Is Ethanol Reducing Foreign Oil Demand?
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.
A Free Market?
Senator Grassley winds down his editorial with:
As a free-market conservative, I believe that competition spurs innovation, encourages dialogue and ultimately delivers the best quality products to consumers. That’s one of the many reasons I believe so strongly in ethanol as part of an all-of-the-above energy strategy.
I agree with that, but that’s not the case with our ethanol policy. This isn’t a free market. Mandating a product and then forcing consumers to subsidize it is the opposite of a free market.
There is a natural market for ethanol for refiners to meet their octane requirements, but it is likely far lower than current ethanol consumption levels. That’s a problem for farm-state “free-market conservatives” like Senator Grassley who only believe in the free market to the extent that it doesn’t decrease demand for ethanol.
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