Oil industry predictably blames ethanol as prices spike again

By Holly Jessen | July 17, 2013

A group of energy experts held a media call about rising gas prices on July 15, shooting down critics’ assertion that ethanol is to blame. “As usual, there has been lots of finger pointing and accusations from the oil companies,” said Geoff Cooper, vice president of research and analysis for the Renewable Fuels Association.

Nationwide, gas prices have jumped about 25 to 30 percent in the last couple weeks—ending up at the highest price since early June, Cooper said. He referenced a July 16 U.S. Senate Energy and Natural Resource committee hearing, during which various speakers blamed biofuels, the renewable fuel standard (RFS) and the “so-called blend wall,” for higher gas prices. “That, of course, is utterly ridiculous,” he said.

In fact, ethanol actually reduces gas prices, as multiple analyses from a variety of sources have shown in the last few years. A 2008 government study showed, for example, that ethanol saved drivers 20 cents per energy equivalent gallon of gasoline while a 2012 study from academic sources showed ethanol saved more than $1 a gallon of gas.

Cooper then named off three reasons ethanol has a direct effect on lowering gasoline prices. First, ethanol extends the fuel supply, forcing overall fuel prices lower. He compared this to margarine, which brings down the price of butter as the cheaper substitute enters the marketplace. Secondly, ethanol is simply cheaper at the wholesale level. “Ethanol has consistently sold at a discount to gasoline blendstock since 2007,”he said, pointing out that this provides a strong incentive for maximum blending. On July 12, ethanol was 67 cents cheaper than wholesale gas, the widest spread in more than three months. On July 16 the spread was $2.45 a gallon for ethanol and $3.10 or $3.12 for gasoline.

Finally, Cooper pointed to the fact that ethanol is a cheaper source of octane, which reduces production costs at petroleum refineries. In fact, a U.S. DOE analysis concluded that ethanol would still be the most economical source of octane enhancement for refiners even if it was pried at 110 percent of wholesale gas prices. Currently, ethanol prices are at about 80 percent of gas prices, Cooper continued.

Some refiners also blame higher renewable identification numbers (RINs), driven by the blend wall, for rising gas prices. “There really isn’t a shred of evidence to support that notion,” Cooper said. The blend wall has actually been erected by the oil companies themselves and RINs can be banked or traded, enhancing the flexibility of the RFS, he said. In fact, it would only take a slight increase in the use of E15 this year and the next to satisfy the requirements of the RFS with blending, rather than through banked RINs, he said.

Another faulty claim is that there are no automakers making use of higher ethanol blends. In fact, there are 15 million flex-fuel vehicles on the road today, which can use up to E85. In addition, one-third of all new 2013 light duty vehicles, primarily made by General Motors and Ford, have language in their warranty and owner’s manuals that cover blends up to E15. And, it was just recently learned that Volkswagen will also include similar language for its model year 2014 vehicles, Cooper said. Of course, the EPA previously approved E15 for use in all light duty vehicles 2001 and newer, which accounts for 85 percent of the vehicle miles traveled today.

So what is driving increased gas prices? Increased oil prices and conflicts in the Middle East, Cooper concluded. The next speaker, Anne Korin, co-director of the Institute for the Analysis of Global Security, expanded on that topic by speaking about the Organization of the Petroleum Exporting Countries (OPEC), also known as the oil cartel. It has been 40 years since the Arab oil embargo of 1973 and since that time the number of automobiles on the road has quadrupled, the global population has nearly doubled and oil demand has increased drastically—and still OPEC countries, which account for three-fourths of the world’s oil reserves, are producing almost exactly the same amount of oil. “This fundamentally, is the reason why oil prices are very high,” she said.

The last two speakers were Bruce Vollan, owner of a South Dakota gas station that offers E15, E85 and other fuels, and Anna Rath, founder and CEO NexSteppe, a company working to develop feedstocks for advanced and cellulosic biofuel. Vollan repeated his success story in offering consumers choice at the pump, which has resulted in ethanol making up 18 to 28 percent of total sales on a per gallon basis. He added that, since the company installed blender pumps, it receives RINs with the ethanol it purchases and can resell them. From there, the company passes the savings on to its fuel customers.

Rath spoke briefly about the need for policy certainty in the U.S. NexSteppe is working in both the U.S. and Brazil and the difference between the two countries is that Brazil has clear, well-defined and favorable policies, while the U.S. is going through a lot of policy uncertainty with attacks on the RFS and other issues. As a result, the company’s sales in Brazil are growing rapidly while sales in the U.S. are moving very slowly. “[Policy uncertainty] makes it very difficult for people to make the kinds of large investments necessary to really build infrastructure and begin producing these advanced and cellulosic fuels,” she said.