The Politics Of Ethanol

For the past decade or so, as the ethanol industry has grown in Minnesota, Iowa and other Midwestern states, it has garnered very little attention from big oil companies, the national media or from the politicians in Washington, D.C. Now, all of a sudden, ethanol is a major news story every day, is being discussed by President Bush and congressional leaders, and is being blamed by some as a major cause of our high retail gas prices. So what has changed in the past year? First of all, the dramatic rise in crude oil prices to over $70/barrel, and the resulting retail gas price at the pump of nearly $3/gal. Also in August of 2005, Congress finally passed a comprehensive Energy Bill, after nearly two years of debate, which emphasizes domestic development of renewable energy. Now, just a few months later, President Bush and some members of Congress want to make it easier to import the ethanol from Brazil and other foreign countries as an alternative, a move that is being supported by some of the large oil companies.

Who Do You Believe?
Part of the 2005 Energy Bill that was signed into law calls for discontinuation of the use MTBE as fuel additive due to health and environmental concerns, and to replace MTBE with ethanol and other alternatives. Also, the current high crude oil prices and retail gas prices have many political leaders in Washington, D.C. calling for more flex-fuel vehicles, more consumer access to E-85 (85% ethanol) blended fuel for automobiles and more rapid acceleration of ethanol production from corn, cellulose and other sources in the next few years.

According to President Bush and others in his administration, we need to temporarily lift the 54 cent tariff on ethanol produced in Brazil to make it easier to import foreign ethanol, because the domestic shortage of ethanol is a big part of the cause of high retail gas prices. The President’s position has some bi-partisan support in Congress, particularly from the East and West Coast. Congressman John Shadegg (R-AZ) supports the Bush administration, and has introduced legislation to temporarily suspend the ethanol tariff on Brazilian ethanol, saying that the big oil companies are being unfairly blamed for the current high domestic gas prices, as compared to the domestic ethanol industry. Senator Charles Schumer (D-NY) also has urged Congress to temporarily suspend the tariff on imported ethanol, predicting that it could lower retail gas prices by up to eight cents per gallon.

On the other hand, Senator Charles Grassley (R-IA) calls the suspension of the ethanol import tariff a “step in the wrong direction,” and will signal greater investment in development of the ethanol in Brazil and other foreign countries rather than in the U.S. Also, Congresswoman Stephanie Herseth (D-SD) is concerned that we will be subsidizing Brazilian ethanol in lieu of investing in ethanol development in the U.S., and eventually will become dependent on foreign ethanol for future U.S. fuel needs, in a manner similar to today’s needs for crude oil from the Middle East. Meanwhile, other congressional leaders, such as Congressman Collin Peterson (D-MN), feel that the main concern with ethanol is the infrastructure within the U.S., and that we need to encourage the manufacture of more flex-fuel vehicles that can utilize E-85 fuel, and that we need strategies to make E-85 fuel more readily available throughout the U.S.

Ethanol Industry Facts
-According to the Renewable Fuels Association (RFA), there are currently 97 ethanol production plants operating in the U.S., with a production capacity of nearly 4.5 billion gallons a year. There are 35 new ethanol plants and nine plant additions that are currently under construction in the U.S., which will expand domestic ethanol production by another 2.2 billion gallons per year.

-According to the U.S. Energy Information Administration (EIA), U.S. ethanol production in February 2006, set a new production record at 302,000 barrels of ethanol per day, which is 14,000 barrels per day above January 2006, and 57,000 barrels per day above February 2005.

-According to RFA, the ethanol industry has been gearing up for expanded summer ethanol needs and the increasing transition from MTBE to ethanol, and currently has a 25 day inventory of ethanol in stock.

-Currently, ethanol makes up less than 4 percent of the total automobile fuel that is being used in the U.S.

-According to EIA data, the U.S. already imports a significant amount of ethanol each month, estimated at 25 million gallons in February, even with current ethanol import tariffs in place.

-Brazil currently uses nearly all the ethanol produced within the country, and has become nearly energy self-sufficient in the past three decades.

-Currently, only 650 of the nearly 180,000 retail gas stations in the U.S. offer E-85 ethanol-blended fuel.

Bottom Line
From this angle, it appears that any small, short-term improvements in the retail gas price that might potentially be achieved would not be worth the potential negative impact on continued growth and development of the ethanol industry in the U.S. that could result from proposals to lift the ethanol import tariffs with Brazil and other foreign countries. It appears that the common sense alternatives being offered by Congressman Peterson and other members of Congress from the Midwest, both Republicans and Democrats, make much more sense as a long-term energy policy for the U.S. These alternatives would not only encourage greater domestic production of ethanol and other renewable fuels, but would also improve infrastructure to increase the availability of flex-fuel vehicles, and would make E-85 fuel alternatives more readily available across the U.S.

Editors note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.