June 13, 2005

Farm, Oil Groups Spar Over Ethanol

WASHINGTON -- Farm and oil industry lobbyists are waging a pitched battle of dueling facts and figures on the costs of corn-blended ethanol as the U.S. Senate prepares to debate an energy bill that would double its use.

The National Corn Growers Association and other backers of a plan to require U.S. refiners to blend 8 billion gallons of ethanol into gasoline a year by 2012 say it will give the oil-addicted economy a home-grown substitute. Gasoline prices should fall as more ethanol is used, they say.

Meanwhile, the American Petroleum Institute and refiners see it as a boondoggle benefiting a handful of Midwest farm states. They say an ethanol mandate will drive up pump prices and make corn -- as well as groceries -- more costly.

On Tuesday, the Senate will wade into the fight between the two politically powerful lobbies when it takes up energy legislation. The $11 billion package also includes incentives to boost domestic oil, natural gas, coal and nuclear supplies.

The U.S. House passed an energy bill this spring that would set a more modest target of 5 billion gallons annually by 2012 for the additive, which makes gasoline burn more cleanly.

Costs and Benefits

The true costs and benefits of corn-distilled ethanol are difficult to pinpoint amid the lobbying hype.

While gasoline prices soared this year to record highs, ethanol prices fell due to an oversupply of corn and new ethanol plants coming online. Ethanol now costs about half the price of gasoline, after a 51-cent-a-gallon federal tax break.

"Given today's gasoline prices, ethanol can be brought to the market at well below gasoline prices," said Mark Cooper, an economist at the Consumer Federation of America, which has cast its lot with ethanol producers.

American drivers could save as much as 8 cents a gallon at the pump if oil refiners produced more fuel with a mix of 10 percent ethanol and 90 percent gasoline, Cooper said.

The consumer group, as well as farm state Democrats, have accused the oil industry of deliberately keeping gasoline supplies tight and prices high when ethanol is plentiful and could stretch the nation's fuel supply.  

An estimated $6 billion in investment is needed to build enough ethanol plants to produce an extra 4.3 billion gallons of capacity.

Oil Industry Skeptical

Refiners have long fought ethanol's encroachment into their business, preferring petrochemical-based additives like MTBE.

The API and the National Petrochemical and Refiners Association say the energy bill should boost ethanol only to 5 billion gallons a year. The additive must be trucked, making it more difficult for refiners to handle the blending material.

"It adds a lot of additional costs to consumers on the energy and food side with no corresponding benefits," Edward Murphy, an API spokesman, said.

The oil industry says an 8 billion gallon requirement would add as much as $12.8 billion annually to consumers' grocery bills, as higher corn costs are passed through to cattle and poultry producers. The extra ethanol will not make a dent in America's oil imports, it says.

A study by the U.S. Energy Information Administration concluded that boosting ethanol use to 8 billion gallons could raise gasoline prices by 3.6 cents per gallon, the oil industry says. That price increase is based on the assumption that cheap additives like butanes and pentanes must be removed to make room for ethanol, the EIA said.

Farm, Oil Politics

This year, U.S. ethanol plants will produce nearly 4 billion gallons. Most is now sold in the Midwest but ethanol makers see a growing market as the additive MTBE, which pollutes groundwater supplies, is phased out by many states.

That's still a drop in the bucket compared with the 38 billion gallons of gasoline that U.S. drivers burn annually.

With farm state politics and oil industry influence going head to head, it remains far from clear what the ethanol requirement will be in a final energy bill.

Rep. Joe Barton of Texas, who will head a Senate-House bargaining session if the Senate passes an energy bill, said he opposes a mandate above 5 billion gallons.

But Republicans and Democrats alike from farm states are eager to bump up ethanol incentives before next year's congressional elections.

Presidential hopefuls are also keen on ethanol. No aspiring presidential candidate aside from Republican maverick John McCain has dared oppose ethanol ahead of Iowa's political caucuses that kick off the presidential election season.

"Ethanol supporters have been able to parlay a pretty limited geographic base into a pretty tough political operation," said Jerry Taylor, an analyst at the Cato Institute.


On the Net:

National Corn Growers Association

American Petroleum Institute