Energy Policy:

NCEP's Drew Kodjak, NCGA's John Doggett discuss ethanol, biodiesel, fuel prices

Is the future of ethanol brighter because of high gasoline prices and the quest for greater U.S. energy independence? What about biodiesel, and new sources of biofuels? Will the Senate energy bill give a big boost to Midwestern farmers and ethanol producers? Drew Kodjak, program director for the National Commission on Energy Policy, and Jon Doggett, public policy vice president of the National Corn Growers Assn., join OnPoint to talk about the politics and economics of ethanol and other biofuels.

Transcript

Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining us today is Jon Doggett, vice president of public policy with the National Corn Growers Association. Also with us today is Drew Kodjak, program director for the National Commission on Energy Policy. Gentlemen thanks for joining us today.

Jon Doggett: Thank you.

Drew Kodjak: Thank you.

Brian Stempeck: I kind of want to start off with a real general question. When I talk to people who are outside the Beltway, who don't talk about energy policy on a daily basis, a lot of them have heard of ethanol, they've seen it at certain gas stations and they think it's generally a pretty good idea and they say, "Why aren't we using this in every car around the country every single day?" Jon what's your reaction to that kind of question?

Jon Doggett: Well, I think part of the reaction is that the success story of ethanol that we've seen in the last four, five, six years, the last 10 years, more than 30 percent of our gasoline through most of the country contains ethanol. That's a huge gain. We've gone from no ethanol in California to where ethanol is now providing nearly 1 billion gallons of renewable fuels to, for motor fuels in California and we did that in a very short period of time when they banned MTBE. So the success story out there is, is that we're seeing a lot more ethanol in gasoline, what we need to do is we need to make sure people know about it and have opportunities to have even more ethanol use in their local community.

Brian Stempeck: Clearly though, there are also some barriers to ethanol's use, and I know Drew that you talk about this a little bit in the national commission report on energy policy. Can you go over what are some of the issues that you have when you're talking about corn-based ethanol?

Drew Kodjak: The National Commission on Energy Policy was very concerned about oil security for the United States, saw a couple things that could be done, one to just increase oil supplies globally, two to improve the efficiency of the fleet, and three to improve our use of alternative fuels and expand those. The commission didn't want to choose one particular alternative fuel and there's lots of options out there. Ethanol though was seen as a very attractive alternative fuel because unlike natural gas for example, it can be used largely within the existing fleet of vehicles that we have and with the existing distribution infrastructure. So that made it quite attractive to the commissioners. In terms of what the commission thought about corn ethanol versus what is a, another feed stock you can use, if there's research to develop it, is the whole plant. If you use corn as an example, it's the corn kernels currently being used and the commission was interested in promoting research to use more of the corn plant, the corn stock, the corn stover, etc. and that has the non-sexy name cellulosic ethanol. One of the benefits that you get from that is that you get a lot more supply. There's a limit to how much ethanol you can actually produce from the corn kernel, but if you expand to using plant material, not just the corn stock, but forest products etc., you can get a lot more, essentially, transportation fuels.

Brian Stempeck: Jon, how much of the ethanol that we're talking about today is coming from corn versus coming from the cellulosic stock, other types of ethanol that Drew just mentioned?

Jon Doggett: Virtually all of the ethanol today is produced using grain and almost all of that is corn. There's very little cellulosic. There's ethanol being produced right now, but I think that there's, as we've said, there's a lot of feed stock potential. There's a lot of alternatives out there. There's a lot of options and we've been, in the corn industry, looking at how do you use more of that kernel to corn in ethanol production? How do you make it more efficient and how do you get to take that kernel corn, use more of it and produce more of that ethanol from it? And then also, what are we going to do with the stalks? What are we going to do with the rest of the corn plant? Those things are further down the road. We've got to a 4 billion gallon ethanol market because we've taken the basic corn kernel, we've got a long ways to go. We've come a long ways and the future, I think, is unlimited for carbohydrate based fuels and chemicals.

Brian Stempeck: Let's turn to the energy bill for a second. Right now the Senate Energy Committee is working on their version of the energy bill and last time around we saw the Senate work on a mandate that would basically require that states use about 5 billion gallons of ethanol by 2012. This time around, people are saying, we want to see it go up to 8 billion gallons of ethanol by 2012. Why such a huge jump in the amount that they want to see from only a couple of years ago to today?

Jon Doggett: Well first of all, it's not a mandate on the states. It's a mandate on the refining industry, where the people produce the motor fuels. The reason is, is that when this idea first, when the 5 billion gallon figure was first floated, that was back early in 2001. We've more than doubled our production in that period of time so we've taken an industry from less than 2 billion to over 4 billion in that period of time and so if we are going to only stick to the 5 billion gallon figure we're basically projecting no growth for this industry out into 2012. And the folks who invested in these plants, most of them farmers and the capital markets, really want to look for a floor not a ceiling and that floor needs to be fairly high.

Brian Stempeck: But if you've had such rapid growth like you're talking about, you're already at 4 billion gallons roughly, why the need for a mandate at all?

