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Wednesday, May 8, 2013
In an April 24 commentary, “The fuel standard is working,” Adam Monroe of Novozymes North America argued that the federal Renewable Fuel Standard is working well. In doing so, Monroe falsely credited “the mix of renewable fuel in our gasoline with lowering the average price of a gallon by 79 cents” or even “by $1.09.” On April 19, letter writer Bill Boshong (“Goodlatte’s wrong on renewable fuel”) claimed that the RFS is helping “lower consumer gasoline costs by an average of 89 cents a gallon.”
A trivial analysis shows these claims to be absurd. If a gallon of pure petroleum-based gasoline costs $4, and 10 percent of that is replaced with ethanol that costs nothing, then the price becomes $3.60. A 40-cent reduction is the absolute maximum savings that could be achieved, and that’s only true if ethanol is available for free and there are no taxes or distribution costs associated with that 10 percent fraction. Neither of these exceedingly favorable assumptions is true.
For a more refined analysis, let us examine data from the U.S. Department of Energy. In March, a gallon of gasoline averaged $3.71; $2.34 of this was for crude, 59 cents was for refining, 37 cents was for distribution and marketing, and 41 cents was for taxes. A gallon of pure ethanol costs about $2.45. If 10 percent of the crude and refining costs (29.3 cents total) are replaced with a tenth of a gallon of ethanol (costing 24.5 cents), then the resulting mix (a gallon of E10) will cost $3.66. A savings of merely 5 cents.
And since ethanol has only 70 percent of the energy density of pure gasoline, that gallon of E10 will propel a car only 97 percent as far as a gallon of pure gasoline. Three percent more fuel must be purchased to compensate for this (costing the equivalent of an extra 11 cents per gallon), turning the 5-cent savings into a 6-cent penalty. The net conclusion? The Renewable Fuel Standard makes our driving more expensive, costing American drivers $8 billion per year.
So should the RFS be eliminated? Perhaps. The impact on our wallets, though mild, remains undesirable, but Monroe is quite correct in noting that it has reduced our reliance on imported oil. We avoided importing approximately 200 million barrels of oil last year because of the RFS, reducing our trade deficit by nearly $20 billion. This is a significant accomplishment, and it’s worth noting that the $20 billion we didn’t send overseas was instead used to pay American farmers and ethanol workers.
On the other hand, the RFS has introduced enormous distortions into our food supply, diverting 40 percent of the nation’s corn crop to fuel production.
The result has been rising prices in grocery stores and falling volumes of food exports. The financial impact of this is difficult to quantify, but it is unquestionably real.
Additionally, there are environmental impacts. The massive increase in corn farming has caused large increases in soil erosion and fertilizer run-off, and using ethanol as a fuel does surprisingly little to reduce carbon dioxide emissions in America.
This is because the distillation of ethanol to remove excess water requires a great deal of heat, which in turn means burning large amounts of wood, coal, natural gas or fuel oil. Many (but not all) environmentalists now oppose corn ethanol for these reasons.
So I ask again: Should the RFS be eliminated? To be honest, I don’t know. The reduction in oil imports is a real and substantial benefit, with real jobs to go with it.
But there are costs associated with it, both in terms of our fuel bills and our food bills. I’m able to afford these additional costs, but many people cannot. A lot of people are barely scraping by in today’s struggling economy. Should we continue to make their gas and groceries bills higher with the Renewable Fuel Standard?
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