American Ethanol on the Rocks
Walter Russell Mead & Staff
The American Interest
Posted: Sep 06, 2015 - 12:51 pm
It’s been a bad week for U.S. ethanol producers after two plants, one in Wyoming and one in Virginia, closed their doors. Their shuttering signals a retrenchment in the fledgling biofuel industry that’s struggling to deal with falling demand and shrinking margins. The two shuttered facilities were so-called “destination plants,” sited well outside of the corn belt that produces their product’s primary feedstock. While just a few years ago their existence made sense thanks to government mandates creating an artificial market for corn-based ethanol, today it is harder to justify. Reuters reports:[Those plants] that suspended operations this week were built in the ethanol boom years of the 2000s when the promise of increased U.S. government blending mandates could justify the cost of having to buy railcars full of corn from hundreds of miles away. That is no longer the case for some of these “destination” plants.
And demand is falling. With gasoline cheaper than ethanol in some parts of the country, little demand is seen beyond the U.S. government blending requirements that mandate nearly every gallon of gasoline sold in the United States contain 10 percent ethanol. This is just the beginning. One ethanol trader told Reuters they “wouldn’t be surprised to see more” destination plants close as they prove incapable of turning a profit in a tightening market as a result of their increased transportation costs. And while these plants make up the minority of America’s ethanol production, their closing might be a kind of canary in the coal mine for the industry. Refiners can only blend so much biofuel into gasoline (beyond 10 percent by volume, ethanol can start harming older engines, creating what’s come to be known as the “blend wall”), a limit that ties ethanol’s fate to gasoline demand.
But even as that demand ticks upwards while prices decline to 11-year lows, ethanol is struggling to make it into your car’s gas tank—gasoline is simply cheaper without the biofuel blend, so refiners have no reason to demand any more than the government mandates.
This is just the latest chapter in the long, sordid story of America’s biofuel boondoggle. What was once billed as an eco-friendly way to bolster our country’s energy security has instead turned out to be a policy disaster. Our federally mandated corn-based ethanol program starves the world’s poor by raising global food prices (and potentially incites riots), costs consumers an estimated $10 billion annually, and worst of all isn’t even green. It’s no surprise then to see contractions in the already struggling industry. The sooner we reform or repeal this harebrained policy, the better.
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