December 4 -- It's in the gas you pump. It shapes your grocery bill and the prospects of the nation's corn growers
It's a clear, colorless liquid known as ethanol. But its fortunes are sputtering.
For more than 30 years, the federal government has offered tax credits and imposed a tariff to stimulate U.S. production of ethanol, nearly all from corn. The goal: to reduce the nation's reliance on foreign oil. Ethanol use boomed after 2005 when the Renewable Fuel Standard mandated a growing proportion of "natural" alternatives in your tank.
Most gas now sold in stations is classified as "E10," meaning 10 percent is ethanol. About 14 billion gallons of ethanol will be produced in the United States this year.
The policy created strong demand for corn. So strong that about 40 percent of the nation's corn yield is set aside for ethanol. And that, some analysts say, has helped drive up prices for food - everything from corn to soda to poultry.
"I just think this is a classic example of where you can reduce federal involvement and not hurt the individual," said Democratic U.S. Sen. Jim Webb, who has sought to drop the subsidies. "We need to be a lot smarter about letting the marketplace work."
The tax credit and tariff are set to expire at the end of December. Midwestern politicians have fought to keep them, and, in the past, they have seemed untouchable in presidential election years, given the early Iowa caucuses. But this time, the subsidies may be running on empty in Congress.
"There's a pretty good chance that they will just let it go," said William Gibson, a professor of political science at Virginia Wesleyan College.
He said an unlikely alliance between environmentalists and budget-cutting tea party activists may doom the subsidies, which cost the government $6 billion a year. Ethanol critics range from former Democratic Vice President Al Gore to Rich Lowry, editor of the conservative National Review, who called it "an object lesson in the incorrigibility of Washington's gross special-interest politics."
Representatives of the ethanol industry say the policy has reduced U.S. intake of foreign oil and the price of gas. Yet even ethanol lobbyists say they're not fighting to renew the subsidies.
"The industry has evolved to where the tax incentive isn't as important as it once was," said Matt Hartwig of the Renewable Fuels Association, which lobbies for ethanol. "We also recognize the country is in a bit of a jam right now. Everyone needs to do their part."
Ethanol isn't new.
Benjamin Franklin used it for his warming pan in the 18th century, said Bill Kovarik, a professor of communication at Radford University who has studied the topic. Henry Ford built the Model T with an "adjustable carburetor" to run on gas or ethanol, Kovarik said.
The energy crisis of the 1970s, with curtailed foreign oil supplies and spiked gas prices, fueled the modern interest in ethanol. In 1978, Congress enacted the tax credit, now worth 45 cents for every gallon, for companies that blend ethanol. The tariff, now at 54 cents per gallon, came two years later to ward off imported ethanol, particularly Brazilian sugar-based ethanol.
In 2005, President George W. Bush signed a law creating the Renewable Fuel Standard and the modern ethanol boom.
It's a complex issue that doesn't "fit into a sound bite," said Sheryl Ball, an associate professor of economics at Virginia Tech. When she surveyed her colleagues, "there wasn't anybody willing to give me a thumbs up on it."
Critics most frequently target ethanol's effect on food prices.
Supply and demand dictate that the remaining corn available for food will cost more, they say. Corn prices tripled from $2 a bushel in 2006 to about $6 now.
That triggers higher prices at the store not just for corn and products with corn syrup such as sodas and baked goods, but also for beef, poultry and pork. Corn is a primary ingredient of feed, which makes up 60 to 80 percent of the cost of raising animals.
The Congressional Budget Office reported in 2009 that up to 15 percent of the rise in food prices resulted from ethanol policy. The budget office also said the subsidies added $600 million to $900 million to the cost of U.S. programs to feed the needy in fiscal 2009.
Environmentalists, from Gore to the Sierra Club, also have voiced growing alarm about a compound they once championed. Friends of the Earth said ethanol production increases greenhouse gas emissions.
The hazards include soil erosion, nitrate poisoning of groundwater and air pollution, said Tadeusz Patzek, chairman of petroleum and geosystems engineering at the University of Texas at Austin. In a paper he called it "a human assault on geologic processes."
