Governors' Biofuels Coalition

WASHINGTON — After years of success in Washington, the ethanol industry’s power may be slipping.

The Environmental Protection Agency’s proposal last month to slash for the first time ever the amount of ethanol that must be mixed into the nation’s gasoline supply marked just the latest blow to an industry that until recently had seen consumption of the largely corn-based fuel soar. Experts say the growth helped mask underlying problems that now threaten to slow or even halt the industry’s expansion.

Even if ethanol supporters convince the Obama administration to reverse course on the renewable fuels mandate, they still face a long struggle to wrest away more market share from the powerful oil industry blamed by some for limiting the amount of the renewable fuel available to gas stations.

“The biggest obstacle to increasing ethanol output out there is the policy that we have,” said Bruce Babcock, an Iowa State University economist. “The policy puts the burden of expanding ethanol with the oil companies that have no incentive to do it. They are in the sweet spot.”

Until as recently as a few years ago, ethanol producers had little evidence the backing they had grown accustomed to outside of the Corn Belt in Washington could be eroding. In 2007, the ethanol industry won over Congress and the Bush administration who agreed to support expanding the Renewable Fuel Standard, a mandate that requires refiners to blend ever increasing amounts of biofuels into the nation’s gasoline supply through 2022. President Obama came into office and made renewable fuels a centerpiece of his energy policy.

But at the end of 2011, a tariff on ethanol imports and a tax credit on production of the renewable fuel were allowed to expire by Congress. Lawmakers from non-corn producing states and opponents of the Renewable Fuel Standard have pushed further changes to the measure, calling the mandate outdated. And now, with a crush of new vehicle technologies rolling off the assembly line — from hybrids to electric cars — there’s a sense that ethanol isn’t the only game in town.

“It’s not something the average consumer thinks about day after day,” said Matthew Diersen, a South Dakota State University agricultural economist. “We’re to the point where you get other fuels being talked about, electric cars. You get the feeling these alternative fuels might be crowding out the arguments for and against ethanol. I’ve heard more people talk about how would you plug in an electric car than where could they find or not find” fuel containing 85 percent ethanol.

Along with a decline in its influence in Washington, the ethanol industry is burdened by a pair of challenges: first, the existing infrastructure of service stations and second, the 240 million or so registered cars and trucks in the United States today, both of which have been designed for decades to use petroleum-based products. While the EPA has approved fuel with 15% ethanol for most cars and trucks built since 2001, some automakers refuse to honor warranties or advise against using higher ethanol blends, and oil industry-funded studies say it could cause false check engine lights and engine damage. Most cars today use fuel with 10% ethanol.

Only about 60 gasoline stations are registered to offer the E15 blend, according to the Renewable Fuels Association — a mere fraction of the more than 140,000 fueling locations across the United States. The challenge to getting more stations to carry the fuel is an example of the age-old chicken and egg dilemma. If gas station owners need to spend money buying new storage tanks and pumps compatible with E15, they want to know they can recoup the costs by selling enough of the product. But drivers, in turn, may be wary of using E15 unless they know they can find enough gas stations to supply them while remaining confident that the fuel is safe for their cars.

Even bigger obstacles remain for E85, the fuel blend which can be used in 15.5 million flex-fuel vehicles on the road, about 6% of cars and trucks on the road. An estimated 3,200 U.S. stations offer E85. Although E85 is usually cheaper, a car using the fuel would see its mileage lowered by 29% compared to pure gasoline, according to the Department of Energy. Most consumers don’t even know that E85 is an option, according to a survey by the National Association of Convenience Stores, which this summer found only a third of respondents were familiar with the fuel.

There also is a disconnect between where the fuel is sold and where flex-fuel vehicles are located. Babcock and fellow economist Sebastien Pouliot at Iowa State University in August released a study that showed most flex fuel automobiles are in urban areas while the stations selling E85 tend to be found in rural parts of the Midwest where most of the country’s corn is grown and support for ethanol remains strong.

Bob Greco, downstream director with the American Petroleum Institute, said refiners and gas station owners are simply responding to consumers who so far have not shown enough demand for higher ethanol blends.

“The ethanol industry is starting to grasp at straws. I think they are greatly concerned that they can’t grow their market share,” said Greco. “At the end of the day, refiners and gas stations want to sell fuel that their customers demand. The market is not calling for more E85. The market is not calling for E15.”

