Market Analyst: Time for Bold Action on Biofuels

BY DAVE JUDAY

President Obama’s re-election paves the way for him to actually pursue the “all of the above” energy strategy he has promised. After a series of government-backed green tech companies collapsed, the Obama team smartly shifted away from its renewables-only myopia and — at least rhetorically — adopted a broader energy approach more friendly to traditional oil and natural gas.

Next year, the President should back up that promise with bold action. As a first move, he should propose reform to the nation’s biofuels policy.

Already this year, a bipartisan group of eight governors and a coalition of the nation’s livestock industry requested that the biofuels mandate be waived. The conflict between drought year corn harvests and a growing ethanol industry are creating a food versus fuel crisis. The Obama Administration denied that waiver request.

The biofuel hysteria, however, started back with President George W. Bush. In 2007, he signed the Energy Independence and Security Act, establishing a national “renewable fuel standard” requiring domestic refineries to mix a certain volume of biofuels every year.

For 2013, that volume is 16.55 billion gallons. That amount is set to increase substantially next year, and every year until 2022, when the goal is 36 billion gallons of biofuels. More than 25 percent of our current total fuel use.

This goal is unattainable under the current system. Corn supplies for conventional ethanol are stretched to the limit, especially given this year’s drought. And given weather patterns and after effects of this record drought, next year is not assured to be any better.

Domestic corn production hasn’t kept up with the sharp uptick in demand. In fact, since government started dictating ethanol use, the amount of corn used to manufacture fuel has jump 382 percent. Production has not kept pace. Corn production has only increased 5.4 percent since ethanol mandates were instituted. Fully 40 percent of our nation’s corn supply goes to ethanol. More corn goes to making ethanol than feeding livestock.

When demand outstretches supply, the price of corn and corn-dependent foods jumps — dramatically. Poultry prices are 3.4 percent higher this year compared to 2011. Milk and dairy prices are up 9.1 percent, pork 7.5 percent and hamburger 10.4 percent.

Then there is the situation with so-called cellulosic ethanol. By 2022, the RFS requires the use of 16 billion gallons of ethanol made from non-food source feedstocks, such as switchgrass, wood fiber, and other materials. This goal is also unattainable.

Distilling cellulosic ethanol is vastly more complex than producing corn ethanol and is not yet commercially viable. Over the last three years the RFS has mandated 850 million gallons of cellulosic ethanol, yet the US Environmental Protection Agency has had to waive that mandate each of those years. To date, only 20,000 gallons has been produced, despite hundreds of millions of dollars spent in federal grants, loan guarantees, incentives, and a whole suite of potential subsidies awaiting any commercial breakthrough. This inconvenient truth has yet to be addressed.

For his second term, President Obama should discontinue this misguided policy of pouring massive amounts of federal dollars into an unpopular and economically destructive fuel product. Ethanol supports and mandates should be scaled back.

There are much smarter ways of boosting domestic energy production that can also find support on both sides of the political aisle. Crude oil production in this country is up 11 percent since 2006. Private firms are still finding new, massive oil reserves right under our feet. Notably, there’s the eight-billion-barrel-strong Bakken Shale in North Dakota, the recent development of which has created a state-level job glut and driven unprecedented economic growth.

We should further develop oil and natural gas deposits here at home. Doing so won’t require any artificial government supports or regulatory favoritism. And it will create jobs and drive down energy prices while avoiding the adverse unintended consequences of overreaching biofuel mandates. The volumes of biofuels that can stand on their own economically will add to the vitality of the energy sector.

Politically, there should be room for such a move. On election day, voters sent a clear signal that they want Congress and the President to work together to both create jobs and cut down on excessive government spending. Scaling back biofuel supports and expanding domestic energy production does both, and helps the President achieve his “all of the above” energy strategy.

Dave Juday is a commodity market analyst and principal of The Juday Group

  Biofuels, fuel product, market analyst, Obama