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By Robert Rapier on Sep 27, 2007 with no responses

Debunking Business Week Misinformation

Besides hypocrisy, another thing I hate is the spreading of misinformation. Sometimes, the spreading of misinformation is done without malice, because you may just be repeating something you thought to be true. So, misinformation is in a different category than hypocrisy for me. But I do try to combat the spreading of misinformation when it occurs, particularly when the misinformation causes people to get mad at my industry. After all, we have enough ill will toward us already. We don’t need more heaped on as a result of misinformation.

Which brings me to a very misinformed story in Business Week:

Big Oil’s Big Stall On Ethanol

This is a remarkable collection of half-truths that paint a thoroughly inaccurate picture. Here is the story that Business Week told: E85 is being stalled because the oil companies are fighting against it. Yet they are reaping billions in subsidies from ethanol. And the auto makers are upset about it. After all, they need the oil industry to embrace E85 so they can sell more E85 vehicles.

I was compelled to write to David Kiley, the author of the story, and point out the errors in his argument. I will also point them out here.

For starters, Kiley argues that Big Oil is the beneficiary of the ethanol subsidy. Vinod Khosla has made similar arguments. As I have pointed out in my draft Ethanol FAQ, the ethanol industry is certainly displaying curious behavior on this issue if it is a benefit for the oil industry:

Consider for a moment just who has lobbied to keep the credit intact. Has it been oil companies? No. Has it been politicians from oil states like Texas and Alaska? No. The groups always arguing in favor of the ethanol tax credit have historically been farm state politicians, ethanol lobbying groups, and corn lobbying groups.

Last year I documented the reaction of Brian Jennings, the executive vice president of the American Coalition for Ethanol, when ExxonMobil (XOM) CEO Rex Tillerson called for an end to the subsidies. Jennings said “it is outrageous for an executive for big oil to actually suggest getting rid of the tax credit for ethanol.” That’s very odd behavior if Big Oil is actually the beneficiary.

Kiley then argues that wider availability of E85 is the best way to meet the targets that congress has set:

Despite collecting billions for blending small amounts of ethanol with gas, oil companies seem determined to fight the spread of E85, a fuel that is 85% ethanol and 15% gas. Congress has set a target of displacing 15% of projected annual gasoline use with alternative fuels by 2017. Right now, wider availability of E85 is the likeliest way to get there.

And of course, “Big Oil” is his reason that E85 is not spreading. In my response to him, I asked him to do a calculation:

If you produced E85 with 100% of the ethanol made in the country, what percentage of the nation’s fuel would it supply? Answer that question, and you may understand why there aren’t more E85 pumps.

(The answer to the question is that using the entire ethanol supply to produce E85 could supply 4% of our fuel). Of course you can’t make E85 with anything approaching 100% of the ethanol supply, because most ethanol is blended as an oxygenate. But let’s also consider his claim that E85 is a likely way of displacing 15% of projected gasoline demand.

If we want to displace 15% of of our 140 billion motor fuel supply, we need 21 billion gallons of gasoline equivalent. Because E85 has a lower energy content, we will need more than 21 billion gallons of E85 to displace 21 billion gallons of gasoline. How much will we need? As I reported last year, the DOE showed that a Ford Taurus that gets 29 mpg on gasoline gets 21 mpg on E85. I just checked a number of 2007 models here, and the drop in fuel efficiency from gasoline to E85 is consistently in the range of 26-30%. So, let’s say we lose 28% on our fuel efficiency, which means we need 28% more E85 than the 21 billion gallons of gasoline we are displacing.* This means we need 27 billion gallons of E85, which will consist of 4 billion gallons of gasoline and 23 billion gallons of ethanol.

So we need 23 billion gallons of ethanol to accomplish 15% gasoline displacement. Availability of the pumps is given as a major problem in the Business Week article. I have a question. Can we actually produce anywhere close to this amount of ethanol? Is this like Field of Dreams, where we build the infrastructure and then the ethanol will come? Why on earth would gas station owners sink a lot of money into E85 pumps when the fuel is not available in any significant quantity?

Here’s another way to look at the problem. If you blended all of last year’s ethanol into the gas supply, it would only make a blend of 3% ethanol. Not E85. E3. You could burn E3 in the cars on the road now. In fact, you can triple the ethanol production, put 100% of it in the gasoline supply, and you have an E10 blend that any car on the road today could run. No need for expensive new pumps. No need for E85 capable vehicles.

One other thing I commented on in my response to the author was this claim:

That inconvenient truth is one reason oil companies aren’t rushing to install E85 pumps. Of the 179,000 pumps at U.S. gas stations, only about 1,000 pump E85. Almost none are at oil-company-owned stations.

Remember, this is an article vilifying Big Oil for not putting E85 pumps in their stations. I wonder if the author bothered to check and see the percentage of gas stations owned by oil companies? Probably not, because when he found out that it is less than 3%, it would have taken the wind out of his article. That’s right, most service stations are owned by independent operators, not Big Oil as the author apparently believes. They would be the ones on the hook for purchasing these pumps, and their margins have to justify the pumps.

One final note about the auto companies. The article paints them as a group trying to promote ethanol, but says they are “infuriated” at the oil industries tactics. Please. The auto industry loves making E85 capable vehicles, because there is a CAFE loophole that allows them to exaggerate the mileage of an E85-capable vehicle for CAFE accounting purposes – even if the auto never sees any ethanol. This means that they can meet their CAFE targets and avoid financial penalties by making vehicles like a Ford Expedition E85 capable.

Of course the geniuses at Oil Watchdog have latched onto this article. For them, it provides a simplistic explanation (very important for that audience) for why people are down on ethanol: It’s not actual problems with ethanol, it’s just a Big Oil anti-ethanol campaign. And for them, this qualified as a “solid answer” to the question of why there is so much anti-ethanol sentiment lately. Pathetic.

To conclude (I hadn’t intended to write this much), we have a very misinformed writer misleading a big audience and misdirecting their ire at oil companies over an issue he is wrong about. In other words, just another day at the office.

* Some might argue that engines optimized for E85 (with higher compression ratios, for instance) might not have the steep 28% mileage drop. This is possible, but remember that we are talking about displacing 15% of the gasoline supply, and we don’t know where we could come up with the ethanol to do that. So autos are likely to continue to be optimized for the predominant fuel, not for something like E85.