How To Fix The Ethanol Industry

Making Iowa Self-Sufficient

If ethanol is a real alternative to gasoline, why don’t Iowans consume as much as they can? Ethanol should have a greater advantage over gasoline in Iowa than probably in any other state. Ethanol should enjoy significant logistical advantages over oil in Iowa.

The problem is the price. According to data from the Energy Information Administration (EIA), the energy equivalent price of E85 is consistently 15% to 30% higher than for regular gasoline. That, in my opinion, is the single biggest factor in explaining why E85 has failed to take over the fuel market in Iowa.

Ethanol proponents will say that the oil industry keeps E85 out of the marketplace. But if the energy equivalent price for E85 is lower, they can’t keep it out of the marketplace, because they can’t stop people from opening their own E85 stations. Further, E85 is available across Iowa, and if the demand was higher, availability would increase.

The objective for Iowa — and by extension all of the Midwestern ethanol-producing states — should be to undercut the price of gasoline. There are several ways to accomplish this, albeit at a cost. Currently, the cost of our ethanol mandate is borne by refiners, and subsequently consumers across the country. The benefit flows from around the country into the Midwest. That is a nice arrangement for the Midwest, but not as good for the states that don’t produce ethanol. Hence, the constant battles over the RFS.

If I was the governor of Iowa, my top priority would be to seize control of the state’s ethanol destiny. I would do that by first estimating the overall benefit to the state from the ethanol industry. This would include all of the tax revenues associated with the industry, as well as those derived from corn farming.

I would then set out to provide a substantial fraction of those revenues as incentives for using E85. I would consider this an investment into building an E85 corridor across the Midwest. The objective would be to make the energy equivalent price of E85 consistently and appreciably less than the price of gasoline. (This could also be accomplished by additional taxes on gasoline, but incentives are an easier path).

I would also provide incentives designed to increase the usage of ethanol in farm equipment. Ethanol’s high octane means it is resistant to preignition during compression. That means it can operate in engines with higher compression ratios than typical gasoline engines. (For example, see the Cummins ETHOS engine). It could also be used in farm equipment with modified diesel engines. But given the cost of diesel versus ethanol, farmers haven’t shown much interest in ethanol-powered farm equipment.

Iowa does have some incentives in place, but they haven’t been sufficient to kick-start the E85 industry. In order to ensure the future of Iowa’s ethanol industry, they need to be increased.