The Ethanol Death Spiral
The cost of ethanol affects each American every time they fill up their car’s gas tank.
Unless something gives, it’s cost will soar ever higher and higher each year for at least the next decade. Crop land and government folly will conspire to cost all of us dearly at the pump AND at the grocery store.
An insightful graph on the subject came out today from the EIA. It’s in the EIA’s daily publication, Today in Energy, and has the exceptionally boring title, “U.S. ethanol production and the Renewable Fuel Standard RIN bank“.
Don’t judge a ‘Today in Energy’ by its title. In these tough economic times, it is anything but boring when it hits you square in the pocketbook! This pretty little graph is scary stuff.
Innocent into Insidious
At the surface it’s innocent enough. Last year’s drought devastated the Midwest’s corn crop and as a result gasoline producers had to “spend” banked RIN’s to meet their RFS targets… whatever all that means.
Corn is the primary source of ethanol blended into U.S. gasoline.
RINs are ethanol renewable identification numbers. They are what the ever-popular EPA uses to exactly define how much ethanol each gasoline producer blends into gasoline sold in the United States. RFS targets are the national Renewable Fuel Standards set forth in laws passed in 2005 and revised in the Energy Independence and Security Act (EISA) of 2007.
Those laws were created to reduce U.S. dependance on foreign oil.
That doesn’t sound so bad, does it? Read on…
The RFS ‘target’ isn’t a gentle little target at all. It is a federal mandate. Producers who fail to meet their target are fined by the EPA! Guess who pays those fines? Yup, YOU at the pump!
The EPA generously allows gasoline producers to “bank” any overproduction of ethanol in years of plenty and spend them as RINs in years of drought, like last year. 2012 is the first time banked RINs had to be spent. (they show up in yellow in the pretty graph above)
The Problem with the Federal Mandate
The federal government has a knack for requiring things without any regard to cost nor practical reality. They do it all the time.
For example, the unanticipated skyrocketing cost of Obamacare will be pushed off onto state governments over the next few years. Where will that money come from? Yup, increases in YOUR state taxes.
In the case of ethanol, the federal government mandates that the RFS target increases each year to 36 billion gallons by 2022. That is what the little red lines in the pretty chart show.
The federal ethanol mandate for 2013, which might not be met, is 14 billion gallons. In just 9 short years, that amount MUST increase by two and a half times!
Before 2005, less than 2 billion gallons of ethanol additives were produced. In 2011, 40% of the U.S. corn crop went to produce gasoline.
The government’s folly in it’s ethanol mandate is that it is disconnected from gasoline consumption. 36 billion gallons will be required in 2022 no matter what. If gasoline consumption goes down through more efficient cars or through conservation or with fewer cars on the road, it won’t matter.
Corn Pulled Like Taffy
The U.S. is the world’s largest corn producer. Corn production is pulled in these vital, but competing directions:
- Ethanol production
- Livestock feed
- Fight global hunger
- U.S. food production
With so many competing entities, the price of corn is rising. During last year’s drought the United Nations frantically urged the United States to temporarily ease its ethanol mandate in order to save enough corn to prevent people in 3rd world countries from starving. The U.S. government promptly ignored that request.
Another thing, where is all the additional crop land to more than double ethanol production over the next 9 years going to come from?
The EPA, in its infinite wisdom, has a partial solution… import sugar cane and/or replace gasoline with biodiesel!
Who is gonna pay for those increased costs? Bingo! Right again… YOU are!
It is impossible to meet the federal ethanol mandate over the next 9 years. Heck, it isn’t even tied to consumption. The only hope to meet the mandate is for a lot more inefficient internal combustion engines be put on the road so that more gasoline is sold. That makes no sense at all!
The federal government believes it can legislate innovation through mandates that will goad reluctant private-sector companies into meeting unrealistic goals. The federal government is wrong.
Average citizens will be made to pay for a well-intentioned, but now unneeded government mandate. It will cost both at the grocery checkout line and at the gas pump. If 2012 is any indication, the EPA plans to let the 3rd world starve.
When citizens can no longer afford it, just like U.S. Senator Max Baucus predicts for Obamacare, there will be a huge ethanol train wreck.