A fight between oil giants and corn farmers reached a fever pitch on Wednesday, as the oil industry used a new study to argue that increasing ethanol use in fuel will hurt consumers and the economy.
Groups representing ethanol producers fired back, saying the oil industry was trying to undermine government efforts to reduce reliance on oil-based fuels. Because most U.S. ethanol is made with corn, producers are allied with corn farmers, who enjoy an expanded market and higher prices for their crops because of ethanol demand.
The report’s predictions were dire, concluding that the federal Renewable Fuel Standard will fail because it is increasing costs for fuel makers, eventually leading to higher consumer prices and $770 billion in lost gross domestic product by 2015.
The oil industry study, commissioned by the American Petroleum Institute and produced by NERA Economic Consulting, added that government mandates requiring energy companies to buy more ethanol have created a “death spiral impact.”
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By 2015, the report said, compliance with the Renewable Fuel Standard “will likely be infeasible, which would result in significant damage to the economy.”
The “death spiral” described in the analysis involves fuel producers cutting back on the products they sell in the United States because of the high additional cost of complying with mandates to buy alternative fuels. Instead, refineries would ship more of their products overseas, slashing domestic supplies and pushing U.S. fuel prices higher, the report said.
“The Renewable Fuel Standard program is irretrievably broken,” said Bob Greco, director of the API’s downstream group, speaking on a conference call with reporters.
He called on Congress to repeal the law.
Both the API and ethanol backers said they would support a congressional hearing on the mandate.
Groups representing ethanol producers and corn farmers argued that there is plenty of room for growth in alternative fuel consumption, but that refiners are refusing to broaden their offering of the fuel in gasoline blends.
The API said the oil industry’s efforts to meet government mandates could lead to a 30 percent jump in gasoline costs by 2015.
The higher gasoline costs effectively would reduce American workers’ take-home pay by almost $580 billion, according to an API statement on the report.
At the heart of the argument is a trading system meant to support ethanol production. Each company that purchases a gallon of biofuel receives a credit that can be traded. Companies that purchase more gallons than they need to meet their own mandates can then sell the credits to other refiners.
The U.S. Environmental Protection Agency sets the amount of credits companies need to obtain during a given year, as a percentage of their overall fuel production.
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“The problem is there is more ethanol on the market than we can blend into gasoline and the amount of gasoline that the American public wants has been declining and has continued declining,” Greco said.
Trading on the market for the credits, also known as Renewable Identification Numbers, has led to soaring prices for the credits that refiners say have driven up their costs.
Ethanol producers say that fuel makers wouldn’t need to buy as many credits if they bought and blended more ethanol into their gasoline.
Though the EPA has approved the wide use of E15, a blend of gasoline with 15 percent ethanol, oil companies have resisted, saying gasoline with 10 percent ethanol, which dominates the market today, is the highest blend that is safe for most engines.
Renewable fuel advocates say E15 is safe and note that some vehicle engines are designed to run on blends as high as 85 percent ethanol.
“They can expand the use of ethanol by selling E85 or by selling E15 and expanding the amount of a less expensive product into the gasoline pool, or they can trade the RINs that they’ve gotten for free amongst themselves,” said Bob Dinneen, president of the Renewable Fuels Association.
Read FuelFix’s ongoing coverage of the ethanol debate: