Ethanol loses Big Oil, big advocates and maybe big subsidies

Dipka Bhambhani Contributor
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If you’re wondering why your grocery bill is so high, one place to look is your car.

It’s probably running on gasoline blended with corn-based ethanol.

Demand for the corn-based biofuel, because of government mandates and federal subsidies to the ethanol industry, has contributed to a tripling of the price of corn over the past decade, to about $7.00 per bushel.

That commodity spike is being blamed in part for rising food prices, which in turn have helped spark riots and political unrest around the globe, and even political wrangling here at home.

Even though the ethanol industry stands by what it says are the positive results of subsidizing ethanol — providing 400,000 U.S. jobs, lowering greenhouse gas emissions, and replacing 364 million gallons of foreign oil with 10.6 billion gallons of ethanol in 2009 — it admits it is shaken by recent events.

Washington, D.C.-based Growth Energy is one of the country’s largest groups of ethanol producers.

Its president and chief executive, Tom Buis, said the industry is fighting battles on several fronts. It’s being blamed, at least in part, for rising corn prices and thus rising food prices. It’s fighting relentlessly on Capitol Hill to avoid losing long-time subsidies, and the ethanol industry is slowly losing support of an old ally — the oil industry.

“We’ve weathered many storms, but [all of] this is currently a huge threat,” Buis said.

The House recently passed a spending bill that includes two provisions that hamstring the ethanol industry for the first time in nearly two decades.

One provision, by Oklahoma Republican Rep. John Sullivan, prevents the Environmental Protection Agency from allowing the industry to increase the amount of ethanol per gallon of gasoline from 10 percent, called e10, to 15 percent, e15.

“It was purely political and obviously supported by [the oil industry],” Buis said. Sullivan, he said, is just supporting the oil interests of his state to the detriment of the ethanol industry.

Another provision by Arizona Republican Rep. Jeff Flake stops federal funding to install new blender pumps at filling stations. Blender pumps blend ethanol with gasoline from underground drums at the filling stations.

The reverberating shock through the ethanol industry came, however, from Iowa Republican Sen. Chuck Grassley, who has been traditionally one of the strongest supporters of federal ethanol programs.

Grassley announced that he might vote against ethanol subsidies and from moving the country from e10 to e15 in an upcoming Senate spending bill, in an effort to reduce the federal deficit.

According to the senator’s forthcoming newsletter, he says he will vote against ethanol subsidies if the Senate holds “an up-or-down vote on a significant deficit reduction package that targets a variety of programs and policies, including anti-ethanol provisions.”

Grassley adds, however, that “Ethanol is good for national security. It’s the only domestically produced renewable energy source that’s substantially reducing America’s reliance on foreign oil.”

Buis said he is confident the ethanol industry still has Grassley’s support, but knows what ethanol is up against — particularly, the oil lobby.

“Oil doesn’t want to lose market share,” Buis said. “The oil industry is not going to lobby [for ethanol].”

It wasn’t always this way, however.

The American Petroleum Institute represents oil and gas companies and some ethanol blenders. In March 2007, then-API President and CEO Red Cavaney told the Agriculture Department’s Outlook Forum, “We must resist the siren song of those who believe one form of energy can only gain at the expense of another. The challenge before us all is to oppose those who would have us point fingers.”

“Rather, we should join hands and work together to leverage one another’s strengths,” Cavaney added at the time.

Four years later, that tune has definitely changed.

Last month, API Downstream Director Bob Greco told the EPA that, “Ongoing vehicle and infrastructure research must be completed before E15 should be allowed into the marketplace so that all potential risks can be accurately assessed and adequately addressed.”

At issue is whether to allow the EPA to permit up to 15 percent of ethanol to be blended into each gallon of gasoline from its currently level of 10 percent.

The American Petroleum Institute refused requests for an interview.

“[The oil industry] is for anything unless it becomes a serious threat to their market…but once we became a serious market, you saw oil’s attitude totally change,” Buis said. “We’re not some pie in the sky energy source, we’re for real.”

If ethanol is indeed “a serious market,” and “for real,” are subsidies even necessary for the industry to survive? That’s the $6 billion question.

That’s how much blenders receive each year for mixing the ethanol into the gasoline, because of a 45-cent per gallon blenders tax credit.

Steve Ellis, vice president of Taxpayers for Common Sense, a bipartisan budget watchdog group, said the ethanol industry does not need a handout because there’s already a federal mandate to use it.

“You can either subsidize [ethanol] or you can protect it or you can mandate that it be used. In this case we’re doing all three,” Ellis said.

What Ellis refers to is that aside from the 45-cent per gallon tax credit, there is a 54-cent tariff on imported ethanol, a federal effort to thwart the import of ethanol made from Brazilian sugarcane, which is cheaper to grow than corn and arguably more efficient to burn.

Finally, the White House has stated it wants 36 billion gallons of ethanol in the fuel mix by 2022.

“If you stripped away the tax credit, it would have virtually no effect on how much ethanol we use,” Ellis said.

At this point we’re producing so much ethanol — a record 350 million gallons last year – the industry is exporting it, he said.

One long-time Washington energy analyst who spoke on the condition of anonymity said ethanol can actually thrive without a subsidy. “They don’t need a federal handout; they’re going fine now,” he said.

Ethanol subsidies were created in the 1980s and 1990s when agricultural prices were depressed. The subsidy was created to help farmers, “and buy votes in the Midwest swing states,” he said. Now the price of corn has gone up three times of what it was when the subsidy was first instituted.

As for the federal mandate that drives the demand for ethanol, the analyst said, “The mandate really exists to help corn farmers, despite the malarkey that it exists to help the environment. It does not help the environment at all. It exists to buy votes in the farm states.”