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Looks Like I Struck a Nerve

I started to notice a trend in the comments following my latest Forbes essay about the redundant nature of ethanol subsidies now that mandates via the Renewable Fuel Standard (RFS) are in place. Several comments in a row seemed to be regurgitated talking points that were just red herrings with respect to the point I was making. I knew that meant that somewhere a call had gone out to ethanol supporters to speak out against me. I now know the source, and at the end of this essay, I offer a debate challenge to the organization that issued the talking points.

To review, my point is simple. Someone said that it would be great if I could reduce it to a talking point, so here it is: Mandating ethanol while also subsidizing it is like paying people to obey speed limits.

If that isn’t self-explanatory, here is the logic behind the analogy. We have laws that govern the speed limits on our roadways. You can be penalized if you violate these limits, thus there is an enforcement mechanism in place that compels people to obey the law.

This is the same as the ethanol mandate. We have a law in place that directs refiners to blend a certain percentage of ethanol into their fuel. There are penalties for failing to meet those mandates, thus there is an enforcement mechanism in place.

Now would anyone think it was a good idea if we started using tax dollars to pull people over and pay them for complying with speed limits? I think most people would agree that this would qualify as a stupid idea and a waste of taxpayer money – especially when you consider that some government agency would have to run and audit the program for compliance. It would certainly be redundant given that there are already penalties in place for failure to obey.

With the ethanol subsidies, we are paying people to obey the speed limit. And the ethanol lobby was a little concerned that I had called attention to that fact. Turns out that Growth Energy, the ethanol lobbying organization whose co-chairman is General Wesley Clark, issued the following talking points to their members and asked them to rise up in a groundswell of opposition.

An excerpt from the e-mail they sent out (courtesy of this link):

Here are some points to consider, and remember to use these in your own words:

* What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry. Does Forbes really endorse raising taxes in this tough economic climate? Does Rapier really think raising taxes on an emerging industry is smart?

* With domestic, green energy the likely source of hundreds of thousands of new jobs in the United States, why would Forbes and Rapier force a job-killing tax increase on ethanol?

* If Rapier is so eager to tax American energy companies, why not end the massive tax subsidies and tax breaks that Big Oil and gas companies get? By some estimates, the oil and gas industry will get around $29 billion in tax breaks from 2008 to 2013. That’s an enormous handout to an industry that sends a billion dollars a day overseas – often to countries that are hostile to the United States.

* If the choice were to give a tax credit that helps an American farmer and an American engineer in an American ethanol plant, or giving a tax break to an oil man who is doing business in the Middle East, I’d rather the tax credit stay here on American shores..

* The VEETC has reduced farm payments and increased tax revenue that completely offsets whatever the cost of that tax credit is – and in fact generates additional revenue for the federal treasury. In 2007, the $3.3 billion VEETC costs saw farm payments reduced by $8 billion, and generated $8 billion in tax revenue, according to an Iowa State University study.

That is absolutely priceless. None of those talking points actually address my argument. But apparently they were counting on some of their members not being able to think for themselves and just go out and repeat the talking points. So, a few showed up at Forbes and did just that. I answered each one of them – pointing out the obvious flaws in their thinking –  and of course none of them responded because they didn’t have anyone telling them what to say. 

But hey, I am a big boy. I can take the heat. Let’s take their talking points and address them, just to show how silly they are.

Point 1: What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry.

Response: Right. Taking a tax credit away that is collected by the oil companies – which last year amounted to about $5 billion – and giving it back to taxpayers is a tax increase. That’s straight out of Lobbying 101, where up is down and green is red if that’s what your client wants.

I would love for someone to walk me through just how this amounts to a tax increase on this “innovative, domestic energy industry.” Anyone? Remember, the oil companies are still mandated to blend the same amount of fuel, whether they collect a subsidy or not. Point 1 – as silly as it was – refuted.

Point 2: With domestic, green energy the likely source of hundreds of thousands of new jobs in the United States, why would Forbes and Rapier force a job-killing tax increase on ethanol?

