A new study conducted by Price Waterhouse Cooper (PwC) for the National Council of Chain Restaurants (NCCR) estimates the impact of the federal Renewable Fuel Standard (RFS) on the chain restaurant industry.

PwC used the following research strategy. First, PwC examined 11 public and private sector studies estimating the extent to which the RFS increases ethanol utilization beyond what would occur in a free market. Estimates range from an additional 1.0 billion gallons per year at the low end to an additional 6.0 billion gallons per year at the high end. Next, PwC estimated the impacts of these RFS-driven increases in ethanol consumption on the demand for and price of corn and other agricultural commodities. Then, PwC combined these price impact estimates with survey information on chain restaurant food commodity purchases.

Here are the results.

If the RFS in 2015 increases annual ethanol consumption by 6 billion gallons (“Scenario I”), quick service restaurants are projected to spend an additional $2.5 billion (10% of major food commodity spending) and full service restaurants an additional $691 million (8.9%). Costs at a typical restaurant increase by $18,190 in quick service restaurants and $17,195 in full service restaurants.

If the RFS in 2015 increases annual ethanol consumption by 1 billion gallons (“Scenario II”), quick service restaurants are projected to spend an additional $393 million per year (1.6% of major food commodity spending) and full service restaurants an additional $110 million (1.4%). Costs at a typical restaurant increase by $2,894 in quick service restaurants and $2,736 in full service restaurants.

Of course, it’s not just the restaurants that will bear those costs. Their customers will pay higher prices too.

Below are some charts and graphs from the study that provide more detail.

Corn consumption for ethanol has increased dramatically since the RFS was enacted in 2005. In 2010-2011, ethanol consumed more corn than livestock agriculture for the first time. As of marketing year 2011-2012, ethanol consumed 45% of the U.S. corn crop.

Corn, wheat, and soy prices in early 2012 were 161%, 116%, and 83% higher, respectively, than they were in Jan. 2003.

Corn is a key input in livestock production, so higher corn prices increase the cost of meat, poultry, and dairy products. Rising corn prices also bid up the price of other crops that compete with corn for customers and/or land. The chart below estimates the RFS’s impact on agricultural commodity prices under Scenarios I and II.

The 2015 RFS is projected to increase annual expenses of a typical quick service restaurant by $18,191 under Scenario I and $2,894 under Scenario II.

The 2015 RFS is projected to increase anual expenses of a typical full service restaurant by $17,195 under Scenario I and $2,736 under Senario II.

Percentages in the charts below give a sense of how much more restaurant customers may have to pay for specific food items due to the RFS.

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.

Graph courtesy of Roger Pielke Jr.

The EPA announced yesterday that it would open a 30 day commenting period as it weighs requests from multiple state governors to use provisions in the Clean Air Act to temporarily suspend the corn ethanol mandate under the Renewable Fuel Standard:

The EPA asked on Monday for public comment on the need for an ethanol waiver. The 30-day comment period will begin once the notice is published in the Federal Register.

“This notice is in keeping with EPA’s commitment to an open and transparent process to evaluate requests the agency receives under the Clean Air Act, and does not indicate any predisposition to a specific decision,” agency spokeswoman Alisha Johnson said in a statement.

By law the agency has until November 13 to make a decision on the waivers, meaning EPA could act on the requests after national elections on November 6.

Aimed at reducing U.S. reliance on foreign oil, the Renewable Fuels Standard, or RFS, would require 13.2 billion gallons of ethanol to be made from corn this year.

Recall in 2008 Texas Governor Rick Perry submitted a similar request to the EPA which the EPA denied by arguing that waiver requests must show that the mandate was “severely damaging” a region’s economy rather than just contributing to economic damage.

As noted, the EPA will not need to act on this until after the election. It’s possible at that point they would consider in some way reducing the blend level of corn ethanol, though it seems very unlikely as the Obama Administration — like the administrations before him — has repeatedly placed the interests of ethanol producers over the interests of consumers.  The popularity of ethanol has shifted slightly in recent years, though its hard to imagine it’s shifted enough such that the EPA would be willing to enrage the ethanol industry, and send a “chilling signal” to investors in order to alleviate the demand for corn created by the Renewable Fuel Standard. Perhaps things will change if the drought continues or intensifies.

More likely, if anything, as Roger Pielke Jr. points out the outcome will involve some sort of change to the Renewable Identification Number system allowing refiners increased flexibility to push blending obligations to future years when (presumably) drought conditions have alleviated. He also produced a nice graph (above) displaying modeled reductions in corn prices in response to theoretical changes to the RFS. The same study, oddly enough, has been touted by ethanol supporters to suggest that changes to the RFS would not have significant impacts. However, the study found corn price reductions in the range from 7.5-25%, depending on the severity of modifications to the RFS. I wouldn’t classify any of those as insignificant.

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.

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.

* Ethanol has about one-third less energy than an equal volume of gasoline. Consequently, even today, when the per-gallon price of ethanol is lower than gasoline, it still costs more to drive one mile on ethanol than it does on gasoline. But don’t take my word for it. According to the AAA’s Daily Fuel Gauge for May 16, 2012, the mile-adjusted price of E-85 (motor fuel blended with 85% ethanol) is $4.261 per gallon — pricier than regular gas ($3.728/g), premium ($4.026/g), and diesel ($4.032/g).

