First, what Rep. Bachmann proposed was a credit or rebate of about $80 to encourage the conversion of standard cars into flex fuel vehicles that can burn E85, a blend of 85% ethanol and 15% gasoline.

(Although the cost of conversion is listed as anywhere from $400 to $600 at various sites on the web, Bachmann seems to be getting her $80 figure as the cost of the actual physical equipment that needs to be purchased for conversion, not including the labor. It's the equipment purchase that would get the credit.)

The bigger issue in the ethanol industry and its use as a fuel is not just the expiration of the blenders' credit at the end of the year, which conventional wisdom holds will not be extended. More importantly, there are several hard ethanol realities that are on a collision course with each other.

--Although the Environmental Protection Agency has granted a waiver for some late-model vehicles to use a 15% ethanol blend, the so-called E15, retailers are going nowhere near that fuel, from all indications. It's a major investment to construct separate tanks to hold E15 (for a mere 5 extra blending percentage points), and then install separate dispensers, all the time worrying that somebody with a car that can't operate on E15, but can safely operate with E10, is going to put E15 in their car by mistake. And then: see you in court, because it's your fault, Mr. Retailer, for wrecking my engine. This entire problem has a shorthand name: the blendwall, and it effectively remains stuck at 10% for non-flex fuel vehicles. A flex fuel vehicle is one that can burn an 85% ethanol blend, E85.

--The US consumption of gasoline can now accurately said to be plummeting. The latest MasterCard survey shows the four-week average consumption of gasoline down almost 4% year-on-year.

--Regulations are requiring a greater amount of ethanol and other biofuels to be blended into a gasoline market with declining demand. (The specifics of the 2012 rules are to be released in a few days.) Given the combination of declining demand and a rising mandate, the mandate is expected to be close to 10%...the blendwall.

Now, the mandate is not all ethanol in gasoline. Biodiesel is part of it too. But with ethanol use dwarfing biodiesel consumption, the collison of blendwall vs. mandate is causing a significant degree of angst. It's a Gordian knot, defined as one that is constructed in such a way that the only method to release it is the slice of a sword.

Or maybe something else. Enter E85. E85 is priced considerably lower at retail than gasoline, only because it gets significantly worse mileage. It can only be used in flex fuel vehicles, and where it's already in place at retail outlets, the dispensers are usually so far from the regular gasoline dispensers that a driver would have to go out of his way to put E85 in a car that isn't built to handle it. There are about 8 million flex fuel cars in the US now, and converting an existing car to use E85 is not difficult or wildly expensive, hence Bachmann's recommendation. 

But as the irresistible force meeting the immovable object gets closer in the ethanol market, E85's main advantage is that it might be able to untie the Gordian knot. As Platts' long-time ethanol expert Robert Sharp notes, the way around this problem is the use of RINs, renewable identification numbers that come with the production of every gallon of renewable fuel. A RIN allows a company with a renewable fuel requirement to essentially buy its way around any shortfalls in its own production or sales. But if everybody is short, because of the Gordian knot, the supply of RINS tightens. Theoretically, it could disappear. So it isn't a perfect solution. At a certain point, the market must manufacture the minimum required by the EPA. 

More than a year ago, energy economist Philip Verleger wrote in a report that E85 might be the way to overcome any shortfall. "The possibility of high RIN prices may also increase efforts to make E85," he wrote. "E85 blends create roughly 65 extra RINS per 100 gallons. As the RIN price increases, the profitability of marketing E85 will follow. Indeed, under some circumstances firms might actually be able to profit from paying customers to take E85." That situation would occur if the RIN price rose to a level relative to the retail price of gasoline where the RIN was particularly strong, while the fuel price might be weak.

It doesn't happen overnight, Verleger noted. Like E15, E85 also requires tanks and dispensers. The difference, of course, is that E85 brings a company a lot closer to its renewable fuel requirements than E15. And while the E85 infrastructure is tiny compared to that of E10 or conventional gasoline, it does exist; there are no signs that it's being developed with E15.

Rep. Bachmann's comments may not have all of this in mind, but they fit in with what's going on. For example, last month, the ethanol lobby under the direction of the Renewable Fuels Association backed an "open fuel standard" that would require vehicles to run on a wider range of fuels...like E85. A new group called The Coalition for E85 is seeking to have some sort of blenders' credit kept alive for that fuel, even as it expires for E10 (or E15).

E85 gets mocked a lot, but it may be a solution to cut through that Gordian knot.

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