Ethanol Gets a Reprieve, Lawnmowers Don't (ADM, VLO, PEIX)

Tucked neatly away in the recently passed tax bill was a renewal of the $0.45/gallon subsidy for corn ethanol. The subsidy renewal also includes a continuation of the $0.54/gallon tariff on imported ethanol and revives the expired biodiesel credit of $1/gallon. All told, the renewal of the ethanol subsidies adds about $10 billion to $13 billion to the deficit.

Earlier this year, the US EPA approved a 15% ethanol blend (E15) for use in automobiles manufactured after 2007. The renewable fuels lobby pushed hard for this because it would increase demand for ethanol. After all, ethanol refiners, like Archer Daniels Midland (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), and privately held POET LLC, were increasing refining capacity and the companies needed a market. What ethanol producers really want is a mandate for 85% ethanol fuel (E85) and the continuation of subsidies, but that combination is unlikely to be realized.

The EPA’s decision to permit the E15 blend is based on its determination that E15 would not cause the later model cars to emit more pollution than the fuel for which they were designed. The EPA apparently did not weigh the effect that E15 would have on car engines.

Bloomberg reports that a group of US carmakers and engine manufacturers have filed a request with a federal appeals court to review EPA’s decision to allow E15 on the basis that the decision violates the Clean Air Act. The group contends that EPA’s own statutory rules prohibit fuels that cause engine failures and that E15 has been demonstrated to cause such failures.

If E15 replaces E10 and becomes the new standard, some 400 million cars, motorcycles, chain saws, motor boats, and other small-engine driven machines could be adversely affected. Some parts of these engines actually disintegrate when E15 is burned.

The federal government commissioned a study by Underwriter’s Laboratories on the effects of E15 on the gasoline pumps in use at most US gas stations. After stating that overall results were inconclusive and that some equipment performed adequately, there’s this:

“Some new and used equipment demonstrated a reduced level of safety or performance, or both, during either long-term exposure or performance tests. Dispenser meter/manifold/valve assemblies in particular demonstrated largely noncompliant results. Nozzles, breakaways, and swivels, both new and used, experienced noncompliant results during performance testing. Responses of nonmetals, primarily gaskets and seals, were involved with these noncompliances.”

Non-compliance means the equipment develops leaks or breaks. That means the country’s hundreds of thousands of gasoline pumps ought to be replaced in order to protect public safety. What are the chances of that happening?

The backers of the move to E15 were ethanol producers, corn farmers, and the renewable fuels trade groups. Not because of any benefit to US energy policy, but simply as a way to maintain profits. A few more campaigns like this and the renewable fuels folks should rank right down there with oil companies and members of Congress in public popularity polls.

Paul Ausick