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Will E85 Ever Be
Cheaper?

January 2006

2005 was a very expensive year for gasoline.

Thanks to Washington, 2006 could be even worse.

The feds did not waste any time, with two costly gasoline requirements having taken effect on January 1st. That’s right. The year has already begun with two new regulations that will raise the price at the pump.

The first is the new ethanol mandate -- part of the massive energy bill passed last August. Under the new law, 4 billion gallons of this corn-derived fuel additive will have to be included in the nation’s gasoline supply throughout 2006.

Ethanol costs more than gasoline (if it didn’t, its producers would not need federal help) -- and its use reduces fuel economy. The new mandate is great news for some well-connected special interests, namely Midwestern corn farmers and big ethanol producers like Archer Daniels Midland (ADM). But those who are stuck paying the tab -- you -- will be far less thrilled.

The second regulatory price boost will come as a result of the latest round of sulfur reductions from gasoline, pursuant to a costly Clinton-era regulation. Similar low-sulfur rules applicable to diesel fuel also take effect in 2006 and will have an even bigger impact on diesel costs.

While Washington is doing things that will hurt consumers, it isn’t doing much to help them. These new gasoline regulations would not be so hard to take if EPA regulators or Congress used the occasion to clear away several of the old ones that also add to fuel prices. The energy bill does contain some modest streamlining measures, but overall, 2006 will bring more regulatory additions than subtractions.

Over the past ten years, the EPA has imposed a bewildering variety of fuel requirements, with as many as 18 so-called boutique fuels in use at any given time. The cost and complexity of this scheme goes well beyond any rational clean air justification. Granted, air quality has been improving, but it was doing so just as quickly before these newfangled fuel requirements were imposed.

The new ethanol and sulfur rules may each add several cents to the price per gallon -- bad enough, but it’s the cumulative burden of all these federal regulations that is even more substantial.

The fuel regulations will continue to grow after 2006. For example, EPA is required, pursuant to a settlement of a lawsuit brought by an environmental group, to propose another round of regulations limiting the amount of benzene and similar trace components from gasoline. The regulation must be proposed by February 2006 and take effect by 2007.

In addition, Washington has done little about the regulations that make it difficult for oil refiners to expand capacity. No new refinery has been built in decades, and expansions of existing refineries must run a gauntlet of time-consuming requirements. The red tape is a part of the reason that refinery capacity has barely kept pace with growing gasoline demand. It is challenging enough for refiners to produce sufficient gasoline while meeting the expanding list of fuel specifications, but even more so when the sector is already stretched thin.

Of course, there are factors outside of our government’s control that raised the cost of gasoline in 2005 and will likely continue to do so in 2006. Chief among them is the surging global demand for oil. Oil in 2005 averaged about $57 per barrel, a $16 increase over 2004. Each additional dollar per barrel translates into roughly 2.5 more cents per gallon of gas. Yes, Congress could help bring down prices over the long term by allowing increased domestic production, including the 10 billion barrels of oil in Alaska’s Arctic National Wildlife Refuge (ANWR), and tens of billions more located in restricted areas off America’s coasts. But in the near-term, there is little Washington can do to influence the cost of crude.

It is possible that global demand growth will slacken in 2006 and we’ll benefit from a drop in oil prices. But if that doesn’t happen, the creeping regulatory burden will make gas more expensivethis year than last. And until Washington gets serious about reining in its ever-expanding list of fuel rules, America is likely to experience even more pain at the pump in the years ahead. Kroger and HEB stores are begining to sell E85 in Texas and are (iniitally) selling it for less than the cost of regular gasoline.

 Related:
 Food Versus Fuel
 The Cost of E85
 More Corn Please
 A Gallon of E85
 Outlook for Ethanol Industry
 Ethanol Production Costs
 Texas Gas Tax Relief

adapted - TCS Daily


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