Response: Repeat the “tax increase” canard, and hope it begins to take hold with their members (and hopefully the public). “This guy wants to raise our taxes!” Remember, at issue here is $5 billion (and rising) of taxpayer money that is being paid out in unneeded subsidies. Eliminating that is a tax increase in their world? There are no words.

Point 3: If Rapier is so eager to tax American energy companies, why not end the massive tax subsidies and tax breaks that Big Oil and gas companies get?

Response: This one is a beauty. First, the point is completely irrelevant, given that the oil companies would still be under mandate to buy the product. Whether they are being subsidized by a trillion dollars a year has no bearing at all on this argument, as it doesn’t impact how much ethanol they are mandated to buy. It is just one more red herring.

But the really funny part about this point is the oil companies are the ones receiving the subsidy in this case. The ethanol industry has told us that many times. If Growth Energy is suggesting we get rid of oil company subsidies, aren’t they just making my point for me?

It wasn’t so long ago that Brian Jennings, the executive vice president of the American Coalition for Ethanol – a fellow ethanol lobbying organization (there seem to be quite a few) – said matter-of-factly that the blender’s credit does not benefit ethanol producers, that “it is actually an incentive the petroleum industry receives for blending ethanol into gasoline.” Vinod Khosla has made the same argument. Here he is on this issue:

Ethanol has a subsidy, but the farmer doesn’t get any of that. What I heard, is that well past midnight when this was being debated in the conference committee, the oil companies inserted 2 words into the language, calling this subsidy a blender’s credit. So the person who is blending it with gasoline gets it. All $2 billion of it last year [2005] was collected by the oil companies. Like they needed more money.

So which is it, ethanol lobby? How exactly is a credit received by the oil industry for complying with a law to blend more ethanol supposed to benefit the ethanol industry? Are you afraid the oil company wouldn’t blend the ethanol if the subsidy wasn’t there? I know I am repeating myself, but you don’t seem to get it: They are compelled to do so by law regardless. Finally, why do you wish to protect the subsidy when members of the ethanol lobby have pointed out that it is really an oil company subsidy?

Point 4: If the choice were to give a tax credit that helps an American farmer and an American engineer in an American ethanol plant, or giving a tax break to an oil man who is doing business in the Middle East, I’d rather the tax credit stay here on American shores.

Response: But doesn’t the “oil man” get this tax credit? You guys are talking out of both sides of your mouth, and it isn’t a pretty picture. I think you have set a record for red herrings in a response.

Point 5: The VEETC has reduced farm payments and increased tax revenue that completely offsets whatever the cost of that tax credit is…

Response: Irrelevant even if true, because once more I remind you that the blender still has to buy the ethanol. So if it really had the offsets you claim, that won’t change by eliminating the subsidy.

If that’s the best you have, then I can safely conclude that the emperor has no clothes. You didn’t address my arguments at all, because you know you can’t. Of course people might be curious as to why you have responded in such a way, but I know why you did. The last thing you want is for people to confront the costs of ethanol at the pump, where they might start to think that our ethanol policy isn’t such a good idea after all. That is what you truly fear.

In conclusion, I would like to issue a debate challenge to Growth Energy. Instead of hiding behind e-mail messages to their members, I challenge them to take up a three-round written debate on the matter. I propose the following:

Resolved: Implementation of the RFS negates the need for the tax credit.

If you are up to it, pick the best person from your organization. Better bring your “A-Game”, though. Or, if that e-mail represents your “A-Game”, you might as well forfeit now.

February 18, 2010 Posted by | energy policy, ethanol mandate, ethanol subsidies, farm policy, Growth Energy, politics | Comments Off on Looks Like I Struck a Nerve

A Redundant Subsidy

My latest is up at Forbes right now. It is about the redundant nature of our current ethanol subsidy:

A Redundant Subsidy

An excerpt:

As many ethanol producers have argued – the gasoline blender and not the ethanol producer receives the subsidy anyway. The gasoline blender – ExxonMobil for instance – buys ethanol for $1.70 per gallon (currently), receives a tax credit worth $0.45 per gallon (the credit was reduced to that level in 2009), and then blends it into gasoline that is presently wholesaling at approximately $1.90 per gallon. With the tax credit, the current price of ethanol on an energy equivalent basis to gasoline is just about equal to the $1.90 wholesale price of gasoline. So the tax credit compensates the gasoline blender for blending in a higher cost feedstock.

