The Biofuels Fiasco
Even Rube Goldberg would recoil in horror from this regulatory contraption.
Oct 31, 2011, Vol. 17, No. 07 • By DAVE JUDAY
A food versus fuel debate has raged for the past few years as ethanol consumes more and more of the U.S. corn supply. Ethanol will use about 40 percent of the U.S. corn crop this year, and for the first time ever, more corn will go into motor fuel production than into feed for livestock. As the National Cattlemen’s Beef Association has pointed out, since Congress mandated the use of ethanol in the nation’s fuel supply, corn use by ethanol mills has increased by 382 percent, yet with a limited supply of farmland and the need to grow other crops, plus some less than ideal weather conditions this year and last, corn production has increased only 5.4 percent over the same period.
As a result, ethanol policy has been a major contributor to reduced red meat production. Per capita beef supplies for next year are projected to be at their lowest level since 1955. Food inflation is rampant—especially in categories where corn is a significant input. To date, poultry prices are up 3.4 percent over last year, milk and dairy is up 9.1 percent, pork is up 7.5 percent, and hamburger is up 10.4 percent. All categories are projected to increase even more next year. Moreover, the impact is not just domestic, as more than 60 percent of the world’s tradable corn supply originates in the United States.
Food versus fuel is not the only market distortion caused by the federal mandate to use ethanol in the U.S. motor fuel supply. The federal regulations and mandates of what feedstocks may be used to make which biofuels are now creating chaos within the fuel sector—which hits motorists and taxpayers in the pocketbook, too.
Consider that within the overall mandate that 36 billion gallons of ethanol be used for fuel by 2022, ethanol distilled from corn is limited to 15 billion gallons because of food versus fuel concerns. Despite already consuming 40 percent of the U.S. corn supply, corn ethanol has not yet hit its 15 billion gallon limit. Nonetheless, there still is more corn ethanol being produced than the market can absorb because of slackened motor fuel demand and a number of regulatory barriers.
Federal support for the ethanol industry has resulted in an excess, and thus exportable, supply of ethanol. Sold politically just four years ago in the 2007 Energy Independence and Security Act as a means to secure domestic energy independence, subsidized American ethanol is now exported to Great Britain, Finland, and the Netherlands, helping them comply with biofuel mandates issued by the European Union. Complex biofuel policy schemes are not just a U.S. mania.
While excess corn ethanol is exported, however, the U.S. market is still short of overall biofuel supply to meet the 2007 mandate. To make up the 21 billion gallons difference between corn’s allotted maximum and the total biofuels mandate, so called advanced biofuels—which are simply those made from feedstocks other than corn—are also prescribed by statute.
Biodiesel is one such advanced biofuel. It is mostly made from soybean oil. The federal mandate for biodiesel use provides for one billion gallons by 2012. That is more than one-third of the country’s total soybean oil supply. While blenders of corn ethanol enjoy a 45 cents per gallon tax credit, biodiesel receives a $1 per gallon tax credit. At wholesale prices above $5.50 in mid-October, even the dollar reduction provided by the tax credit still leaves biodiesel far more expensive than the $3.80 per gallon retail price of petroleum diesel.
For a time, the $1 tax credit provided a huge incentive to import soy oil from South America, blend it with a small amount of petroleum diesel to claim the U.S. tax credit—the blending often occurred while the tanker ship was still in port—and then re-export the blended fuel to Europe to further capture EU subsidies. That little scheme was known as “splash and dash,” and it was a $300 million subsidy to promote domestic biofuel use that did not in fact subsidize biodiesel use in the United States.
Consider the absurdity of splash and dash at its height: According to the Department of Energy, in 2008 the United States produced 678 million gallons of biodiesel and exported 677 million gallons. We imported 315 million gallons, and domestic U.S. consumption was 316 million gallons. That particular stratagem ended in 2009, but exports haven’t. Despite not meeting the mandated minimum for domestic biodiesel use last year, more than a third of the biodiesel produced in this country was exported in 2010.