Unachievable Government Ethanol Mandate Drives Gasoline Prices Higher


Gasoline pump

As noted at Reason 24/7, gas prices are going up, and federal rules mandating the use of ethanol seem to be responsible for at least part of the price hikes. Among the many, many components of the Energy Independence and Security Act of 2007was a requirement that U.S. use of biofuels increase from 4.7 billion gallons in 2007 to 36 billion gallons in 2022. The number seemed to have been pulled from the air, since nobody can really know what fuel requirements will be years in the future, although continuing growth in demand for gasoline was assumed. In fact, though, gasoline use has slid since the year the law passed, from 3,389,269,000 barrels per year to 3,185,312,000 barrels per year*. And car manufacturers advise against using gasoline blended with more than ten percent ethanol, unless the car was designed for it, which most aren't. But companies that supply gasoline are still required to increase biofuel consumption, which means ethanol, because that's what's available, so …

As the United States Energy Information Administration puts it:

With almost all gasoline in the United States already blended with 10% ethanol (E10), significant increases in domestic consumption of ethanol as required under the RFS2 over future years will be challenging unless higher-percentage ethanol blends can achieve significant market penetration. E10 was the maximum ethanol blend allowed for use in most of the vehicle fleet until 2011, when the Environmental Protection Agency (EPA) approved the use of 15% ethanol blends (E15) in all light-duty vehicles from model years 2001 or later. Many ethanol producers have been approved by EPA to sell their ethanol for blending into E15, but as of August 2012, only one retailer in Kansas had announced that it has E15 for sale.

As with most matters government-ish, there is an odd way around the dilemma of being mandated to sell something that nobody wants to buy. Gasoline companies can purchase "renewable identification numbers" also referred to as "ethanol compliance credits." Buying ethanol compliance credits is like, well, buying indulgences from the medieval church. And gas producers need a lot of indulgences as the demand for gasoline falls even while requirements for biofuel use rise. Which has driven the cost of credits from a few cents last year to over a dollar in recent weeks.

That's a big hike in the cost of production for gasoline companies even as demand drops.

Gasoline consumption
U.S. Energy Information Administration

As the New York Times reports:

Refiners have been trading so-called ethanol credits furiously in an effort to meet federal environmental mandates, helping to significantly push up the cost of those credits — a jump to more than $1 from a few pennies in the last several days, and drivers are feeling the effects, experts say.

Prices for premium gas are now about 30.2 cents over the price of regular, according to Trilby Lundberg of the Lundberg Survey. That is up from 24.1 cents in 2010 and 18.2 cents in 2000. Any increases could affect about a third of this year's car models, because premium fuel is required or recommended for them, according to Edmunds.com.

Experts disagree on the reasons for a widening gap between the costs of regular and premium gas. Reasons for the ethanol surplus are even more broadly in dispute, between producers and the oil companies. Gas companies are required under federal law to blend a certain number of gallons of ethanol into the fuel. But refiners argue that some cannot reach that requirement because they are nearing or at the so-called blend wall, the maximum percentage of ethanol in gasoline that most gas stations can handle, 10 percent. They also note that is the maximum level recommended by auto manufacturers for most cars.

Refiners blame Congress, arguing that the ethanol quota was set at a time when gasoline demand was expected to rise steadily. Instead, demand has declined, and refiners, obligated to blend more ethanol than they can actually use, have resorted to buying a lot of ethanol credits, known as renewable identification numbers (or RINs), to meet the mandated levels.

Note that the biofuel mandate also drives food prices up because ethanol is made from corn, which people and animals eat. So fuel mandates are competing with demand for food. The law actually foresaw this problem, by requiring that fuel producers start buying biofuels that isn't mafe from food crops— the use of 8.7 million gallons was required in 2012. But that generated another problem, since only 20,000 gallons were actually produced. Citing that little glitch, the U.S. Court of Appeals for the District of Columbia vacated the 2012 rules.

The EPA responded by setting 2013 requirements at 14 million gallons.

But, while all of this stupid rulemaking and spiteful bureaucracy is eminently mockable, how does it drive gasoline prices through through roof? As the Times adds:

There are two ways the ethanol credit issue could drive gas prices higher. Mr. Drevna said that refiners would probably seek to recover the cost of the credits, which were a mere seven cents or so at the beginning of this year, in the prices they charge. And Eric G. Lee, an analyst at Citi Research, said that some refiners might seek to avoid the ethanol requirement by exporting their gas, which could tighten supplies in the United States.

Questioning the wisdom of the federal government's whole biofuel mandate, Jen Alic, at the Christian Science Monitors writes:

Consumer groups are balking at a mandate they think could harm vehicles and leave car-owners stranded without insurance in the case of ethanol-related damage. All the pieces weren't put into place ahead of this mandate, and insurance companies are balking at the idea that they may have to fork out cash for any damage ethanol might cause to engines.

Unmeetable mandates involving nonexistent products, dynamically shifting markets defying lawmakers' predictions and costly bureaucratic work-arounds. Mull that over as you watch the numbers spin around at the pump.

And that's without even getting into the sad fact that the use of ethanol as fuel has driven corn prices high enough to cause riots in Mexico over the skyrocketing price of tortillas.

* I originally wrote "day" because the brain, it doesn't always work.