Ethanol Advocacy Groups Want More Ethanol

by Brian McGraw on September 26, 2011

in Blog

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In a post titled “An ‘open’ and shut case for an enduring American energy policy: The infallibility of free markets underscores the philosophy for FuelChoiceNow” two authors argue that markets are generally the best method to reward new products and technologies while dismissing those that don’t quite pan out.

So, its odd to see that the the rest of the post goes on to demand that the government intervene in the market to require that automobile producers adjust their industrial processes and begin to build each car as flex-fuel compatible, meaning that it can run on higher blends of ethanol. Let’s address their arguments:

First, we must be honest about the problem itself. The current fuels marketplace is not open. It lacks fundamental market forces. It is highly consolidated, vertically integrated, and by virtue of OPEC, price manipulated. A non-competitive marketplace alters the implicit contract with innovators and drives new technologies and entrepreneurs elsewhere. The government objective is not to prop up new fuels, but rather to fix a broken marketplace that discourages innovation and leaves our country vulnerable to economic downturn.

Second, we have to move federal energy tax policy from the 20th to the 21st century. The U.S. taxpayer has de-risked oil investments, protected oil assets, and built oil infrastructure at tremendous cost for nearly a century, because promoting oil put us in the best position to succeed in the global economy. This is no longer true. We need to align federal tax policy with the national imperative to reduce oil dependence, create new economic opportunity, and give consumers a choice at the pump. The costs of the status quo dwarf those of promoting change.

This is partially true and partially false. The fuels market is not completely “open” but few markets are due to thousands of interventions in the economy, and it does not in anyway “lack fundamental market forces.” If someone produced an incredibly cheap fuel overnight that worked better than petroleum, individuals would stop purchasing petroleum (and then the media would scream about our new “addiction”). It just turns out that this is a very difficult thing to do.

You can currently purchase E85 at thousands of stations across the country. Most people choose not to, because it is not cost competitive with regular gasoline blends. Most automobile companies choose not to build more flex fuel vehicles because consumers have not seemed interested in purchasing it, and it makes automobiles cost more.  Unsurprisingly, many of the flex fuel vehicles exist today not due to market demand, but because they can count as offsets for automobile manufacturers in meeting fleet-wide mile per gallon standards (meaning they do not have to build as many vehicles with high fuel economy).

Does the current market place discourage innovation? No. If there were economically competitive alternatives to petroleum consumers would purchase them in order to save money. This is why many people in cities buy bicycles.

Third, there are a number of alternatives to foreign oil that are already price-competitive, but face unnecessary infrastructural and refueling challenges that impede market access. These unnecessary market barriers, which can be mitigated at little cost, should be targeted and eliminated to promote consumer choice in the immediate term.

This is classic op-ed speak for “I’m lying” but I’m going to dress my argument up in a bunch of vague buzz words so no one really has any idea what I’m saying. Exactly which alternatives to foreign oil are price competitive but are subject to “unnecessary infrastructural and refueling challenges”? And how are “infrastructural and refuelling challenges” unnecessary? Is it unnecessary to build infrastructure to deliver fuels to the marketplace? Could we just wave a magic wand instead?

Is it unnecessary for gasoline stations to spend tons of money building additional underground storage for ethanol or additional blender pumps? Is it unnecessary to include the cost to automobile manufacturers to build different engines or add modifications such that alternative fuels can be used with traditional petroleum?  Should we just pretend that these things don’t cost money and not include them in the final market price of the fuel? Of course all of these represent real costs, but that is what the authors seem to suggest.

There might be good arguments for some of these policies, but they cannot be based on support of “free markets.”

Finally, I am actually sympathetic to the idea that it would be a good idea for automobile manufacturers to build most of their fleet as flex fuel vehicles (not that it would be a good idea for the government to require them to do so), as expressed here (the author provides a similar take down of an argument put forth in the New York Times supporting a FFV requirement):

When viewed from a technical perspective, I don’t find the Council’s arguments for mandating FFVs especially persuasive. However, I think there’s a more compelling argument to be made, relying on option value. If it costs $100 to modify a car to run on other fuels besides gasoline, then that investment would still have value even if in practice the car’s owner never actually bought those fuels, as has been the case with the vast majority of the cars already capable of using E85. The option still has value because it provides an insurance policy against some future circumstance in which the only fuels available (or affordable) are non-petroleum ones, for whatever reason: an oil embargo, peak oil, pipeline failure, or some weather-related catastrophe, take your pick. That kind of competition for oil doesn’t even require large sales of non-petroleum fuels before having an impact in the market. The key question is whether it’s worth enough to us as a society to require the collective expenditure of roughly $1.2 billion a year (adapting all new cars) or up to $24 billion (retrofitting the entire light-duty vehicle fleet) to force it to happen, as opposed to leaving this as the consumer and manufacturer choice that it is today.

It would seem, from 3000 feet, that if it truly only costs $100 to make the vehicle flex fuel compatible that this might be a good idea as vehicles made these days are likely to be on the road for a very long time. It’s quite possible that the future value of having this alternative (in case biofuels happen to take off) would outweigh the immediate cost of an additional $100 to consumers. However, the automobile manufacturer’s are assuredly aware of this argument and are not convinced by it. And because they have spent a lot more time, effort, and money into investigating this issue than I have, I am likely incorrect.

(It’s also quite possible that the widely cited figure of $100 in additional cost to make a vehicle flex fuel compatible is incorrect.)


Howard Holme September 27, 2011 at 12:13 pm

Ask your members of Congress to co-sponsor the Open Fuel Standard
that would have cars run on methanol, ethanol, gasoline, or be biodiesel or electric. Methanol from natural gas will be the fuel that breaks OPEC, and can create millions of American jobs.
Apparently the manufacturers oppose this because they currently get a major credit from making ethanol flex fuel cars in complying with the CAFE standards, whether or not the cars actually use ethanol. Maybe the manufacturers need to be bought off with some methanol CAFE standard credit.

American Citizen September 28, 2011 at 10:08 am

” It’s quite possible that the future value of having this alternative (in case biofuels happen to take off) would outweigh the immediate cost of an additional $100 to consumers. However, the automobile manufacturer’s are assuredly aware of this argument and are not convinced by it. And because they have spent a lot more time, effort, and money into investigating this issue than I have, I am likely incorrect.”

Brian, What you are missing is the quid pro quo the auto manufactures want in CAFE standard relief for making more Flex Fuel Vehicles. They are holding FFVs hostage.

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Richard Matthews October 2, 2011 at 6:05 am

More ethanol results in higher food costs, more subsidies (tax dollars we don’t have), lower mpg ratings, more environmental destruction, and damage to engines designed to burn gasoline. What’s not to like? Another policy to bribe voters in the corn belt.
Obama is intentionally destroying the economy because the result is more people dependent on government which translates into more votes for the Socialist Party.

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