10:01pm

Wed July 20, 2011
Energy

Ethanol Industry Torn Over Losing Subsidy Billions

The federal government pays oil companies about $6 billion a year to blend ethanol into your gasoline; it's been subsidizing ethanol for 33 years now. But any agreement in Washington to raise the debt ceiling will most likely include a plan to cut that subsidy off. And after all these years, many in the ethanol industry say they don't really care.

The end of the subsidy — and the mixed reaction to that idea — reveals how the world of corn ethanol has changed dramatically.

Blending Ethanol With Gas

The fuel that's in your car or truck right now didn't get to the gas station straight from the refinery. It very likely stopped at a place like the Magellan fuel terminal in Kansas City, Kan., where gasoline from a pipeline is blended with ethanol.

"The ethanol all comes in here by truck," says Jeff Myers, who runs the sprawling complex of enormous white fuel tanks.

Pointing at a line of trucks nearby, he says, "They're full of ethanol. So, they're waiting to pull in under this bay, where they will unload the ethanol. The other trucks in line, over here, they're waiting to load fuel."

Myers says that ethanol and gas are mixed in the trucks' cargo tanks, earning whoever owns the fuel a "blending credit" worth 45 cents for every gallon of ethanol.

A New Position On Losing Subsidy

Until recently, the ethanol industry said it would wither without this subsidy. Bob Dinneen, president of the Renewable Fuels Association, made this argument in an interview with the Domestic Fuel podcast less than a year and a half ago.

"If you do not extend the tax incentive, we're going to lose 112,000 jobs across all sectors of the economy," he said back then.

When asked if the industry needs that same tax credit now, Dinneen says, "No, you don't. In today's environment, no you don't need it."

But people like Tom Burris, with Growth Energy, the other main ethanol group, say the tax credit has been vital to helping ethanol get off the ground.

"The industry wouldn't have happened without it," Burris says, "but we're in a different position today."

There are at least three reasons behind the change. The first is regulatory: the government forces oil companies to use ethanol. And that mandate is growing. Next year, it will call for more ethanol than the industry produced this year.

That government mandate renders the tax credit irrelevant, says Bruce Babcock of Iowa State University.

"You can see that that growing mandate really is the thing that's going to drive ethanol demand," he says, "and the $6 billion that we are spending really isn't going to accomplish anything."

High oil prices are another reason ethanol producers are sanguine about the tax credit ending. Corn ethanol is currently cheaper to produce than gasoline. It's also quite a bit cheaper than imported ethanol, most of it made from sugar cane.

The third reason Babcock cites is something some folks might call sour grapes.

"They've never been so politically vulnerable as they are right now," he says. "They're used to winning these battles for subsidy. And they put a great deal of political weight and effort into maintaining this tax credit, and they lost."

Momentum To Cut Subsidy

In June, the Senate voted overwhelmingly to end the $6 billion ethanol subsidy.

The move was "definitely long overdue," says Shelia Karpf, of the Environmental Working Group.

"We think of it as a college kid that needs to move out of their parents' basement, or even a 50-year-old that needs to move out of their parents' basement," she says.

A tariff on imported ethanol will die with the subsidy. But that's not likely to stop ethanol production from using about 40 percent of all the corn grown in the United States. And the next battleground, Karpf says, will be over cutting the mandate to use ethanol.

"There are talks right now about trying to reduce the corn ethanol mandate," she says, "since it is pushing up the price of feed and food."

But the ethanol mandate has a lot more friends than the subsidy did — and it's not likely to change anytime soon.

The ethanol industry's more immediate problem is finding some way to sell all the fuel it can produce. That would mean going above the 10 percent now found in most gasoline.

Gas stations, like one in Lee's Summit, Mo., could be part of the solution. Here, customers can buy a range of fuel blends — 85 percent ethanol is a popular one. Thanks largely to the tax credit, it's much cheaper than normal gas. But patrons also say they appreciate that it helps farmers and is not made with imported oil.

Michael Riely pulls up in a Japanese sports car with a big hood scoop, and starts filling up at the pump.

"For me, it's either this gas, or I have to run race fuel. And race fuel runs at least 8 bucks a gallon," Riely says. "So, I'm paying $2.99 for this, versus the same quality fuel I have to pay $8 if I want regular gasoline for this car."

So, 33 years of federal subsidies have helped to build a large U.S. corn ethanol industry. And mandates aside, most people who run it say it's ready to stand on its own.

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