Ethanol Production Down in 2013 Despite Federal Mandate

Despite federal law requiring refiners to blend increasing amounts of ethanol into gasoline, domestic ethanol production has actually declined over the last year. The U.S. ethanol industry produced 6.40 billion gallons of ethanol through the first half of 2013, down from 6.89 billion gallons over the same period last year, according to the Energy Information Administration’s (EIA) Monthly Energy Review. As the following chart shows, this is the third straight year that domestic ethanol production is stagnating.

Source: The Energy Information Administration

The data reflect a growing disconnect between federal law and economic reality. Under the Renewable Fuel Standard (RFS), refiners are required to blend greater amounts of ethanol into the nation’s transportation fuel supply, with the goal of blending 36 billion gallons by 2022. Even though production was flat last year, the Environmental Protection Agency (EPA) raised the ethanol mandate to 16.55 billion gallons for 2013, up from 15.2 billion gallons in 2012.

Mandating ever-rising volumes of ethanol regardless of whether it makes sense harms American families. The RFS burdens refiners with massive compliance costs, which get passed on to consumers in the form of higher gas prices. The cost of ethanol credits, which refiners use to demonstrate compliance, skyrocketed from 7 cents in January to a high of $1.43 in July, settling at about 60 cents. Valero, a major refiner, announced earlier this year that they will spend between $500 million and $750 million on ethanol credits in 2013, compared to $250 million in 2012.

Source: The New York Times

The dramatic spike in the price of ethanol credits makes gasoline more expensive for Americans. Gas prices could spike as much as $1 per gallon in 2014 due to the rising cost of ethanol credits, according to the Energy Policy Research Foundation. A study by NERA Economic Consulting finds that the RFS could raise gasoline prices by 30 percent in 2015 if action is not taken to correct the government’s unrealistic projections.

In addition to an unrealistic overall mandate, EPA also imposes an unattainable cellulosic mandate. As we have written before, EPA required refiners to blend 5 million gallons and 6.6 million gallons of cellulosic ethanol in 2010 and 2011, respectively, but not a single drop was produced in either year. EPA actually raised the mandate to 8.65 million gallons in 2012, but just 20,069 gallons were produced. In 2013, EPA lowered the requirement to 6 million gallons, yet EPA data show that only 129,731 cellulosic ethanol credits have been generated so far this year.

That ethanol production has declined despite rising federal mandates demonstrates the failure of energy central planning. Consumers, including motorists and refiners, will always make more economical decisions than bureaucrats in Washington. It is no more possible for regulators to predict precise volumes of ethanol in a given year than it is for meteorologists to predict the weather on a given day in some distant future. This just shows, once again, that the RFS is fatally flawed.

IER Policy Associate Alex Fitzsimmons authored this post.