Ethanol Fraud and Why You Pay More at the Pump

Ethanol Fraud and Why You Pay More at the Pump

REUTERS/Joshua Lott

Why in the world is the government still forcing ethanol down the gas tanks of American consumers? Ethanol was meant to help clean up the air and to keep gasoline prices in check. It does neither. Instead, it degrades the environment and is currently boosting gas prices. Talk about a teachable moment. No program could better explain why so many Americans oppose Big Government.   

Most Americans probably assume that corn-based ethanol is “green” -- it is not.  Numerous studies have shown that ethanol use does not significantly lower emissions, but instead actually harms the environment. That conclusion has led numerous green groups to abandon their earlier support for ethanol.

In 2011, Greenpeace and the Clean Air Task Force (in conjunction with several business and farm organizations) requested hearings on the Renewable Fuel Standard that mandated ethanol use. In a letter to Senators Inhofe and Boxer, they cite a study by The National Academy of Sciences, which found “that using corn ethanol in engine fuel is increasing air pollutants, exacerbating global warming, degrading water sources, and damaging biodiversity.”  

Production of ethanol requires enormous amounts of (sometimes scarce) water. A Salon piece last year reported, “The World Policy Institute has calculated…that it takes 32 gallons of water to produce enough oil to drive from New York to D.C. and back again. The production of enough corn-based biofuel to fuel the same drive requires more than 35,000 gallons of water”.

Another problem is that the fertilizers spread on corn-growing acreage pollute streams feeding the Mississippi watershed and the Gulf of Mexico. On their website, Friends of the Earth reports, “Chemical runoff from corn fields is a primary cause of the “dead zone” in the Gulf of Mexico — an aquatic area the size of Massachusetts so polluted that nothing can survive in it.” Further, the nitrogen in fertilizer also releases nitrous oxide, a more toxic substance than CO2, into the atmosphere. So much for ethanol as a clean fuel.

Meanwhile, instead of helping to drive down gasoline prices, the mandate is doing exactly the reverse. Crude prices today of $96 a barrel (WTI) are 8.5 percent below year-ago levels, and demand for gasoline has dwindled steadily since 2007 – both factors which should be pressing prices lower. But, because refiners are struggling to comply with ethanol rules built for a different age, gasoline prices are stuck at sky-high levels. 

In 2005, when the government first required refiners to incorporate ethanol into gasoline sold in the U.S., and when they upped that demand by enacting the Energy Independence and Security Act of 2007, the presumption was that the U.S. was running out of oil. Demand for gasoline had hit an all-time high in 2007 and oil imports were rising. In the aftermath of 9/11 and the Iraq war, legislators searching for a way to lessen our dependence on Mideast oil not only raised fuel efficiency standards for autos and light trucks for the first time in 22 years, but also mandated that refiners blend 10 percent ethanol into the nation’s fuel mix. Environmentalists were delighted, as were the nation’s farmers. 

As it has turned out, nearly all the assumptions behind the ethanol mandate were wrong. The biggest surprise, of course, is that the U.S. is not running out of oil. After two decades during which oil prices rarely topped $25 per barrel, and following many years of decline, U.S. production fell below 4 million barrels per day in September 2005. War worries, soaring demand from China, as well as declining production here and elsewhere, finally reversed the downtrend and prices began to climb.

Crude was $21 in January 2002; in July 2008 the price peaked at $145 before crashing as the financial crisis roared through every marketplace. (Some economists have argued that the recession was actually precipitated, like other downdrafts, by that sudden ascent in oil prices.) In any event, the run-up in prices sent drillers scurrying for prospects; U.S. production rebounded and last month topped 7 million barrels per day.

That’s great news, except that consumers have yet to enjoy the benefits.  The 2007 law mandated that refiners blend 13.8 billion gallons of ethanol into the fuel they sell this year. However, since consumption has fallen short of forecasts, refiners do not need the targeted amount; as a result, they are forced to buy credits called Renewable Identification Numbers, or RINs. At an investor conference last month, Valero Energy reported that these credits were in such short supply that the price had soared from 3 cents a gallon last year to more than $1. More recently the price has drifted down to 66 cents – a cost which is being passed onto motorists.

The company pointed out that the law encourages refiners to ship product overseas where the ethanol mandate does not apply and discourages imports – raising prices in the U.S. Some say that jump in RIN prices has added as much as ten cents per gallon to the cost of gasoline.

According to a 2010 piece by Craig and Andrew Hug for the Environmental Working Group, “Between 2005 and 2009, taxpayers spent a whopping $17 billion to subsidize ethanol. In return, they got a reduction in overall oil consumption equal to an unimpressive 1.1 mile-per-gallon increase in overall fuel economy.” Now Americans are paying above-market prices for gasoline. Will the Obama administration and Congress confront the powerful ethanol lobby and undo this albatross? Not likely. Our central planners are hard at work trying to increase the ethanol in our tank. As said earlier, a teachable moment.