INSIGHT: US energy policy on ethanol a sad tale of confusion

22 June 2010 18:09  [Source: ICIS news]

By William Lemos

US ethanol makers desperate for higher blend mandateHOUSTON (ICIS news)--In a land where superlatives are a way of life, none rings as true these days as when Americans talk about how much the country depends on energy it does not produce.

With only 5% of the population, America consumes around 22% of the world’s crude supply, gobbling more than second-ranked China and third-ranked Japan put together.

Much has been said in Washington in the last 30 years about energy security. But the US seems to take two steps back for each step forward every time it tries to deal with its energy problems.

Ethanol is a prime example. After a promising start five years ago, fuel ethanol has gone from hero to villain and today probably ranks as the most controversial energy issue in America - excluding, of course, offshore drilling in the wake of the BP spill.

Who is to blame?

It depends on who you talk to. Ethanol makers say they have been persecuted by the oil and food industries because the former is losing market share to the biofuel and the latter can no longer buy corn on the cheap.

Critics counter that US ethanol is its own enemy, citing government subsidies as evidence the industry is economically unviable. Opponents also charge that US ethanol is flawed due to its feedstock being corn, which they argue should be eaten and not used for biofuel production.

While that debate could go on forever with no clear winner, one culprit on the sidelines should not miss its share of the blame: the government, for sending mixed signals to the market.

US energy security was an important issue for President Richard Nixon in the early 1970s. In something of a tradition now, every US president since has talked about energy security but, like Nixon, has done little to address the problem.

That started to change with the mass production of ethanol, the only realistic domestic alternative the US has been able to come up with in the last 30 years to reduce oil imports.

Like a bull charging out of the pen, the US implemented an aggressive renewable fuels programme in 2005 and revamped that plan two years later, aiming to use biofuels to reduce dependence on foreign oil and greenhouse gas (GHG) emissions.

But the intensity of that initial push is in contrast to the apathy seen in the past two years, as the fate of biofuels now seems consigned to a handful of lawmakers representing states that rely on the industry.

US biodiesel makers have been hardest hit by political inertia. That industry is on the verge of collapse after a six-month delay by Congress on a vote on a subsidy extension. That delay is despite the US mandating that some 1bn gallons of biodiesel be blended in 2010.

Lack of political initiative could likewise spell disaster for the ethanol industry, which is seeking an increase in the limit of ethanol the US can blend in gasoline as well as a five-year extension to the subsidies it receives.

US ethanol is subsidised through a 45 cent/gal tax credit given to gasoline blenders for adding ethanol. But that incentive and a 54 cent/gal tariff on imported ethanol are set to expire at the end of 2010.

Industry groups last week warned that allowing the subsidy to expire could cost 112,000 jobs and force around two of every five US ethanol plants to close.

Legislation seeking an extension was introduced in April, but Congress has yet to look into the issue, said Julie Allen, a consultant with Kansas-based accounting firm Kennedy Coe.

An end to government support would also inhibit investment in second-generation ethanol production, the industry claims, saying second-generation ethanol will be vital for the US to meet its renewable fuels targets.

The ethanol industry is fighting a parallel battle to have the ethanol blending cap on gasoline lifted.

The industry wants the government to authorise blending of up to 15% (E15) to create additional demand and absorb growing production of the biofuel.

The US now restricts blending to 10% (E10), which limits the US ethanol market to around 13bn gal/year. US ethanol production last year totalled 10.8bn gal and output in 2010 could hit 13bn gal.

As with anything involving ethanol, the increase in the blend volume is a controversial issue. Opponents claim more ethanol in gasoline could interfere with vehicle performance and potentially void vehicle warranties.

The fate of higher blends rests with US Environmental Protection Agency (EPA).

The agency was originally expected to rule on the issue in December 2009, but postponed the decision to July and last week announced it was putting off the ruling until September.

Ethanol advocates have argued that a weakened US policy towards ethanol could end up leaving the country with a biofuels mandate, but without enough domestic production to meet it.

The outcome would be continued dependence on foreign crude oil with a new dependence on imported ethanol.

Not a good case for energy security there.

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By: William Lemos
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