Ethanol Industry: A Rebuttal
By Sara Nunnally
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In this article
I’ve always put forth the idea that ethanol will not be a complete substitute for gasoline.
Current wholesale gasoline prices are 23 cents higher than ethanol prices.
We should be using alternative fuels to power ethanol production plants.
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Ethanol Industry: A Rebuttal
My esteemed and thoughtful colleague Andrew Mickey sent me an article published by the Cato Institute called, “Ethanol Makes Gasoline Costlier, Dirtier.”
Now, if you’ve been following my articles, you know I’m a fan of ethanol, so imagine my chagrin when I read Andrew’s e-mail, “Thought you might get a kick out of this! Cato Institute rules!”
In the article, originally published in the Chicago Sun-Times on January 27, 2007, the authors lie out all the pro-ethanol hype and systematically dismantle the White Elephant.
I’d like the chance for a rebuttal. Here now are four of the “myths” the authors discuss.
“Ethanol will lead to energy independence. If all the corn produced in America last year were dedicated to ethanol production (14.3 percent of it was), U.S. gasoline consumption would drop by 12 percent. For corn ethanol to completely displace gasoline consumption in this country, we would need to appropriate all U.S. cropland, turn it completely over to corn-ethanol production, and then find 20 percent more land for cultivation on top of that.
“The U.S. Energy Information Administration believes that the practical limit for domestic ethanol production is about 700,000 barrels per day, a figure they don’t think is realistic until 2030. That translates to about 6 percent of the U.S. transportation fuels market in 2030.”
Finally, surprisingly, an agreement. I’ve always put forth the idea that ethanol will not be a complete substitute for gasoline, and I think it’s wrong for ethanol proponents to let people think ethanol will ever be a complete substitute for gasoline. But many pro-ethanol people have consistently said that ethanol is not a “silver bullet”: David Morris of the Institute for Local Self Reliance, John Sheehan from the National Renewable Energy Laboratory, and numerous others have asserted that ethanol should not be considered a substitute for gasoline.
However, I think the authors missed a word: greater. Ethanol will lead to “greater” energy independence.
Let’s face it: the transportation industry uses more than two-thirds of all the oil we consume. Out of 21 million barrels of oil a day, that accounts for over 14 million barrels of oil.
The United States also imports more than 60% of the oil we consume, and more than half of that comes from OPEC nations.
It doesn’t take a rocket scientist to see that lessening the amount of oil the transportation industry consumes will lead to less oil imports.
“Ethanol is economically competitive now. According to a 2005 report issued by the Agriculture Department, corn ethanol costs an average of $2.53 to produce, or several times what it costs to produce a gallon of gasoline. Without the subsidies, costs would be higher still. A study last fall from the International Institute for Sustainable Development found that ethanol subsidies amount to $1.05-$1.38 per gallon, or 42 percent to 55 percent of ethanol's wholesale market price.”
Not to be too critical, but a more recent USDA report, from February 2007, using 2006 data, estimated the cost of producing ethanol at $1.65. And to be fair, that price is probably a touch low considering slightly higher corn prices. Still a far cry from $2.53.
We’ll talk more about subsidies later, specifically in comparison to what the oil industry receives… but let’s move on to gasoline.
Current wholesale gasoline prices are 23 cents higher than ethanol prices (comparing June futures spot prices): $2.36 versus $2.13. The higher gasoline prices go, the more competitive ethanol becomes. Subsidies or no subsidies.
“Ethanol reduces gasoline prices. If you lived in California and other areas that used reformulated gasoline last summer -- that’s the environmentally ‘clean’ gasoline required for areas with air pollution problems, and that’s where most of that ethanol went -- you might have paid up to 60 cents a gallon more for gasoline than you would have otherwise. That’s because the federal government required oil refineries to use 4 billion gallons of ethanol in 2006 regardless of price, and gasoline pump prices last summer reflected the fact that ethanol was twice as expensive as wholesale conventional gasoline.”
This is true, but it’s only half the story. Last summer, ethanol prices skyrocketed when demand shot up after refineries chose to switch most of their MTBE usage to ethanol. In fact, prices climbed to more than $4 a gallon, which was certainly much more than gasoline prices at the time.
However, these prices were out of the ordinary, and as you can see by how the dynamics have changed, ethanol is much more fairly priced. Looking now at this reversal, one can assume that a required amount of blending may be in favor of ethanol, and could possibly result in lower gasoline prices than non-blending.
It’s unfortunate that the authors chose to highlight an almost hyperbolic example.
“Ethanol is a renewable fuel. According to a group of academics from UC Berkeley who published in Science magazine last year, 5 percent to 26 percent of the energy content of ethanol is ‘renewable.’ The balance of ethanol’s energy actually comes from the staggering amount of coal, natural gas and nuclear power necessary to produce corn and process it into ethanol.”
This statement takes a number of things into consideration, the most important being whether or nor you believe ethanol has a positive net energy balance. That argument aside, though, the Berkeley study has a point: the use of fossil fuel to create alternative fuels is a bit counterintuitive… and completely unnecessary.
We should be using alternative fuels to power ethanol production plants. I believe we will be in the future. The catch? They’d negatively impact the cost of production in the near term. While an investment in renewable power to run production plants would eventually pay down the road, high initial costs would certainly be too much for smaller ethanol producers to handle.
But let me briefly address the net energy balance question. In a National Corn Growers Association national forum on “Ethanol Energy Balance,” John Sheehan from the National Renewable Energy Laboratory said the following in response to Dr. Pimental, a professor from Cornell University in opposition to ethanol:
“All energy is not created equal. The U.S. has lots of coal and natural gas. But they don’t work in the gas tank. They have the wrong energy quality. Solutions will require making comparisons and choices between real alternatives.
“Using the criterion of Pimentel and Patzek, the ‘net energy’ of electricity produced from coal is minus 235 percent, because it takes three calories of coal to produce one calorie of electricity. But, electricity is higher quality energy than coal. Refining crude oil into jet fuel, diesel or gasoline results in a net energy balance of minus 39 percent, as opposed to minus 29 percent for making ethanol from corn, according to Pimentel’s figures.
“If ‘net energy’ was a good yardstick, we should shut down all coal-electricity generation and all oil refineries.”
I have to say that Pimentel’s negative net energy balance for ethanol (of
-29%) has been widely criticized. One critic, Michael Wang, of the Argonne National Laboratory’s Center for Transportation Research “accused Pimentel and Patzek of consistently overestimating energy requirements for both farming and processing of corn for ethanol, including calculating ethanol plant energy use at 30 percent above actual figures.”
I’ll leave it at that for now. Tomorrow, I’ll talk about four more pro-ethanol myths the Cato Institute tried to debunk.
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S.R. Nunnally is a commodities expert and technical analyst for Taipan Financial News. She is the editor of Material Profits, a monthly newsletter providing in-depth, cutting-edge research in the commodities sector. She is also the founder of Material Profits Wildcatter, employing an elite group of aggressive investment strategies.
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Related Resources
UDSA: The economic impacts of ethanol production.
Cato: Ethanol Makes Gasoline Costlier, Dirtier.
NCGA Forum: The Great Ethanol Debate.