US Agriculture Secretary Vilsack visits Minnesota; defends ethanol subsidies

By Steve Karnowski

….Some in Congress and other critics of the ethanol industry have called for ending the main federal subsidy for corn-based ethanol, the 45 cent per gallon “blender’s credit,” which expires at the end of the year and goes to fuel companies that blend ethanol into gasoline. They argue that the country can’t afford it, and that the industry doesn’t need it because the federal Renewable Fuels Standard already ensures demand for ethanol. And they also contend corn ethanol drives up food prices, an idea Vilsack disputed.

Vilsack said corn ethanol subsidies are still important while the country invests in developing advanced biofuels including cellulosic ethanol, which can be made from biomass such as corn stalks, perennial grasses and waste wood. He listed several Agriculture Department programs that are funding such work, but cost hurdles and a shortage of investment capital have impeded large-scale production of cellulosic ethanol so far.

The secretary paid tribute to Minnesota’s and CHS’ efforts to promote biofuels. Dayton pointed out that Minnesota was the first state to mandate that gasoline contain 10 percent ethanol.

CHS says Cenex is the country’s largest retailer of the high-ethanol blend E85 and one of the leading operators of “blender pumps,” which dispense blends ranging from 10 percent ethanol to 85 percent ethanol. E85 is sold at 238 Cenex stations, and the chain has about 114 blender pumps, said Ann Mann, spokeswoman for CHS’ energy group.

Vilsack highlighted the Agriculture Department’s announcement earlier this month of financial incentives for fuel station owners to install blender pumps, also known as flexible-fuel pumps, which can cost them around $100,000. He noted the Obama administration’s goals of reducing oil imports and of installing 10,000 blender pumps nationwide within five years. A robust biofuels industry will also require encouraging automakers to produce and motorists to buy more flexible-fuel vehicles, which currently make up only about 3.5 percent of U.S. automobiles on the road, he said.

Our Take:
A thank you is in order to CHS for being a leader in developing blender pump infrastructure. The Obama Administration and the USDA have recently announced the formulation of programs that are meant to result in 10,000 blender pump installations across the US in the next five years. We would argue this is a good start, especially given the federal government’s budgetary concerns. Once American motorists get a taste for true choice at the pump, the clamor for more blender pumps may accelerate the spread of this infrastructure.

We think supporting domestic energy production will increase the flow of revenue to the US Treasury and ultimately help combat the deficit by reducing our trade imbalance in energy.

Blender Pumps in combination with the inclusion of flexible fuel systems in more cars produced in Detroit promise to break the sleeper-hold that oil has on transportation energy in the United States. Until the blender pump/fueling infrastructure reaches critical mass (say a blender pump in every third or fourth gasoline station–one in every station would be even better), the blender credit is the necessary bribe that gets oil companies to blend ethanol at levels above the national requirement. Yes they would blend it based on RFS alone, up to the amount stipulated by law, but oil companies have consistently used about a billion gallons more ethanol than RFS requires since the first RFS passed in 2005 — this is absolutely essential to the proper functioning of the fuel market. It allows the ethanol companies to underwrite the build out in advance of the stipulated requirement. When the law reaches its maximum requirement, 15 billion gallons, the production capacity will already be in place before that amount is required by law.

People may remember in the early 2000s what happened when all of a sudden MTBE was being yanked off the market–ethanol’s only competitor as a gasoline oxygenator–state governments banned the fossil fuel product because it was found to have serious environmental impacts to water quality. There was a period of time when the 39 US cities required to use oxygenates in gasoline called for more ethanol than was being produced. The result was economic discomfort, to say the least.

Since the blender credit is responsible for creating that excess capacity, doing away with it before the RFS law reaches the highest stair step–15 billion gallons per year–could result in the industry pulling back and not creating the last necessary piece of capacity.

All that is very technical, but the bottom line for consumers is choice. In order to have a viable choice other than gasoline at the pump, the alternatives need to be supported until they break through the monopoly and can stand on their own. Without that support, it’s back to one choice at the pump, which increases the ability of oil producers to charge more, and means we are transferring more American wealth and losing American energy jobs, and filling the treasuries of countries that have no love for us. And don’t forget, it was the price of gasoline that triggered the last recession–people traveled less, spent more on gas and less on products that had a higher economic impact for America. Do we really want to go another recession when people choose to spend on gasoline, and pull back their spending on other consumer goods? It’s a toxic situation that requires American investment so that we can build our way to energy independence.

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