Written Testimony of
Mr. Bob Dinneen
President and CEO
Renewable Fuels Association
Senate Environment and Public Works Subcommittee on
Clean Air, Wetlands, Private Property and Nuclear Safety
Mr. Chairman and members of the Committee, today’s hearing on proposals to increase renewable fuel consumption is extremely timely. Crude oil prices are rising, driven by concerns over the conflict in Iraq and continued political unrest in Venezuela. At the same time, gasoline output is down, in part, because refiners have responded to increased demand for heating oil. Consequently, the need for an energy policy that reduces our nation’s dependence on foreign sources of energy by increasing the production and use of domestic fuels such as ethanol and biodiesel has never been greater. I commend the Chairman for convening today’s hearing, and for his leadership on promoting opportunities for increased production and use of domestic ethanol.
The Renewable Fuels Association is the national trade association for the domestic ethanol industry. Our membership includes ethanol producers and suppliers, gasoline marketers, agricultural organizations and state agencies dedicated to the expanded production and use of fuel ethanol. The U.S. ethanol industry consists of 69 production facilities located in 20 states with an annual production capacity of 2.75 billion gallons. Production capacity continues to expand, particularly among farmer owned cooperatives, the fastest growing segment of our industry. Thus, the U.S. ethanol industry and farmers across the country stand ready to contribute more meaningfully to our growing energy needs.
The war in Iraq, coupled with political upheaval in Venezuela, has focused renewed attention on the need for a comprehensive national energy policy that ensures a reliable fuel supply. As you know, the U.S. currently imports more than 57% of our oil, and our imports are predicted to grow to 68% by 2025. At the same time, we rely increasingly on our energy supplies from unstable regions of the world, including Iraq. In fact, last year we imported 450,000 barrels of oil per day from Iraq! In addition, the war on terrorism has renewed interest in reducing energy imports and diversifying the energy sector.
In testimony before Congress, R. James Woolsey, former Director, Central Intelligence, said, “We have to realize that our fuel distribution… systems are almost certainly going to come under attack in some way. Their high degree of centralization and their fragility to terrorist attack is a serious matter. One thing we have to be looking at is how to decentralize and how to make more flexible and less fragile our energy distribution networks. It means local production of renewable fuels… rather than relying on imports and central fuel stations.”
President George Bush has recognized the contribution American agriculture can make to provide a more reliable fuel supply through the production of domestic liquid fuels such as ethanol and biodiesel. In calling for the Congress to pass an energy bill last fall, President Bush said, “We need an energy bill in America. An energy bill that enhances renewables like ethanol. An energy bill that makes us less dependent on foreign sources of crude oil.”
Deputy Secretary of Energy Kyle McSlarrow echoed the Administration’s support for expanded use of ethanol in the U.S. fuel supply in recent testimony before the House Energy and Commerce Subcommittee on Energy and Air Quality. Among the eight goals the Administration feels should guide the energy debate, McSlarrow stated, “the Administration strongly supports a renewable fuels standard that will increase the use of clean, domestically produced renewable fuels, especially ethanol, which will improve the Nation’s energy security, farm economy, and environment.”
The increased use of renewable fuels will expand U.S. fuel supplies. Ethanol and biodiesel are blended with gasoline and diesel after the refining process. Thus, the increased use of these fuels adds directly to domestic fuel supplies. Blending ten percent ethanol in a gallon of gasoline provides an additional ten percent volume to the transportation fuel market.
The U.S. ethanol industry has been a responsible partner in the fuels marketplace, increasing production capacity to meet the growing demand for ethanol created by state and federal law. In 2002, the U.S. ethanol industry set records in production, production capacity, and number of new facilities. Twelve new state-of-the-art production facilities were completed in 2002; and with expansions at existing plants completed, the industry produced more ethanol in 2002 than at any time in its history – 2.13 billion gallons.
Last year’s record production represents a 20-percent increase over 2001 and a 45-percent increase since 1999. This record-breaking production is continuing this year. In January, the industry set an all-time monthly production record of 177,000 barrels per day, representing a 31-percent increase over last January’s production.
