The Guardian's reporter has made incorrect assumptions about the bill. Its legal mechanism is emissions not fuel consumption, which favors ethanol blends. Gasoline burns more completely with the oxygen of ethanol blended in. Auto manufacturers can design higher fuel economy in FFV's if they consider this important. Fuel energy content is not the only factor here. Fuel efficiency is equally important, considering that car engines are only about 20% efficient. The auto industry now has the right incentives to build more efficient rather than more powerful vehicles.

SWEET

If I recall the MPG figures are calculated on the basis of gasoline energy. The CAFE standard would not be a barrier to ethanol adoption per se but will reduce energy demand. Raising the mileage standards will likely do more than all the ethanol we can possibly produce to reduce oil use.

If these standards are achieved the total gas market place will likely decrease from approximately 140 billion gallons today to 105 to 110 billion gallons in 2016 by improving the current CAFE standard by 40%. With this being the case the current ethanol industry is probably overbuilt for future fuel needs unless E85 becomes materially cheaper and is widely adopted.

The Guardian is a notorious anti ethanol rag. Beware of ethanol statements from oil producers. Ethanol has a pricing problem in that it is priced higher than it should be for it's energy content at the retail level. I beleive this is done by oil companies who are putting their product first by keeping ethanol overpriced. They pocket some the blenders credit and mark ethanol to what the market will bear rather than pricing it according to energy content. If ethanol were priced appropriately at retail it should have nothing to fear. It has nothing to fear long term anyway because of Peak Oil. These higher fuel standards appply only to new cars/trucks. Buy the time the vehicle inventory is replaced with them in 10-15 years, the Post Peak Oil situtation will be so advanced that ethanol producers will find their output in high demand regarldess. The Guardian has no foresight and doesn't know or care about the implications of Peak Oil. Peak Oil is bad news for oil producers and many of them are in denial here and abroad.

David Heesch attributes high ethanol prices at the pump to oil-company manipulation. Let's examine that with reference to real numbers. According to DTN's own web site (www.dtnethanolcenter.com/index.cfm?show=10&mid=32), the average rack price for ethanol -- i.e., the wholesale (pre-tax) price demanded by ethanol suppliers, not set by the oil companies -- was around $1.85 per gallon at the beginning of this week. That was 80% of the average RETAIL price of gasoline ($2.31/gallon). If we knock off 25% of the retail gasoline price (20% for taxes, and a conservative 5% distribution margin; see http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp), that brings the wholesale price of gasoline down to around $1.73 per gallon (gasoline prices have since firmed a little and are now around $1.78; see http://www.nymex.com/index.aspx) -- i.e., below even the rack price of ethanol. Conclusion: the high price of ethanol at the retail level has everything to do with its high cost of production, and hence its wholesale price, and little to do with oil-company manipulation.

Ah yes, I hear, "But what about the $0.45/gallon blender's credit?" That brings the effective cost of E100 to the blender to $1.40/gallon. But that is still around 80% of the wholesale price of gasoline -- i.e., considerably above the price that ethanol would command if it were competing purely on the basis of its energy content. (It doesn't, of course, because it also has a value as an oxygenate in some markets, and as an octane enhancer.) But it does suggest that there is not a lot of scope at the moment for "pricing [ethanol] according to energy content", as suggested by David Heesch.

Ronald - wouldn't you agree though, that the ability of Valero, and now Sunoco, buying production plants and producing ethanol, with little to no debt load, due to the bargain prices paid for the plants, has indeed placed the oil industry in a position to manipulate the rack price for ethanol - even to the point of driving additional plants to the point of being sold at a bargain price to oil companies as well? Is it just possible that this has been the plan all along?

Don, what share of the ethanol market does Valero and Sunoco count for? No more than 10%, right? (www.ethanolrfa.org/industry/locations/) That is not enough to control the market price. And, in any case, what earthly interest would it profit Valero (or Sunoco) to price its ethanol at a loss? It is not a significant producer of crude: it is in the REFINING business. From its standpoint, all it cares about is making the most profit it can from processing and selling liquid fuels. Don: it is not constructive to blame all kinds of phantom boogeymen for the troubles of the ethanol industry. Isn't it enough to point to the squeeze it is experiencing as a result of lower gasoline prices and relatively high feedstock prices?