But what if the tax credit was not there? Would ExxonMobil blend less ethanol? No, they are mandated to blend a certain amount, and if they fail to do so they are penalized. So in the event that they did not get the tax credit, then the energy equivalent price they would pay for ethanol would be about $2.50 per gallon (based on ethanol’s current spot price). At a 10% blend, this would mean that at current prices the price charged for a gallon of ethanol-blended-gasoline would need to rise about six cents to keep the gasoline blender’s costs equivalent to the cost they currently have with the tax credit in place. The only difference would be that the cost would then be borne directly by drivers in proportion to the number of miles they drive.

I also walk through the history of U.S. ethanol subsidies. If they haven’t served their purpose by now, they never will.

February 16, 2010 Posted by | energy policy, ethanol mandate, ethanol subsidies, farm policy, politics | Comments Off on A Redundant Subsidy

EPA Delays Ethanol Ruling

In a move that wasn’t really a surprise, today the EPA announced that they are not yet ready to approve ethanol blends above E10 for automobiles:

EPA Notifies Industry Group on Status of Ethanol Waiver Request

WASHINGTON – The U.S. Environmental Protection Agency (EPA) today announced that it expects to make a final determination in mid-2010 regarding whether to increase the allowable ethanol content in fuel.

In a letter sent today to Growth Energy – a bio fuels industry association that had asked EPA to grant a waiver that would allow for the use of up to 15 percent of ethanol in gasoline – the agency said that while not all tests have been completed, the results of two tests indicate that engines in newer cars likely can handle an ethanol blend higher than the current 10-percent limit. The agency will decide whether to raise the blending limit when more testing data is available. EPA also announced that it has begun the process to craft the labeling requirements that will be necessary if the blending limit is raised.

In March 2009, Growth Energy requested a waiver to allow for the use of up to 15 percent ethanol in gasoline, an increase of five percent points. Under the Clean Air Act, EPA was required to respond to the waiver request by December 1, 2009. EPA has been evaluating the group’s request and has received a broad range of public comments as part of the administrative rulemaking process. EPA and the Department of Energy also undertook a number of studies to determine whether cars could handle higher ethanol blends. Testing has been proceeding as quickly as possible given the available testing facilities.

In a letter to Growth Energy, a pro-ethanol organization headed up by POET CEO Jeff Broin and General Wesley Clark, the EPA indicated that testing had only been completed on two vehicles, but testing on an additional 12 vehicles was expected to be completed by May 2010. On the basis of the two completed tests, the EPA said they would “be in a position to approve E15 for 2001 and newer vehicles in the mid-year timeframe.”

That begs the question of whether there is expected to be a potential problem in vehicles older than 2001 models. If so, and E15 is approved for 2001 and newer models, I can imagine a logistical nightmare and a class action lawsuit waiting to happen. Instead of having three grades of gasoline, there would likely need to be five or six grades depending on the age of your car. For gasoline blenders and for station owners, it will be a bit of a headache. For lawyers, a potential windfall as pre-2001 car owners have their engines ruined because they put the wrong fuel in, or someone else messed up in the supply chain.

Instead of going down this path, why don’t we do more to incentivize E85? We aren’t close to saturating the market for E85; the problem is just that the E85 price isn’t low enough relative to gasoline. There are supposedly several million E85 vehicles on the roads today, with automakers ramping up production even more in future years.

Consider for a moment the potential E85 market in the Midwest, where most of the corn is grown and most of the ethanol is produced. Per the EIA, the demand for gasoline in the Midwest in 2008 was 2.5 million barrels per day. Imagine for a moment that this demand was for E85. In that case, because of the lower energy content, demand would rise to around 3.3 million barrels per day. Of that, 85%, or 2.8 million barrels per day, would come from ethanol.

