent Department of Energy statistics, ethanol blends of more than 55 percent account for only 2,000 barrels per week out of total gasoline production of about 8.7 million barrels per week.”
• The RFS has dramatically altered U.S. corn markets. Corn prices have increased from $2.00 a bushel in 2005/2006 to $6.00 a bushel in 2011/2012. Corn use for ethanol increased from 1.6 billion bushels in 2005/2006 to 5.0 billion in 2011/2012. Feed use of corn declined from 6.2 billion bushels in 2005/2006 to an estimated 4.6 billion in 2011/2012. Corn exports declined from 2.1 billion bushels in 2005/2006 to an estimated 1.7 billion bushels in 2011/2012.
• The RFS creates risks as well as benefits for ethanol producers. “Since the first RFS schedule in 2005, the corn cost in a gallon of ethanol has increased from about 50 percent to more than 80 percent of total ethanol production costs. Corn costs for ethanol producers have also been much more volatile. . . .This higher volatility [after the 2007 RFS] has increased business risks for all corn users. The result has been the bankruptcy of a number of ethanol companies and food producers.”
• Corn is a key commodity used by meat, poultry, and dairy producers. Corn prices also influence wheat, soybeans, and other commodities, because corn competes with those crops for customers and/or land. The cost of corn, wheat, and soybeans used in U.S. food production has risen from $26.5 billion in 2005, when the first RFS was enacted, to $69.5 billion in 2011. “The cumulative cost increase over 2005-2011 was $141.9 billion.” Higher energy prices also played a significant role. Nonetheless, the RFS mandates were an important factor.
• The cost of food has increased much faster than overall inflation since the 2007 RFS was enacted. “Overall price inflation of items other than food, even including energy, declined dramatically after December, 2007. The decrease was largely due to the 2008-2009 recession. In 2005 to 2007, food prices were increasing slower than all items other than food. However, post-RFS food price inflation accelerated, even in the face of the recession.”
• “Higher corn prices (and associated increases in wheat and soybean prices) have dramatically raised the costs of producing meat and poultry.” Unspurprisingly, per capita meat and poultry consumption “has declined to the lowest level since 1990.”
• Like the MIT study I reviewed earlier this week, the FarmEcon study rejects the ‘finding’ of Iowa State University researchers that ethanol, by expanding the U.S. motor fuel supply, reduced the crack spread (refiner profit margin) by $1.09 per gallon in 2011, sparing consumers an equivalent increase in pain at the pump.
• FarmEcon offers a critique based on statistical models but also presents an Econ 101 argument: “The 2000-2011 average gasoline crack price spread was 27.8 cents per gallon. The 2011 margin averaged 37.1 cents. A $1.09 increase in that margin would lead to refineries quickly increasing gasoline production and reducing gasoline exports. The increase in gasoline supply available to the U.S. market would largely, likely entirely, wipe out the higher gasoline price.” In other words, the market is self-correcting. Refiners don’t need big-daddy government to tell them to produce more fuel when demand increases faster than supply and prices rise.

* The reform examined in the study, proposed by Rep. Bob Goodlatte (R-Va.), would relax the RFS targets as the corn stocks-to-use ratio declines below 10%. Stocks-to-use measures the quantity (“stock”) of a commodity at the end of a particular time period as a percentage of total use of the commodity during that time period. TradingCharts.Com explains how a stocks-to-use ratio is calculated.

The stocks to use ratio indicates the level of carryover stock for any given commodity as a percentage of the total demand or use. The mathematical formula for this relationship is as follows:

 Beginning Stock + Total Production – Total Use ÷ Total Use

. . . . beginning stocks represent the previous year’s ending or carryover inventories. Total production represents the total grain produced in a given year. Total usage is the sum of all the end uses in which the stock of grain has been consumed. This would include human consumption, export programs, seed, waste, dockage and feed consumption. By adding carry-over stocks to the total production you will obtain the total supply. From the total supply, subtract the total use and the resultant figure will be the year ending carryover stock. The carryover stock divided by the total usage can be expressed as a ratio which when compared with previous years gives the market analyst an indication of the relative supply/demand balance for a particular commodity. This ratio can then be used to indicate whether current and projected stock levels are critical or plentiful.The ratio can also be used to indicate how many days of supply are available to the world marketplace under current usage patterns ( eg. a 20% stocks to use ratio for wheat indicates that there are 75 days supply of wheat in reserve).

