Why We Need to Kick Our Foolish Ethanol Addiction

Corn-producing states love the federal mandate to add it to motor fuels, but it no longer makes sense — if it ever did.
August 28, 2017
Corn sticking out of a car's gas hole.
(Shutterstock)
By William Murray  |  Contributor
Federal energy policy manager for the R Street Institute

Bad news arrives slowly to some U.S. political circles. The failure of the federal Renewable Fuel Standard (RFS) program to achieve its policy goals over the past decade is one of the slowest awakenings in recent memory.

First authorized by Congress in 2005 and then expanded in 2007, RFS mandates that oil refiners quadruple the amount of biofuels -- primarily ethanol -- blended into transportation fuels by 2022 as a way to wean the United States off what's so often been decried as its "addiction to oil."

But the security of U.S. fuel supplies is no longer a pressing problem, thanks to the development of hydraulic fracturing for oil and gas in places like North Dakota, Pennsylvania and Texas. As a result, no one is very happy with the federal government's continuing attempt to manage what is already a broken ethanol market.

At an Aug. 1 public hearing regarding what level the Environmental Protection Agency should set for its proposed volume requirements of biofuels in 2018, critics of the ethanol mandate -- including refiners, livestock producers and consumers -- argued against the market-distorting program. On the other side, the ethanol and biofuels industries complained that the EPA is unlawfully constraining the industry's growth by refusing to expand the mandate as directed by Congress.

Is it any surprise that a centralized industrial program designed in direct opposition to free-market principles would disappoint everyone involved, especially when the problem of fuel scarcity has been solved by other means?

What is really going on is a gasoline market under serious duress, with no political will to stop the madness by doing away with the RFS mandate. It's not just the fracking revolution that is bypassing the biofuels industry; the growth of electric-powered automobiles will only serve to further depress demand for the industry's products. This leaves RFS as nothing more than a subsidy program for ethanol makers, corn farmers and the multinational oil companies that own ethanol-blending facilities.

Meanwhile, governors from the major corn- and ethanol-producing states of Iowa and Nebraska promote ethanol blending as a way to prop up their states' economies during economic slowdowns while downplaying the original national-security arguments that no longer apply. In Iowa's case, 3.5 percent of its gross domestic product -- about $4.6 billion a year -- can be tied directly to its renewable-fuels industry. "As the current agriculture economy experiences a downturn, sustainable and predictable renewable-fuels markets are helpful to the bottom line for farmers and rural Iowa," Gov. Kim Reynolds said during a news conference after the EPA's Aug. 1 hearing.

In hindsight, President George W. Bush was trying to find his way out of a serious jam when he said in his 2006 State of the Union speech that the country was "addicted to oil" and needed biofuels as a way to wean itself from that dependency. Like many a government program, the RFS started as a strategic investment, only to develop a political constituency strong enough to protect its future existence, regardless of its future value.

From 2005 to 2007, when the United States imported roughly 60 percent of its oil, prices were rising dramatically and the country's oil production was seen to be in permanent decline. Out of desperation, the federal government picked biofuels as a savior, using economic and scientific assumptions that have since proven woefully inaccurate.

The first mistake was to believe the rosy predictions that development of cellulosic ethanol that uses inedible parts of the corn stalk and abundant switch grass would advance rapidly. But the science didn't pan out. A decade later, the cost to convert corn stocks into fuel remains too high -- as much as $120 a barrel for its crude-oil equivalent, according to some estimates.

The second mistaken assumption was lawmakers' failure to account for a possible economic downturn's impact on gasoline demand. Following the recession of 2008 to 2009, gasoline demand flatlined. Meanwhile, annual increases in the ethanol-blending mandate pushed up the quantity of ethanol in the U.S. gasoline pool much faster than anticipated. This meant reaching the so-called "blend wall" for the U.S. automotive fleet, at which point car companies void the warranties on older car engines if more than 10 percent ethanol is used. Thus, there really is no way to get around the EPA decision to effectively freeze annual ethanol production at its current 18 billion gallons.

These facts concerning the RFS have been clear in scientific literature and public-policy circles for years. Nevertheless, farm-state governors and other proponents continue to demonstrate their tin ears regarding how counterproductive the ethanol mandate has become.

This isn't how energy and agricultural policy is supposed to operate. Let hope the truth about the RFS program can finally start to seep into the ears of those most prone to exaggerate its benefits to the larger American electorate.