Ethanol supporters offer counterarguments and additional points on its behalf:
The bogeyman for rising food prices, they say, isn't ethanol, but speculative commodities trading and rising oil prices. There's enough corn for fuel and food. Growers "typically carry over a billion bushels of corn from one year to the next in surplus," said Andrew Smith, senior assistant director of the Virginia Farm Bureau Federation.
The policy, supporters say, has helped both consumers and the government.
The ethanol blend reduced gas prices at the pump an average of 89 cents per gallon last year, economists from Iowa State University and the University of Wisconsin found in a study funded by the Renewable Fuels Association. A McKinsey and Co. study in 2008 pegged the savings at 17 cents a gallon.
The ethanol requirement also has saved the U.S. government billions in payments to farmers that would be triggered under a different subsidy if corn prices were too low, said Chris Thorne, spokesman for Growth Energy, a coalition of ethanol producers.
As for the environment, the fuel association's Hartwig said: "Unfortunately for many in the environmental community, there isn't anything they like unless it's this utopian ideal for energy production."
At first glance, ethanol policy might not appear to affect Virginia's businesses much.
Virginia is a "corn-deficit state," said Katie Frazier, executive director of the Virginia Grain Producers Association. With 340,000 acres devoted to the crop, it brings in far more corn than it sends out. And it doesn't have a major ethanol plant, she said.
Nevertheless, ethanol has had sharp, and differing, effects on local companies from Smithfield Foods Inc. to Norfolk Southern Corp.
Smithfield executives have blamed ethanol for hog-production losses surpassing $539 million in fiscal 2010. C. Larry Pope, Smithfield's president and CEO, thinks $1 per bushel of the price increase for corn comes from ethanol subsidies. Every extra dollar triggers a $10 increase in the cost of raising each animal, said Dennis Treacy, an executive vice president. "So if you have 16 to 17 million head, that adds $160 million."
Stihl Inc., the Virginia Beach-based power-tool manufacturer, has brought up other problems. If it sits too long, ethanol attracts moisture and can separate from gasoline, sometimes clogging fuel jets and creating gum deposits, said John Foster, manager of product compliance. The Consumer Product Safety Commission cited "the level of ethanol" when it recalled 2.3 million Stihl tools in May over concerns about fastening or removing fuel caps.
Foster recommended that gas not be kept in tools for longer than two months.
For Norfolk Southern, ethanol has been golden. From November 2010 to October 2011, the company transported nearly 2.1 billion gallons of ethanol from the Midwest to points across the country, said Tom Landrum, national account manager - a huge jump from the 298 million gallons it moved in 2003.
Officials from Stihl and Norfolk Southern have steered clear of the political debate. Not Pope. He has said the policy "makes absolutely no sense at all."
If the tax credit and tariff die, what will happen? Maybe not a whole lot.
The Virginia Farm Bureau's Smith predicted a drop in food prices and corn production: "Farmers are going to grow what they think they can make money on." But Hobey Bauhan, president of the Virginia Poultry Federation, said the fuel standard "will continue artificially inflating corn prices."
U.S. Rep. Bob Goodlatte, a Republican from the Roanoke area, wants to do away with the Renewable Fuel Standard. He submitted two bills in October - one to kill it, the other to relax it when corn supplies get low.
"As long as the government is mandating that a certain amount of corn be used for ethanol production, they're going to get their higher price, and my livestock farmers and consumers are going to be the losers," he said.
Those bills, Thorne said, "would turn the clock back to the 1970s and allow OPEC to control the economy."
He and Hartwig seek a new wave of cars and gas-station pumps that can operate on fuel with higher levels of ethanol. Others champion alternative ethanol sources, such as grass or wood, or moving to other energy forms, like electricity.
In a statement, Republican U.S. Rep. Randy Forbes of Chesapeake criticized the "knee-jerk reactions" in favor of, and now against, ethanol. He submitted a bill to encourage harnessing energy from sources such as nuclear fusion and to launch a multibillion-dollar research competition to uncover other alternatives.
Ball, the Tech professor, said: "We need to stop making fuel out of things people can eat and work really hard to find a way to make fuel out of things that people can't eat."
