Why the Foreign Oil Argument No Longer Works for Ethanol

Last Updated Nov 16, 2010 6:11 PM EST

The U.S. ethanol industry, which has emerged from the recession to become the largest producer in the world, can't find a home for its product. At least not here in America, which has led to record exports to Canada, Europe and even Saudi Arabia, the Financial Times reported this week. If the exports continue, and they will, pro-ethanol advocates would be smart to change their "weaning off the foreign oil teat" mantra to something else.
Government data showed 251 million gallons in fuel ethanol exports in the nine months to September 30, more than double the 2009 total. The U.S. became a net exporter this year.
The record exports are problematic for the U.S. ethanol industry both here and abroad. Most importantly, it threatens to undercut the ethanol industry's efforts to extend a hefty 45-cent-per-gallon blender's tax credit set to expire at the end of the year.

Problems in the U.S. The U.S. market for ethanol can be summed up in a word: Glut. Federal mandates require a total renewable fuel standard -- most of which is corn-based ethanol -- at 12.95 billion gallons in 2010. The mandates, coupled with the blender's tax credit, which cost taxpayers some $6 billion last year and was originally passed to fuel domestic use of ethanol, has boosted production here.

But demand for fuel hasn't followed, leading to a saturation in the market. The EPA's decision to raise the percentage of ethanol allowed to blended in fuel from 10 percent to 15 percent didn't help because it only applies to new cars sold since 2007. Plus, the nine food industry groups and some oil companies have banded together to sue the EPA over its decision. Meaning, fuel retailers will be reluctant to offer the 15 percent fuel blend.

Problems in Europe Want to know what happens next? Look no further than the U.S. biodiesel industry. U.S. biodiesel producers were hit in July 2009 with a five-year tariff on exports to Europe after an investigation determined that the fuel, which once benefited from a $1 per gallon tax credit, was being sold at discount and damaging overseas markets.

The tax credit has since expired and the biodiesel industry, already grappling with weak demand, has hit the skids.

Here's an idea The obvious solution for pro-ethanol folk is to find ways to boost consumption here in the states. But what if that's not possible?

Lose the subsidy, which is really benefiting the refiners anyway. And keep the mandate.

Photo from Flickr user Perry McKenna, CC 2.0
Related: