Ethanol fumes

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It seems like an easy fix.

Oil prices have hit record highs. Ethanol, a gasoline additive, can both stretch our supplies of oil and ease air pollution. And best of all, it's a corn-based product. Although America imports nearly two-thirds of its oil, it grows all the corn it needs and more. So all lawmakers have to do is require that gasoline contain a given percentage of ethanol, and our gas-price problems won't be as bad. Or so the theory goes.

The problem is, we've been doing this for years, and it's not working so well. In fact, it's part of the reason gasoline prices are so high.

Even before the Energy Policy Act of 2005, Washington politicians already were doing all they could to prop up the ethanol industry. Since the Carter administration, they've lavished on ethanol a 50-cent-per-gallon federal tax credit to make it competitive with gasoline. They've kept up tariffs on foreign ethanol to help domestic suppliers and ladled on tax credits for small ethanol producers and aid to corn farmers.

But the ethanol lobby was not satisfied. And in 2005, Congress obliged the industry by requiring 4 billion gallons of ethanol be added to the fuel supply this year, with that number growing to 7.5 billion gallons by 2012. Not only did the energy bill force up demand for ethanol, it also eliminated, as of May 6, its chief competitor as a gasoline filler: MTBE, or methyl tertiary-butyl ether.

MTBE illustrates the folly of government mandates. MTBE was used to meet Clean Air Act requirements but turned up in water supplies and brought a raft of lawsuits. Thus, in 15 years, Congress has gone from a de facto mandate on MTBE to a de facto ban on it. The costs of this reversal also add to the current jump in prices.

The 1990 Clean Air Act amendments required use of reformulated gasoline (RFG) in metropolitan areas with the smoggiest air. One requirement for RFG is that it contain 2 percent oxygen content by weight, necessitating addition of so-called oxygenates. The two most economical oxygenates were MTBE and ethanol. MTBE quickly became the most widely used oxygenate, with ethanol a distant second.

By the mid-1990s, traces of MTBE began showing up in groundwater supplies. Oil companies became the targets of lawsuits from property owners and municipalities whose water had been affected. The fuel industry's best defense was that it was using MTBE to comply with the 2 percent oxygen content requirement and thus merely following the law.

Last year's energy bill repealed the 2 percent oxygen content requirement, which is good. But the abrupt elimination has caused transitional problems. Refiners, who requested but did not get liability relief from lawsuits, have moved quickly to phase out MTBE use in anticipation of the deadline, adding further to the supply shortfalls over the last several weeks.

With the government forcing Americans to use ethanol and eliminating its only real rival, prices for ethanol, of course, went up -- to the point that it now costs more than gasoline.

Beyond its high price, ethanol imposes costs in other ways. Ethanol costs more to ship than gasoline, especially troublesome now that ethanol use has expanded beyond the industry's Midwestern base. It also requires more energy to manufacture ethanol. Cars using it get lower gas mileage. All things considered, ethanol not only adds several cents per gallon to the price of gas, it does little, on balance, to reduce fossil fuel use.

Ethanol's much-ballyhooed environmental benefits don't stand up to scrutiny either. Though ethanol use reduces some forms of vehicular pollution, it increases others. In areas not in compliance with the federal standard for smog, oil companies can't simply add ethanol to ordinary gasoline without violating EPA regulations. Instead, it must be added to a specialized ultraclean blend that compensates for ethanol's shortcomings. Moreover, the EPA says ethanol plants themselves are significant emissions sources, especially now that high natural-gas prices have forced some to burn more coal.

The problem is high gas prices are here now, the summer driving season is almost here and Congress feels pressure to do something soon. In reality, the best measures to deal with high energy costs are long-term, such as expanding domestic production and refining capacity. If government is to mandate use of a variety of blends -- a third of gasoline now sold in the U.S. is RFG, or reformulated gasoline -- refining capacity must expand.

Expanding refining and exploration is a slower, less spectacular approach than eliminating MTBEs or mandating ethanol use. But unlike those steps, it would work for the benefit of drivers.

Ben Lieberman is senior policy analyst in the Roe Institute for Economic Policy Studies at the Heritage Foundation.