LUFT: Market-based future for ethanol

Domestic product is critical insurance policy against oil shocks

For years, ethanol has been the fuel free marketers loved to hate. Much of this is for good reason. Ethanol represented what most Americans dislike about Washington: undue government intervention in the free market, abuse of taxpayer dollars and political favoritism. The result is that for many people, ethanol is identified with pork and corruption rather than with energy security.

But as of January 2012, Congress has ended the 30-year practice of putting $6 billion a year,known as the Volumetric Ethanol Excise Tax Credit, into the pockets of big oil companies for the ethanol blended into our fuel. Also finished is the 54-cent-per-gallon import tariff on Brazilian sugarcane ethanol. Now that ethanol has lost these protectionist measures, intellectual consistency warrants that free marketers continue to make wrong right. Unsubsidized ethanol should be able to compete with unsubsidized gasoline, methanol and other fuels at the pump so consumers can choose to purchase the cheapest fuel. Today, this cannot be done since most of the cars sold in the United States are blocked from burning anything other than gasoline.

At current oil prices, ethanol is more costly than gasoline while the alcohol fuel methanol, primarily made from natural gas, is cheaper than gasoline on a per-mile basis. But the comparative per-mile economics of ethanol could easily improve if, as a result of a war in the Persian Gulf, the fall of the House of Saud or collapse of Nigeria, oil prices were to soar into uncharted territory. Ethanol contributes more to the U.S. automotive fuel market than the oil we import from Saudi Arabia since the industry sustains nearly a half-million high-paying American jobs.

Aside from that fact, ethanol should be viewed as an insurance against economically devastating oil shocks that will hit us again sooner or later. According to Merrill Lynch, by adding supply to the fuel market in the summer of 2008, when oil reached $147 a barrel, ethanol was responsible for keeping the price of oil 15 percent lower than where it would have been otherwise. The savings to the U.S. economy that year alone far outweighed the subsidies the industry had enjoyed.

Congress should remove barriers to fuel competition so a variety of fuels, including ethanol, can be blended at any ratio consumers wish to pour into their tanks. An open fuel standard would ensure new cars sold in the United States have flexible fuel engines designed to run on any combination of gasoline, ethanol and methanol. According to General Motors, adding fuel flexibility to a new gasoline-only automobile costs about $70. All that it takes is a fuel sensor and a corrosion-resistant fuel line, since alcohol is more corrosive than gasoline. For such a minimal cost, consumers would be able to shift to competitive fuels on the fly next time oil prices go through the ceiling.

Ethanol trading also deserves the benefit of free competition. Congress did the right thing in removing the import tariff, opening the U.S. fuel market to ethanol made in friendly Brazil, as an alternative to petroleum from hostile countries. Lawmakers should now take on the equally scandalous environmental shell game that forces U.S. ethanol producers to export their product to Brazil rather than sell it domestically.

The United States exports ethanol to Brazil while Brazil imports it from the U.S. This paradox stems from a ruling by both the U.S. Environmental Protection Agency and the California Air Resources Board that producing sugarcane ethanol results in lower greenhouse gas emissions than producing corn ethanol. As a result, California, the largest ethanol-consuming state outside of the Midwest, imports sugarcane ethanol from Brazil rather than corn ethanol from the Midwest. In turn, corn ethanol from the Midwest is shipped to the Gulf of Mexico by rail and then to Brazil via tankers to replace the volume Brazil sends to the U.S.

Even if the EPA is correct that the production of sugarcane ethanol emits less greenhouse gas, the ruling results in burning a gigantic amount of marine fuel in the process of shipping corn ethanol 6,200 miles from Houston to Brazil while a roughly equal amount of sugarcane ethanol travels 8,400 miles in the opposite direction from Brazil to California. The EPA’s flawed accounting scheme, therefore, results not only in an unnecessary and costly exchange but also in much higher emissions. Removal of this discriminatory ruling would reopen the California market to Midwest ethanol, shortening the transportation distance from plant to market by more than 7,000 miles, hence cutting consumers’ refueling costs.

Ethanol is not a perfect fuel, but neither is gasoline. Let’s open the market to a variety of liquid fuels and let consumers decide which to use in their tanks. Now that ethanol opponents have achieved victory, it remains to be seen whether they can maintain their commitment to free markets. They can do so by fighting policies that discriminate against ethanol with the same vehemence they employed in fighting those measures favoring it.

Gal Luft is director of the Institute for the Analysis of Global Security and an adviser to the United States Energy Security Council.