The Energy Policy Research Foundation (EPRINC) recently released a white paper inexplicably suggesting that the cost of the Federal ethanol program exceeds its benefits by a factor of 3 to 1. Among other debatable claims, the paper asserts that the rising cost of corn is a major obstacle to the expansion of the corn ethanol industry, irrespective of the fact that crude oil prices have surged to levels not seen since the 2008 commodity bubble and gasoline prices are approaching record highs. Before debating the specific contentions of the paper, I should point out that EPRINC is a non-profit group funded by Big Oil, staffed by former oil company employees, and directed by a board of trustees that includes the oil refining industry's top lobbyist. EPRINC was formerly (and less ambiguously) known as the Petroleum Industry Research Foundation, or PIRINC. That little disclosure may help you better understand some the biases and preconceptions that immediately rise to the surface of the EPRINC paper. While we're still reviewing the paper and digesting some of the assumptions and assertions, here are five observations and responses to some of the most questionable statements and claims made in the paper. 1. Rising ethanol feedstock costs have been largely offset by higher market prices for ethanol and distillers grains co-products. EPRINC suggests that higher ethanol feedstock costs are rendering ethanol production uneconomical and leading to "...poor profitability, if any, for ethanol producers..." The paper further contends that higher corn costs are somehow contributing to higher gasoline prices. The truth is that ethanol profitability has not deviated from the range typically seen throughout the last three years (Iowa State tracks ethanol profitability on a monthly basis here). Ethanol profit margins are primarily a function of four factors: corn prices and natural gas prices (input costs), and ethanol and distiller grains prices (output values). Obviously, higher output values allow producers to pay more for inputs. Currently, strong prices for ethanol and distillers grains are mostly offsetting the higher input costs that ethanol producers are facing today. It's true that margins are currently tight, but no more so than in March or April of 2010, when corn prices were half of what they are today. Further, ethanol producers hedge their risk by forward contracting for grain, meaning much of the grain being processed by the industry today was purchased at much lower prices. 2. While ethanol prices have in fact risen in response to higher oil and corn prices, they remain substantially lower than gasoline prices. EPRINC acknowledges that ethanol is currently selling for 80 cents/gallon less than gasoline at the wholesale level, but then the paper argues that ethanol prices are "well above" the cost of gasoline. The authors can only make that wild claim by adjusting the market price of ethanol to reflect its lower energy content, a dirty old trick used over and over by disingenuous ethanol detractors. Adjusting ethanol prices to reflect the fuel's lower relative energy content completely ignores the actual utility and value of ethanol in the gasoline market. Blenders and refiners don't necessarily use ethanol for its energy value—they use it for its oxygen and octane value. EPRINC itself recognizes that ethanol's value as an oxygenate for reformulated gasoline drives as much as half of its current usage. Further, oil refiners use high octane ethanol to upgrade otherwise unsellable low octane sources of gasoline (called sub-octane). They use ethanol to blend low quality gasoline to the octane level needed to meet minimum specifications for regular gasoline grades. This practice reduces the refiner's cost of producing gasoline. Refiners also use ethanol to upgrade regular grade gasoline to mid and premium grades. What would blenders and refiners use to meet oxygenation requirements if ethanol wasn't available? What would they use to upgrade poor quality, low octane gasoline? Without question, ethanol is the only fuel on the market today that allows them to do these things cost effectively. So why on Earth should ethanol's price be adjusted to suggest it only has value as a BTU replacement? Even if EPRINC could justify adjusting the ethanol price based on energy content, they "forgot" to reflect the fact that the Volumetric Ethanol Excise Tax Credit (VEETC, or also called the blender's credit) reduces the effective price that the blender pays for ethanol by another 45 cents/gallon. So, rather than ethanol being 80 cents/gallon cheaper than gasoline, it's actually $1.25/gallon cheaper for the blender. If EPRINC repeated its silly energy adjustment calculation and included the impact of VEETC, the energy adjusted price of ethanol ($3.20/gallon) would still be cheaper than gasoline ($3.40/gallon). ($2.60/gallon ethanol - $0.45/gallon VEETC = $2.15/gallon ethanol x 1.49 = $3.20/gallon ethanol on GGE basis). 