Fingered as one of the likely suspects in the great gasoline price caper of 2000, ethanol has some good alibis, heavyweight political support and some surprise character witnesses affiliated with Big Oil.
Yet the additive for cleaner-burning fuel, which is produced mainly from corn in the Midwest, is taking heat these days. Some critics say the Midwest’s politically inspired addiction to ethanol is one of the reasons why gasoline prices have spiked to more than $2 a gallon in the Chicago area.
No question, ethanol owes its presence in Midwestern gasoline to farm-state politics. Illinois lawmakers have long championed ethanol as a pollution-cutting addition to gasoline, and national political candidates have embraced the volatile substance to lubricate their campaigns in the heartland.
Despite gripes about its cost and questions about how well it works, ethanol has gathered enough political capital to maintain a generous federal subsidy that encourages its use–refiners get a tax credit of 54 cents for every gallon of ethanol they blend with gasoline, and consumers pay only pennies a gallon for it at the pump.
Ethanol’s alleged role in the Midwest gas-price crunch stems from the June 1 start of stricter clean air regulations in high pollution areas, including Chicago. The Environmental Protection Agency began requiring use of a new kind of fuel, called Phase 2 reformulated gasoline, or RFG-2, which in the city requires increased use of ethanol.
Refiners say that using ethanol to make this blend is more expensive than using the main alternative to ethanol, an oil-based additive known as MTBE. So ethanol, some refiners assert, is at least partly responsible for high gas prices.
But ethanol advocates and even some oil industry representatives, such as the American Petroleum Institute’s John Felmy, say that even though ethanol is more expensive than MTBE, it is at most a minor factor in the gas-price run-up.
The subsidy that ethanol receives from the federal government offsets a large part of its cost and thus limits its impact at the pump, said University of Illinois economist David Bullock.
“It costs a lot more to make fuel out of corn than to suck it out of the ground in Saudi Arabia,” yet the subsidy helps keep the price of ethanol “competitive,” Bullock said.
Monte Shaw, spokesman for the Renewable Fuels Association, a trade group for ethanol producers, pegs the cost of ethanol in a gallon of gas at about 7.1 cents in the Chicago area. Shaw said that virtually all ethanol is priced between $1.23 and $1.25 per gallon. Subtracting the 54-cent tax credit yields a cost of roughly 71 cents per gallon of ethanol to the refiner; thus the 10 percent ethanol in a gallon of blended gas costs about 7.1 cents, he said.
Since Illinois is a leading grower of corn and producer of ethanol, led by Decatur-based Archer Daniels Midland Co., it is hardly surprising that the state’s congressional delegation guards the interests of the industry.
And as Midwest gas prices have come under scrutiny, ethanol defenders are in full swing.
One prominent booster, House Speaker Dennis Hastert, has called on the EPA to grant even more federal support for ethanol. The Illinois Republican is proposing a carbon monoxide credit for ethanol, which he said would cut prices by 15 cents a gallon. He and others also have asked for a temporary waiver on the RFG-2 requirement to provide relief to Midwest gas buyers.
As usual in ethanol politics, requests for special breaks on behalf of the fuel additive are couched in terms of the benefits for everyday folks. Hastert, for instance, beseeched the EPA to act on his plan immediately, “because folks who need to get to work, do chores on the farm, take the kids to day care or go on a family vacation can no longer wait for this much-needed relief at the gas pump.”
However, if ethanol accounts for such a small part of the cost of gas, as Shaw and other advocates contend, then the opportunities for making it a big part of a gas-price relief plan appear to be minimal.
Meantime, Shaw is floating a plan for adding an even greater proportion of ethanol into area gasoline than the current 10 percent.
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“Illinois is swimming in ethanol, so refiners should be able to increase the fuel supply by blending more with the gasoline,” Shaw said.
Not surprisingly, the American Petroleum Institute’s Felmy says the idea of putting more ethanol and less petroleum into gasoline blends is way off the mark.
“It’s not that simple,” Felmy said. “Preparing the right mixture is more complicated.”