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Avoiding The Blend Wall

gas pumps with ethanol labels
photo by Phil Roeder

Congress writes an unworkable law. The executive branch, seeking to make a feasible something out of a legislative nothing, essentially rewrites the law. Backers of the original statute cry foul.

No, we are not talking about Obamacare - not today, anyway. But the pattern is certainly becoming familiar.

Today our topic is renewable fuels, by which I mean corn-based ethanol and its entourage of fermented yard clippings. In 2007, Congress and then-President George W. Bush decreed that we should blend an ever-increasing amount of this modestly combustible brew into our petroleum-based fuel supply. The idea was to force some of that nasty, foreign-produced, trade-deficit-inducing petroleum out of our tanks, to be replaced by clean, green, American-made hooch.

But events have not worked out the way the law’s authors envisioned. We are pumping a lot more oil now than we were just a few years ago, and we’re burning less of it in our gas tanks. Between us and our Canadian neighbors, we’re getting surprisingly close to a North America that can function entirely on its own crude oil. Meanwhile, the diversion of a big chunk of our corn supply to motor fuel has driven up feed prices for our livestock producers and land prices for young or expansion-minded farmers.

These unintended consequences probably were not enough to derail the ethanol mandate alone. But another problem looms: the ethanol “blend wall.” With quotas scheduled to rise again next year, there is a good chance that the existing rules will make us blend more ethanol into our fuel than we can actually use without damaging many of our cars and gas pumps.

So the Environmental Protection Agency has proposed bending - make that reinterpreting - the statute so it can fit into reality. According to Bloomberg, the EPA has proposed lowering the requirements for ethanol use that would have taken effect in 2014. Overall renewable fuel use would be reduced from 18.15 billion gallons to 15.21 billion gallons in 2014, while the corn-ethanol requirement would be trimmed to 13 billion gallons, compared to 2013’s 13.8 billion gallon benchmark.

Oil industry representatives have said that, if the requirements rise as scheduled, the falling demand for gasoline would mean that compliance would force them to make fuels with greater than 10 percent ethanol. However, the American Petroleum Institute reports that blends over 10 percent can cause engine problems, and that older vehicles can’t handle blends above 15 percent at all.

Opponents of the change dispute the existence of the blend wall. Anne Steckel, vice president for federal affairs at the National Biodiesel Board, said in a statement, “We’re not sure where these numbers are coming from, and it may just be wishful thinking among folks in the oil industry.”

One thing that is indisputable is the drop in gasoline consumption. When the rising quotas for ethanol were outlined in 2007, demand was projected to steadily increase. Reality, however, has not conformed to the legislation’s assumptions. This has left refiners scrambling for either credits to offset their mandatory ethanol consumption or hardship exemptions (which, for now, only one refinery has secured).

Now it is ethanol producers and farmers who may have to scramble, if the EPA’s proposal is approved. The New York Times noted that a record corn crop is expected, and “the price of a bushel has fallen almost to the cost of production.” Gas stations have reported that selling so-called “flex fuel,” blends of up to 85 percent ethanol that newer cars can handle, has been an ongoing challenge. Ethanol producers who were confident despite the lapse of a tax credit for ethanol use in 2011 are a lot less confident right now.

The truth is that ethanol has its place, but it is not at all clear that the place needs bolstering beyond market forces of supply and demand. Yet for now, we are likely stuck with at least some ethanol support. As Gina McCarthy, the administrator of the EPA, said in a news release, “Biofuels are a key part of the Obama Administration’s ‘all of the above’ energy strategy.” The president’s energy strategy has remained reactive, rather than active, making “all of the above” sound like “anything popular at the moment.” This state of affairs doesn’t leave the EPA much room to maneuver.

Even if we allow the premise that mandating ethanol makes sense at all, Congress could avoid running into the blend wall by requiring refiners to meet a certain percentage of ethanol blends, rather than requiring them to use a certain volume of ethanol. Until lawmakers act, however, the question is whether EPA and the administration have any latitude (or, in keeping with their custom, will claim any latitude) to respond sensibly.

Critics of the Affordable Care Act (like me) tend to take the administration to task for altering or ignoring parts of the law that are not workable, or at least are not workable right now. Critics of renewable fuel mandates (like me) are probably going to applaud the administration if it essentially rewrites the destructive legislation that Congress passed to placate corn farmers by filling our tanks with bathtub gin. Maybe the only party that deserves points for consistency is the administration that consistently claims the power to do what it wants.

On the other hand, consistency won’t take us very far if our cars won’t start. So let’s keep the corn on the farm, the liquor in the liquor cabinet, and gas in our gas tanks - at least until something truly better comes along.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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