TradingCharts.Com notes that historical stocks-to-use data provide “bench mark ratios” useful for predicting movements in commodity prices: “On a world basis a stocks/use ratio for wheat under 20% has typically led to strong price advances. For corn, the comparable number appears to be under 12% . For soybeans, the critical level is below 10%.”

The Goodlatte proposal adjusts the RFS targets as follows:

• No reduction in the mandated quantity of renewable fuel if corn stocks-to-use is above 10%;
• a 10% reduction if stocks-to-use is 10.0%-7.5%;
• a 15% reduction if stocks-to-use is 7.49%-6.0%;
• a 25% reduction if stocks-to-use is 5.99%-5.0%; and,
• a 50% reduction if stocks-to-use is below 5%.

According to FarmEcon, corn stocks-to-use in 2010/2011 was 6.2% and in 2011/2012 is 6.7%. In both crop years, the RFS target would be reduced by 15% under Goodlatte’s proposal.

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.’  

Knittel and Smith begin with a discussion of basic economics to “place loose bounds” on the potential effects of ethanol production on gasoline prices. They note that the largest component of the price of gasoline is the cost of crude oil.

A barrel of crude oil contains 42 gallons, so every dollar per barrel increase in oil prices raises wholesale gasoline prices by about 2.4 cents. Thus, when oil is $100 per barrel, roughly $2.40 of the price of gasoline will be the cost of crude.

Ethanol production can have only a “minimal impact” on crude oil prices. U.S. ethanol constitutes only 1% of world oil use. In addition, ethanol has one-third less energy content by volume than gasoline, so U.S. ethanol production replaces only 0.67% of world oil. Ethanol’s impact on the biggest factor affecting gasoline prices is likely very small.

Ethanol production could however affect gasoline prices by decreasing refiners’ profit margins. The CARD study concludes that the “crack spread” – the weighted average price of refined products minus the price of crude oil — would have been $0.89 higher if ethanol had been removed from the market in 2010 and $1.09 higher had it been removed in 2011. But, argue Knittel and Smith, crack spreads never stay that high for an entire year. Indeed, the “crack spread has not exeeded 60 cents for more than a few brief periods in the past 30 years.” The reason is that when “the crack spread is high, large profits encourage entry into the refining industry, which in turn puts downward pressure on the crack spread.” Or, as I put it above, refiners are not deer in the headlights; they respond to market signals (prices).

The CARD study implies that, but for ethanol production, the crack spread in May 2010 would have been $1.37 — “20 cents higher than the highest crack spread ever observed in the data.” Knittel and Smith comment: “For this to be a long-run effect — which is the implicit assumption in the RFA’s claims — we would have to expect that these historic high crack spreads would not increase capacity utilization,” even though refinery utilization averaged 86.4% in 2010, “lower than every year from 1992-2007.” In other words, we would have to assume that refiners don’t want to get rich.

For reasons of space, I won’t try to summarize Knittel and Smith’s detailed discussion of “issues related to model specification.” More newsworthy and certainly more entertaining is their discussion of “spurious correlation.” Using the CARD study’s models, they estimate the effects of ethanol production on natural gas prices and unemployment rates — “dependent variables” with no particular connection to ethanol. Here’s what they find.

Based on the CARD models, had no ethanol been produced in the U.S. in 2010, “natural gas prices would have increased by 65 percent.” Similarly, “eliminating ethanol in 2010 would have decreased U.S. unemployment by 65 percent.” (So much for RFA’s claim that ethanol creates jobs!)

The authors comment:

These empirical relationships are a classic example of spurious correlation. Ethanol production during this time period is increasing. Therefore, other variables that have a predominant trend, either upward in the case of unemployment or downward in the case of natural gas prices, are likely to correlate well with ethanol production.

To nail down the point, the researchers provide a “whimsical” example. Using CARD’s models, they find that every additional million barrels of ethanol produced increases the age of daughter Caiden Knittel by 26 days and that of daughter Hayley Smith by two months. Policy implication: Eliminating all ethanol in 2010 would ”cause Caiden to be a newborn (12 days old) and would cause Hayley’s age to be negative.”

