Steffy: Ethanol fantasy runs into reality

Report: Rick Perry asks EPA for renewable fuel waiver

America’s 5-year-old ethanol dream may be running out of gas.

The drought ravaging the Midwest is driving corn prices to record highs – rising 50 percent in the past six weeks – and sparking a renewed debate over federal mandates that require the blending of corn-based ethanol in gasoline.

The U.S. Environmental Protection Agency, which administers the ethanol mandate, has begun weighing requests from governors of some states to waive the requirement.

Gov. Rick Perry requested a similar waiver a few years ago, but the EPA rejected the request because he couldn’t prove it caused direct economic harm to Texas. On Friday, he asked again for a waiver.

Farm groups argue the mandate is hurting meat and dairy producers by driving up feed costs and that it will ultimately lead to higher food prices worldwide. The United Nations’ top food and agriculture expert agrees, recently joining a growing global chorus calling on the U.S. to suspend the mandate.

So far, the government estimates food prices will climb by no more than 4 percent this year, but those forecasts are likely to be revised upward.

Ethanol has also contributed, modestly, to surging gasoline prices. In the past month, prices for regular unleaded rose nationally an average of about 7 percent – to $3.72 a gallon from $3.48, according to the American Automobile Association – but ethanol’s contribution to that, if any, has been no more than 6 cents a gallon, according to a recent study by the U.S. Energy Information Administration.

Ultimately, refiners have to pass on higher ethanol costs or absorb them.

The combined threat of higher food and fuel prices draws long-overdue scrutiny to the underlying legislative fantasy that spawned the ethanol mandate.

Five years ago, President George W. Bush championed and Congress adopted the Renewable Fuels Standard, which requires that 10 percent of gasoline stock comes from ethanol. The mandate is set to rise to 15 percent in a few years.

At the time, the strategy was to reduce American dependence on foreign oil by developing a vibrant domestic biofuels industry.

The Obama administration embraced the policy, which fit with its own strategy of promoting alternative energy.

Ethanol has been a fuel under fire for the better part of a century. As far back as the 1920s, its development was opposed by oil companies trying to keep the farm lobby out of the energy business, even as members of Congress fretted about ethanol’s effect on food prices.

Despite the current international pressure to ease off the mandate, it isn’t likely to go away, especially in an election year. Democrats aren’t likely to abandon such a visible alternative fuels program months before a national election, and Republicans from farm states aren’t likely to push for a repeal or temporary waiver, either.

Congress already allowed tax credits for ethanol production to expire last year.

“The mandate is all that’s left protecting ethanol,” said Stephen Arbogast, a University of Houston finance professor who has studied biofuel development. “It’s a back-door price support for the farm lobby.”

Large-scale ethanol production hasn’t been profitable without government support for more than 30 years, and promises that developing corn ethanol would lead to new technology such as ethanol from switchgrass or other non-food plants haven’t materialized. By now, so-called cellulosic ethanol was supposed to be ramping up to large-scale production. The technology remains mired at the developmental phase.

In other words, Congress adopted legislative incentives, betting on a nonexistent technology.

Given all the ethanol infrastructure that was built in the mandate’s wake, it’s unlikely the government is going to change course. Far more likely: raising the blending threshold to 15 percent will be postponed or abandoned.

The rise of natural gas reserves from shale deposits has largely undermined the call for boosting ethanol content. Converting trucks and fleet vehicles to run on natural gas, for example, is much easier than developing economically viable biofuels, Arbogast said.

“Forcing more ethanol into the diminishing gasoline pool may not be a great idea,” he said. “Ethanol may have gone about as far as we want it to go.”

Rising food prices may finally be the catalyst that gets Congress to wake up from its ethanol dream.

Loren Steffy,, is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Follow him online at, and