Lawmakers Take on Gasoline

Congress is desperate to do something, anything on energy security. But it will take time.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

May 25, 2007

Alternative motor fuels will get a big boost from Congress this year as lawmakers set more-ambitious goals for ethanol, biodiesel and other competitors to oil-based fuels.

Politicians want a lot more ethanol blended in with gasoline. Look for legislation requiring at least 35 billion gallons a year of ethanol to be mixed into motor fuels by 2017. That'll represent a substantial step up from the existing mandate for only 7.5 billion gallons a year of ethanol by 2012, which Congress passed in 2005 as part of a sweeping energy law. In fact, ethanol manufacturers are on course to reach the 2012 goal this year, thanks to a proliferation of new production facilities since the law took effect.

But reaching the 35-billion-gallon level is another story. Congress is betting the farm on new technology designed to make cellulosic ethanol from farm waste, sawdust and switchgrass. The process is still in its early days, with fledgling firms -- backed by venture capitalists and other private investors -- likely to produce only about 150 million gallons of cellulosic ethanol by 2012.

These producers would need to expand cellulosic ethanol output at a superhuman rate over the subsequent five years to make the roughly 20 billion gallons needed to reach the overall 35-billion-gallon target. Why so? Production of ethanol from corn can't get much beyond 15 billion gallons a year without putting enormous upward pressure on the prices of beef, pork, poultry and dairy products.

Lawmakers are moving ahead regardless. "There is a bipartisan frenzy to do something right now about our energy security, especially with gas pump prices where they are today, even though the technology and infrastructure won't be ready for prime time for years," says Thomas Pyle, a vice president with The Rhoads Group, a lobbying firm.

Similarly, Congress is likely to set a first-ever mandate for the use of biodiesel at 5 billion gallons a year by 2017, but this shouldn't pose much of a problem for the industry. Current output, produced mainly from soybeans, is running at a clip of about 300 million gallons a year and rising rapidly.

Congress will also raise fuel-efficiency standards for autos to spur advancements in gasoline-electric hybrid motors and fuel-cell-powered vehicles. Odds are that Congress will require automakers' fleets to average 40 miles per gallon by 2020, up from 27.5 MPG for cars and 22.2 MPG for light trucks now.

As with ethanol, achieving the new target on time will be a major stretch --especially given that ethanol, while cleaner than gasoline, is a less-efficient fuel. Automakers need super-efficient plug-in hybrids and economical fuel cell engines to make big strides in mileage, but these technologies are still in the concept stage -- commercial production isn't likely until well into the next decade.

Congress is simply eager to take bold action on fuel efficiency before next year's election. Says Pyle: "This is about the easiest thing [lawmakers] can do to show the American people that they understand their anxiety about current gasoline prices and are doing something about it, even though it won't help in the least."

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