The 2007 energy independence law is proving to be a law of unintended consequences.
The intent was to boost the production of ethanol and other biofuels so the country could reduce its growing dependence on imported oil.
At the time, President George W. Bush, a former oilman, complained that the nation was “addicted to oil.” Peak Oil, a theory that held that global oil supplies had peaked and would soon decline, was spreading the notion of impending scarcity.
Biofuels offered a remedy. Corn-based, sugarcane-based or even grass-based distilled alcohol — ethanol — could replace some of the gasoline in the fuel tank.
Thanks to the law, 10 percent of the gasoline used in the United States consists of alcohol from fermented plants. Biofuels have reduced U.S. oil consumption by 5 percent.
The law instructs refiners to put more ethanol into the nation’s gasoline every year. But gasoline consumption has dropped, from 142.38 billion gallons in 2007 to 133.78 billion gallons in 2012. It turns out that 2007 was the peak year for gasoline demand rather than supply.
Still, the biofuels mandate marches on. Subsidies for making ethanol went away in 2011. But the law requires the use of 13.8 billion gallons this year, and 15 billion gallons in 2015.
Higher prices ahead?
Refiners say they are starting to hit what’s called a “blend wall”: the amount of ethanol that can be used without damaging engines. Refiners are warning that gasoline costs could jump $1 a gallon if the government doesn’t ease up on the law’s requirements.
Ethanol producers scoff at the idea of a blend wall. Some time ago, they petitioned the Environmental Protection Agency to allow gasoline retailers to sell gas with an ethanol content of 15 percent. The EPA granted the waiver, ruling that this product would not damage the engines of cars produced after 2001.
So far, not many people are making, selling or buying what’s called E15.
Ethanol producers also say refiners could avoid a blend wall by promoting the use of E85 — where up to 85 percent of the fuel is ethanol — in flex-fuel cars that can burn ethanol in any concentration. About 1 in 20 cars in the country is a flex-fuel car.
Here again, though, the refiners say no one is buying E85, because it is not a cost-effective alternative to gasoline.
Engine damage risk
The 2007 law allowed refiners to avoid fines for not meeting the ethanol-content rules by issuing tradable chits. A refinery that exceeded its ethanol quota could sell these to a refinery that was short.
A year ago, these chits — called Renewable Identification Numbers — were selling for about 7 cents a gallon. In March, they hit $1.05. Today they are still selling for 80 cents a gallon.
Refiners say they can’t solve this problem with E15, because they’ll be sued by motorists for damaging their cars. The EPA’s waiver did not certify it safe for use in cars produced before 2001, which still account for about 30 percent of the nation’s autos. And even though the EPA says E15 is OK, some automakers have warned that its use will void a car’s engine warranty.
The House Energy and Commerce Committee has started issuing short white papers and inviting comment on the biofuels mandates of the 2007 law and whether they should be changed.
The U.S. oil supply, meanwhile, has gone up by 2 million barrels a day. That’s curbed oil imports twice as much as home-grown ethanol. As new oil supplies surge in Texas and North Dakota while gasoline demand ebbs, forecasters are now seeing a day in the next decade or so when the United States will be self-sufficient in oil.
Follow Jim Landers on Twitter at @landersjim.