The oil blowout will mean more subsidies for the ethanol industry. That's bad news for consumers.

Commentary about business and finance.
June 10 2010 12:14 PM

The Ethanol Trap

The oil blowout will mean more subsidies for the corn-fuel industry. That's bad news for consumers.

Read Slate's complete coverage of the BP oil spill.

Corn.
Corn-ethanol producers are lobbying for a bailout

The most disgusting aspect of the blowout in the Gulf of Mexico isn't the video images of oil-soaked birds or the incessant blather from pundits about what BP or the Obama administration should be doing to stem the flow of oil. Instead, it's the ugly spectacle of the corn-ethanol scammers doing all they can to capitalize on the disaster so that they can justify an expansion of the longest-running robbery of taxpayers in U.S. history.

Listen to Matt Hartwig, communications director for the Renewable Fuels Association, an ethanol industry lobby group: "The Gulf of Mexico disaster serves as a stark and unfortunate reminder of the need for domestically-produced renewable biofuels." Or look at an advertisement that was recently placed in a Washington, D.C., Metro station: "No beaches have been closed due to ETHANOL spills. … America's CLEAN fuel." That gem was paid for by Growth Energy, another ethanol industry lobby group.

The blowout of BP's Macondo well has given the corn-ethanol industry yet another opportunity to push its fuel adulterant on the American consumer. And unfortunately, the Obama administration appears ready and willing to foist yet more of the corrosive, environmentally destructive, low-heat-energy fuel on motorists.

Why does the ethanol business need federal help? The answer is so disheartening that after five years of reporting on the corn-ethanol scam, I find it difficult to type, but here goes: The corn-ethanol industry needs to be bailed out by taxpayers because the industry was given too much in the way of subsidies and mandates. And now the only way to solve that problem is—what else?—more subsidies and mandates. The BP mess provides the industry with the opening it needs to win those subsidies from the federal government.

In its 2005 energy bill, Congress dramatically increased the mandates (and subsidies) for corn ethanol. That resulted in a surge of new construction. Led by German financial giant WestLB AG, banks poured billions of dollars into new distilleries, which quickly created an ethanol bubble that mirrored the U.S. real estate bubble. Over the past five years, U.S. ethanol production capacity has more than tripled and now stands at more than 13 billion gallons per year. But that's far more capacity than the U.S. motor fuel market can absorb. In March, nearly 1 billion gallons of ethanol production capacity was sitting idle. And yet, according to the Renewable Fuels Association, the industry has about 1.4 billion gallons of additional distilling capacity under construction.

The bankruptcy court is the best place to comprehend the oversupply of ethanol. Over the past 18 months or so, bankruptcy casualties have included VeraSun, the second-largest producer in the United States; Pacific Ethanol; Aventine Renewable Energy; and others.

In industry parlance, the corn-ethanol sector is facing a head-on collision with the "blend wall." Ethanol producers depend on gasoline sales because their product must be mixed with conventional fuel. But thanks to the recession and the end of Americans' love affair with large SUVs, U.S. gasoline demand is flat or declining. That has left a smaller pool of gasoline to absorb all the alcohol the ethanol industry is producing. Or as Bob Dinneen, the president of the Renewable Fuels Association, has put it, "[W]e have lots of gallons of ethanol chasing too few gallons of gasoline."

Now the industry is counting on a president beleaguered by the made-for-TV crisis in the Gulf of Mexico to help it out. And he appears ready to do just that. On April 28, six days after the Deepwater Horizon rig sank, President Obama visited an ethanol plant in Missouri and declared that "there shouldn't be any doubt that renewable, homegrown fuels are a key part of our strategy for a clean-energy future." Obama also said, "I didn't just discover the merits of biofuels like ethanol when I first hopped on the campaign bus."

The strongest indication that an ethanol bailout is imminent came last Friday when Agriculture Secretary Tom Vilsack (former governor of Iowa, the nation's biggest ethanol-producing state) said, "I'm very confident that we're going to see an increase in the blend rate."

The "blend rate" refers to the federal rule that limits ethanol blends to no more than 10 percent for standard automobiles. Commonly known as "E10," the fuel contains 90 percent gasoline and 10 percent alcohol. The Obama administration bailout, which would come via approval from the EPA, will likely allow gasoline retailers to blend up to 15 percent ethanol into U.S. gasoline supplies.

And that's where the corn-ethanol mess becomes truly outrageous and depressing. The United States now has about 250 million motor vehicles. Of that number, only about 7.5 million are designed to burn gasoline containing more than 10 percent ethanol. And there is evidence that even 10 percent ethanol may be too much for the other 242.5 million. Last year, Toyota recalled more than 200,000 Lexus vehicles because of internal component corrosion that was caused by ethanol-blended fuel.

In addition to problems with their cars, consumers may soon find that more ethanol in their gasoline will result in the fouling of smaller engines. The Outdoor Power Equipment Institute, which represents companies that make lawnmowers, snowblowers, chainsaws, and the like, opposes the bailout of the ethanol industry. It says that increasing the amount of ethanol in gasoline "could damage millions of forestry, lawn and garden, and other small engine products currently housed in consumers' garages."

An increase in the ethanol blend rate is opposed by one of the oddest coalitions in modern American history. Last year, more than 50 groups—including the Sierra Club, National Petrochemical and Refiners Association, Competitive Enterprise Institute, Grocery Manufacturers Association, Friends of the Earth, National Chicken Council, and the Association of International Automobile Manufacturers—signed a letter that was sent to Vilsack, EPA administrator Lisa Jackson, Energy Secretary Steven Chu, and Obama's energy advisor, Carol Browner. The coalition members said that they oppose "any administrative or legislative efforts to increase the current cap on the amount of ethanol permitted to be blended into gasoline" until "comprehensive testing programs" have been done.

The damage caused by increasing use of ethanol won't be limited to ruined boats, snowblowers, weed whackers, and lawnmowers. The EPA itself has admitted that increased use of ethanol in gasoline will result in worse air quality. You read that correctly: The agency in charge of protecting the environment in America concluded in April 2007 that total emissions of key air pollutants such as volatile organic compounds and nitrogen oxides will increase because of expanded use of ethanol. (Read the key EPA document here.)

Yes, it's madness. And none of this even considers the effect that the ethanol rip-off is having on food supplies. Earlier this year, the Earth Policy Institute estimated that in 2009, the U.S. ethanol industry consumed 107 million tons of grain, or about 25 percent of total domestic grain production. That amount of grain, said the Institute, "was enough to feed 330 million people for one year at average world consumption levels."

BP's disaster in the Gulf of Mexico will force the offshore oil and gas industry to dramatically improve its safety procedures. That's a good thing. But if it only serves to strengthen the corn-ethanol industry, it will be a squandered opportunity, and another tragedy for the nation.

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