Big Oil's Big Stall On Ethanol
By David Kiley
For some industries, the prospect of $3.5 billion in federal subsidies now, and double that in three years, might be a powerful incentive. But not, apparently, for the oil industry, which is seeing crude oil prices soar to record highs. Despite collecting billions for blending small amounts of ethanol with gas, oil companies seem determined to fight the spread of E85, a fuel that is 85% ethanol and 15% gas. Congress has set a target of displacing 15% of projected annual gasoline use with alternative fuels by 2017. Right now, wider availability of E85 is the likeliest way to get there.
At the same time the industry is collecting a 51 cents-per-gallon federal subsidy for each gallon of ethanol it mixes with gas and sells as E10 (10% ethanol and 90% gas), it's working against the E85 blend with tactics both overt and stealthy. Efforts range from funding studies that bash the spread of ethanol for driving up the price of corn, and therefore some food, to not supporting E85 pumps at gas stations. The tactics infuriate a growing chorus of critics, from the usual suspects—pro-ethanol consumer groups—to the unexpected: the oil industry's oft-time ally, the auto industry.
Those who criticize the industry's stance see it as reminiscent of its attempts to discredit the theory that human use of fossil fuels has caused global warming. Mark N. Cooper, research director at the Consumer Federation of America, authored a recent paper characterizing the situation as "Big Oil's war on ethanol." The industry, he writes, "reacted aggressively against the expansion of ethanol production, suggesting that it perceives the growth of biofuels as an independent, competitive threat to its market power in refining and gasoline marketing."
The industry collects the subsidies, but didn't lobby for them—Congress created them to encourage a larger ethanol market. While oil reps say they aren't anti-ethanol, they are candid about disliking E85. Says Al Mannato of the American Petroleum Institute (API), the chief trade group for oil and natural-gas companies: "We think [ethanol] makes an effective additive to gasoline but that it doesn't work well as an alternative fuel. And we don't think the marketplace wants E85."
One prong in the oil industry's strategy is an anti-ethanol information campaign. In June the API released a study it commissioned from research firm Global Insight Inc. The report concludes that consumers will be "losers" in the runup to Congress' target of 35 billion gallons of biofuel by 2017 because, it forecasts, they'll pay $12 billion-plus a year more for food as corn prices rise to meet ethanol demand. The conclusions are far from universally accepted, but they have been picked up and promoted by anti-ethanol groups like the Coalition for Balanced Food & Fuel Policy, made up of the major beef, dairy, and poultry lobbies. Global Insight spokesman Jim Dorsey says the funding didn't influence the findings: "We don't have a dog in this hunt."
Academia plays a role as well. There is perhaps no one more hostile to ethanol than Tad W. Patzek, a geo-engineering professor at the University of California at Berkeley. A former Shell petroleum engineer, Patzek co-founded the UC Oil Consortium, which studies engineering methods for getting oil out of the ground. It counts BP (BP ), Chevron USA, (CVX ) Mobil USA, and Shell (RDS ) among its funders. A widely cited 2005 paper by Patzek and Cornell University professor David Pimentel concluded that ethanol takes 29% more energy to produce than it supplies—the most severe indictment of the biofuel. Michael Wang, vehicle and fuel-systems analyst at the Energy Dept.'s Argonne National Laboratory, says among several flaws in the study is the use of old data and the overestimation of corn farm energy use by 34%. Pimentel defends the study. In a recent update, he and Patzek hiked the estimate of ethanol's energy deficit to 43%.
A more moderate conclusion comes from a recent study by the University of California at Davis, which last year received a $25 million grant from Chevron to study biofuels. It said the energy used to produce ethanol is about even with what it generates and that cleaner emissions would be offset by the loss of pasture and rainforest to corn-growing. Only a small part of the research backed by the grant will involve ethanol, says Billy Sanders, UC Davis' research director. The primary focus will be developing alternative processes and feedstocks for biofuel that is not ethanol.
Infrastructure problems are behind much of the oil companies' resistance to E85. It adds "too much complexity and cost," says Shell spokesperson Anne Bryan Peebles, since it requires separate pumps, trucks, and storage tanks. Any mix with more than 10% ethanol may cause corrosion and other problems in existing pipelines.
That inconvenient truth is one reason oil companies aren't rushing to install E85 pumps. Of the 179,000 pumps at U.S. gas stations, only about 1,000 pump E85. Almost none are at oil-company-owned stations. And if an independent station that operates under, say, the Exxon (XOM ) or Shell brand wants one, it can cost around $200,000 to install a separate pump when all the gas suppliers' restrictions are met. Exxon Mobil Corp. bars branded independents from buying fuel from anyone but Exxon, though it let a handful install E85 pumps for test marketing—as separate machines on separate islands nowhere near Exxon or Mobil signs. ConocoPhillips (COP ) has a similar policy. But switching existing tanks and pumps to E85 is the cheapest way to offer it, with more than 50% of costs often offset by various subsidies. Mannato says companies want to prevent consumers who don't have flex-fuel vehicles, which run on either gas or E85, from gassing up with E85. Also, they "don't want their brand associated with someone else's product."
A FACE-OFF WITH DETROIT
The industry's stance angers carmakers, which have more than 5 million flex-fuel vehicles on the road. General Motors (GM ), Ford (F ), and Chrysler all pledge that half of new-vehicle sales should be flex fuel by 2012 but are waiting for bigger commitments to E85 pumps. "Big Oil is at the top of the list for blocking the spread of ethanol acceptance by consumers and the marketplace," says Loren Beard, senior manager for energy planning and policy at Chrysler, referring to the struggle to get E85 pumps installed.
The API says its pilot programs show that many consumers fill up once, and not again, after they experience the 25% loss in fuel economy that comes with E85. Some states near ethanol plants, like Indiana, sell E85 as much as 33% cheaper than gas; in others, like New York, E85 costs more than gas.
As tension grows between Big Oil and its critics, ethanol production will keep rising. That may pressure oil companies to accept E85. The industry can absorb almost all the 15 billion gallons projected for production by 2012 in the form of E10. After that, without more E85 pumps, there'll be a lot more ethanol on the market than drivers can find to put in their tanks.
Kiley is a senior correspondent in BusinessWeek's Detroit bureau