Ethanol Subsidies Under Fire From Both Political Parties

$2.00 per gallon in some markets, plus Obama support may not be enough to save ethanol

How does $2.00 a gallon sound to fill up your tank? How about 80-cents a gallon? No, you aren't in a time machine. But if you drive a Flex-Fuel car, truck or SUV that runs on E85 (ethanol), those are the kinds of per-gallon prices you've been seeing in parts of Minnesota.

It sounds great since E85 vehicles include such common rides as Chevy Suburbans and Impalas, Ford F150 pickups and Flex, Chrysler Town & Country and Dodge Charger. But running vehicles on E85 (85% ethanol and 15% gas) is one of the big political hot potatoes this year and going into next year's Presidential contest.

Look for the topic to get some air in tonight's New Hampshire Republican debate. Despite the importance of Iowa, a corn state that gets huge benefits from government ethanol subsidies, in presidential politics, most Republicans, and even some Democrats, are against continuing $6 billion a year in ethanol subsidies, an annual expenditure that is slated to balloon to $60 billion a year a decade from now.

GOP Presidential hopeful Mitt Romney and Newt Gingrich support ethanol subsidies, while rivals Tim Pawlenty, Jon Huntsman are against it. Minnesota Congresswoman Michele Bachmann says only that subsidies should be "examined," a predictable position considering the popularity of the subsidies in both her home state, as well as her birth-state of Iowa.

President Obama supports Ethanol subsidies, research and development, and a plan to double ethanol consumption in ten years. The vast majority of ethanol produced in the U.S. today is from corn. Chemists and other scientists have been trying to perfect the process, though, to extract ethanol on a large scale from all manner of materials -- grasses, corn husks, fibrous plant waste products like corn stalks, as well as trash.

The GOP opposition has an odd set of friends in this fight: The environmental lobby, who believe the production of ethanol wastes more fuel than it saves, and the food manufacturing lobby, which doesn't want to see grain prices skyrocket as grain is diverted from food supplies to fuel supplies.

The benefits of running our cars and trucks on ethanol and E85 are controversial. While it burns cleaner than gasoline, many credible scientists have shown through peer-reviewed studies that it takes more energy to produce ethanol than it provides when we burn it. On the other hand, supporters believe that ethanol can make the U.S. less dependent on foreign sources of oil, which is a national security issue, as well as a trade balance argument. Plus, there are more jobs to be created through developing an ethanol infrastructure than in continuing to import oil from hostile Middle East countries.

E85 Not So Popular With Drivers

For now at least, ethanol isn't very popular among drivers because it's not as efficient as gas. Running a vehicle on E85 delivers about a 23% fuel economy penalty. The government, for example, certifies a Chevy Suburban's fuel economy running on gasoline at 17 mpg combined city and highway driving, while it certifies the same vehicle at 13 mpg running on E85.

In Ann Arbor, MI, a gallon of unleaded regular gas costs $4.07, while a gallon of E85 costs $3.59 per gallon, only an 11% discount to the gas. [See website].

But the spread between gasoline and E85 varies around the U.S., often favoring drivers in farm states where ethanol refineries are plentiful, thus so is the supply. Because ethanol is largely trucked rather than piped for now, prices tend to be lower the closer the station is to an ethanol production plant.

In Riverside, Iowa, E85 costs $2.89 a gallon, a 21% discount to gas. In North Liberty, Iowa, the discount to gas is 26%. Statewide in Iowa, the average discount to gas is 21%. In Washington State, the cheapest E85 is $3.59, and the state-wide average discount to gas is just 10%.

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Alternative Fuel: Ethanol Production

$2.00 per gallon E85 Sounds Good

To attract drivers, some non-profit and trade organizations subsidize the prices. Non-profits in the Midwest have been, on and off, offering discounts -- as much as 85 cents a gallon making the E85 about $2.00 a gallon -- to drivers to fill up with E85. The American Lung Association in Minnesota, for example, sponsors ethanol price promotions because it is promoting the cleaner fuel to go into more cars and eliminate pollution in the state, said Lisa Thurstin, a spokeswoman for the group.

"A lot of people don't even know their vehicles can take flex fuel," said Thurstin. "For a lot of them, it's their first time."