How much is 2.8 million barrels per day? It would be 43 billion gallons per year of ethanol, far greater than the 10 billion or so gallons of ethanol produced in the U.S. in 2010. In fact, even if you could convince only half the people in the Midwest to use E85, there would be absolutely no need to even think about increasing the amount of ethanol in the general gasoline pool. And that’s just in the Midwest!

So why isn’t this strategy being heavily pursued? Primarily I think it comes down to cost. If you can get 15% ethanol into the gasoline pool, any cost penalty is spread out over many consumers and it is further masked because the bulk of the fuel is gasoline. With E85, ethanol is carry the brunt of the costs and the penalty is far more obvious.

As I write this, per this site that promotes E85 fuel, right now the savings from burning E85 instead of regular gasoline is only 11.88% (a national average price of $2.53 for gasoline versus $2.23 for E85). The problem is that the mileage penalty is going to be over 20% in most cases (the energy content of E85 is almost 30% less than gasoline on a per gallon basis), and therefore people are not going to voluntarily buy it.

How to get around that? Well, if you could instead make everyone buy E15, you don’t really have to worry about that cost problem. Consumers will be forced to take the hit, but it will be spread out across all consumers. But if they could make the cost of ethanol more competitive such that the savings from E85 is consistently around 25-30% relative to gasoline, E85 demand would be great enough to consume all of the ethanol we will make for the foreseeable future.

December 2, 2009 Posted by | energy policy, EPA, ethanol mandate, ethanol prices, politics | 131 Comments

Oil Companies Acquire More Ethanol Plants

As I noted in my essay Big Oil Buys Big Ethanol, I expected that we would see more oil companies buying up troubled ethanol assets. Per the Houston Chronicle, Sunoco has become the latest:

Oil companies shop for discounted ethanol plants

FULTON, N.Y. — When Sunoco closed this week on the acquisition of a bankrupt ethanol plant for pennies on the dollar, it became just the latest oil refiner to step into the alternative fuels market.

Traditional refiners under pressure to reduce emissions are finding new avenues to meet evolving environmental standards, and finding big bargains along the way.

However, I think the article largely misses the point of why these transactions are taking place:

The plant is close to Sunoco’s main operations in the Northeast where many of its 4,700 gas stations are concentrated, but the shift in U.S. energy policy was a big motivator.

The entry of traditional oil companies is part of a natural industry evolution, [Matt] Hartwig [of the Renewable Fuels Association] said.

I don’t think these transactions are taking place because oil companies want to go green, or because they see this as a fantastic growth opportunity. They are doing this merely because they have been required to put ethanol in their gasoline. To meet their commitments, they can either purchase ethanol from the ethanol producers, or they can buy their own ethanol plants. If you can acquire ethanol plants for pennies on the dollar, it is cheaper for them to go that route. If, on the other hand they thought the mandates were going away, I don’t think they would be jumping in.

But don’t be surprised if the top U.S. oil companies — Exxon Mobil Corp., Chevron Corp. and ConocoPhillips — don’t make the leap, Kment said.

“For them, a 50 million gallon, or even a 100-million gallon plant would only produce a drop in the bucket of their total needs,” Kment said.

But again, it isn’t about their total needs. It is about meeting the ethanol mandate, which they can do by producing “a drop in the bucket of their total needs.” This isn’t about oil companies trying to become ethanol companies. The scale of ethanol is far too small for that. Even if the oil companies bought up all of the ethanol capacity in the country, it would still be only a drop in the bucket. But it would enable to them to fulfill the government mandate.

June 19, 2009 Posted by | ethanol mandate, ethanol subsidies, oil companies | 13 Comments

The WSJ Hates Ethanol

Actually, according to them everybody hates it:

Everyone Hates Ethanol

I can assure them that corn farmers, ethanol producers, and ethanol lobbyists don’t hate ethanol. 🙂 But they are correct that a coalition of strange bedfellows has united in opposition to our ethanol policy.

