Can a Representative of the Oil Patch Destroy America’s HomeGrown Fuel Industry?

Date: 17 Jun 1997 | posted in: From the Desk of David Morris, The Public Good | 0 Facebooktwitterredditmail

Can a Representative of the Oil Patch Destroy America’s HomeGrown Fuel Industry?

by David Morris

June 17, 1997 – published in St. Paul Pioneer Press

The Chairman of the House Ways and Means Committee is an extremely powerful person. This is true even in ordinary times. It is particularly true this year. When both political parties supported a balanced budget agreement they left the actual details up to Ways and Means. That gave the Committee and especially its Chairman, enormous power.

It also raised the potential for an abuse of that power. And that has indeed occurred. As Chairman, William Archer should represent the whole country, not simply his own province. This he has not done. Instead he has used the enormous powers of the Chairmanship to wage a highly personal and parochial vendetta against ethanol.

Archer’s province is Houston. Texas produces over 75 percent of a chemical called MTBE, ethanol’s primary competitor in the gasoline additive market. Eliminating ethanol could boost the revenues of Texas’ petrochemical companies by hundreds of millions of dollars.

Whatever one’s attitude toward ethanol, there is a basic issue of fairness here. To my knowledge, no other business tax benefit was reduced by Archer’s Committee. No other energy tax benefit was reduced. Of the dozens of tax benefits that formally expire before the year 2002, only ethanol was singled out for a formal declaration by the Committee years in advance that its benefits would not be extended.

And finally, in a rare and perhaps unprecedented action, Archer has changed the tax rules in midstream. Even before the ethanol tax incentives are scheduled to end, Archer is immediately cutting benefits to the newest ethanol producers by as much as 50 percent, thereby endangering hundreds of millions of dollars of good faith investment.

Ironically, Archer’s effort to wreck the ethanol industry coincides with growing concern about MTBE. In California, MTBE is rapidly leaking into ground water and reservoirs, giving the water a kerosene like smell. Out of 245 sampling sites at wells statewide, over 75 percent showed detectable levels of MTBE. In Santa Monica, 7 water wells have been closed.

Numerous complaints by motorists about ill-effects from breathing MTBE have led big cities like Chicago and Milwaukee and small communities like Missoula, Montana and Fairbanks, Alaska to shift from MTBE to ethanol. If Chairman Archer has his way these cities will no longer have that choice.

Given Archer’s success and because of the budget balancing process, those who support ethanol industry must now identify an”offset”, that is another revenue source to make up for restoring ethanol’s tax incentives. Here’s my proposal. Eliminate the oil depletion allowance, an 80 year old tax break that rewards companies for rapidly exhausting a non-renewable resource. That would generate more than enough revenue to continue to support ethanol.

Federal tax benefits to oil come to about $4 billion a year, or 1.5 cents per gallon of gasoline consumed, according to a recent study by Professor Jenny Wahl, PhD economist from the University of Chicago and former tax expert for the Department of Treasury. The federal tax benefits to ethanol come to about $750 million a year, equivalent to a little over half a cent a gallon of gasoline consumed.

One might wonder what economic benefits we derive from continuing to throw tax money at a huge and mature oil industry, the majority of whose raw material is imported. Few could question the benefits gained from the ethanol incentive.

Ethanol is sold in over 40 states by over 35 companies with plants in 22 states. Ten years ago ADM controlled over 75 percent of the ethanol market. Today the majority of ethanol comes from small and medium sized and often locally owned plants.

In Minnesota, eleven ethanol plants will be operating by this summer. Several more are nearing construction. The vast majority will be owned by over 8,000 farm families, about l0 percent of Minnesota’s farmers. By 1998, ethanol will provide 10 percent of the state’s fuel.

The ethanol tax benefit has spurred not just a homegrown fuel industry but the beginnings of a sophisticated biochemical industry. Just as an oil refinery manufactures many products from crude oil, so these new biorefineries make a variety of products from plant matter. And as with the oil industry, we can expect these biorefineries to maximize the value they extract from their raw material. In a few years they will be making not just ethanol, but higher priced intermediate chemicals and maybe even final products like bioplastics.

But that won’t happen unless Archer is stopped. His Ways and Means Committee should have identified all existing energy tax incentives, developed a policy framework for deciding which to cut and which to extend, and then, after vigorous and informed public debate, made its decision. That did not occur and the nation could suffer dearly from the arrogance of a single Congressman from the oil patch.

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David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.