Jon Doggett: I think the reason is, again, just to make sure you have, this is a floor for an industry that's going to, is an emerging technology. We need to make sure that the investors and bankers are happy and comfortable with where we're going to go with this industry. We've had some booms and busts in the past, certainly that was quite some time ago, but we need to have a floor and we need to, what we are doing is we're seeing that technology is going to take us away from one of, the big drivers for ethanol demand, and that is as an oxygen in reformulated gasoline. As that potential goes away or flattens out, we're not going to have the ability to grow to meet a demand and replace fossil fuels.

Drew Kodjak: Jon, one point there. The commission was very concerned, in long-term projections we're looking at a global demand for oil at twice the rate that we've grown over the last 20 years. And that was a concern across the board for our commissioners and so certainly we should do we can to try to expand international oil extraction, reduce demand here at home, but also I think it's terrific news that the Congress and the corn growers believe that they can actually ramp up to 8 billion gallons. I mean that is still not a huge part, that's only a couple of percentages of our annual gasoline usage, but that's terrific news for us, frankly, terrific news.

Brian Stempeck: Going back to one of the things you were talking about earlier, the cellulosic ethanol, is Congress listening when it comes to these kinds of alternative forms of ethanol? Are they providing any of the incentives for that type? We already see, you know, there's a certain excise tax credit for ethanol producers and we're going to have this mandate likely going through if an energy bill passes, but what about these alternative forms and is there anything in the bill for them?

Drew Kodjak: Great question. Two things to talk about there, one is that there are no commercial cellulosic ethanol plants in existence in the United States today. It is a future fuel. There is a plant up in Canada, run by a company called Iogen, and they are looking to locate here in the United States, perhaps in Idaho frankly. One of the things that is being talked about in Congress right now is to try to create a package of incentives to allow that plan to take place and allow essentially the financial assistance to get a couple of plants up and running. It's one of the commissioner's recommendations here as well. The other thing that is that in the energy bill as part of that, what's called the renewable fuels standard, is to create a bit more of a credit for cellulosic ethanol than for corn-based ethanol.

Brian Stempeck: Jon, going to you. We had former CIA Director Jim Woolsey was on the show a few weeks ago and one of the things he said was that when you're talking about future fuels and you're talking about using ethanol the key is, it's not corn, not corn, not corn. He was pretty emphatic about that point. Obviously you're representing the corn growers, how do you respond to Mr. Woolsey's assertion that corn ethanol is really no way to go?

Jon Doggett: Well I guess that would fly in the face that we have 4 billion gallons of production and an industry that has doubled in four years. We wouldn't be where we are right now if it wasn't for the corn industry. Every advancement that's been made in research and public policy and in promotion, almost all of that has come from the corn industry. So we certainly see that there is a future for non-corn ethanol out there some period from now, but we have to deal with what has happened in the past, how it affects today and how it's going to affect what we're going to do in the future. Corn will always have a part in the ethanol industry some way or another and we firmly believe that and our industry is gearing up towards that.

Brian Stempeck: As we're all watching the energy bill debate obviously the ethanol section is a huge portion, but the other issue right now if MTBE which stalled the energy bill last time around. Are you hearing anything about a way to, obviously you have a huge interest in getting the ethanol mandate through, where do you see a potential compromise for dealing with the MTBE liability issue in cleaning up some of these spills, but also getting the ethanol mandate through? Do you think it's going to get through this year?

Jon Doggett: Yes.

Brian Stempeck: Where do you see the middle ground?

Jon Doggett: I'm unencumbered by a law degree. I think that there's probably a lot of compromise, there's a lot of room for negotiation and that's something for the MTBE industry to work out as to what they could work out with the folks that want to get an energy bill done. I hope they get to it. I hope they get it done soon and we all would benefit from that happening.

Brian Stempeck: Drew, do you have any thoughts about how the energy bill is going to get through this year in terms of some of the possible MTBE compromises?

Drew Kodjak: It's a tough nut.

Brian Stempeck: Are you optimistic? Do you think it's going to get through?

Drew Kodjak: I am optimistic as well, but there's no silver bullet in the compromise.

Jon Doggett: I think the recent House vote to take out the MTBE liability provision in the House energy bill, the caps amendment, the fact that that failed by such a narrow margin, I think that was significant. I think it was a wakeup call to a lot of folks that this is an issue that's not going away and that there needs to be a solution and that solution's to going to have to come quickly.

Brian Stempeck: OK. Another issue right now is a lot of high gasoline and high oil prices. I know this is an important thing that the corn growers and ethanol producers are trying to get out, that usually the argument with ethanol is that you have people in California and New York saying, "Ethanol is too expensive. You have to ship it. You can't put it through a pipeline. It's too expensive to mix with our gasoline." Now with gasoline prices higher, ethanol's coming in looking like a better bargain. What's the case with that right now?

