If ethanol is not under siege, it should be

Oil Price:

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Refiners spend billions of dollars to comply with the RFS. These compliance costs help subsidize the ethanol industry at the expense of refiners, and they help to artificially increase the price of fuel at the pump. Make no mistake — this is a direct transfer of wealth from refiners and gasoline consumers to the ethanol industry.

Ironically, last week I received a press release that cited a senior official with a biofuel industry group: “Farm-state lawmakers are furious that Administrator Pruitt has unilaterally undercut demand for biofuels with his secretive waivers, redirecting farm income to a few oil companies during the worst agricultural crisis since the 1980s.”

The irony is that these lawmakers are upset that farm-state income that was redirected to farm states in the first place is at risk of being redirected back to where it originated.

But then Senator Grassley veered onto thin ice with his claims about ethanol reducing dependence on foreign oil:

“The addition of ethanol into the U.S. fuel supply and advances in shale production, which I also support, allowed for increased domestic energy production. In turn, imports of foreign oil have dropped significantly – a staggering 40 percent since the RFS was implemented.

In fact, the U.S. Energy Information Administration noted in an independent analysis that in 2017, net U.S. imports of “petroleum from foreign countries were equal to about 19 percent of U.S. petroleum consumption,” which was the lowest percentage since 1967.”

Senator Grassley purposely blurs the lines here by implying that ethanol played a major role in that 40% drop in foreign oil. But let’s look at the facts.

According to the Renewable Fuels Association, ethanol production in 2005 was 3.9 billion gallons. By 2017, that level had reached 15.8 billion gallons. So over that timeframe, ethanol production increased by 11.9 billion gallons. That is a daily production rate increase of 776,256 barrels of ethanol.

However, one barrel of ethanol does not displace one barrel of oil. Ethanol has an energy content of 76,100 British thermal units (BTU) per gallon. Oil, which is used to produce gasoline, diesel, jet fuel, etc., has an energy content on average of about 138,000 BTU/gallon. However, the equivalent of about 10% of that barrel is consumed in converting the oil into finished products, so we can assume a net finished product energy content of around 124,000 BTU/gallon for oil.

Therefore, a barrel of finished ethanol will displace around (76,100/124,000) = 61% of a barrel of oil (ignoring the oil inputs required to produce that barrel of ethanol). That reduces the equivalent daily production rate increase from 776,256 barrels of ethanol to 473,516 barrels of oil equivalent. In other words, that’s how much oil that ethanol could have displaced over that time frame (again, ignoring oil inputs into the farming of corn and production and distribution of ethanol).

Over the same timeframe, U.S. oil production increased from 5.2 million BPD to 9.4 million BPD — nearly ten times the increase in ethanol production. Natural gas liquids (NGLs) production, some of which end up being processed into gasoline, increased by more than 600,000 BPD over the same timeframe.

So, while it can be argued that ethanol made some contribution to the decrease in foreign oil dependence, the truth is that the overwhelming majority of the reason for the decrease was the increase in U.S. crude oil and natural gas production.

Further, unlike the gains in ethanol, the gains in U.S. crude oil and NGL production were not enabled by laws requiring the consumption of these products. Nor do consumers pay direct subsidies to these products akin to the RIN system in place for the ethanol industry. Oil companies do receive various tax breaks against taxes they owe, but then so do ethanol companies. That’s a topic for a different column.
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Actually, ethanols contribution to the reduction in fuel imports is much worse than even these figures show.  If refineries were not required to waste money on RINs those billions of dollars could be used to convert their facilities to refining the light crude coming out of the shale wells which is currently exported because the refining capacity is not there to deal with it.  If that were teh change and they were no longer stuck with having to import heavy crude the import of oil would dramatically be reduced.  It is one of the ironies of ethanol that a product that was supposed to reduce imports is actually causing them to be needed.

Instead, consumers are stuck with a bad product that is making it harder to reduce dependency on foreign oil.

The fact of the matter is that if ethanol added real value to the fuel market, it would not need any mandate.