Is Ethanol the Answer?
No one looked seriously at ethanol as fuel until the oil price shocks of the 1970s, when Congress decided to subsidize a homegrown alternative—most significantly through a tax credit to oil companies for every gallon of the costly alternative they blended into gasoline.
But when oil prices fell again in the late 1980s through the 1990s, the nation's dependence on petroleum imports mushroomed to 60 percent, and ethanol was reduced to a performance-boosting additive for some midwestern gasoline—a nice, subsidized side business for the dominant producer, Archer Daniels Midland.
Around 2000, ethanol started gaining traction when it emerged as the substitute to methyl tertiary butyl ether (mtbe), an oxygenate that reduced air pollution but leaked into drinking water at potentially dangerous levels. At the same time, upstart businesses like VeraSun of Brookings, S.D., were learning to produce ethanol more efficiently. Then came the Iraq war and high oil prices. Suddenly, the price ethanol refiners could fetch for their product from the big oil companies was far higher than the production cost. In places like Galva, where farmers had pooled their money to put up plants earlier, returns rolled in. It was a modern-day gold rush for grain farmers and investors. Today, 60 percent of ethanol production is in the hands of small companies.
Politics
The rush of new players strengthened the industry's clout. One of the largest stakes in the No. 2 producer, VeraSun, for instance, is owned by a midwestern venture capital firm, Bluestem, founded by Steve Kirby, former lieutenant governor of South Dakota and a big Republican donor. Among other big investors in small ethanol companies: Microsoft founder Bill Gates and the politically connected Carlyle Group private equity firm, where George H. W. Bush was once a director.
The 10 largest ethanol producers and their trade groups have handed out $4.7 million in federal campaign contributions since 2000, says the Center for Responsive Politics. The Renewable Fuels Association has increased its lobbying spending 60 percent in the past seven years, and former Sens. Bob Dole of Kansas and Tom Daschle of South Dakota tout ethanol's national security benefits for a group of farm and energy interests called the 21st Century Agriculture Policy Project. Just as crucial, while far less tangible, has been Washington's veneration of the long-suffering small farmer, now turned ethanol entrepreneur.
It all paid off in 2005, when, with gasoline prices ratcheting higher, Congress wrote into its big energy bill a renewable fuel standard, an unprecedented mandate requiring refiners to double the amount of ethanol they blend into the nation's gasoline by 2012—a major coup for the industry. Congress's decision in that bill not to give the oil industry any protection from mtbe lawsuits made ethanol even hotter. Oil refiners immediately announced a switch to ethanol en masse, dramatically boosting demand.
Energy economist Philip Verleger is one of many who traced last summer's high gasoline prices to ethanol panic. As it turned out, the taxpayer paid twice. First, at the pump. Then, because of the long-standing ethanol tax breaks—now at 51 cents per gallon—the government sent $2.5 billion last year to the flush oil industry to blend ethanol it would have needed anyway.
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