3. Ethanol is reducing—not increasing—the price of gasoline at the pump. Without providing any evidence whatsoever to substantiate the claims, the EPRINC paper suggests that ethanol "...is likely to contribute to price increases in gasoline" and that the RFS "...increases prices at the pump." Numerous economic analyses by universities, the investment community, government agencies, and others have concluded that increased use of ethanol is undoubtedly holding gasoline prices lower than they would be otherwise. The latest such study, conducted by economists at Iowa State University and the University of Wisconsin and released by the Center for Agricultural and Rural Development (CARD), found that the increased use of ethanol reduced wholesale gasoline prices by an average of $0.89 per gallon in 2010. The new study, an update to a 2009 Energy Policy paper, also found that the growth in ethanol production reduced gasoline prices by an average of $0.25, or 16%, over the entire decade of 2000-2010. Further, the study determined that gas prices could nearly double if ethanol production came to an immediate halt. Notably, EPRINC has not disputed the findings of the new CARD paper, even when given the chance to do so at this morning's hearing of the House Energy and Commerce Committee's Subcommittee on Energy and Power. 4. The EPRINC paper's back-of-the-envelope cost/benefit calculation for the Federal ethanol program is deeply flawed and misleading. The authors take an overly simplistic and lopsided approach to estimating the cost/benefit ratio of the Federal ethanol program (VEETC and RFS). Using convoluted math, they say "...the loss of taxpayer revenue alone far exceeds the benefits from the program by nearly 3 to 1." In general terms, they arrived at the figure by subtracting the Oak Ridge National Laboratory estimates of oil import savings due to the RFS ($2.7 billion) from the estimated "cost" of VEETC this year ($6 billion). This is a terribly incomplete and dishonest way to estimate the net cost/benefits to the taxpayer of our ethanol policy. For example, the calculation leaves out the reduction in farm program payments that is due to heightened grain demand for ethanol use (isn't it a bit hypocritical to blame ethanol exclusively for higher corn prices, but then not give any credit for the massive reductions in farm payments?!) Nor does the calculation take into account the savings on gasoline prices discussed above. The $0.25/gallon savings on every gallon of gasoline from 2000-2010 means drivers (most of whom are taxpayers) saved an average of $34.5 billion per year over the decade. As Greenwire's Jenny Mandel noted in the New York Times, "That amount far exceeds the federal subsidies for biofuels." And it would far exceed the annual "cost" of VEETC even if you believed it was acceptable to adjust the gasoline savings to reflect ethanol's lower energy content. 5. EPRINC is correct that the 10% "blend wall" is an important obstacle to ethanol expansion, but is incorrect in its assessment of E15 as a "bridge to nowhere." One of the only things we agree with EPRINC on is that the E10 blend wall is a significant impediment to further ethanol expansion. We've been saying that for a long time, and it's the reason our industry supports a transition to allowing (not mandating) the use of E15 in all conventional automobiles. But here's where we disagree: EPRINC says E15 is a "bridge to nowhere" because of the additional regulatory and marketplace hurdles that must be overcome before it can be used widely. The ethanol industry is quite familiar with the litany of E15 rollout issues that EPRINC identifies and we are working to address each and every one of them. At the same time, we are supporting policy proposals that will bring blends above E15 and more flex-fuel vehicles to the marketplace in the longer term. The real "bridge to nowhere" is continuing to rely on foreign crude oil to power our automobiles. It shouldn't come as any surprise that a non-profit group funded and directed by Big Oil would generate a study that distorts the truth about the benefits of ethanol and the RFS. But it is a bit surprising that the paper has gotten as much notice and traction as it has. Hopefully, we've given you some reasons to be skeptical of the EPRINC paper's conclusions and the organization's stance on renewable fuels.