Ethanol subsidies: A uniter among Midwest rivals?

Senate Democrats and Republicans agree on little these days, save for the fact that the sun rises and sets. (Although where it rises and sets still might be up for debate.) However, a group of Midwest senators agree on one thing: Subsidies for ethanol should be extended.

It’s no secret that the price of gas is skyrocketing. Today it hovers at $4 a gallon, and barrels are more than $100. Of course, all over the world people are paying more for gas than Americans. Europe, for example, pays twice as much. The problem is complex–environmentally, politically, and economically–and can’t be answered with a single resolution.

Still, biofuels, especially cellulosic ethanol, continue to be an emerging solution. E85, which is made from 85 percent ethanol, saw record sales in Minnesota in March of this year, just as gas prices began to rise. Yet as gas prices rise and ethanol use increases, Republicans in states other than the Midwest are calling for a moratorium on subsidies.

From HuffPo:

Sen. Tom Coburn, R-Okla., is forcing a vote on a measure Tuesday that would repeal the credits. Coburn says they are wasteful subsidies for an industry that no longer needs them.

“The days of placing spending programs in the tax code and giving them holy status are over,” Coburn said. “Ethanol is bad economic policy, bad energy policy and bad environmental policy.”

The Sierra Club supports the repeal, mostly due to the fact that the majority of ethanol is still currently produced from corn/ And monoculture farming–and the government subsidies for corn that fuel monoculture farming and an increase in herbicide and pesticide use–has had a particularly destructive impact on the environment over the last few decades.

So who supports ethanol subsidies? A bipartisan group of senators. Amy Klobuchar (D-Minn.) has co-sponsored a bill with John Thune (R-S.D.) that would extend certain ethanol subsidies. The bill, S.1185, would replace the current 45-cent a gallon tax credit with one that would fluctuate with the price of crude oil.

According to Sen. Richard Lugar (R-Ind.): “The proposal acts as a safety net to prevent OPEC from manipulating oil prices to kill-off their ethanol rival. When oil prices are high, as they are today, corn-based ethanol would not receive subsidy payments.”

Wait. What?

According to HuffPo, under the new proposal, ethanol blenders would receive a maximum of 30 cents per gallon if oil prices fall below $50 a barrel, and zero subsidy at all if crude prices are at $90 a barrel or more.

A cloture vote on Tuesday killed Sen. Tom Coburn’s (R-Okla.) amendment to end ethanol subsidies—so any new proposals such as Klobuchar’s might be DOA. It’s hard to understand a proposal that would end subsidies as the price of oil actually increased. Wouldn’t that be the goal of OPEC? To increase its prices to kill the ethanol industry? Is there something I am not getting?

One caveat: The controversy could produce more discussion around cellulosic ethanol. And who knows? Maybe with new discussions around renewable energy in the Senate, an American company will take a nod from Canada and start turning trash into energy.

6 thoughts on “Ethanol subsidies: A uniter among Midwest rivals?

  1. If OPEC wanted to hurt ethanol it could up production to lower oil costs. Ethanol is used most when gas prices are high, even by big oil companies. So, cheap gas harms ethanol’s current economic advantage (at least it is cheaper for those of us in the midwest).

    It appears that Sen. Klobuchar’s bill would create a safety net to ensure the ethanol industry could keep operating if oil prices were to fall again.

    On the political prospect, I think yesterday’s hard defeat of the Coburn amendment had more to do with politics than policy (Dems were pissed on the tactics he used, so even ethanol opponents voted againts the amendment). Most everyone seems to think that ethanol support will change this year, it is just now a fight over whether it is fast and painful or using an approach like Senator Klobuchar’s that might soften the impact.

  2. Re: rising E85 sales in Minnesota, we have also seen record E85 sales in Iowa and North Dakota recently. As Jon points out, when the price of gasoline is high, motorists are more likely to look to lower-priced alternatives like E85.

    It should be noted also that mass transit use spikes when retail fuel prices are high.

    Too bad it takes pain at the pump to make some people consider less polluting alternatives.

  3. But even if the price of oil remains high (and if Klobuchar’s proposal becomes a bill), could etanol survive without subsidies, especially if that cost is passed on to the consumer?

  4. But even if the price of oil remains high (and if Klobuchar’s proposal becomes a bill), could etanol survive without subsidies, especially if that cost is passed on to the consumer?

    We know that the price of oil is going to increase. It is inevitable. (And necessary if we want to move forward with renewable energy.) Allowing for ethanol subsidies only IF oil prices are below a fixed rate seems entirely counter-intuitive.

  5. In the ideal world of policy making, the senators’ choice of choosing a $50 floor and $90 cutoff would be based on how that cost – and the resulting price at the pump – relates to the price of making ethanol. If that were true, it would indicate that the ethanol industry should not need a subsidy at all to compete, when oil is $91. If that is true or those are just numbers were chosen by the writers for other reasons, I do not know.
    But, I do think that the price ethanol currently sells for in Minnesota reflects both a lower cost product to make and some of the federal tax credits getting passed along to consumers (i.e. even without the federal tax credit, a gallon of ethanol may still be cheaper than the current gas price, just not the 18% or so less that we are averaging in Minnesota right now).

  6. Permanent high oil prices would be good for ethanol (and biodiesel, and electric vehicles, and mass transit, etc.) And we should expect oil prices to stay high — mostly.

    The problem is that, due to market volatility, the price of oil also sometimes plummets. As it did during the most recent recession. At which point the business case for oil’s competitors falls apart and investors take a hit. Of course, investors know this is a possibility, so it has a chilling effect.

    The conspiracy theory is that OPEC is watching this dynamic and takes advantage of it by every so often intentionally (temporarily) drives down the price of oil. But even if it’s not intentional, it is still a major concern. This type of subsidy seems designed to address that concern. And save taxpayers money to boot.