Jon Doggett: Well the case with that is, is that all of the naysayers that said that when we were going to replace MTBE in California that gasoline prices were going to go up. Gasoline prices did go up, but ethanol prices came down. If it wasn't for ethanol, in much of California, they would be paying in some places, as much as a dime more for their gasoline at the pump. We have had grave concerns about the fact that ethanol, which generally, historically has traded at a premium over unleaded rack gas or basic gas, is now trading at a discount to that and that's prior to the 51-cents-per-gallon blenders credit. There are spot markets where the net cost of ethanol is nearly a dollar cheaper than rack gas. We think that that's unfortunate that the petroleum industry hasn't taken advantage of that. We think it's a short-term situation, but it certainly puts an awful lot of political pressure on a lot of members of Congress to go ahead and to pursue very seriously and very enthusiastically a higher mandated figure for renewable fuels.

Brian Stempeck: We've seen a lot of consumer groups come out, actually, about this issue and a couple of senators, Senator Harkin came out on this and said, "The oil industry isn't using the ethanol like it should be." How do you see as, what's the best way to pressure them to try to get them to use this ethanol? Is it just, you know, putting out these reports or what's, is there anyway to get them to use more ethanol at the lower prices?

Jon Doggett: Well, I think that they are using ethanol, but that they've discounted the price. I think that there are number of options available in the public policy arena. I think that the fact that we have folks like Senator Harkin and others who have called upon the Department of Energy to investigate as to what's going on with this disparity in the prices. We've asked a number of questions of the petroleum industry, none of which have been answered. It's unfortunate, we want to work with these folks, they're our customers and we want to see them use our product. We also don't want to see it discounted to the point where our industry has some serious economic consequences to it because they're doing whatever they're doing.

Brian Stempeck: Drew, last week President Bush came out and was talking about biodiesel, he was down in Virginia at a biodiesel plant and saying, pointed to this as another of the renewable fuels that could be a good option. Right now it's still a pretty tiny percentage of the overall diesel market, but how did the National Commission come out on that and what are your thoughts on biodiesel's potential?

Drew Kodjak: The commission was very interested, not only in using what's called energy crops, corn or switch grass for cellulosic ethanol, but also wastes. And the issue with biodiesel, there is a plant out in Missouri that turns turkey parts into diesel fuel, what we called biodiesel in this report. It also can be used as, from waste grease, turning waste grease from like McDonald's into fuel. So the commissioner was very interested in trying to find ways to use waste in the United States by turning them into transportation fuels. It is a small market right now, but the commissioners thought that it was useful to promote it.

Brian Stempeck: Same question on kind of how the energy bill comes down on this. Are there credits for biodiesel? A question for both of you, is Congress listening and are they pushing this forward as a good option as we're looking towards an energy bill coming out in the next few months?

Drew Kodjak: Well the renewable fuels standard is not ethanol specific. It's for all renewable fuels. So biodiesel is included in that and we heartily support that. I think it's going to be part of the ultimate package that will be signed into law and I hope that's sooner than later.

Brian Stempeck: Are there also specific credits though in the energy bill to deal with biodiesel? I mean it's, obviously, you know, pretty far behind the overall ethanol industry, but are we looking at any targeted credits just for biodiesel?

Jon Doggett: Not I know of.

Drew Kodjak: Yes, they did achieve a, in the corporate tax bill from last Congress, there is a tax credit there. It needs to be extended. It's a short-term credit right now and it needs to be extended. So I think we're going to go beyond that and I think that the biodiesel industry is where the ethanol industry was about 25 years ago. What's interesting is, is that we're getting a lot of inquiries from folks in Europe where their ethanol industry is about 25 years behind ours, but their biodiesel industry is about where we are now with our ethanol industry. They use a lot of biodiesel in Europe.

Brian Stempeck: One last question for both of you. Currently there's a lot of vehicles in the United States, I think about 4 million so-called flexible fuel cars and trucks that are already equipped to run on gasoline with a high concentration of ethanol in it. People have come out and criticized this credit for these kinds of cars and trucks before, saying they're not actually running on the ethanol. They're equipped to do so, you have millions of the cars, Jon why aren't they doing so?

Jon Doggett: Well, because most consumers that own a flex-fuel vehicle don't know that they have one, No. 1, and No. 2, if they do, they don't know where the pump with E85 is located. We've been, we have presented to the automobile industry a series of recommendations as to how that they can go ahead and help increase the use of the E85 in those flex-fuel vehicles. It doesn't make much sense, from a public policy standpoint, to have flex-fuel vehicles, give them the CAFE credit and then not have them use the E85. It's available. We've got plenty of product to get out there. The car companies need to work on it and the petroleum industry needs to make sure we've got the infrastructure to provide the product.

Brian Stempeck: Drew, any thoughts on how we can get more consumers to use the ethanol in the cars they have that are equipped to run on it?

Drew Kodjak: I think it just needs to be more widely available. I mean, E85 is not widely available in the United States and it would be nice if it was.

Brian Stempeck: All right. We're out of time. We're going to have to stop there. I'd like to thank both of our guests today. That was Jon Doggett, vice president at the National Corn Growers Association and also Drew Kodjak with the National Commission on Energy Policy. I'm Brian Stempeck. This is OnPoint. Thanks for watching.

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