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Ethanol Mandates, A Black Swan?

February 27, 2009

Nassim Taleb defines The Black Swan as “The Impact of the Highly Improbable.”  It has led me to the conclusion that the ethanol mandates of the states and especially the federal RFS mandate of EISA 2007 are a Black Swan.  Who could have predicted the negative economic impacts that are being caused by the misguided government manipulation of the gasoline market by forcing ethanol blending.

First, everyone should understand that ethanol blended gasoline on a mass scale should only be allowed in computer controlled, fuel injected cars.  It has no place in fixed jet, carbuerated engines, especially in humid environments.  This is why every state that passed a mandatory ethnol fuel law provided for the availability of ethanol free gasoline for certain engine applications, most notably marine and aviation use, antique and classic cars and motorcycles, snowmobiles and like recreational vehicles, and small engines used in stationary applications like generators and pumps and 2 cycle engines used in tools.  None of the states, except Missouri, made ethanol free gasoline easy to get, but all of the statutes have exemptions.  Missouri did the right thing and prohibited the blending of ethanol in premium unleaded gasoline so it was widely and easily available for everyone that needed it.  Be advised that there are only five states with active mandatory E10 laws, the rest of you have no exemptions and no protection.

Having said that, one must wonder what the federal politicians were thinking when they passed EISA 2007.  It contains a massive production quota that does not take into account what the annual gasoline consumption in the US might be.  Of course the entire RFS portion of the bill is predicated on a massive build up of Flex-Fuel cars and fueling infrastructure to support them.  But there was no guarantee when the bill went into effect in 2008 that the auto industry was going to embrace Flex-Fuel cars on a massive scale and gasoline dealers were going to install the expensive infrastructure to support them, especially considering that this created a chicken and egg scenario.  The gasoline distributors and stations would only add infrastructure if there were cars to buy E85, and Detroit would only build cars if there was demand created by the availability of cheap E85 pumped at omnipresent gas stations.  None of that is going to happen in this crumbling economy.  But the inflexibility in the federal statute is forcing the gasoline distributors to put the ethanol in every bit of gasoline that they can find, even though in a couple of more years they will crash into the “blending wall“.

The blending wall is truly a Black Swan.  But there are so many others.  One of the most ironic is the battle over the blender pumps which is causing states to be sued by the American Petroleum Institute for putting into effect laws governing the delivery of ethanol that they believed would economically benefit their citizens.  Now the citizens get to pay for the lawsuits.

The most  unfortunate Black Swans are the economic damage caused by pigheaded greed that could have been avoided had people in the ethanol and gasoline industry recognized that ethanol blended gasoline can cause property damage and should have only been allowed for computerized fuel injected cars.  But it appears that greed and the politicians ignorance got the best of them and now ethanol will be in all of the gasoline, and the only remedy for those who suffer damages is to sue.  The saddest Black Swans are the people put out of business who don’t have the economic clout to sue.  The problems with ethanol and boats and airplanes and 2 cycle engines, etc. have been known for a decade, yet nothing has been done to avoid the negative publicity and lawsuits.  This particular Black Swan could have been avoided by prohibiting the blending of ethanol in premium unleaded gasoline and labeling all gas pumps accurately as to ethanol content.  But then that is what a Black Swan is, the impact of the highly improbable.  I am indebted to Mr. Taleb for helping me understand the world I live in.

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