The answer to a reader's question in the July 17, 2012, "Me and My Car" column in The Wall Street Journal drew our attention to an interesting situation.
The reader owned a 2010 Nissan Rogue that never came close to achieving the Environmental Protection Agency's (EPA) fuel-efficiency rating. Out of frustration, the reader traded it for a 2012 Jeep Patriot, but after a limited number of miles, he still wasn't getting the miles-per-gallon estimated by the EPA. The column's writer, Jonathan Welsh, answered that the EPA doesn't use ethanol in the fuel it uses to test and certify the miles per gallon rating of new vehicles, which is a legal requirement under the Corporate Average Fuel Economy (CAFE) mandate for automobile companies. According to Mr. Welsh, given the fact that ethanol is blended into gasoline in many parts of the United States, consumers forget about it and that fuel component is the reason why most of the actual fuel ratings fall short of the government's estimates.
We must admit we hadn't thought about the lack of ethanol as the explanation of the difference in theoretical fuel economy and real-world experience. It sent us off to do a little research about the current state of vehicle fuel-efficiency performance.
On the Department of Energy's website, www.fueleconomy.gov, it states that E10, the 10% blend of ethanol and gasoline that we are required to use, will result in 3-4% fewer miles per gallon than on straight gasoline. Interestingly, the E85 blend (85% ethanol and 15% gasoline) is estimated to get 25-30% fewer miles per gallon. Prior to 2008, the EPA tested vehicles using only three tests all of which assumed optimal weather and driving conditions. The agency then would subtract 10% for city mileage and 22% for highway to get to its reported mileage estimates. Now they have added five tests and use the average of the five additional tests to adjust their city and highway mileage ratings.
Ethanol as a fuel has a long history in the U.S. It was initially used as an illuminating fuel as far back as Civil War years and when the whaling industry was shrinking. Ethanol was actually the fuel of choice for Henry Ford's first car in 1896, but its role was usurped by gasoline.
The Energy Policy Act of 2005 instituted regulations that ensured that all gasoline in the U.S. contained a minimum volume of a renewable fuel, primarily ethanol made from corn. This mandate, known as the Renewable Fuels Standard (RFS), aimed to double U.S. consumption of ethanol by 2012. The use of ethanol was embraced to help fight air pollution from auto exhausts and as an engine anti-knocking agent to replace MTBE, another fuel additive with poisonous consequences when spilled, which was later banned. The Energy Independence and Security Act of 2007 expanded the RFS and required that 36 billion gallons of ethanol be blended in the nation's gasoline, diesel and jet fuels by 2022. In 2007 the nation was consuming 6.8 billion gallons of ethanol.
The ethanol folly has continued and now we are in a situation where there is too much corn-based ethanol and not enough ethanol derived from cellulosic material as mandated by the law such that refiners are fined for not providing a fuel that commercially can't be produced. Exploding corn prices due to the current Midwest drought and heat wave have squeezed ethanol manufacturers to the point where a number of plants making ethanol are being shut down and companies are going out of business. According the Energy Information Administration (EIA) web site, as of April 13, 2012, a gallon of E85 cost $3.47 compared to $4.89 for gasoline and $4.12 for diesel. Of course, that was before the recent jump in corn prices.
If the U.S. wasn't consuming 40% of its corn crop for making ethanol, the drought and heat wave would be having little impact on corn prices. At that same time, a gallon of gasoline equivalent for compressed natural gas was only $2.08, a point the natural gas industry is pointing out. The chart on fuel prices the EIA displays on its web site (Exhibit 11) shows that for an extended period of time, ethanol cost more per gallon than gasoline yet delivers significantly fewer miles per gallon.
What struck us about our research into the EPA testing methodology and ethanol use was that we have a government mandate to blend ethanol into our fuel supply, yet the EPA certifies miles-per-gallon ratings of vehicles while using a fuel containing no ethanol. But then again, the EPA's testing is done in a laboratory with the vehicle on a dynamometer, the equivalent of an exercise bike, and the fuel consumption is never measured directly but only estimated by capturing the carbon output from the vehicle's tailpipe. This is one reason why hybrid vehicles get much higher EPA mileage estimates since the battery power portion of the power doesn't emit any carbon.
As comedian Stan Laurel would have said to his partner Oliver Hardy, "Another fine mess you've gotten me into." With these sorts of illogical government policies, we really should be worried about our health care system post 2013.
G. Allen Brooks is Managing Director of Houston-based investment banking firm Parks Paton Hoepfl & Brown. This article originally appeared in the July 31, 2012, issue of PPHB's newsletter "Musings from the Oil Patch."