Energy hypocrisy: Ethanol isn't a good fuel, but it's not going away anytime soon

Ethanol was supposed to do a lot for the US.

It was supposed to help reduce our dependence on foreign oil. It was supposed to combat climate change. It was supposed to be a gateway for more renewable fuels technology. It was supposed to reduce gasoline prices because it was cheaper.

So when Congress mandated in 2005 that 10% of the nation’s fuel supply had to be blended with ethanol, which is derived from corn, there were some idealistic hopes that renewable fuels would wean us off fossil fuels.

It hasn’t worked that way.

The US is reducing its dependence on foreign oil, but not because of ethanol. It’s because we’re pumping more of our own oil here, thanks to fracking. It hasn’t led to more research and development of advanced biofuels.

Instead, we’re putting nearly 40% of the US corn crop in our gas tanks, which some argue pushes up food prices.

And lately ethanol is not even a cheaper alternative to gasoline.

Since mid-December, ethanol prices have risen above reformulated gasoline prices because of the sharp drop in crude-oil and gas prices, along with a rise in corn prices.

As of 26 January, Chicago Board of Trade ethanol futures were holding around $1.448 a gallon, whereas New York Mercantile Exchange reformulated gasoline futures prices were at $1.3167, giving the renewable fuel a 13-cent premium.

Ethanol prices are not likely to get any cheaper anytime soon, unless gasoline prices start to rise.

Luckily for consumers, it shouldn’t affect them too much at the gas pump. Scott Irwin, professor of agricultural economics at the University of Illinois, said it’s a possibility prices could rise at the retail level because there’s been about a 30-cents-per-gallon swing in the cost of ethanol. But that may only translate to about a 3-cents-per-gallon increase when filling a tank, since ethanol represents only 10% of the fuel.

What else might be causing higher ethanol prices? It could be the Renewable Fuels Standard passed by Congress in 2005, said Don Roose, president of US Commodities, an agricultural consulting firm.

“By mandating that 10% of the gas has to have ethanol in it, we have an artificial place to put ethanol,” he said. “That’s the dominant reason [for higher prices].”

The corn-based ethanol mandate has lost many of its champions in the past few years, and there have even been moves to get rid of it.

Most famously, such arguments cropped up during the rise of commodity prices in 2008 ahead of the credit crisis, and again in 2012 when a midwestern drought decimated corn supplies.

There’s currently another attempt to get rid of the mandate afoot in the Senate, with senators Dianne Feinstein, of California, and Pat Toomey, of Pennsylvania, leading the charge.

On 16 January, they introduced the Corn Ethanol Mandate Elimination Act of 2015 as an amendment to the Keystone XL Pipeline Act. Feinstein proposed a similar act in 2013.

“This bill is a simple and smart modification of the Renewable Fuel Standard program. Once we remove the corn ethanol mandate, the RFS program can finally serve its intended purpose: to support the development of advanced, environmentally friendly biofuels like biodiesel, cellulosic ethanol and other revolutionary fuels,” Feinstein said in a press release about the measure.

Mike Zuzolo, president of Global Commodity Analytics and Consulting, suggested it might gather a little more traction this time around.

“It has a better chance of passing because of the lower gasoline prices ... When gasoline prices are high, the legislators do not want to monkey around with ethanol. When corn prices are high and gas prices are low, they want to monkey around with the ethanol mandate. We’re in an environment where ethanol is not looked on as favorably as the last 10 years. The ethanol people know that,” he said.

Irwin, though, said there’s little chance of it happening.

“I only say this half-jokingly, but the RFS will be changed or repealed over the dead, cold, clammy, dead body of Senator Chuck Grassley of Iowa ... Ag politics are geographical, not along party lines. The senators who most strongly favor ethanol are in an even more powerful position after the last election,” Irwin said.

And there’s one thing everyone seems to agree on: Even if the Feinstein amendment passes, it may not matter.

We’re stuck with corn-based ethanol, like it or not. The one thing ethanol still does is comply with the need for cleaner-burning fuel under the 1990 Clean Air Act, which requires major metropolitan areas to have an oxygenate added to gasoline to help with smog.

The US doesn’t make enough oxygenate substitutes to replace ethanol at the scale we use it now. Before ethanol, the fuel additive MTBE was used, but that has effectively been banned.

Plus, with energy prices so low, there’s less urgency to develop alternative fuels, Zuzolo said.

“With ethanol prices sliding, it’s harder to find new alternatives. The research and development is so cost-intensive,” he said.

There is some push to have the mandate tweaked to lower the levels of ethanols that make it into the gasoline supply. The Environmental Protection Agency is seeking comments about reducing the mandated amount of ethanol for 2015. In 2014, 14.4bn gallons were supposed to be blended, based on the mandate, with that number rising to 15bn in 2015.

But because of low gasoline demand, only 13bn was blended, which was the 10% limit.

Irwin said he personally thinks the EPA will keep the mandate as is and not lower it, based on current public comments.

With ethanol prices sitting above those of gasoline, it is harder for ethanol refiners to turn a profit, and many of them are even starting to lose money. To cover their costs, refiners may need to keep ethanol prices high as long as the Renewable Fuels Standard remains, Zuzolo and Irwin said.

“The trick for the energy industry is to find the minimum price for ethanol that will keep … ethanol flowing to them, but it also has to be high enough to at least cover the variable costs and somewhat more than that for domestic ethanol producers,” he said.