Ronald - excuse my rough estimates - 10B gals of ethanol/year x .50/gal. blender credit = $5B in income from blending alone - and now even more if they own they own the ethanol to begin with.

Don. You are talking about blenders -- a rather diverse lot -- not just Valero, I presume. To get that $4.5 billion a year, they have to first buy the ethanol. Assuming that ethanol producers will not sell at a loss for long, they will at least charge enough to cover their operating cost. Hence some, depending on market conditions a lot, of the blenders' credit is not captured by the blenders but by the ethanol producers, currently to cover their higher costs. And to get the blending credit, it is not just enough for an oil company to blend the stuff to make any money off of it: they have to sell it, too. So that means that the price will range somewhere between what the market will bear and the net value to the blenders of buying the ethanol and receiving the VEETC. I still don't see how your theory of an oil-company conspiracy, grown out of increasing control of the industry, leads you to conclude that they are intentionally driving up the wholesale price of ethanol.

Ronald - I didn't state this "theory" as a fact - I just posed the question - primarily the blenders are oil/gasoline companies - none the less - we are talking about a large amount of income from the blender credit. The ethanol producers would be "tickled pink" to make that kind of income.

Um, so I take it, Don, assuming you are no fan of the oil companies, that you would just as soon see the VEETC blenders credit expire?

CAFE standards have NOTHING to do with ethanol. If you look at the EPA data (look at fueleconomy.gov) every FFV engine is run for test cycles on gasoline and E85, and the CAFE calculations are based on the gasoline cycle results, not the E85 cycle results.

WHAT are you talking about, Matthew? I just looked at the page (http://www.fueleconomy.gov/feg/byfueltype.htm), and I see test results for FFVs for both pure gasoline and E85. For example, it shows that in city driving a GMC Yukon Denali 1500 AWD gets 12 mpg on pure gasoline, and 9 mpg on E85.

Ronald - if it wasn't for the ethanol producers making the ethanol - the blender profit wouldn't exist - hence with number of plants going bankrupt the oil/gasoline companies are compelled to buy these plants for 25% of build costs, assume little to no debt load, produce their own ethanol, and keep the blender profit coming.

Sorry, Matthew, I misunderstood your question. There is a difference between the EPA ratings and how the sale of an FFV affects a company's compliance with CAFE. An alternative-fuel vehicle DOES enter into a company's CAFE, very much so. The mpg rating of each FFV sold, for the purpose of a estimating a company's corporate average fuel economy, is based on the assumption that the vehicle is run 50% of the time on gasoline, and 50% of the time on E85. Since the ethanol consumed is not counted, that means that the gallons that count in the "miles per gallon" are only equal to half of the gasoline consumed in the gasoline-only test, plus half of the gasoline consumed in the E85 test. The result: "a dual-fuel vehicle that gets 20 mpg running on gasoline receives [a CAFE] credit as if it were achieving better than 30 mpg" (www.ucsusa.org/assets/documents/clean_vehicles/executive_summary_final.pdf).

Don, this is what I am trying to figure out. Most economists assume that the ultimate beneficiaries of the blender's credit are not the blenders, but the people upstream: corn and ethanol producers, both through higher prices. If, even after factoring in the blenders credit, blenders are having to pay 80% of the price of gasoline for a fuel with 68% of the energy of gasoline, where's the profit? And with corn at $4.26 per bushel, and 2.75 gallons per bush -- i.e., $1.55/gallon just for the corn -- where's the profit?

Ronald - I think the confusion is who the profit of the blending goes to - there is a huge assumption that it all goes to the producer - the truth is - it doesn't - it goes to the blender. Historically they haven't had to worry about the fixed costs of corn, nat. gas, etc. experienced by the producers.