Knittel and Smith conclude:

The results of Du and Hayes are at odds with the historical levels of either the crack spread or the crack ratio [the price of gasoline divided by the price of crude oil] and are inconsistent with an equilibrium [a long-term balance between supply and demand] in the oil refining industry. While an instantaneous surprise elimination of all ethanol sold in the U.S. might raise gasoline prices for a short period, one cannot assume these instantaneous effects would persist for more than a few weeks. This is precisely what Du, Hayes, the RFA, and Secretary Vilsack have done.

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.

How much progress have we made on cellulosic ethanol? Robert Rapier points out that the companies promising the “first commercial cellulosic plant” are about a century too late:

But believe it or not, commercialization also took place in the U.S. in 1910. 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 ethanol per day from wood waste, and both were in production for several years (Sherrard 1945).

To put that in perspective, Iogen claimed in 2004 that they were producing the world’s first cellulose ethanol fuel from their 1,500 gallon per day plant. (While 1,500 gal/day is their announced capacity, if you look at their production statistics they have never sustained more than 500 gallons per day over the course of a year; 2008 production averaged 150 gal/day).

Many companies are in a mad rush to be the “first” to commercialize cellulosic ethanol. The next time you hear someone say that they will be the first, ask them if they plan to invent the telephone next.

When reading about the potentials of cellulosic ethanol, I find very few optimists who are not financially tied to the industry and the government support that the industry relies on. The timing of government’s attempt to create both supply and demand for a new product was unfortunate, as the mandate began to ramp up significantly during the recession. However, we only have about 10 years until the Renewable Fuel Standard ceases increasing, and we have yet to produce any cellulosic ethanol at all. If you allow for some successes in the next 2-3 years, these will still be a drop in the bucket compared to the amount the government had “mandated” be produced. At the same time, the mandate continues to direct capital towards projects that aren’t competing on the merits of the technology, but are competing for guaranteed returns promised by our government.

It seems that there is little chance that cellulosic ethanol will have a significant effect on our nation’s fuel supply absent unforeseen breakthroughs in their effectiveness. It will still take massive amounts of land to produce the inputs necessary to create cellulosic ethanol, and these inputs must be cheap enough such that they make it into the market place. Check out the rest of Robert Rapier’s post for a back of the envelope calculation on land use with cellulosic ethanol production:

But then Jerry Taylor, who is the co-founder of MFA Oil Biomass provided a follow-up answer: “It takes 1,000 acres even at 12 tons an acre that we produce to produce 1 million gallons of cellulosic ethanol based on the known conversion rates today.”

Taking his biomass yield assumptions of 12 tons an acre at face value (I doubt you can consistently get 12 dry tons per acre at large scale; commercial hay production is only around half that), we can do an interesting calculation. One million gallons of cellulosic ethanol has the same energy content as half a million gallons of crude oil. (Ethanol contains 2/3rds the energy of gasoline, but a barrel of crude also produces diesel, jet fuel, and fuel oil). U.S. oil production is presently 6.1 million barrels per day. That is 256 million gallons per day, 10.7 million gallons per hour, or 1 million gallons every 5.6 minutes.

Therefore, taking his yield assumptions at face value, 1,000 acres of land planted in Miscanthus giganteus over the course of a year could produce the energy equivalent of under 3 minutes of U.S. oil production. Of course U.S. oil production does not come close to meeting our needs, so to put it in terms of total U.S. oil demand of 18.7 million bpd, 1,000 acres of Miscanthus would cover 55 seconds of U.S. oil consumption. Since that doesn’t take into account the petroleum that will be required to produce the cellulosic ethanol (e.g., running trucks and tractors), the net number would be even lower.

When the government introduced the mandates for ethanol and related biofuels, they needed a way in which companies could verify that they were complying with the Energy Independence & Security Act of 2007. For whatever reason, the decided mechanism would require that companies purchase credits to demonstrate that they had complied with the mandate: a renewable identification number (RIN). Each RIN is theoretically tied to a gallon of ethanol, biodiesel, or similar renewable fuel. However, because the RINs can be sold and traded similar to stock, in practice the pairing of a RIN with a particular gallon of fuel is somewhat superficial.

