April 2 (Bloomberg) -- U.S. oil production has reached a 20-year high and, since March 2012, demand for gasoline has fallen almost 5 percent. So why have prices at the pump jumped? From mid-December through the end of February they rose almost 20 percent, though they have declined a bit in recent weeks. Some of the blame for the increase goes to the federal mandate on ethanol use in the U.S. fuel supply.
Fuel blenders are required to mix 13.8 billion gallons of ethanol with gasoline this year, under an energy bill passed in 2005 and revised two years later -- at a time before domestic energy production surged and motorists began using less gasoline.
Now, the fixed ethanol mandate could force blenders to make gasoline that’s more than 10 percent ethanol -- more than some cars are equipped to burn. Some automakers have said that using a mix of 15 percent ethanol, which the Environmental Protection Agency plans to order blenders to produce, might void engine warranties.
The solution for blenders is to buy credits, which give them a break on how much ethanol they must mix into the gasoline they sell. The price of credits has soared, however, reaching more than $1 a gallon in early March, after trading at just 7 cents in January.
The same law, the Energy Independence and Security Act, requires refiners and blenders to use ethanol derived from cellulosic fiber, such as grass, wood and agricultural waste. The trouble is, there’s not enough ethanol from these materials to meet EPA targets. A federal appeals court in January had the good sense to reject that mandate, though it seems as if the EPA didn’t get the message: The agency increased the amount of cellulosic ethanol that blenders are supposed to use next year.
Some members of Congress asked the EPA to suspend the ethanol mandate amid last summer’s drought, the worst in more than 50 years. Most U.S. ethanol is produced from corn; about 40 percent of the nation’s harvest, the world’s largest, goes to fuel production. Although corn prices have dropped from the highs of last year, they are still about a fourth higher than they were in June.
The ethanol mandate has been blamed for an array of market distortions, including soaring farmland prices, environmental degradation (as marginal soils and wetlands are cultivated) and higher global food costs. Ethanol from corn may not even be a net positive in terms of energy output -- some scientists say the amount of energy used to produce ethanol from corn is larger than the amount it yields. That undermines claims that ethanol use reduces greenhouse-gas emissions.
Rather than require blenders to mix a fixed quantity of ethanol into gasoline, the EPA should let them use the amount needed to maintain a 10 percent mix and abandon plans to require a 15 percent blend. If gasoline consumption keeps falling, consumers should be able to benefit from lower prices.
Better yet, Congress should end the outdated mandate altogether.
Ethanol may have its place. It can help gasoline burn more efficiently in older car engines, and is less toxic than the alternatives used to boost fuel octane ratings. Those advantages shouldn’t be compromised by a rigid rule that contributes to higher gasoline prices.
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