Sometimes the only way to show how bad a policy is, is to have the market show you (from the NYTimes):
Two years ago, Congress ordered the nation’s gasoline refiners to do something that is turning out to be mathematically impossible.
To please the farm lobby and to help wean the nation off oil, Congress mandated that refiners blend a rising volume of ethanol and other biofuelsinto gasoline. They are supposed to use at least 15 billion gallons of biofuels by 2012, up from less than seven billion gallons in 2007.
And two years ago, I pointed out what a bad idea this is...
But nobody [including yours truly] at the time counted on fuel demand falling in the United States, which is what has happened during the recession. And that decline could well continue, as cars become more efficient under other recent government mandates.
Since many of the problems I pointed out with ethanol policy centered around the impact on the demand for food and energy, decreases in both would be a good thing, right? Well, not exactly...
At the maximum allowable blend, in which gasoline at the pump contains 10 percent ethanol, updated projections suggest that the country is unlikely to be able to use all the ethanol that Congress has ordered up. So something has to give.
“The market is full,” said Jeff Broin, chief executive of Poet, a company in Sioux Falls, S.D., that produces ethanol.
Damn markets...
In theory, the Environmental Protection Agency has the power to solve this problem by tweaking the mandates imposed by Congress, and it may act as early as next week.
Uh oh, here come policy solutions to fix bad policy. First a bad policy solution...
Each potential solution would anger one interest group or another, so the agency has been subjected to fierce lobbying, including from members of Congress lining up behind various factions. One possibility is to raise the maximum proportion of ethanol in gasoline to 15 or 20 percent.
But that idea is opposed by some carmakers and pollution experts. They contend that high ethanol blends can cause damage to cars, including making catalytic converters run hotter.
The Alliance of Automobile Manufacturers says it believes this could cause the converters, components that help control pollution, to fail at around 50,000 miles. They are supposed to last for 120,000 to 150,000 miles. “We are sensitive to the issues facing the ethanol industry, but the government must make decisions based on sound science,” said Dave McCurdy, president and chief executive of the alliance, in a letter to the E.P.A.
Now a good policy solution...
Another possibility is that the agency could waive the mandates requiring use of a large volume of biofuels.
Can anybody guess what's coming next?
But that would anger farmers, who sell a great deal of corn to ethanol factories, and the members of Congress who represent them.
Oh, God forbid we remove farm subsidies. Next thing you know they'll claim it would hurt companies making bad investments in ethanol technologies...
It might also undermine the efforts of companies that are investing millions in factories to make ethanol from waste materials, like corncobs, straw and garbage.
See, told you so...
“Ethanol is the only viable, competitive alternative to foreign oil,” said Tom Buis, chief executive of Growth Energy, the ethanol trade group that filed the petition with the E.P.A. to increase the blending percentage. “If we’re going to become less dependent on foreign oil, we’ve got to move forward.”
How about a wait and see solution...
A third possibility is that the E.P.A. could announce that it is waiting for more data on how cars perform at higher blends, but that would merely put off the hard decision.
When Congress wrote the rules, in 2007, gasoline consumption had been growing for years, and it looked as if the nation would be able to use considerably more ethanol in the future. Gasoline consumption hit a peak of 3.4 billion barrels that year.
But gasoline demand fell in 2008, after soaring gas prices early in the year were followed by the economic crisis. Consumption was slightly less than 3.3 billion barrels last year, and it could end 2009 at about the same level.
With consumers buying more fuel-efficientcars these days, and carmakers rushing to bring even more of those to market, gasoline demand may not recover much in coming years, even as ethanol production soars.
Do we really want gasoline demand to 'recover'? I thought the point was to reduce gasoline consumption. Are you telling me that Congress put in place an ethanol policy under the guise of reduced dependence on fossil fuels that relies on increased demand for gasoline to be viable?
As of yet, not all gasoline is blended with 10 percent ethanol, but that saturation point is rapidly approaching. Under the present rules, the nation could hit the upper limit of its ability to consume ethanol in 2011.
Mr. Buis and others argue that Congress or the E.P.A. must do something if the country is to move to a new generation of biofuels that do not compete with food crops. The possibilities include ethanol made from wood chips, waste paper or agricultural waste like straw and corncobs.
Congress has also passed mandates for the blending of this type of fuel, so that the nation’s total consumption of all renewable fuels, in vehicles and other equipment, is supposed to reach 36 billion gallons in 2022.
Perhaps the easiest way for the country to absorb all the excess ethanol would be to make wider use of an ethanol blend called E85, which contains 85 percent ethanol and 15 percent gasoline. Most cars on the road cannot use it, but in recent years, millions of “flex-fuel” cars have been sold, especially by General Motors. (Any car with a yellow gasoline cap can use E85.)
AHA! I've got an idea! Maybe the government should bailout GM so that it can produce cars that run on E85. What's that? They already did? Oh.
The problem is that at current prices, E85 does not make economic sense for drivers, and most of them use regular gasoline in their flex-fuel cars. That means gasoline stations have little incentive to install pumps for E85. The fuel can be found in the Corn Belt but is not readily available elsewhere in the country.
Pffft. Since when did a little thing like 'economic sense' stop Congress from enacting bad policy?
Gasoline was selling on average Thursdayfor $2.63 a gallon, while E85 was selling for $2.23 a gallon. That might make E85 sound like a bargain, but cars go fewer miles on a gallon of ethanol than of gasoline. Adjusted for that factor, E85 on Thursday was effectively 31 cents a gallon more expensive than gasoline.
A return of $4 gasoline might change things, by making E85 a relative bargain and spurring wider use. So would an unexpected spurt in total fuel demand. Otherwise, it is not at all clear how the nation’s coming surplus of ethanol can be absorbed.
You mean a gas tax would help? Whodathunkit*?
Gregory M. Scott, executive vice president of the National Petrochemical and Refiners Association, drives a flex-fuel car in the Washington area, but said he had never put E85 in it.
He said the amount of renewable fuel that Congress had mandated refiners to use, and the amount that can be blended for conventional automobiles, were on a collision course.
“At some point,” he said, “those two lines cross.”
Don't cross the streams!
*Hint: Use the search engine to the right to search Env-Econ for 'gas tax' or 'Pigou Club'...
