With Ethanol, Obama Ignores Common Sense

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WASHINGTON--Since being re-elected, in a triumph of political loyalty over consumer protection, President Obama has refused to waive the federal requirement that 13 billion gallons of corn-based ethanol be blended in 2013 with gasoline.

In making that decision on November 16, Mr. Obama brushed aside evidence that dedicating corn to ethanol, rather than to animal feed and other food uses, has contributed to a rise in prices. Corn prices are up nearly 40 percent over the past year, and wheat prices are up by 20 percent.

One apparent consequence: prices for corn-fed meat are on the rise. U.S. beef is now $4,900 per ton, up from $3,900 in 2009.

And while he purports to be committed to environmental protection, the president also ignored the findings of some analysts that the production of ethanol--which is an expanding industry--makes air pollution worse.

In the mid-2000s, when Congress imposed renewable fuel mandates, adding ethanol to gasoline was seen as a way to diminish gasoline consumption, reduce oil imports and even curtail tailpipe emissions.

In 2012, the subsidy of 45 cents a gallon expired, along with the 54 cent tariff for imported ethanol. What keeps the ethanol industry afloat is the mandate for the American economy to consume ethanol.

Now, with U.S. crude oil and gas production rising and imports falling, and with a nascent trend under way towards powering motor vehicles with abundant natural gas, the case for ethanol is weak.

But an ethanol lobby has put down tenacious roots, including corn farmers, whose price per bushel has risen from under $4.00 in 2010 to over $7.00 in 2012, and investors who placed capital into ethanol-producing plants.

Of 97 million acres of corn in America, about 40 percent is dedicated to ethanol, shrinking supplies that go into food.

In sum, the Federal requirement that ethanol comprise 10 percent of pumped gasoline--and the possibility that Washington will raise that fraction to 15 percent--have slammed American consumers in the pocketbook.

Yet, Mr. Obama refused to waive for 2013 the requirement for blending ethanol.

In the 2007 energy bill signed into law by President George W. Bush, Congress mandated the use of 15.2 billion gallons of renewable fuels this year, of which 13.2 would come from ethanol. In 2013 producers have to use 16.6 billion gallons of renewables, 13.8 billion from ethanol. Quantities gradually increase to 36 billion gallons of biofuels in 2022, of which 15 billion could be ethanol.

The volume of renewables not accounted for by corn ethanol is required to come from advanced biofuel, such as cellulosic ethanol.

This year, 500 million gallons of advanced biofuel is supposed to come from cellulosic materials, or plant waste. But the technology to produce cellulosic ethanol on such a scale does not yet exist. So EPA reduced the required 500 million gallons to 8.65 million gallons. That means that corn continues to be the workhouse feedstock for ethanol.

Since even this smaller amount of cellulosic ethanol does not exist, firms are paying fines of about $7 million annually to the Treasury for not using the fuel.

America is having trouble using the required amount of ethanol. Only 10 percent of motor fuel is ethanol, and as cars become more fuel efficient, Americans are projected to use less fuel, rather than more.

To complicate matters, natural gas is becoming the alternative fuel of choice for vehicle fleets. Companies such as FirstCNG in Wayzata, Minnesota, are converting fleets of vehicles to natural gas and setting up charging stations without government subsidies. Approximately 250,000 vehicles in America run on natural gas.

This will only increase. Globally, 15 million vehicles run on natural gas. In Argentina, 19 percent of vehicles run on natural gas. GM and Ford are making dual-fuel natural gas and gasoline pickup trucks.

For over thirty years, taxpayers funded ethanol subsidies, paid to corn growers and ethanol producers, amounting to nearly $6 billion in 2011.

Several high profile cellulosic ethanol enterprises have failed in recent years. EPA had originally projected that Cello Energy would provide 70 percent of the 100 million gallons of cellulosic ethanol required in 2010. However, Cello went into bankruptcy in October 2010 after being fined over $10 million for defrauding investors.

Another example is Range Fuels, which received a $76 million Energy Department grant, went through bankruptcy in 2011. Just last month, BP announced it was cancelling its plans to build an ethanol plant in Highlands County, Florida, and "ending its pursuit of commercial-scale cellulosic ethanol production in the U.S."

With high gasoline prices, motorists are driving less and purchasing more fuel-efficient cars, reducing gasoline-and ethanol-consumption. In August, the Department of Transportation and the Environmental Protection Agency issued new corporate average fuel economy standards, requiring fleets to have an average of 55 miles per gallon by 2025. Unless standards are revised, that means lower fuel use-and less ethanol use.

Then, ethanol adds to gasoline prices, and lowers vehicle fuel efficiency. It is costly to ship, because it separates from gasoline in the presence of water. So, unlike gasoline, blends of ethanol and gasoline that motorists put in cars cannot be transported through pipelines. Instead, ethanol is shipped by rail, and mixed with gasoline near the point of distribution.

EPA wants to force more ethanol consumption by allowing ethanol levels in gasoline to rise from 10 percent to 15 percent for cars from model years 2001 onward. Since higher ethanol blends are harmful to older car engines-some believe to newer engines also-gas stations would have to operate different pumps for the 10 percent and 15 percent blends. And if a motorist put the 15 percent blend in his older car by mistake-an accident that would likely occur not infrequently-the engine would be damaged.

When Congress passed legislation mandating the use of oxygenated fuels, before the discovery of 200 years of inexpensive natural gas, using ethanol for energy was going to be win-win. The United States can grow so much corn, the argument went, that the country could divert some for gasoline and thus reduce tailpipe carbon emissions and become less dependent on foreign oil producers.

Alas, in the real world, unintended consequences arrive all too often.

Ethanol production is contributing to increases in the price of food, both in the United States and abroad. Not only is corn that was used for food made into ethanol, but other crops are being abandoned for corn. The Arab Spring was started by riots in Tunisia in December 2010 over high food prices, and last week high prices caused riots in Jordan.

Then, many scientists now believe that the production of ethanol causes more harmful emissions than it prevents. The more ethanol we produce, the more greenhouse gases are generated. Rising corn prices encourage farmers all over the world to transform their land from forests and fallow fields to corn, thereby losing the capture of airborne carbon dioxide performed by trees and shrubs.

Despite all of this downside, Mr. Obama is loyal to his environmental base and to farmers who voted for him, even though common sense would dictate otherwise.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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