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Ethanol quotas pump money from our pockets

7:22 PM, Aug. 17, 2013  |  Comments
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When members of Congress decided in 2007 to require that Americans put 36 billion gallons of ethanol in their gas tanks annually by 2022, they must have thought there was an award for bad public policy.

The idea never made the slightest sense. The law, an expansion of a mandate adopted two years earlier, called for impossibly large quantities of corn to go into fuel production rather than onto people's tables, driving up food prices. This year, the mandate requires 16.6 billion gallons of ethanol, absurdly consuming 37 percent of the nation's corn crop and requiring farm land roughly equal to the size of Kentucky.

Now unforeseen events are adding a tragicomic twist.

Because of a decline in gasoline consumption - driven largely by a new generation of fuel-efficient cars - the only way to burn that much ethanol is to blend more into each gallon of gas. This is bad news for your car because automakers won't warranty their engines when they run a blend higher than the current 10 percent ethanol.

Refiners are left with only one viable option: buying credits known as RINs (for Renewable Identification Number) that provide an out. Under the bizarre ethanol law, each RIN that a refiner acquires is a gallon of ethanol that it doesn't have to blend.

Those RINs, which cost a few pennies last year, have traded for as much as $1.40 this year because of the mandate. Major refiners have spent hundreds of millions of dollars on them, enriching speculators and passing along their additional costs in the form of higher fuel prices.

Recent estimates of the cost to consumers for this RINsanity come in at about 10 cents a gallon. A study by the non-profit Energy Research Policy Foundation projects that by next year, when the mandate will rise to 18.2 billion gallons, the purchase of RINs will push up the price of a gallon of fuel by 20 cents to $1.

Since the 2022 ethanol mandate is twice that level and another federal law mandates increasing fuel efficiency, one can only guess how big the hit will get.

Why would Congress fleece consumers in this way? There's only one reason: to please a well-organized farm lobby, which collects most of the money consumers are forced to waste.

All of the energy independence goals that the ethanol mandate was supposed to meet in 2022 have already been met - surpassed in fact - by developments that would have been unimaginable a few years ago.

New drilling technologies pushed up domestic oil production by 1.3 million barrels per day between 2005 and last year. Thanks to this increase, the aforementioned drop in gasoline consumption and the substitution of plentiful natural gas for oil in a number of uses, oil imports are plummeting. They have fallen by 3.1 million barrels a day since 2005 and now account for 40 percent of consumption (down from 60 percent in 2005) and are projected to fall further.

The Obama administration has some flexibility to lower the mandates, but a better approach would be to repeal the law entirely. There are no awards for bad laws. Only negative consequences.

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