Unfortunately, this government created market in RINs has created an opportunity for criminally-minded entrepreneurs to scam the companies who are attempting to comply with the law by creating fake RINs and selling them in the marketplace. Note that these oil companies are required by law to purchase these credits, and its often difficult to verify that they are genuine, leading oil companies to often completely bypass small producers and only purchase biofuels and credits from larger, recognizable producers, a somewhat unique barrier to entry for small firms (suspicion of fraud). The latest case in fraudulent RINs surfaced late last month involved the sale of 60 million credits worth roughly $84 million, the third big bust in recent years ($ub required):

According to the violation notice, EPA determined that the fake credits were generated between July 16, 2010, and July 15, 2011. The Clean Air Act allows the agency to assess a civil penalty of up to $37,500 a day for each violation.

“When fuel credits are generated or used that do not represent qualifying renewable fuel, it undermines Congress’ goals in creating the program, creates market uncertainty and is a violation of the standard,” EPA said in a statement emailed to Greenwire. “EPA enforcement of the standard deters fraud and abuse in the system, helps to restore certainty in the market and ensures that the goals of Congress are met.”

This is the third notice EPA has issued since November to companies allegedly producing fake credits, and it is likely not the last.

Last November, EPA accused a Maryland man of generating $9 million worth of fraudulent renewable identification numbers (RINs) on his computer. The 38-digit numbers represented 22 million gallons of biodiesel that was never produced at the man’s company, Clean Green Fuel LLC.

EPA issued another violation notice in February to Texas-based Absolute Fuels LLC for allegedly creating 48 million fake credits worth approximately $62 million. The agency said CEO Jeffrey Gunselman used the money to purchase an aircraft and a number of vehicles, including a 2010 Mercedes Benz and a 2011 Bentley.

Yes, creating markets that are easy to fraudulently manipulate would indeed seem to undercut the goal of the ethanol mandate. Thankfully, unlike in previous cases, the EPA is working constructively with the companies who have been subjected to these scams rather than fining them for getting caught up in a problem the government has created.

This is yet another reason why moving forward with increasing blends of ethanol is not a good idea. Freeze the mandate at 2012 levels if it can’t be scrapped completely. Yes, the short term capital losses from ethanol investments  will be realized, and this will hurt a lot, but the alternative is to continue investments into a fuel that is still more expensive than gasoline once you adjust for its lower energy content. Or we can continue pretending that whatever minute environmental benefits accrue from corn ethanol are worth the absurd push to encourage ethanol use beyond E10. We can also continue to pretend that cellulosic ethanol is around the corner, and won’t suffer from the same problems that have haunted corn ethanol: high prices and heavy land use.

About a year ago on this blog, I offered some skeptical commentary about the gloomy testimony of Dr. Christopher Field of the Carnegie Institution for Science, who warned the House Energy & Commerce Committee that global warming would inflict major losses on U.S. corn crop production unless scientists develop varieties with improved heat resistence.

I noted that long-term U.S. corn production was increasing, including in areas where average summer temperatures exceed 84°F, the threshold beyond which corn yields fall, according to Field.

Well, this just in, courtesy of the Renewable Fuels Association (RFA): USDA projects the U.S. corn crop for 2012 to reach 14.79 billion bushels, the biggest ever. RFA’s objective, of course, is not to debunk climate alarm, but to assure us that we can have our corn (ethanol) and eat it too. Nonetheless, the numbers are mighty impressive and indicate that, in this decade at least, U.S. corn farmers are more than a match for climate change. From RFA’s briefing memo:

At 14.79 billion bushels, the 2012 corn crop would:

• be a record crop by far, beating the 2009 crop of 13.09 billion bushels by 11%.
• be 65% larger than the crop from 10 years ago (8.97 billion bushels in 2002).
• be more than twice as large as the average-sized annual corn crop in the decade of the 1980s (7.15 billion bushels on average).

The 2012 projected yield of 166 bushels per acre would:

• be a record yield, beating out the 2009 average yield of 164.7 bushels per acre.
• be only the third time in history yields have topped 160 bu/acre, the others being 2009 (164.7) and 2004 (160.4).
• be 35% higher than the average yield from the 1990s and 12% higher than the average yield since 2000.