The article makes a lot of good points, but it is quite harsh:

These days, it’s routine for businesses to fail, get rescued by the government, and then continue to fail. But ethanol, which survives only because of its iron lung of subsidies and mandates, is a special case. Naturally, the industry is demanding even more government life support.

Corn ethanol producers — led by Wesley Clark, the retired general turned chairman of a new biofuels lobbying outfit called Growth Energy — want the Obama Administration to make their guaranteed market even larger. Recall that the 2007 energy bill requires refiners to mix 36 billion gallons into the gasoline supply by 2022. The quotas, which ratchet up each year, are arbitrary, but evidently no one in Congress wondered what might happen if the economy didn’t cooperate.

I laid out this scenario in A Vicious Circle. It goes like this.

1. First we create policies to subsidize, and when that doesn’t work well enough to mandate ethanol usage.

2. Overbuilding of capacity occurs, especially since the barriers to market entry are so low.

3. Margins fall, so producers find themselves in financial trouble.

4. Now we need more mandates, to keep the producers that were created in Step 1 from going bankrupt. Suddenly ethanol looks great, and given those low barriers to entry…

WSJ explains that a complicating factor is that fuel demand is down, so the amount of ethanol forecast to be produced is now more than the market is likely to absorb:

Americans are unlikely to use enough gas next year to absorb the 13 billion gallons of ethanol that Congress mandated, because current regulations limit the ethanol content in each gallon of gas at 10%. The industry is asking that this cap be lifted to 15% or even 20%. That way, more ethanol can be mixed with less gas, and producers won’t end up with a glut that the government does not require anyone to buy.

The amazing thing – and this is already starting to take place – is that oil refiners are potentially liable for any damages that result if higher blends damage engines:

The biggest losers in this scheme are U.S. oil refiners. Liability for any problems arising from ethanol blending rests with them, because Congress refused to grant legal immunity for selling a product that complies with the mandates that it ordered. The refiners are also set to pay stiff fines for not fulfilling Congress’s mandates for second-generation cellulosic ethanol. But the cellulosic ethanol makers themselves already concede that they won’t be able to churn out enough of the stuff — 100 million gallons next year, 250 million gallons in 2011 — to meet the targets that Congress wrote two years ago.

I have also said on numerous occasions that there is no way the cellulosic mandates will be met. Congress still hasn’t figured out that they can’t mandate technological breakthroughs. They keep assuming that if they pass laws, aspiring entrepreneurs will form companies and figure out the needed breakthroughs. If it was that simple, cancer and heart disease wouldn’t still be with us.

The article notes the irony that financially successful but politically unpopular business like oil companies are potentially liable for a product that has been politically forced upon them through companies that wouldn’t exist without generous subsidies and mandates. Their closing paragraph echos my previous essay on why this is a vicious circle that we are unlikely to break any time soon:

To recap: Congress and the ethanol lobby argue that if some outcome would be politically nice, it should be mandated (details to follow). Then a new round of market interventions is necessary to fix the economic harm resulting from the previous requirements, while creating more damage in the process. Ethanol is one of the most shameless energy rackets going, in a field with no shortage of competitors.

Once again, I note that it isn’t ethanol the fuel that I have a problem with. What I have always had a problem with is the system we have set up, which seems to have been done without giving enough consideration to potentially unintended consequences. If the government had spent more time listening to critics, instead of just dismissing them as shills trying to protect their interests, we may have been able to avoid some of this mess.

I have said before that I am a big fan of incentives, but not such a big fan of mandates. Incentives over time can – and should be rolled back as an industry starts to become established. If it can’t become established, going to a mandate means you are now trying to force something that is highly uneconomical. The problem with a mandate like this – which followed 30 years of subsidies that couldn’t get the industry to a self-sufficient state – is it forces you to purchase the fuel regardless of the cost. In the case of the subsidies, at least you have an idea about how much money is being funneled into the industry to keep it afloat. Mandates dictate that no matter how much it costs, we are going to blend 10.5 billion gallons of ethanol into the fuel supply in 2009.

