Oil refiners make a peace offering to the ethanol industry

Oil refiners make a peace offering to the ethanol industry
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In an effort to break a nasty, decades-long political conflict between Big Corn and Big Oil, independent oil refiners are proposing an increase in the octane level of gasoline after 2022 that will both improve fuel efficiency and help bridge a deep divide over the future of ethanol use.

For an example of a profound government policy failure, look no farther than the Energy Independence and Security Act (EISA) of 2007 and its ethanol mandate. The law — with the best of intensions, of course — mandated the blending of corn ethanol into the U.S. gasoline pool to a level of 10 percent to help curb expensive foreign oil imports. Unfortunately, the law didn’t take into account the potential for technical hiccups, or unintended economic and political consequences.

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Renewable Fuels Standard (RFS) language embedded within the law assumed that cellulosic ethanol derived from nonfood plants would be invented and commonplace by around 2015. This would have allowed total ethanol usage to surge from 15 billion gallons (about 650,000 barrels of oil equivalent per day) all the way to 36 billion (1.5-1.6 million barrels of oil equivalent per day) by 2022.

 

But researchers were never able to develop market-ready cellulosic ethanol, making it impossible for refiners to adhere to the legislative mandate. This forced the EPA to become a market intervener on a grand scale. The agency limited the amount of ethanol in the market to around 15 billion barrels while expanding blending waivers for small refiners — which destroyed the demand-signals ethanol-makers in the Midwest were counting on to build their market.

Consequently, U.S. biofuel policy is a bloody mess and will likely remain so through the expiration of the current RFS law in 2022.

In the much nearer term, the conflict has begun to sap valuable political capital from the Trump administration, with Republican senators from the Farm Belt threatening to withdraw their support of administration policies if the White House does not protect farmers’ interests.

The EPA has tried to balance farmers’ interests with those of refiners, without a lot of success. More recently, however, the American Fuel & Petrochemical Manufactures (among others) put forward an attempt to cut the policy knot by recommending changing the RFS standard to a higher octane performance standard nationwide. This standard would boost the octane level nationally from its current 87- to 93-octane level — available in nearly all of the more than 100,000 retail gas stations in the United States — to 95-octane.

The new octane level would match the standard used in Europe and, because higher octane boosts the efficiency of an engine, would also add 3 percent to the fuel economy of the overall car fleet.

American-made ethanol uses roughly 40 percent of the country’s corn crop and has become an integral revenue generator in much of the U.S. Farm Belt, which has seen depressed commodities prices for the past several years. Ethanol can’t be shipped easily through pipelines and must be blended just before sending to gas stations, with refiners responsible for additional handling costs.

Meeting the 95-octane standard would be fuel-neutral, which could allow ethanol — which has an octane rating above 110 — to continue to be the predominate additive to gasoline that it is today. Yet instead of a dysfunctional, unworkable mandate, the recommendation would allow market forces to operate.

Convincing the ethanol industry to accept this offer will be hard. The industry has been attacked aggressively in recent years by the oil industry, which argues that compliance costs have gotten out of control. The auto industry hasn’t been much help either, since ethanol in high concentrations is a solvent that can damage car engines. As a result, car companies have refused to honor engine warranties using gasoline with ethanol mixes above 10 percent, angering the ethanol industry.

The Trump administration has spent a lot of political capital on the subject, with President TrumpDonald John TrumpTrump warns Iran's Rouhani: Threaten us 'and you will suffer' Pompeo: Iran's leaders resemble the mafia NYT's Haberman: Trump 'often tells the truth' MORE himself holding a number of Oval Office meetings on the issue with stakeholders in recent months. But so far, there has been no breakthrough.

What’s different this summer may simply be timing. With the Senate promising to work through the normal August recess, there may be enough floor time during the rest of the year — and enough bipartisan desire — to replace the ethanol mandate with a phased-in minimum octane requirement. Given that a transition from the RFS after 2022 is likely inevitable, it’s possible that after so many years of mistrust between the two, the ethanol industry may choose to grab the hand that the refining industry is holding out to it.

William Murray is Federal Energy Manager at the R Street Institute, a nonprofit group dedicated to promoting limited government.