The Cacophony in Today’s Energy Policy Debate

Escalating oil and gasoline prices have consumers and politicians lashing out in every direction. U.S. politicians have singled out their favorite scapegoats namely, the big oil companies, whose recent earnings are perceived to be “windfall profits.” Creeping into this noisy debate on what to do about high gasoline prices are the tired remedies such as price controls and a Windfall Profits Tax on “obscene” profits being reported by “Big Oil.”

It is also widely perceived that the ethanol industry has been unduly favored and increased production of corn ethanol is solely responsible for higher food prices. Under attack are the gasoline blenders’ tax credits, USDA corn subsidies and the tariffs on imported ethanol.

What is not widely discussed in this cacophonous energy policy debate are ways in which the U.S. government can best support the private sector in finding solutions to the energy problems we now face. The primary focus of this article is in presenting a range of “positive” measures to be considered by the U.S. government in supporting the development of a robust U.S. biofuel industry.

Obstacles to Overcome in Increasing U.S. Fuels Supplies

Admittedly, a shortage of refinery capacity in the U.S. has contributed to fuels shortages and price spikes. No new refineries have been built in the U.S. in the last 30 years, and even if more refineries are to be built, it will take time. It is widely recognized by energy policy makers that biofuels should play an important role in increasing the supply of fuels.

In 2007, The Energy Independence and Security Act (EISA) was passed by Congress. This positive piece of energy legislation established future goals for the increased production of biofuels. These goals are known as the mandated Renewable Fuels Standards (RFS).

Unfortunately, EISA does not address the number of obstacles that the biofuels fuels industry faces in meeting these mandated standards. The biofuels industry is relatively new and is undergoing growing pains. Currently 99% of all biofuels being produced in the U.S. are made from agricultural crops such as corn and soybeans. Because corn and soybeans have alternative uses, 1st generation corn ethanol and biodiesel refiners are not assured as to their future availability and cost. Likewise, 2nd generation biofuels refiners have to develop new biorefineries in places where the supply and cost of the biomaterial to be used as feedstock can be assured. In addition, 2nd generation biofuels processing technology is still undergoing change and the risk of obsolescence is still high. Unfortunately, there are no substantial and coherent government support programs being offered to those that who to build biorefineries.

Past Failed Energy Policies Should Not Be Repeated

Federal price controls on domestic crude oil and refined petroleum products had been tried in the 1970’s in an attempt to constrain fuel price increases. They did not work then and will not work now, and we should not repeat the mistakes made in the “70’s.

In 1980, after price controls were abandoned, Congress enacted a Windfall Profits Tax (WPT) on domestic producers of crude oil, as they feared that steep oil price increases would re-occur. This WPT also proved to be counter-productive, contributing to the reduction of domestic oil production and an increase in foreign oil imports, and higher prices. It would be a big mistake to again impose such taxes on Big Oil, as we want them to be able to reinvest in the energy sector in the U.S.

Ideas for Establishing a Harmonic and Coherent Energy Policy

Most will agree that a harmonic and coherent set of government energy policies ought to be established:

  • To encourage U.S. oil companies to increase investment in the U.S. energy sector;

  • To promote the use of alternative fuels and biofuels in transportation;

  • To promote the development and increased use of wind, solar power and other renewable energy technologies;

  • To develop clean coal technology;

  • To promote development of new nuclear power plants and

  • To promote energy conservation measures.

Biofuels, An Important Piece in the Energy Policy Puzzle

To meet EISA’s RFS mandate, 10% of the U.S. fuels requirements need be biofuels. This will require an investment of US $11 billion in four years, US $46 billion in 10 years and US $105 billion in 15 years. Corn ethanol is currently being produced at the rate of 8.7 billion gallons per year, and by year 2015, the RFS calls for 15 billion gallons per year to be produced. This represents 42% of year 2022’s 36 billion gallons per year mandate. The mandate also requires that by 2022, 58% of the total biofuels produced are to be 2nd generation biofuels, with cellulosic ethanol providing 76%, of this 21 billion gallon per year requirement.

What Will It Take To Meet EISA’ RFS Mandate

If the RFS mandate is to be met, significant positive government support will be needed to stimulate private sector investment in biofuels plants and related infrastructure. There will be a need for more R&D grants, tariff protections, tax holidays during ramp-up and accelerated amortization of investment in new technologies. The U.S. Department of Energy’s loan guarantee program for renewable energy projects needs to be expanded and access to government loans, increased. In addition, conventional fuel surtaxes may need to be employed to support the higher cost of distributing and marketing advanced biofuels.

Other Measures Being Discussed

An additional number of positive measures have been articulated both in Congressional hearings and as part of the energy programs announced by both presidential candidates. The most unique measures being discussed include:

  • Providing government incentives for increased parity between petro-diesel and biodiesel, and between E85, E10 and gasoline,

  • Increasing user taxes on fuels to reduce demand and to fund needed energy projects,

  • Providing federal funds and other incentives for developing promising technologies that could provide two billion gallons of cellulosic ethanol by 2013;

  • Increasing the RFS mandate from 36 billion gallons per year to 60 billion gallons per year by 2030; and,

  • Providing tax incentives for expanding locally owned bio-refineries.

Because this cacophonous energy policy debate will continue into the next administration, the biofuels industry must remain vigilant to see that some of the bad ideas, such as a Windfall Profits Tax, are not part of energy policy. Suggested instead are a number of positive measures that the U.S. government could take to facilitate private sector initiatives in biofuels that will be needed in the next 10 to 15 years.

Tim Sklar is president of Sklar & Associates, a consulting firm specializing in biofuels project development. He is a CPA with expertise in project finance, due diligence investigations, viability assessments and business plans. He has extensive consulting and operational experience in business turnarounds and operational management and restructuring, having served on the management consulting division of accounting and consulting firms PriceWaterhouseCoopers and KPMG on U.S. and international assignments. Sklar served as chief financial officer of regional manufacturer GFC Inc, leading a major business turnaround effort.