The U.S. oil industry recently proclaimed that the U.S. federal biofuel mandate is "unworkable" and "should be repealed." The industry should know. In addition to being the nation's primary customer for ethanol and biodiesel, oil companies have invested more than $9 billion in biofuels, according to the American Petroleum Institute. Indeed, somewhere between 10 percent and 15 percent of all U.S. ethanol is now produced by oil companies.
Ethanol advocates argue that it's no surprise America's "big oil" companies would oppose the mandatory use of non-petroleum-based motor fuels. But as the statistics above show, it is not as if the oil industry hasn't given biofuels the old college try. Moreover, the industry's contention that "there's a fundamental flaw" in the nation's biofuel policy and the "only way to fix it is to scrap the law and start over" rings true.
There's no better example of such flaws than the federal mandate for cellulosic ethanol. Cellulosic ethanol is made from woody and grassy non-food-source plants. The intent of the mandate is to avoid the food-versus-fuel conflict that conventional ethanol generates while creating a lower-carbon fuel. By 2022, the United States will be required to utilize 16 billion gallons of cellulosic ethanol -- that's 45 percent of the total biofuel mandate and more than 12 percent of current overall total U.S. fuel use.
But the science just isn't there yet. The breaking down of grass and wood into fuel alcohol is a much more complex process than the fermentation of simple sugars found in sugar cane, corn and other grains currently used to make conventional ethanol. Five years after Congress mandated its use, cellulosic ethanol is still not commercially available. Since 2010, a total of 850 million gallons have been mandated by federal law; over that same time, only 20,000 gallons have been produced.
Over the past three years, the Environmental Protection Agency has reduced the cellulosic ethanol mandate down to about 20 million gallons, but that is still a thousand times the volume actually produced. Under the law, oil refiners must pay penalties to the EPA for each gallon of cellulosic ethanol they do not use, even though those gallons simply do not exist and cannot be purchased at any price.
The story behind the 20,000 gallons of cellulosic ethanol that were made is perhaps just as confounding as the mandate itself. That ethanol was refined in the U.S. under a development agreement with the state-owned Brazilian energy firm Petrobras. Most of the production was exported to Rio de Janeiro this past summer, to be used in a fleet of minivans dedicated to shuttle attendees of the Rio+20 conference, the United Nations' confab on sustainable development.
Consider the irony of shipping such a minor amount of fuel from the American Midwest all the way to Brazil, just to gas up shuttle buses for conferees who had flown in from Europe, Asia, Africa and North America -- to present it as a showpiece of sustainable reductions in transportation carbon emissions.
According to the minutes from the proceedings of the Rio+20 conference, there were "important synergies arising from this unique multi-stakeholder approach, with a special emphasis on generating action oriented solutions." Perhaps one of the best "action oriented solutions" would be to stop the showpieces and adopt a new approach. The cellulosic ethanol mandate clearly isn't working. It's time to scrap it and start over.
Dave Juday is a commodity market analyst and the principal of the Juday Group.