The irony is that we could rely heavily on oil and coal for the ethanol production production, and yet the final product is ‘renewable’ and therefore heavily subsidized. That’s why I have frequently said that ethanol subsidies are indirect fossil fuel subsidies.

Note: I will be traveling for a couple of days, so probably no comments from me. I have set up another essay to automatically publish while I am away.

March 17, 2009 Posted by | energy policy, ethanol, ethanol mandate, ethanol subsidies, politics | 34 Comments

Amazing Ethanol Lawsuit Against Oil Companies

I did a double-take when I saw this headline:

Ethanol Lawsuit Proceeds against Oil Companies

It turns out that oil companies – forced to use ethanol in gasoline despite many protests – are now being sued because ethanol blends can corrode fiberglass tanks in boats.

NAPLES, Fla. — A Florida lawsuit against six oil companies that alleges negligence for failing to warn boat owners of potential harm from ethanol-blended gasoline, survived a motion to dismiss from the defendants, NaplesNews.com reported.

Plaintiff attorney Jeffrey Ostrow of Fort Lauderdale said the next step is pursuing certification to become a class-action lawsuit. The intent is to represent all Florida boat owners who have used ethanol-blended fuel and whose boats have been damaged by the fuel, Ostrow said. He filed the lawsuit in August 2008 on behalf of three plaintiffs.

The defendants include Chevron, Exxon, BP, Shell Oil, ConocoPhillips and Tower Energy Corp., a California-based independent petroleum wholesaler, the report stated.

Our judicial system never ceases to amaze me. Why not instead go after the lawmakers who thought it would be a good idea to rapidly increase the amount of ethanol in the fuel system without thoughtfully considering the impacts?

At issue is a state law adopted in spring 2008, which states all gasoline sold in Florida must contain 10 percent ethanol, called E10, by the end of 2010 as part of conservation measures. Two exemptions were included allowing ethanol-free gas to be sold for airplanes and boats. About half a dozen other states require ethanol additives in gasoline.

I guess it’s like Willie Sutton’s alleged answer about why he robbed banks: “Because that’s where the money is.” So, why sue oil companies for complying with this mandate that was forced on them? Because that’s where the money is.

January 23, 2009 Posted by | boats, ethanol mandate, litigation | 46 Comments

EPA Denies Ethanol Waiver

No big surprise here, and I have been advising people that there was very little chance that the EPA would grant the waiver, but they have officially denied the ethanol waiver request from the state of Texas:

EPA denies Texas governor’s ethanol waiver request

EPA Administrator Stephen Johnson, during a conference call with reporters, said the agency’s assessment looked at the livestock issue and found feed prices have increased because of biofuel production. “However, is that the result of the (Renewable Fuels Standard) mandate? Our conclusion is no,” Johnson said. “And second, are those price increases meeting the statutory requirement of severe harm to the economy? And our conclusion is no.”

Environmental groups, concerned about how biofuels affect climate, water quality and biodiversity, also supported the waiver. Sandra Schubert, spokeswoman for the Environmental Working Group, said the denial is shortsighted and that the country should be focused on viable clean energy solutions. “Instead, the misguided corn ethanol mandate is forcing farmers to plow up marginal land and wildlife habitat, while increasing global warming and dumping toxic fertilizers and pesticides into our precious water sources,” she said in a statement.

On Capitol Hill, the decision drew mixed reaction. Members of the Texas congressional delegation, U.S. Rep. Joe Barton and Sen. Kay Bailey Hutchison, who has filed legislation that would freeze future ethanol production at this year’s level, criticized the agency’s decision.

“I am disappointed that the EPA missed this opportunity to provide relief for American consumers who are dealing with skyrocketing food prices due to the unintended consequences of the continued escalation of the ethanol mandate,” Hutchison said in a statement.

U.S. Sen. Chuck Grassley of Iowa, also a Republican, called the decision a “victory,” saying it will allow farmers to “continue to plan for and meet the fuel and food needs of the future.”

Given the Bush administration’s infatuation with ethanol, I thought the chances of the waiver being granted were very slim.

August 8, 2008 Posted by | EPA, ethanol, ethanol mandate, texas | 20 Comments