- - Monday, May 7, 2012

With regular gasoline prices still averaging more than $3.50 a gallon nationwide, the last thing drivers need is car troubles. Yet a new scheme from Washington to boost the ethanol content of gasoline from 10 percent to 15 percent could gum up many motorists’ travel plans - literally as well as figuratively.

Ethanol has enjoyed a trifecta of government largesse for many years: tariff protection from imports, direct subsidies to encourage its use, and a federal mandate requiring refiners and importers to blend it into the gasoline pool.

At the end of last year, Congress failed to renew the subsidies and tariff protection but retained the federal mandate requiring increases in the use of renewable fuels, such as ethanol, from approximately 13 billion gallons today to 36 billion gallons by 2022.

The mandate assumed that U.S. gasoline consumption would continue to increase rapidly, but the opposite has happened: Consumption has declined by more than 1 million barrels per day since 2006.

To comply with the mandate, therefore, blenders have just one option: increasing the ethanol content of the gasoline supply.

This has severe drawbacks. First, it likely will lead to a significant price increase because the cost of corn is rising. Disappointing U.S. corn yields, loss of wheat crops worldwide, and the increased demand for corn for ethanol production have pushed corn prices from $3.89 per bushel three years ago to more than $6 per bushel today. This makes ethanol more costly than gasoline when adjusted for energy content. (Ethanol contains 33 percent less energy than gasoline.)

A bigger problem is that the federal mandate requires ethanol blending to exceed what most vehicles can use: a gasoline blend containing 10 percent ethanol (the E10 “blendwall”).

One option for meeting the mandate’s targets is with fuel blends containing 70 percent to 85 percent ethanol (E85). But such a mixture can be used only in “flex-fuel” vehicles, and there are too few of them - about 4 percent of the U.S. vehicle fleet, though their numbers are increasing. There also are very few E85 service stations, so E85 would appear impractical without significant new subsidies.

In addition, E85 is even more costly than premium gasoline when adjusted for energy content and mileage performance, according to Department of Energy data.

Rather than telling Congress the truth - that the mandate is unworkable - the Environmental Protection Agency (EPA) instead issued a “waiver,” permitting refiners and blenders to mix 15 percent ethanol blends (E15), assuring drivers the fuel is safe.

But the EPA may have jumped the gun. According to a study being released May 8 by the Coordinating Research Council, a nonprofit technical group supported by the petroleum and auto industries, two popular engine types commonly produced by U.S. and Japanese manufacturers since 2001 failed with “mechanical damage” after being tested with E15 fuel. When gasoline without ethanol was used, the engines ran fine.

It’s not as if the EPA didn’t have any warnings. When the agency initially authorized the use of E15, the automobile industry - including BMW, Ford, Honda and Toyota - argued against it. Ford Motor Co. pointed out that “fuel not approved in the owner’s manual is considered misfueling and any damage resulting from misfueling is not covered by the warranty.” Manufacturers of lawn mowers, boats, snowmobiles and other gasoline-powered equipment also objected, pointing out that E15 would harm their engines.

AAA, the nationwide automobile club, raised significant concerns, as did Edmunds, one of the most authoritative independent sources of automotive information. AAA cited reduced fuel efficiency and “the potential to cause catastrophic engine damage.” AAA also pointed out that older vehicles would “unquestionably experience poor drivability and reduced engine reliability.”

In a market free of government mandates, costs and practicability would be the prime determinants in evaluating the appropriate mix of ethanol and gasoline sold at the pump.

When relative prices of the components used in the production of gasoline shift, refiners will move as quickly as possible to produce a new mix that will maintain their margins. But they won’t make blends that will gum up engines.

The federal mandate prohibits refiners from making such adjustments and fines them if they miss their blending obligations. As a result, refiners will be forced to produce higher-cost fuels - a hidden tax that will only get worse as the required biofuel volumes increase.

The program is adding about 2 cents per gallon to the price of gasoline. But get ready for a run-up of 10 to 20 cents per gallon in the next few years as the mandate pushes “advanced” biofuels (made from algae and weeds) into the gasoline pool.

Lucian Pugliaresi is president of the Energy Policy Research Foundation (eprinc.org).

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