Ethanol is Costing Consumers
Some have said ethanol should lead to decreased gasoline prices, but it's actually doing the opposite...

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We’re going to talk about ethanol, so I might as well start by saying it’s a real pain in the you-know-what.

The only good piece of news is for ethanol makers, and it's that the price of corn is down this year. But even that makes ethanol a sappy, sad case. We’re shoving cheap corn into our fuel, while millions of people in the world go hungry every day.

cornEthanol, an alcohol-based fuel made by fermenting and distilling starch crops – mostly corn – was invented as a replacement for MBTE, the gasoline additive that could potentially be cancer causing and was phased out starting in 2000.

But ethanol won’t soon be outdone.

From 2005 to 2011, the ethanol industry was on fire and saw growth annually, according to The Wichita Eagle. So naturally, farmers began to plant more corn, and in turn, environmental groups began to raise questions about ethanol. Pretty soon, the ethanol industry had pushed the cost of corn and other grains through the roof, and those farmers were singing their praises.

As for everyone else that relies on corn – your cattle and chicken farmer, and even your soda maker – they all experienced rising costs and suffered because of it.

It was in 2005 when Congress created the Renewable Fuel Standard (RFS), a government mandate that required all refiners of gasoline to buy ethanol at an increased rate every year until 36 billion gallons are purchased by 2022, according to The Wichita Eagle. The goal was to strengthen the U.S. fuel industry, reduce foreign oil dependency, and help the American farmer.

Okay, that’s great, but not so fast. Ethanol was supposed to be made using cellulose-heavy plants, like wheat straw or switchgrass, instead of corn – but that never happened.

And it is starting to conflict with the EPA's E10 rule, requiring that ten percent ethanol be added to gasoline. In the beginning gasoline makers were happy to throw it in there – it was cheaper than gasoline by volume. But things have changed.

Having both the RFS and the E10 limits started creating problems, and now we’re at the point where petroleum companies are forced to buy more ethanol than they need for the E10 rule to fulfill the RFS mandate. Oops.

Now it’s trickling down to the consumer, where we’re all starting to see a rise in grocery bills and prices at the pump.

The Struggle

We’ve reached the point now where all of us are contending with what they’re calling the “blend wall” – a catchy little phrase that implies we’re all facing problems due to ethanol’s volatile industry. And it's not just the consumers; the EPA, Congress, and the petroleum industry are all getting hit.

Because of it, refiners are likely to raise gasoline prices as they pay fines to the EPA. Or they’ll turn to exports, and we’ll see a shortage of domestic gasoline.

From there, smaller ethanol companies won’t survive, like the Abengoa ethanol plant that shut down in 2011 after 25 years in operation.

The RFS mandate and E10 aren’t likely to change. And though the government approved E15 last year to try and raise ethanol production, that is hitting snags along the way. People aren’t using it because many believe it is dangerous for their vehicle’s engines – so dangerous, in fact, that many auto manufacturers will void a warranty if it is used.

The petroleum industry has largely turned its back on E15. And now petroleum and ethanol are at each other’s throats.

So the EPA toned down its RFS requirements for 2013 and signaled that it will likely do the same in 2014. It cited stagnant gasoline sales and a lower than expected production of cellulosic ethanol.

But we all know what’s really going on, and the problem persists.

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The Result

Gasoline consumption is on the decline, it’s true, falling slightly in the past couple years on the heels of a wobbly economy, an increase in fuel economy, and things like electric vehicles. That decline will continue through next year.

If gas consumption goes down, ethanol production will stand still, and the industry will be left stagnated.

Petroleum companies will be buying ethanol they won’t use or Renewable Identification Numbers (RIN), issued by the EPA for every gallon of ethanol. RINs have become a market unto themselves, traded between petroleum companies and shooting up in value once overproduction became a real possibility.

Oil companies claim the only way to balance excess ethanol production is to hit us all where it hurts most: at the pump.

They could always start to move E15, but it seems that’s not really a consideration. Further federal action isn’t going to happen, either.

The Payback

After all this, it seems like ethanol has no benefit to the environment. Ethanol evaporates faster than gasoline, so it’s actually even more harmful. The EPA will even tell you that burning ethanol significantly increases ozone emissions.

The whole ethanol industry and all the government mandates that go with it are a complete debacle.

Steer clear when you hear the word “ethanol”, and focus on the electric vehicle market that is coming alive, as well as natural gas and its infrastructure that are paying big dividends.

Let’s not waste another second on ethanol.


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This Article Originally was Published here:

Ethanol is Costing Consumers originally appeared in Energy and Capital. Energy and Capital, a free daily newsletter, offers practical investment analysis in the new energy economy.
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