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Biofuel Boondoggle
America’s Ethanol Industry Shows Why it Needs Subsidies

There’s a growing glut of ethanol here in the United States, and that’s proving to be very bad news for the various producers who have taken advantage of the 2007 law that mandated refiners blend increasing amounts of the fuel additive into gasoline supplies. But lately the EPA has relaxed those quotas, and as a result the market demand for ethanol—which was being driven entirely by government intervention—has fallen well below supply. Bloomberg reports:

Ethanol producers expanded from 81 plants and 3.9 billion gallons of annual capacity in 2005 to 214 distilleries today that can produce 15.7 billion gallons, industry data show. When the government cut its minimum-use mandate to 14.5 billion gallons a year from 15 billion, that left 1.2 billion gallons of surplus capacity. […]

Prospects are so bad, even Archer-Daniels-Midland Co., the biggest ethanol producer, says its looking to scale back operations. Green Plains Inc., Valero Energy Corp., Pacific Ethanol Inc. and Southwest Iowa Renewable Energy LLC also are slowing output, according to company regulatory filings. Abengoa SA, the Spain-based renewable-energy company trying to avoid bankruptcy, said it idled plants in Portales, New Mexico, and Colwich, Kansas, because of lousy profit margins.

We heard about the struggles of Archer Daniels Midland (ADM)—the country’s biggest producer of ethanol—back in February when the company admitted it would be reviewing three of its corn distilling plants for “strategic options” potentially with an eye to sell those assets.

This is what happens when an industry is entirely reliant on government support for its survival. And lest you think the EPA is playing the villain here, the agency had a very real reason to walk back those mandates: refiners can’t realistically blend more than 10 percent ethanol by volume into fuel for fear of ruining older car engines (a limit colloquially called the “blend wall”). That puts a fairly hard cap on things, and the fact that newer cars are being made with higher fuel economy isn’t helping ethanol producers’ cause.

That’s not the only problem with biofuel mandates, of course. They raise global food prices, starving the world’s poor, they cost drivers billions of dollars at the pump every year, and they’re actually bad for the environment. What a mess.

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