Is E85 the Solution to the Ethanol Debate?

Professor Bruce Babcock, of the Center for Agriculture and Rural Development at Iowa State University, believes he has a simple solution to the corn ethanol mandate problem – encourage people to fill their tank with fuel that is 85 percent ethanol instead of the current 10 percent.

“There may be a few good reason for cutting back on our consumption of corn ethanol,” says Babcock, who holds the Cargill Endowed Chair for Energy Economics. “But the reason the EPA is giving sure isn’t one of them.”

In case you haven’t been following, the Farm Belt is in an uproar over Environmental Protection Agency’s recent decision to cut back on the ethanol mandate from 14.4 billion gallons to somewhere around 13 billion for 2014. Iowa Senator Chuck Grassley blames “special interests” – meaning the oil companies – while Governor Terry Brandstat has talked darkly about a “war on corn.”

But dissatisfaction with the corn ethanol mandate extends well beyond the oil companies and the refineries. In December a coalition of liberals and conservatives – led by California Democrat Diane Feinstein and Oklahoma Republican Tom Coburn – introduced a bill to do away with the corn mandate altogether. “I strongly support requiring a shift to low-carbon advanced biofuel,” said Feinstein, “but corn ethanol mandate is simply bad policy,” “This misguided policy has cost taxpayers billions of dollars, increased fuel prices and made our food more expensive,” added Coburn.  “The time has come to end it.”

What’s the problem?  Well, the mandate – adopted by Congress in 2007 at the behest of President George Bush, Jr. – has fallen out of sync with the “blend wall” – the theoretical 10 percent mark where ethanol starts harming car engines. The mandate pushed up to 14.2 billion gallons last year while gasoline consumption actually dropped to 135 billion gallons last year from 142 billion gallons in 2007, pushing it way past the 10 percent benchmark.

Faced with this dilemma, refiners were forced to buy “credits” in the form of “renewable identification numbers (RINS),” which give them bookkeeping credit for consuming ethanol. But the pressure on the market pushed the price of RINs from pennies per gallon to $1.40 last August, pushing up the price of gasoline. Hence the rebellion and President Obama’s apparent instructions to the EPA to cool it on the mandate for 2014.

Professor Babcock says this is all a result of the artificial barrier limiting ethanol content to 10 percent. “E85 [a blend that is 85 percent ethanol] is selling all over Iowa at 15 percent less than gasoline,” says Babcock, who is originally from southern California. “That actually makes it a little more expensive than gasoline because you only get 80 percent of the energy.  But last August E85 was selling 25 percent below gasoline and it was a bargain.  The notion that cars can’t tolerate mixes of more than 10 percent ethanol is purely fictional.”

The 10 percent blend wall is based on the premise that putting more ethanol in your tank can harm your engine. Several years ago the auto companies have announced they will not honor warrantees on older cars that use more than 10 percent ethanol. The EPA has approved E15 (15 percent ethanol) for cars built after 2001, even doing elaborate tests to prove it could work, but no one has paid much attention. “The automakers say, `We didn’t build those older cars for E15 and we don’t want them running on E15,’” says Babcock.  “As far as they’re concerned, that’s the end of it.”

Without much fanfare, however, both Ford and GM are now manufacturing close to half their cars for “flex-fuel” – capable of burning any mix of gasoline and ethanol – or even possibly methanol, which has not been tested yet. “There’s a little embossed insignia on the back of the car but it’s easy to miss,” says Babcock.  “There are now 17 million flex-fuel cars on the road, although most people who have them don’t even realize it.”

Adjusting older vehicles to flex-fuel isn’t that difficult, either.  On the oldest models, it involves only replacing a few rubber fuel lines with aluminum, which a good mechanic could do it for less than $200 – if it weren’t illegal.  On newer models it requires only an adjustment to the software.  New flex-fuel cars sell for the exact same price as ordinary gasoline vehicles.  “GM has done a really good job of figuring out flex-fuel technology,” says Babcock.  “All their trucks are now designed for it. Chrysler is coming around as well but the Japanese cars have stayed away from it.  They’re putting all their bets of hybrids, hydrogen and electric vehicles.  They’re not at all interested in biofuels.”

Babcock’s proposal, outlined in a paper released earlier this month, is for the EPA to sanction E85 so it can start selling somewhere else besides Iowa, where ethanol remains popular and corn is aplenty. “It just doesn’t make sense to have all the stations concentrated in the Midwest,” says Babcock. “The real place for these cars should be on the East and West Coasts.”

Who would pay for upgrading all these stations to handle E85?  Babcock’s answer is the oil refineries. “The cost would be about $130,000 per station or 20 cents for each additional gallon they could expect to sell,” he says.  “If the price of RINs becomes too high, the refiners will have to do something.  People call me naïve to think they will spend all that money building new pumps but they’re already done it in several instances. I’m not some wide-eyed academic economist.”

But the refineries do have another option and that is to go to Congress and the President and insist that the mandate be lowered – which is what they’ve just done. And with a rebellion against ethanol brewing in the non-farm states, it isn’t likely the mandate will be reinstated any time soon – at least until the Presidential candidates start trooping to Iowa again.  On the other hand, Babcock’s proposal for approving E85 so that the 17 million flex-fuel cars already on the road can start using it makes perfect sense.

At this point, the “blend wall” may more of a mental barrier than a physical one. Once we break through it, ethanol, methanol and a lot of other things become feasible.