INSIGHT: US likely to rule in favour of ethanol

10 July 2008 16:43  [Source: ICIS news]

By Joe Kamalick

 

WASHINGTON (ICIS news)--The federal government seems certain to deny Texas Governor Rick Perry’s request for a 50% cut in the US ethanol mandate.

 

In part this is because the Texas case is weak, but mostly it is because President George Bush doesn’t want to shoot Republican presidential candidate John McCain in the back by angering crucial corn belt states.

 

The Environmental Protection Agency (EPA) is to rule by 23 July on the Texas request, which Perry filed with the agency in late April on grounds that corn-based ethanol production - spurred on by federal mandate - is causing economic harm to his state. 

 

The Texas governor urged EPA to chop the 2008 ethanol mandate of 9bn gallons by half because, he said, ethanol-driven demand for corn triggered “skyrocketing” increases in prices for both human foods and livestock feed, causing harm to consumers and the Texas cattle industry.

 

Perry is entitled to make the reduction request because under the Energy Policy Act of 2005 the EPA has authority to waive that law’s renewable fuel standard (RFS) if the ethanol mandate is causing significant harm to a state or region.

 

The Texas governor got support for his appeal from the National Petrochemical & Refiners Association (NPRA) which has long advocated a repeal of the renewable fuel mandate.

 

“NPRA supports the sensible and workable integration of alternative fuels into the marketplace based on market principles that allow each fuel option to seek its true value and optimum level of use,” the refiners’ trade group said in a public comment in favour of the Texas waiver request.

 

“NPRA opposes, however, the mandated use of alternative fuels,” the association said, adding: “There is no free market if every gallon of biofuels - including those that do not exist - is mandated.”

 

The reference to nonexistent biofuels is to the fact that US corn ethanol production is now around 8.5bn gal/year, somewhat shy of the 9bn gallons that federal law says that refiners should blend into gasoline stocks this year alone. 

 

Under the 2007 Energy Independence and Security Act (EISA), US consumption of biofuels is to reach 36bn gal/year by 2022, including 16bn gallons of cellulosic ethanol - for which viable commercial production capacity has yet to develop and a target that even the US Energy Department says cannot be met.

 

As might be expected, the US ethanol trade group, the Renewable Fuels Association (RFA), opposes the Texas waiver request, along with the Corn Growers Association and the National Farmers Union and a couple of thousand others who filed comments against Texas with the EPA.

 

The RFA probably has a winning argument, however, just on the basis of the law.

 

As RFA president Bob Dinneen noted in his letter to the EPA, to obtain a waiver of the renewable fuels mandate, Texas must show (1) that there is severe harm to its economy, (2) that the damage done is due to the ethanol mandate and (3) that ending the mandate would eliminate the problem.

 

Dinneen argues that the claimed impacts to the Texas livestock industry would make up a small fraction of the $1,100bn (€704bn) Texas economy and is probably offset by lower retail gasoline prices due to the ethanol mix in the state’s fuel supplies.

 

He also contends that there is no evidence that the renewable fuel standard alone caused the higher corn prices of which Governor Perry complained and that high oil prices and the weakened US dollar are culprits as well. 

 

Lastly, Dinneen charges that Texas has not shown that cutting the renewable fuel mandate by 50% this year would necessarily lower corn prices - a demonstration needed under the law to warrant a waiver.

 

On those grounds alone, the ethanol industry would probably win the waiver fight against Texas.

 

But there is a lot more.

 

The US national elections are less than four months off, and if Republican presidential candidate Senator John McCain has any hope of winning the White House he’ll need full support from traditionally Republican farm country in the Midwest.

 

It is there that most US corn is grown, with as much as 30% of this year’s crop likely to be ethanol feedstock.

 

In the US corn belt, the states of Iowa, Indiana, Illinois and Ohio account for 50% of the nation’s corn production annually.  Another eight states - South Dakota, Nebraska, Kansas, Minnesota, Wisconsin, Michigan, Missouri and Kentucky - also produce a lot of corn and would be significantly affected if the administration were to set aside the ethanol mandate.

 

Simply put, killing off the ethanol mandate would put a torpedo in Senator McCain’s already leaky election campaign.

 

Kevin Book, senior vice president for energy policy, oil and alternative energy at FBR Capital Markets, contends that the law favours the ethanol industry in this instance. n addition, “anyone making a politically unpopular decision in the absence of indisputable fact is going to have to answer to a large, vocal, organized and empowered voting block in November”.

 

($1 = €.64)

 

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By: Joe Kamalick
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