I hadn’t intended to write another ethanol column so soon, but I have been engaged in a lot of debate and discussion over my recent ethanol columns. I think it’s worth reiterating some points. Also, a recent decision by the Trump Administration is leading to a strong reaction from ethanol interests. Some of those reactions underscore everything I believe is wrong with the current system we have in place, so I want to address that today.
Let me be clear. This column isn’t anti-ethanol. However, you might perceive it to be so if you believe federal mandates are the only way to support the ethanol industry. I maintain that it’s a terrible and precarious way to support the industry because of the ever-present risk of those mandates vanishing.
Instead of being at the mercy of the federal government, the ethanol industry has to become more proactive in growing its markets, especially in the Midwest where they have far more political power than does the oil industry. That’s how they will sustain a robust ethanol industry.
Sharing the Wealth
Imagine that I convinced the federal government to pass a law that requires my next door neighbor to buy a product from me. I argue that he can afford it, because he is wealthy. It will be good for the U.S. economy, I explain, because I will create jobs and prosperity with that money (ignoring the fact that my neighbor may have done the same).
You might think that’s a ridiculous argument on its face, because my perception of my neighbor’s wealth — and my belief that sharing it with me will be beneficial to the U.S. — is no justification for demanding he share it with me. I am not, after all, a socialist.
But now imagine that the government decided that this situation was creating a hardship for my neighbor, and they reduced the amount of product he is required to buy from me. In response, I scream loudly about this injustice, and this “bailout” to my neighbor. You would rightly tell me to stop relying on my neighbor to “create” my wealth, and to get out into the market and do it myself.
How to Create a Cycle of Dependency
This was exactly my feeling on reading ethanol industry responses to the Trump Administration’s recent decision to exempt a number of small refiners from ethanol blending requirements. To recap, the Renewable Fuel Standard (RFS) was passed into law with the Energy Policy Act of 2005 (and subsequently expanded in 2007). The RFS established quotas of renewable fuels that had to be blended into the fuel supply, and an enforcement mechanism to ensure those quotas were met. In other words, it required refiners to use an escalating amount of ethanol in gasoline.
This law spawned tremendous growth in the ethanol industry, but created a market totally dependent on the federal government. That dependence has been on full display this past week.
For refiners, they are forced to blend ethanol into their fuel, or pay a price if they don’t. This costs refiners billions of dollars each year, and as a result they staunchly oppose this law. They would still blend some ethanol if they weren’t forced to in order to increase the octane of certain gasoline blends, but they don’t like being forced to blend a specific amount of ethanol or to pay a price if they don’t.
As a result, refiners are one of the powerful interests aligned against the ethanol industry. And when you live by federal government mandate (or federal subsidy) — as the ethanol industry has for decades — you can die by that same mandate. There are going to be times in which a President isn’t going to be sympathetic to your arguments, and will instead side with the other interests. That is what is happening right now. I have warned about this for years, and it’s why I think Midwestern state governments should take more aggressive steps to build robust ethanol markets in their area. I have argued this point in a series of articles.
The RFS contains a “hardship clause” to protect refineries that process less than 75,000 barrels of oil per day from “disproportionate economic hardship” due to the RFS. These waivers are issued by EPA, and President Trump reportedly personally intervened over the latest batch of requests to approve 31 Small Refinery Exemption (SRE) requests.