ethanol

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

by Marlo Lewis on July 17, 2012

in Features

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

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

Post image for EPA Continues the Cellulosic Ethanol Folly

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…]

Fraudulent Renewable Fuel Credits Continue to Surface

by Brian McGraw on May 25, 2012

in Blog

Post image for Fraudulent Renewable Fuel Credits Continue to Surface

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.

 

♫ Corn Is Busting Out All Over ♫ (Update on Global Warming and the Death of Corn)

by Marlo Lewis on May 15, 2012

in Features

Post image for ♫ Corn Is Busting Out All Over ♫ (Update on Global Warming and the Death of Corn)

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.

Ethanol Still Not Lowering the Real Cost of Gasoline

by Brian McGraw on March 29, 2012

in Blog, Features

Post image for Ethanol Still Not Lowering the Real Cost of Gasoline

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…]

No, Mandates Are Still Not Pro-Market

by Brian McGraw on March 2, 2012

in Blog

The title of an op-ed published in The Wall Street Journal claims: “A Flex-Fuel Mandate Is Pro-Market.” The ethanol industry has made this argument time and time again, that somehow forcing private corporations to adjust their products in a way that will pad the wallets of certain energy sectors is somehow pro-market. Unsurprisingly, his argument relies on the notion that OPEC controls significant portions of oil output, so thus, the U.S. government ought to intervene to level the playing field:

The price of oil is set by a foreign cartel. The Organization of Petroleum Exporting Countries (OPEC) owns almost 80% of global oil reserves yet produces only 36% of daily global supply. This dominant position enables OPEC to raise or lower their production to maintain the global supply-demand relationship that suits their interest. If U.S. oil companies produce more, OPEC will produce less.

…

Let’s open our market to good old American competition. Friedrich Hayek and Milton Friedman stressed that the foremost economic duty of government is to eliminate cartel pricing. Bills are now pending in both houses of the Congress (HR 1687 and S1603) that seek to do exactly that by requiring car makers to enable fuel competition in their own product lines—adding flex-fuel, all electric, hybrid electric, or any other way auto makers choose to implement the law. [click to continue…]

Ethanol Industry Hurting from Loss of Tax Credit

by Brian McGraw on February 29, 2012

in Blog

Post image for Ethanol Industry Hurting from Loss of Tax Credit

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…]

NYT Covers Fines for Non-Existent Cellulosic Ethanol

by Brian McGraw on January 10, 2012

in Blog

Post image for NYT Covers Fines for Non-Existent Cellulosic Ethanol

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…]

Ethanol Industry Finds A Subsidy It Still Likes

by Brian McGraw on January 9, 2012

in Blog

Post image for Ethanol Industry Finds A Subsidy It Still Likes

Just a few days after our previous post outlining the ethanol industry’s brave, unprecedented, legendary, and 100% voluntary decision to give up the ethanol tax credit, we see that there are still other subsidies that they are interested in keeping:

But the head of the Renewable Fuels Association—Bob Dinneen—says the industry will work to ensure that tax credits for cellulosic ethanol will continue past the end of 2012.

“We think that the production tax credit and the depreciation that is now allowed for cellulose needs to continue,” Dinneen says.

Extension of the cellulosic tax credits will send an important signal to the marketplace and encourage investment in the next generation of ethanol technology, Dinneen says.

And to those who consider it just another federal subsidy for ethanol…

“They need only look at the tax incentive for grain-based ethanol that has just expired–that demonstrates you don’t need a tax incentive forever,” Dinneen says.

“You need to encourage investment—convince the marketplace that there is going to be consistent government support that will allow the industry to get on its feet.”

Cellulosic ethanol has not yet been produced commercially, but according to the U.S. Department of Energy web site, several commercial cellulosic plants are under construction.

[click to continue…]

Ethanol Industry Loves America, Gives Up Subsidy

by Brian McGraw on January 6, 2012

in Blog

Post image for Ethanol Industry Loves America, Gives Up Subsidy

Writing in The Hill’s Congressional Blog, lobbyist in chief for the ethanol industry Bob Dineen waxes poetic about the historic nature of the ethanol industry voluntarily giving up losing one of its subsidies, the Volumetric Ethanol Excise Tax Credit (VEETC):

With growing concerns about gridlock in Washington and greed on Wall Street, Americans are wondering whether anyone with a stake in public policies is willing to sacrifice their short-term advantage for a greater good.

Well, someone just did.

Without any opposition from the biofuels sector, the tax credit for ethanol blenders (the Volumetric Ethanol Excise Tax Credit – VEETC) expired on January 1.

In fact, American ethanol may well be the first industry in history that willingly gave up a tax incentive. Facing up to the fiscal crisis in this country, industry advocates have engaged in discussions with the Administration, Congress and our own constituents in an effort to frame forward-looking policies that balance the needs for deficit reduction and the development of clean-burning, American-made motor fuels.

Incentives should help emerging industries to develop and grow, not to be forever subsidized by the nation’s taxpayers. The Volumetric Ethanol Excise Tax Credit — which actually accrued to biofuels blenders, not producers – has helped the renewal fuels industry to stand on its own two feet. So now it is time for this subsidy to be phased out. [click to continue…]

← Previous Entries

Next Entries →