We’ve seen taxpayer bailouts of Chrysler, GM and the big Wall Street banks. Now, thanks in part to the massive oil spill in the Gulf of Mexico, it’s virtually certain that the Obama administration will bail out the ethanol industry by increasing the amount of ethanol that can be blended into gasoline. That means that U.S. consumers will be compelled to buy a new blend of gasoline called E15 (containing up to 15% ethanol) that is inferior to conventional fuel. And here’s the real insult: that new fuel blend may well damage your car, boat, or lawnmower.
If you’re mad about the bailout of Goldman Sachs and the other pirates on Wall Street, get ready for the rescue of the ethanol industry and the frustration that will come with it.
The bailout of the corn ethanol industry has been brewing—or, to be more correct, distilling—since Barack Obama moved into the White House. And while the politics of the oil spill may appear to be a long tractor ride away from those that affect the corn ethanol industry, the signals that the bailout will happen are obvious. On April 28, during a speech at an ethanol plant in Missouri, Obama lauded the ethanol industry saying “there shouldn’t be any doubt that renewable, homegrown fuels are a key part of our strategy for a clean-energy future.” He went on, saying, “I didn’t just discover the merits of biofuels like ethanol when I first hopped on the campaign bus.”
But why does the ethanol business need a bailout? The answer is both obvious and painful: In 2005, Congress dramatically increased the mandates (and subsidies) for corn ethanol. That resulted in an investment bubble in new distilleries that mirrored the real estate bubble. Lenders, led by the German bank, WestLB, threw hundreds of millions of dollars at the ethanol industry. Since 2005, U.S. ethanol production capacity has more than tripled and now stands at more than 13 billion gallons per year. But the industry now faces a glut. In March, nearly 1 billion gallons of US ethanol production capacity was sitting idle. Despite this existing overcapacity, another 1.4 billion gallons of distilling capacity is under construction.
• Voices from the GulfIn short, the ethanol industry is awash is excess alcohol, or in industry parlance, it is crashing into the "blend wall." The ethanol industry depends on gasoline sales because it must mix its product with conventional fuel. But the recession has torpedoed gasoline demand, leaving a smaller pool of gasoline to absorb all the alcohol the ethanol industry is producing. In the words of Bob Dinneen, the president of the Renewable Fuels Association, an ethanol trade group, “we have lots of gallons of ethanol chasing too few gallons of gasoline.”
The oversupply of ethanol can be seen by looking at the parade of ethanol producers heading to bankruptcy court. Over the past 18 months or so, the casualties have included VeraSun, the second-largest producer in the US, Pacific Ethanol (which got $84 million from Bill Gates), Aventine Renewable Energy, and a host of others.
Rather than shutter ethanol plants and reduce production—a move that would be both obvious and logical—the ethanol scammers need the Obama administration to approve an increase in the amount of inferior, hydrophilic, low-heat-content fuel that can be blended into our gasoline. To be specific, they need the Environmental Protection Agency to approve a regulation that will allow gasoline retailers to increase the amount of ethanol that can be blended into gasoline from 10% to 15%. And thanks, in part, to the oil spill, they will get it.
Indeed, the ethanol industry is using the spill to argue for the bailout. Last Wednesday, Dinneen declared that Obama should use the accident in the Gulf of Mexico as a “teaching moment” to discuss America’s reliance on oil. He went on saying that the “juxtaposition of a green American farm field and a copper-toned oil slick spread across the Gulf is striking.” And on Friday, an Iowa ethanol producer said that the spill proves that oil production has become “costlier and riskier.”
But the real risks—and of course, the costs—of the move to E15 will be borne by consumers. Last year, Toyota recalled more than 200,00 Lexus vehicles due to internal component corrosion that was caused by ethanol-blended fuel. And American automakers are adamantly opposed to the increased use of ethanol. Last week, C. Coleman Jones, the biofuel implentation manager at General Motors, told the New York Times that tests done by the Alliance of Automobile Manufacturers showed that higher ethanol blends had resulted in problems in half of the engines that it had tested. The Times quoted Jones as saying that some car owners “will be walking, eventually,” due to problems caused by the higher ethanol blends.
Lawyers in Florida have already sued a group of oil companies for damage allegedly done to boat fuel tanks and engines from ethanol-blended fuel. Ethanol can wreak havoc on older boats, particularly ones with fiberglass fuel tanks. The Outdoor Power Equipment Institute, which represents companies that make lawnmowers, snowblowers, chainsaws and the like, says that increased use of ethanol “could damage millions of forestry, lawn and garden, and other small engine products currently housed in consumers’ garages.”
So, if you’re mad about the bailout of Goldman Sachs and the other pirates on Wall Street, get ready for the rescue of the ethanol industry and the frustration that will come with it. Pretty soon, you may head out to the garage only to find that your old lawnmower won’t start due to problems caused by the alcohol-blended fuel. If that happens, turn and bow in the direction of Iowa, the state that makes unquestioning support for ethanol a prerequisite for every presidential candidate. Then turn toward the Gulf of Mexico and acknowledge the oil spill, the political event that made E15 a reality.
Robert Bryce is a senior fellow at the Manhattan Institute. His new book is Power Hungry: The Myths of “Green” Energy and the Real Fuels of the Future.