Don. The blender's credit is paid to the blender, but its main effect is to raise the market price of ethanol. That does not necessarily mean that ethanol producers are making a profit, only that more of them can cover their costs. That is my point: at the end of the day, most of the blenders credit may end up simply as covering more costs. We have been through this discussion before. If the ethanol industry truly believes that the oil industry is making out like a bandit from the VEETC, then why does it continue to defend it, and lobby for it to be extended? Why doesn't it do just the opposite, and argue for it to be allowed to expire?

If a mandate that would require a minimum of 10% ethanol blend to all gasoline sold in the U.S. would occur - the created market demand might allow for the blender credit to be removed, since the choice of how much to blend would be gone, and the law of supply and demand would take over the price of ethanol.

Don, with the current Renewable Fuels Standard schedule, we're looking at ethanol accounting for 10% of the gasoline blendstock by 2011, perhaps earlier (depending on transport demand). So, are you saying that within a couple of years "market demand might allow for the blender credit to be removed"?

Ronald, just trying to come up with a way to make ethanol more pallatible for the consumers, profitable for the producers, and beneficial for our air quality all at the same time - 2011 is still 2 years away - or are you saying that this goal is impossible?

You've left out a third constituency, Don: taxpayers. Depending on corn prices and gasoline prices, you cannot both make ethanol "more pallatible for the consumers" (if by that you mean cheaper) and "profitable for the producers" unless (a) the industry quickly finds some way to drastically improve its technical efficiency, which is already high; (b) or can find a feedstock that is incredibly cheap. Producers enjoyed cheap feedstocks for awhile with $2 per bushel corn. But to get to that price again would require billions in subsidies (and there would be consequences for other commodity markets), which might make ethanol more profitable for producers, but might not make taxpayers so happy. As for consumers of ethanol-blended gasoline seing a price break, the volume of ethanol being produced compared with the world demand for oil is still in the low single digits. That is not enough to have a big effect on the price of oil, and hence the gasoline price. On the other hand, we cannot expect that the price of ethanol would ever stay long below its energy-equivalent price of gasoline. If it did, then demand would increase, quickly driving up its price to energy-adjusted gasoline parity.

Don, if the oil industry is the major beneficiary of the 'blenders credit', why did RFA and ACE and all the other ethanol advocacy groups lobby furiously to get that old system changed? As you know, the ~50 cent subsidy used to go the ethanol producer, but that law was cleverly changed in 2004 at the urging of the ethanol industry so that it would go to the blender. I find it pretty hard to believe that the ethanol industry was just feeling generous toward the oil industry back then, that they wanted the poor oil companies to get all the economic benefits . . . Of course it was all politics and optics, just a clever way to divert the public's attention away from what the subsidy was actually was doing. Judging by your views, it has been wildly successful . . .

Back in 2004, it was probably the only way to entice the oil/gasoline companies to blend it.

Don, I've never seen any hard evidence to suggest that there were not companies willing to blend ethanol prior to 2004. All that ethanol being produced since 1978 went somewhere, and it wasn't down people's gullets. So, now that the gasoline wholesalers are mandated to blend it, what additional incentive for them to do so is provided by the blenders credit?

Ronald, the big onslaught of new ethanol plant's production started 2004 - prior to that there was minimal ethanol available and the incentive to blend it was there purely by the higher pump price of gas and the credit received. Since 2004 there is a glut of ethanol, by comparison, and the pump price of gas is low enough to hardly warrant blending the ethanol unless required to by state mandate.

When the price of gas was high last summer blenders could increase their profit margin by blending in as much of the then cheaper ethanol they could get away with up to the maximum allowed (10%). With gas prices low and ethanol prices high, they blend as little of the ethanol as they can get away with. That's not evil, that's business. What kills me is this naive idea that US citizens who work in the oil industry are all evil swine and biofuel execs are celibate eunuchs. Until the EU slapped them with import duties, about 50 biofuel refiners were shipping everything they made to Europe because they could undercut suppliers there with our blending subsidy. The energy independence argument is a canard.