And that's the rub. Although the government spends a lot of money supporting ethanol, not many people use it. Still, the auto industry is happy to keep churning out flex-fuel vehicles that run on either gasoline or E85 because they get valuable credits toward meeting their Corporate Average Fuel Economy target.

Opponents of ethanol subsidies have important opposition in this fight: Voters in Iowa, who will be disproportionately important in picking presidential candidates next year due to the way primary elections are set up.

The fact that politicians on both sides of the aisle are not backing off opposition, though, shows a possible tipping point in the offing. In May, politicians from both sides of the aisle joined forces to oppose ethanol subsidies. Sen. Tom Coburn, a Republican from Oklahama, paired up with Democratic Sen. Diane Feinstein to voice their opposition to the subsidies. Feinstein called the benefits "a triple crown of government intervention: its use is mandated by law, it is protected by tariffs, and companies are paid by the federal government to use it."

Republican presidential hopeful John Huntsman, formerly Governor of Utah and ambassador to China, says he is skipping the Iowa Staw Poll this summer because he believes his well-known and unwavering opposition to ethanol subsidies will give him no chance in the corn state.

Obama is Pro Ethanol

President Obama wants to see ethanol use increase. He's pushing the Navy to find ways to use ethanol instead of jet fuel, and is investing millions in developing ethanol refineries. The Administration is pushing to install 10,000 blender pumps in U.S. gas stations to allow for more ethanol use.

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President Bush was also a supporter of ethanol. In 2007, the U.S. doubled its consumption of corn-based ethanol, from 7.5 billion gallons to 15 billion gallons a year. That led to a spike in grain prices, because the U.S. uses 90% of the world's ethanol.

Ethanol seems like one of those fuels everyone should support: It comes from renewable sources (primarily corn in the U.S., although in Brazil they use sugar cane) and it spews fewer emissions into the air, and helps us reduce our dependency on foreign oil.

But it's expensive to support. And in this age of debt ceilings and high unemployment, paying farmers $60 billion annually to turn corn into fuel (which, incidentally, raises the price of food globally) seems like a puzzling idea to many.

There is promising research and development, though, that would at least make ethanol more fuel efficient to use. One of the big factors contributing to E85's poor fuel efficiency is that a vehicle's engine is not optimized to burn ethanol. In other words, when you have to design an engine to burn both gasoline and E85, you give up a lot of efficiency. Ford, however, has been working on a flex-fuel engine that would boost fuel economy by injecting ethanol and gasoline into the fuel system separately, rather than blending it. The rub, though, is that it requires two separate tanks of fuel, and U.S. consumers, other than early-adopter "green consumers," have shown themselves to have little tolerance for even a little inconvenience when it comes to changing habits and thinking differently about fueling their cars.

The ultimate would be an engine that is optimized to run on nothing but Ethanol. But without a better infrastructure of fueling stations, such vehicles would probably be limited to commercial vehicles and trucks that have limited and predictable driving chores.

Hybrids and EVs Getting the Love Now

Especially since automakers are throwing most of their development money into electric-powered cars and plug-in hybrids, they aren't burning the midnight oil to find ways to optimize ethanol. In fact, General Motors CEO Dan Akerson said this week that ethanol "is going to die slowly." Even though the automaker has pledged to make half its lineup capable of running on a blend of ethanol and gas, it appears GM is falling out of love with ethanol.

That's a shame, because one of the most promising futures for ethanol is tied in with a venture the automaker supports. Coskata, a company GM invested in prior to its 2009 bankruptcy and subsequent management overhaul that left Ackerson CEO, is working on ways to make ethanol from cellulosic materials like wood chips, scrap plastic and garbage. That would eliminate concerns that farmers are diverting food sources to make government-subsidized fuel.

The subsidies, chiefly benefiting corn ethanol, were intended to keep ethanol makers motivated to keep producing the stuff while car technology and ethanol extraction methods from other sources were fine-tuned enough to make the fuel a viable alternative energy source. But goodwill towards the industry is wearing thin:

"As our nation faces a crushing debt burden, rising gas prices and the prospect of serious inflation, continuing our parochial ethanol policy that increases the cost of energy and food is irresponsible," Senator Coburn said recently.

Iowa voters might have to get used to this new reality.

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