WASHINGTON (Dow Jones)--The U.S. Environmental Protection Agency chief who takes over next month faces an immediate challenge: how to handle a flood of ethanol into the market.
The U.S. Congress last year increased by almost five times the amount of biofuels that must be in the fuel supply by 2022. Next year alone, companies that blend ethanol must add 11.1 billion gallons, more than double the amount mandated two years earlier. The jump has been hailed by lawmakers from Minnesota and South Dakota, where the ethanol industry is creating jobs, and promoted as part of a solution to U.S. dependence on foreign oil.
But as the U.S. economy weakens and Americans buy less gasoline, ethanol poses a problem. The fuel is coming close to making up 10% of ordinary gasoline, the maximum permitted by regulations. At the same time, an effort to switch to blends slightly higher than e-10 depends on cooperation from Detroit's auto makers, which are running out of cash and having trouble meeting more pressing obligations, such as funding day-to-day operations.
"We're open to start thinking very carefully what's going to happen in distributing this huge volume of biofuels," Margo Oge, the director of the EPA's office of transportation and air quality, said at a conference last month. "There is a lot of discussion about allowing into the markets other blends, like an e-15, an e-20, and obviously before we do that we have to make it clear that allowing these fuels will not have unintended consequences of impacting the environment or impacting the vehicles, both on-road and off-road vehicles."
Supply, Demand Problem
The basic problem was underscored last month when the EPA announced that in 2009, blenders would have to ensure that 10.21% of the volume produced consists of renewable fuels, mostly ethanol. While some will be used in a high-ethanol blend known as e-85, the majority will be used in ordinary gasoline. The result is that ethanol will come close to the 10% level deemed acceptable by regulators - and by car makers, whose warranties for regular vehicles do not extend beyond e-10 blends amid concerns that midlevel blends will damage engines.
Protracted economic weakness has made the issue more pressing. In October, the U.S. Energy Information Administration forecast that U.S. oil consumption would fall by 5.4% next year, the first time since 1980 that annual consumption would decline by more than one million barrels a day. The result would be to boost ethanol's share of supplies and force the country to decide about higher blends faster than planned.
The challenge is complicated by the fact that the ethanol industry is depending on support from General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler LLC. These auto makers, which make dozens of flex-fuel vehicles that can run on e-85, warned Congress last month they were on the verge of collapse. Toyota Motor Corp. (TM) and Nissan Motor Co. (NSANY), which are in better financial condition, each make only two flex-fuel vehicle models, according to the National Ethanol Vehicle Association. Honda Motor Co. (HMC) doesn't offer any flex-fuel vehicles in the U.S. market.
GM is already trying to figure out whether it could help the industry by allowing higher ethanol blends in existing vehicles.
"We're working very collaboratively with EPA and the industry on test plans," said Mary Beth Stanek, director of environment and energy at GM. She said that the auto maker would be open to modifying existing car warranties, but cautioned that any changes would depend on regulatory test results.
Risk Of Backfire?
The push for more ethanol could backfire. Last year, Rep. John Shadegg, R-Ariz., changed the laws governing fuel approvals when his 1973 boat was damaged after he refueled it with an e-10 blend. Now, the EPA must grant specific approval before new fuel blends enter the market. Previously, new blends could enter the market if the EPA hadn't taken any action within 180 days after an application.
Farm state lawmakers are already gearing up for action. Sen. John Thune, R-S.D., and Sen. Amy Klobuchar, D-Minn., are among those pressing the EPA to quickly allow higher blends. They argue that unless government supports the existing ethanol industry now, the country will be unable to move to cellulosic ethanol, a next-generation biofuel that is derived from switchgrass or other plants and considered to be better for the environment.
"One of the things we're exploring with EPA, with Sen. Thune, and others is whether we can move to e-12, e-13, without going through a huge rulemaking," Klobuchar said. "With the economy the way it is, you want to keep fostering the ethanol industry with the understanding that we're going to move to a more efficient ethanol with cellulosic. We're concerned that if we don't keep it moving, that we could have a problem."
(Siobhan Hughes covers energy policy and climate change from Washington, D.C., and can be reached at 202-862-6654 or siobhan.hughes@dowjones.com.)