But the industry is not done yet. There are another eleven ethanol production facilities totaling more than 500 million gallons of capacity currently under construction, which will increase ethanol production capacity to more than 3 billion gallons by the end of this year. At current production rates, the industry will produce a record 2.8 billion gallons of ethanol in 2003.
Ethanol is the third largest and fastest growing market for U.S. corn. In 2002, over 800 million bushels of corn were processed into ethanol and valuable feed co-products, boosting corn prices by 30-40 cents per bushel nationally. The U.S. Department of Agriculture estimates that the ethanol industry will process as much as one billion bushels of corn this year, approximately 10 percent of the national crop. Additionally, ethanol is the second-largest user of grain sorghum. More than 45 million bushels of grain sorghum were used in ethanol production in 2002.
The recent growth in ethanol plant construction has been led by farmers seeking to capture new value-added markets for the commodities they grow. Since 1999, farmer-owned ethanol facilities have increased their percentage of total production capacity to more than 30%. Today, farmers own 29 of the 69 plants in operation. Eight of the 11 plants under construction are farmer-owned. With this new production, taken together farmer-owned ethanol plants will be the single largest ethanol producer in the country.
Ethanol production facilities represent local economic engines throughout rural America, creating jobs, investment opportunities, value-added markets for farmers, and increased local tax revenue. A recent study found that an average 40 million gallon facility would have the following positive economic impact on the local community in which it is located:
The tremendous growth in ethanol demand over the last several years is a direct response to state efforts to reduce the use of MTBE. To date, sixteen states have acted to phase out the use of MTBE, and the ethanol industry has acted responsibly to build additional capacity so that refiners could continue to supply consumers with competitive fuels that meet federal Clean Air Act requirements. Without commenting on whether such state actions are justified, between 3.5 and 4.5 billion gallons of ethanol would be needed to replace MTBE, depending on how new EPA regulations implementing the 8-hour ozone standard impact state decisions to opt into the RFG program.
The U.S. ethanol industry has proven it can supply such demand, if necessary.
In California, most major refiners have voluntarily switched to ethanol one year ahead of schedule. With the transition two-thirds complete, the results can only be described as seamless. There have been no ethanol shortages, transportation delays or logistical problems associated with the increased use of ethanol in the state. Today, approximately 65% of all California gasoline is blended with ethanol, and it is estimated that 80% of the fuel will contain ethanol by this summer. As a result, while there was only about 100 million gallons of ethanol being used in the state last year, California refiners will use between 600-700 million gallons of ethanol in 2003.
Concerns about ethanol supply, transportation and logistics have been successfully answered. Pat Perez, manager of the California Energy Commission’s (CEC) Transportation Fuel Supply and Demand Office, said recently the transition to ethanol is "progressing without significant problems." Furthermore, CEC spokesman Rob Schlichting told the San Jose Mercury News in a February 27 article that the substitution of ethanol for MTBE in California has not added to recent retail price increases “because ethanol is more plentiful than previously expected and cheaper than gas.”
The use of ethanol is not new to Connecticut or New York and ethanol is indeed currently being blended in both states. At our National Ethanol Conference in Scottsdale, Arizona, February 19, Paul Stendardi of Getty Petroleum Marketing spoke of the ethanol blending that is currently occurring in the Northeast. Specifically, Stendardi said, “We’ve been blending with ethanol longer than 12 years. Right now we blend in Providence, Rhode Island, New Haven, Connecticut, Albany, New York, Newark, New Jersey and Paulsboro, New Jersey. We take the ethanol into Providence by rail. We truck it down to New Haven. And we take the ethanol into Paulsboro and Newark by water. And it’s railed into Albany, New York.” Blending ethanol is common practice throughout the country and logistics for converting terminals is very straightforward.
In addition to the ethanol blending currently occurring in the Northeast, California’s successful transition to ethanol should give East Coast policymakers confidence that ethanol can be used to satisfy the Clean Air Act oxygenate requirement in a smooth and orderly fashion. In fact, the Northeast is even better equipped for the transition to ethanol than California as the Northeast draws from a wider variety of fuel supply sources including the Gulf, Mid Atlantic and off-shore refineries. This diversity of fuel supply options will help keep a competitive and steady supply of fuel components coming into the region.