Or check out EPA and the Department of Energy’s joint Web site, www.fueleconomy.gov. The relevant information is not easy to find. Once you get to the landing page, click on Advanced Vehicles and Fuels, then on Flex-Fuel Vehicles, then on Fuel Economy Information for Flexible-Fueled Vehicles, and then again on Flex-Fuel Vehicles. For each of 25 models, EPA and DOE estimate how much the typical owner of a flex-fuel vehicle spends per year to fill up with either regular gasoline or E-85. The estimates fluctuate as gasoline and ethanol prices fluctuate. As of today (May 16, 2012), the average flex-fuel vehicle owner spends about $350 more per year to run the vehicle on E-85.

Today, the National Association of Convenience Stores (NACS) published a study on the challenges facing the more than 120,000 U.S. convenience stores that sell motor fuel in a market increasingly shaped by the competing requirements of two federal programs: renewable fuel standard (RFS, a.k.a. the ethanol mandate) and corporate average fuel economy (CAFE).

I may have more to say about the study in a later post, but the skinny is that RFS and CAFE may whipsaw the retail fuel outlets upon which most of us depend to fill our tanks. CAFE will decrease the amount of fuel purchased and the frequency of consumer transactions at convenience stores, while the RFS will force convenience stores to make costly investments in storage tanks and blender pumps to sell increasing amounts and percentages of high-ethanol blends.

The excerpts below from NACS’s press release paint a disturbing picture on an industry caught in the regulatory cross hairs:

“RFS and CAFE policies cannot coexist without substantial changes in the retail and vehicle markets to accommodate significantly higher concentrations of renewable fuels, an unlikely scenario given that we may not even meet current requirements as they stand in 2012,” said John Eichberger, NACS vice president of government relations and the author of the new NACS whitepaper, The Future of Fuels: An Analysis of Future Energy Trends and Potential Retail Market Opportunities.

The Renewable Fuels Standard, revised by Congress as part of the Energy Independence and Security Act of 2007 (EISA), requires that increasing amounts of qualified renewable fuels be integrated into the motor fuels supply, culminating at a minimum of 36 billion gallons in 2022. This mandate was expected to increase renewables to approximately 20% to 25% of the overall gasoline market in 2022, about double the rate of 10.4% last year.

Meanwhile, in 2011 the Obama administration proposed new CAFE standards, which are expected to be finalized this summer, that seek to increase the average fleet fuel efficiency to an equivalent of 54.5 miles per gallon by 2025. The cumulative effect of the two mandates is that renewable fuels will be required to represent a significantly greater share of the market than originally anticipated — perhaps as much as 40%, or four times higher than today.

“This level of renewable fuels penetration in the market will impose significant economic burdens on the retail fuels market and consumers,” said Eichberger. “To meet such a high renewable fuels concentration, it is likely that most retailers in the country will have to replace their underground storage tank systems and fuel dispensers. For the convenience industry alone, this will require a minimum infrastructure investment that will add nearly $22 billion to the cost of retailing fuels.” [And where will they get the scratch, I wonder, with CAFE depressing motor fuel demand and sales?]

Even after this enormous infrastructure investment, it still may be impossible to satisfy the RFS, considering that only one in six consumers will drive vehicles capable of running on the mandated fuels. The U.S. Energy Information Administration (EIA) projects only 16% of on-road vehicles in 2022 will be flexible fuel vehicles.

“Unless something dramatic happens, we will hit the ‘blend wall’ within the next two years and will not be able to meet RFS requirements. This will trigger massive fines throughout the petroleum distribution system that will increase the cost to sell motor fuels,” said Eichberger.

An industry expert explains the problem to me as follows:

It’s all about the drop in demand caused by increased fuel economy running up against inflexible volumetric mandates and an infrastructure that can’t meet those targets.

In a 140 billion gallon gasoline market, the ”blend wall” (how much ethanol may be blended annually into the nation’s motor fuel supply) is 14 billion gallons (full market penetration of E10 — motor fuel made with 10% ethanol).

If CAFE drops demand to 100 billion gallons, the blend wall drops to 10 billion gallons of ethanol. But the RFS requires the sale of 36 billion gallons by 2022. To sell 36 billion gallons of ethanol and meet and the proposed CAFE standards, E-10 must be replaced with E-40 nationwide. However, pumps and storage tanks at most convenience stores, most cars, and nearly all outboard motors, lawn mowers, and other small engines can’t handle E-40.

The goals of the two programs — cut fuel consumption, expand ethanol consumption — conflict with each other.

Folks, your government’s left hand does not seem to know what its other left hand is doing. Honk if you think central planners can’t plan!

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.

Aside from Minnesota, ethanol production in Iowa is struggling as well, operating at  a margin of -11 cents per gallon:

Figures from Iowa State University Extension confirmed that Iowa’s ethanol plants operated in the red during January, to the tune of 11 cents per gallon.

That comes after operating margins of 19 cents per gallon in December, 69 cents in November, 42 cents in October and 34 cents in September.

The first quarter is typically a tough period for ethanol as gasoline demand falls, but ethanol producers had feared a more severe downturn than usual this year due to continued high prices for corn and the loss of the 45-cents per gallon federal tax credit on Jan. 1.

As you can see from the huge swing in profit margins, the expiration of the tax credit certainly hurt the industry. Furthermore, demand for ethanol is currently low as refiners — forward looking economic actors — purchased significant quantities of ethanol prior to the expiration of the tax credit to take advantage of the tax credit before it expired.

In the long run, the industry is still supported by the Renewable Fuel Standard which keeps a floor on demand. Some plants have closed in the short run, though its likely that most will eventually open in the future when demand recovers.