Russ is spot on. As someone who has deep roots both in the ag industry and the energy industry, I continue to be amazed at the vitriol that is hurled by many ethanol advocates, and all ethanol advocacy organizations. Rep. Peterson's ridiculously manic face-to-face allegation to EPA last week that they were 'in bed with the oil industry' is the latest, but not the last example. I don't know anyone in the energy business who hates the biofuels industry or its efforts. All the big oil companies buy huge amounts of biofuels, all are investing in them, and all agree that we need every BTU we can generate, and the more that is home-grown, the better. What they don't like are mandates and subsidies where the Feds are picking the Winners and the Losers. Big Government, Soviet style mandates that are more akin to a Great Leap Forward will not be the best path for our energy future. Research and grants and loan guarantees for improved corn ethanol production and cellulosic are great approaches to helping us diversify our energy sources, but massive Congressional mandates (the Great 15 Year Plan) are horribly inefficient. I think that if the ethanol industry had been satisfied with a slower rate of growth (the EISA2007 mandates were especially ridiculous) many of today's problems and negative public perceptions could have been avoided. I think you can make the argument that if there are any two industries that helped make this country the Greatest Place on Earth, it is agricultural and energy. If the USA is going to maintain its world standing, it will be on the shoulders of both of those remarkable industries.

Check out these comments from Business Week (2007): http://www.businessweek.com/magazine/content/07_40/b4052052.htm For some industries, the prospect of $3.5 billion in federal subsidies now, and double that in three years, might be a powerful incentive. Despite collecting billions for blending small amounts of ethanol with gas, oil companies seem determined to fight the spread of E85. At the same time the industry is collecting a 51 cents-per-gallon federal subsidy for each gallon of ethanol it mixes with gas and sells as E10 (10% ethanol and 90% gas), it's working against the E85 blend with tactics both overt and stealthy. Efforts range from funding studies that bash the spread of ethanol for driving up the price of corn, and therefore some food, to not supporting E85 pumps at gas stations. Mark N. Cooper, research director at the Consumer Federation of America, authored a recent paper characterizing the situation as "Big Oil's war on ethanol." The industry, he writes, "reacted aggressively against the expansion of ethanol production, suggesting that it perceives the growth of biofuels as an independent, competitive threat to its market power in refining and gasoline marketing." Says Al Mannato of the American Petroleum Institute (API), the chief trade group for oil and natural-gas companies: "We think [ethanol] makes an effective additive to gasoline but that it doesn't work well as an alternative fuel. And we don't think the marketplace wants E85." "Big Oil is at the top of the list for blocking the spread of ethanol acceptance by consumers and the marketplace," says Loren Beard, senior manager for energy planning and policy at Chrysler.

The previous posting is in response to the inferance that all ethanol advocates hate Big Oil - the truth is , ethanol has never waged a war on Big Oil - the industry is too small and lacks the capital compared to Big Oil. It's focus is on survival and producing an alternative renewable energy, that hopefully will be able to help achieve our energy independence as a nation, while providing cleaner air.

Don: You guys are always criticizing articles that are critical of ethanol, or ethanol policies, as inaccurate, biased, and so forth. Yet the one you link to from Business Week strikes me as that and more. Among the things the author, David Kiley (Senior correspondent for BusinessWeek magazine, based in Detroit, Michigan, and hence possibly keen on GM's flex-fuel vehicles) gets wrong are the value of the blenders credit (which he cites as $0.51/gallon; it is accually $0.45/gallon), and the affiliation of Tad Patzek (which he says is University of California, Berkeley; it isn't, it's University of Texas at Austin). He also buys into the notion that the blenders credit is a subsidy to the oil companies (but concedes they didn't even ask for it ... hmmm, I wonder who did?), and doesn't consider the fact that to get the credit the blenders actually have to buy ethanol and sell it, which at the end of the day may leave them with very little or no profit. He makes numerous allegations about oil-company-funded campaigns against ethanol (as opposed to simply not embrasing E85), with no evidence other than to point to an oil-industry-funded study that reaches more or less the same conclusions about the effects of biofuels on food prices as have independent organizations such as the FAO, the OECD and the International Food Policy Research Institute (IFPRI). $12 billion per year in higher costs for food, by the way, is about 1% of America's total annual household expenditure on food. Yet Kiley makes it sound as if Global Insight couldn't have come up with that estimate unless they had been paid to do so by the oil companies. Pathetic.