The U.S. ethanol industry has clearly demonstrated it can continue to provide refiners with adequate supplies to meet current Clean Air Act requirements, even as states take action limiting the use of MTBE. But we have heard the requests of our customers for greater flexibility in meeting those standards, i.e., eliminating the federal RFG oxygen content requirement. Consequently, we have worked for more than a year to develop a consensus proposal that addresses the concerns of a number of stakeholders, including environmental and water quality officials apprehensive about MTBE, petroleum companies appealing for greater flexibility, and ethanol producers expanding to meet the increased demand created by current federal and state laws.
The result of this collaborative effort was legislation overwhelmingly approved by the United States Senate during consideration of the energy bill last year, and recently reintroduced as the Fuels Security Act of 2003 in the Senate, S. 385, and H.R. 837 in the House of Representatives. We continue to support this important legislation, and appreciate the Chairman’s support as an original co-sponsor of S. 385.
The Fuels Security Act of 2003 provides a federal resolution to persistent concerns related to MTBE, avoiding a patchwork of state actions that complicate the fuel distribution system. It maintains the existing clean air benefits of federal RFG with strong anti-backsliding provisions. It provides refiners with the flexibility they have sought in meeting Clean Air Act requirements by eliminating the federal RFG oxygen standard. And it provides some marketplace certainty to farmers and ethanol producers that have acted responsibly to meet the demand created by current law.
Renewable, domestically produced fuels can and should play a larger role in meeting our nation's energy needs. Creating a Renewable Fuels Standard (RFS) in which a small percentage of our nation's fuel supply is provided by renewable, domestic fuels such as ethanol and biodiesel provides a positive roadmap for reducing consumer fuel prices, increasing energy security, and stimulating rural economies by harnessing America's renewable energy potential.
The RFS included in the Fuels Security Act of 2003 boosts the demand for renewable fuels such as ethanol and biodiesel to 5 billion gallons by 2012. A recent analysis by the U.S. Department of Energy, "Infrastructure Requirements for an Expanded Fuel Ethanol Industry," concludes, “no major infrastructure barriers exist” to expanding the U.S. ethanol industry to 5 billion gallons per year. This is because credit banking and trading provisions included in the bill maximize refiner flexibility. The bill does not require that any renewable fuels be used in any particular area, allowing refiners to use these fuels in those areas where it is most cost-effective. Moreover, there are several provisions allowing the requirement to be adjusted or eliminated if price or supply problems occur. Small refiners are exempted from the RFS for several years, allowing those companies an easier transition to the program. Finally, recognizing that MTBE producers made investments in reliance upon a federal mandate, the bill provides significant transition assistance to MTBE producers.
The Fuels Security Act of 2003 is a comprehensive approach to a myriad of fuels issues that has generated broad support from several previously competing interests. It protects the environment while providing refiner flexibility and marketplace certainty to farmers. Given the tremendous growth the U.S. ethanol has been required to commence in order to be prepared in case the Fuels Security Act of 2003 is not passed, however, a more accelerated RFS schedule is warranted. In fact, as domestic ethanol production capacity has outpaced RFS demand in the first several years of the program, new ethanol production would not be needed until 2007 under S. 385. In the meantime, ethanol plants built in anticipation of current law would likely shut down. To avoid penalizing farmers that have built ethanol production capacity to meet the requirements of current law, legislation implementing the fuels agreement in the 108th Congress must include a more accelerated RFS schedule than was included in the Senate energy bill last year.
Mr. Chairman, I thank you again for your tremendous leadership in advancing an energy policy that recognizes the important contribution that can be made to our nation’s energy demands by renewable fuels such as ethanol and biodiesel. The need for a comprehensive energy policy that ensures a reliable fuel supply for our nation has never been greater. America’s economic prosperity and national security depend on the availability of reliable, affordable energy. Therefore, increasing the production of domestic fuels and diversifying our energy infrastructure are critical components of energy policy legislation. Providing for an expanded role for domestic, renewable fuels such as ethanol in the U.S. fuels marketplace is vital if we are to reduce our dangerous dependence on imported energy.
 “Ethanol and the Local Community,” John Urbanchuk, AUS Consultants and Jeff Kapell, SJH & Company, June 2002.