Bush Plan Pits Farmers Against Big Oil

WASHINGTON – The ethanol industry wants California, but the state has other ideas. And that's causing a political headache at the White House.

For weeks, the Bush administration has been caught between two of the most powerful political lobbies in Washington -- farmers and big oil companies -- over a gasoline requirement California officials say is not needed and could boost prices as much as a nickel a gallon.

The issue is ethanol, a corn-based gasoline additive that adds oxygen and allows fuel to burn cleaner.

Now mainly in the Midwest, the ethanol industry has eyed California as a huge market because the state is banning a competing additive, MTBE, after 2002 because it pollutes the water.

But California environmental officials argue they no longer need an additive because refiners can make new blends of gasoline cheaper and cleaner than by using MTBE or ethanol.

More than a year ago, California asked the Environmental Protection Agency to waive the federal oxegenate, or oxygen-adding, requirement entirely. But the issue is so politically charged that it languished without decision in both the Clinton and Bush administrations.

Already at odds with California over high electricity prices, the Bush White House decided tentatively several weeks ago to reject the state's request.

But then, it reconsidered the matter and now it could go either way, said government and industry sources speaking on condition of anonymity.

Farmers had hoped Bush would make an announcement during a trip to Iowa last week to tout his energy plan. But there was no mention of the controversy, although the president praised ethanol as a renewable fuel.

No decision is imminent, said Tina Kreisher, a spokeswoman for EPA Administrator Christie Whitman. She declined to say what the agency has recommended but acknowledged the issue was at the White House.

Farm groups and their ethanol-producing partners have lobbied intensely against the waiver, reminding administration officials that corn-producing states in the Midwest were solidly behind Bush last Election Day. One of the biggest ethanol producers, Archer Daniels Midland, contributed more than $500,000 to Republicans during the last two years, including $100,000 to Bush's inauguration.

"I can assure you that the decision-makers are very aware of the interests of those in the Midwest about this," Agriculture Secretary Ann Veneman assured Iowa farmers recently when asked about ethanol and California.

But on this argument, California has a politically powerful ally as well: the oil companies.

The companies and refiners claim they can make gasoline to meet California's clean-air requirements, the toughest in the country, without any oxygenate -- and do it cheaper. Chevron already makes such a gasoline blend but can't sell it in the 70 percent of California that falls under the oxygenate rule because of air pollution.

"We've pleaded with the administration to do the right thing and grant the waiver," said Edward Murphy, a senior executive of the American Petroleum Institute.

In meetings with administration officials, the API has argued that the oxygenate requirement has contributed to the problems of having to make "boutique" fuels, adding to supply and distribution problems.

Whatever decision the White House makes will have impact beyond California.

Because of concern about MTBE water contamination, 11 states already have banned the additive, although most of the prohibitions will be phased in over the next few years. Eight other states are considering bans and also are waiting to see if they will have to turn to ethanol.

If California, with the country's toughest air pollution requirements, is exempted from having to use an oxygenate in gas, other states, led by a group in the Northeast, are almost certain to seek similar waivers, oil and ethanol industry officials agreed.

A rejection of the waiver means a green light for ethanol expansion, said Monte Shaw, a spokesman for the Renewable Fuels Association, whose members include ethanol producers. More ethanol plants are waiting to be built, awaiting only such a "price signal from the market," he said.

But California officials question whether the industry will be able to supply the 580 million gallons of ethanol a year the state will need.

"We doubt that much will be available," said William Rukeyser, a spokesman for the California Environmental Protection Agency. And if there are shortages, he added, it could lead to soaring prices, as has been experienced in the California electricity market and not long ago in MTBE sales.

Anticipating a surge in ethanol demand as MTBE use is phased out, the industry has been on an expansion binge, although most of its plants are in the Midwest.

"The ethanol industry will absolutely meet California's oxygenate demand ... without increasing consumer gasoline prices," Eric Vaughn, president of the Renewable Fuels Association, assured Bush in a letter urging rejection of the waiver.

Nearly 50 ethanol production facilities are being built or expanded; 20 more are scheduled to be built this year, with an additional 1.4 billion gallons of capacity expected on line by 2003, industry officials said.