Citgo owner Wan Kang said he only sells about 20 to 30 gallons of E85 each day from his Annapolis, Md., station, compared to about 1,350 gallons of the traditional E10 blend. “It’s very slow,” said Kang, whose location has been offering E85 since 2003. “We don’t sell that much. I plan to keep it but I don’t know about the future.”

Supporters of the largely corn-based fuel have criticized the oil industry and other groups for putting roadblocks in place to prevent and discourage the sale of blends above E10. Among their complaints, ethanol proponents point to a refusal by petroleum suppliers to offer the fuels to gas stations and say they have been unwilling to invest in new pumps and other infrastructure. Ethanol boosters also accuse oil refiners and gasoline suppliers of discouraging, and sometimes outright prohibiting, retailers that use their name from offering higher blends.

Senators Chuck Grassley, R-Iowa, and Amy Klobuchar, D-Minn. have asked the Justice Department and Federal Trade Commission to investigate possible anti-competitive practices by oil companies that may be limiting consumer access to renewable fuels.

“There continues to be a lot of hurdles in getting E15 on the marketplace across the country,” said Monte Shaw, executive director of the Iowa Renewable Fuels Association. “The amount of E15 rhetoric and bogus studies that they put out on the marketplace absolutely has affected public perception and more importantly retailer perception, because what we are seeing is where the retailers put them in the sales are actually pretty good.”

Shaw said if the EPA chooses to lower the blending requirements in 2014 when it finalizes the rule, E15 use will continue to grow, albeit at a much slower pace. Last month, the EPA proposed cutting the fuel requirement in 2014 to 15.2 billion gallons of ethanol and other biofuels, 3 billion gallons below what Congress required in a 2007 law. Traditional biofuels, comprised mostly of corn, would be reduced to 13 billion gallons from 14.4 billion.

“E15 will continue to move forward but what we’ve accomplished in one year might take us three years, four years, five years,” he said. “There is no incentive for Big Oil to get out of the way.”

Despite the EPA’s approval of E15 and tests from the agency showing the fuel is safe, the oil and gas industry, AAA, and others have warned of possible damage to car engines from using the fuel. Major automakers have warned consumers against putting blends higher than E10, noting their vehicles were not designed to handle the fuel.

Increasingly, car companies are working to make more of their automobiles compatible with E15. Still, with motorists keeping cars longer, it could take decades before E15-geared automobiles make up the majority of vehicles found on U.S. roadways.

Ford, which approved E15 in its vehicles starting with the 2013 model year, said so far it has not noticed any performance problems in vehicles approved to carry the ethanol blend. GM has designed its vehicles, beginning with the 2012 model year, to use E15. Toyota said more than half of its 2014 models are compatible with the fuel. Amanda Rice, a spokeswoman for Toyota, said the Japanese automaker will continue to post warnings on its gas caps and in the owner’s manual for its other models that are not compatible with E15.

“The automobile manufacturers want to make sure that that car is designed to run on the fuels that are available,” said ISU’s Babcock. “I don’t think that was a conscious decision to keep ethanol out of the market place. It’s a decision to try to match the engineering design of the cars with the fuel that’s available.”

A number of bills have been introduced by lawmakers from ethanol-producing states to give a boost to the industry, but so far they have failed to gain traction in Congress. Most of the measures would require a percentage of automobiles to operate on non-petroleum fuels or provide tax credits to encourage the installation of blender-pumps – costly systems that take fuels from two separate tanks at the gas station and mix them together in various percentages. Currently, there are more than 1,400 blender pumps at fuel stations throughout the country. The USDA announced in 2010 a program of its own to help retailers install as many as 10,000 blender pumps to expand the use of higher fuel blends.

Iowa Sen. Tom Harkin, a Democrat, introduced a bill in September that would create a $1 billion grant program for the installation of ethanol pumps at gas stations and require the Department of Energy to issue new regulations that would compel fuel distributors to put in at least one ethanol pump at half their gas stations by 2022.

While fellow Iowa Sen. Grassley has supported measures in Congress to help the ethanol industry, he said the real benefit would come from clamping down on the petroleum industry. “I think the extent to which we tackle Big Oil on using their muscles to keep their own retailers from putting in E15 pumps is better than anything the federal government can do through subsidies,” he said

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