The Ethanol Backlash
Ethanol, the substitute for gasoline that in the United States is largely derived from corn, is hot. Statistics from the Renewable Fuels Association show that production doubled between 2002 and 2006, from 2.1 billion to 4.9 billion gallons, allowing the United States to surpass Brazil as the Saudi Arabia of ethanol. When the 86 plants under construction today are completed, American production capacity will top 13 billion gallons per year. In his most recent State of the Union address, President Bush called for the United States to produce 35 billion gallons of renewable fuels in 2017.
Any rapidly growing, paradigm-shifting industry is bound to engender both enthusiasm and resistance in roughly equal amounts. And the prospect of using grains, which have generally been cheap in this country, as a replacement for fossil fuels, was bound to excite hope and ruffle feathers. After all, while farmers and ethanol-plant investors will profit, companies and industries that rely on cheap grains, or that produce and distribute fossil fuels, face serious disruption. And so, before it has even emerged as anything more than a marginal contributor to supply—ethanol accounted for about 1.25 percent of gasoline use last year—a full-fledged ethanol backlash is underway. The squawks of protest arise not just from oil companies. They're coming from economists, environmentalists, poverty fighters, and science nerds. Meet the ethanol-skeptics.
Inflation hawks. Economists and analysts have been quick to note (subscription required) that using corn to make gasoline is contributing to the greatest macroeconomic evil: inflation. Indeed, energy and food now constitute a positive feedback loop. The high and rising energy prices—according to the Bureau of Labor Statistics, energy prices rose in the first half of this year at a 27.8 percent annual rate—contribute to high food prices in two ways. It makes farming, food production, and food distribution more expensive, and it encourages more people to use grains like corn to make ethanol, which also drives up corn prices. (Here's a chart of corn futures and a chart of wheat futures.) As the consumer price index shows, in the first half of 2007, food costs rose at a 6.2 percent annual rate.
Poverty activists. Inflation in food prices can inflict severe damage on the poor, who already spend a larger chunk of their income on food than the well-off. It's possible that America's hunger for gasoline could exacerbate hunger in Africa. Earlier this week, Josette Sheeran, an official of the U.N.World Food Program, told the Financial Times that rising global grain prices, which can be attributed in part to rising ethanol production, may force it to scale back relief efforts in places like Chad, Niger, and Mali. They are confronting a doubling of corn prices in some countries, Shareen said. "In a world where our contributions are holding fairly steady, this [cost increase] means we are able to reach far less people."
Efficiency freaks. For economists, engineers, libertarians, and others who believe that inefficiency and market distortions are the greatest evils, ethanol is a fat target. As Robert Bryce noted in Slate, ethanol receives a generous and increasingly unnecessary federal subsidy. Thus, every gallon of ethanol produced adds to the deficit. And since ethanol doesn't pack as much power per gallon as gasoline distilled from crude oil, you have to burn more ethanol to go the same distance. The Environmental Protection Agency's fuel economy guide concludes that cars built to run on E85 (a gasoline made with 85 percent ethanol) get about 25 percent fewer miles per gallon as the same models that run on plain old gas. Business Week's Ed Wallace has thus dubbed ethanol a net energy waste. The frequent need for ethanol users to stop and refuel wastes time and money, and can be a serious impediment to long-distance car travel. The Department of Energy has a list of some 900 stations that offer E85. And as these guys found out, they are sometimes few and far between.
Environmentalists. Environmentalists are quick to warn about how the use of petroleum and coal for energy is fouling our air and water. The use of ethanol for the same purpose, it seems, could do the same. Earlier this week, the Washington Post described a new report, funded by government and nonprofit enviro groups, that looked at the potential impact of higher corn production in Maryland and Virginia on the Chesapeake Bay. The equation goes something like this: More corn farming requires more fertilizer (bad for the environment), and more tractors (bad for the environment), and produces more chemical runoff into water sources (bad for the environment). The upshot: If we keep blending ethanol into gasoline, there might not be any crabs in the Chesapeake anymore.
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Member Comments
Posted By: SacramentoE85 @ 07/03/2008 1:23:39 AM
Comment: I certainly would not want to switch dependence on imported oil from OPEC to dependence on imported ethanol from South America. Just as Brazil built their ethanol industry with subsidies and protection, so will the United States continue to do so. Besides, Brazil already had a tariff-free way to export to the U.S. through a Carribean trade agreement, but failed to get close to meeting the amount allowed during 2007. Thus, removing the tariff would have done nothing to increase imports from Brazil in 2007. Big Oil would like to see imports from Brazil bankrupt the U.S. ethanol industry, buy up Brazilian ethanol production, and continue their reign of control over the fuel business. Shell and BP are looking into ways to buy up Brazilian ethanol production right now, while working to remove the tariffs. Brazilian ethanol on the world market will be good to keep the price of ethanol in check; yet the U.S. needs to continue to use primarily domestically produced ethanol. No sense switching one problem for another. --SacramentoE85
Posted By: almir @ 07/01/2008 11:34:09 PM
Comment: (continuing previous post): In comparison to corn-based American ethanol or biodiesel derived from soybean oil, ethanol from sugarcane do not compete with food and is not subjected to cost pressure. Actually Brazilian food production has doubled in the past decade.
Another persuasive fact for incentiving ethanol production in Brazil is the electric energy that is generated as a by-product of ethanol processing: taking into consideration the energetic balance, the electricity generated in sugar cane processing in Brazil is almost as large as its ethanol equivalence. It's like a two large scale hydroelectric plants generating electricity exactly when it's more necessary: in the Brazilian dry season! So the producers of ethanol are also having increasing revenues by selling electricity to the country's national electric system, which has become an strategic and reliable source of electricity. For all these reasons, ethanol in Brazil is a win-win game for the country, the farmers, the consumers and the environment.
Off course Brazilian ethanol does not intend to concur with petroleum, but it could ease up current oil crisis by supplying a small part of the world energy demand. It is only necessary to look at the increasing demand from the non-oil countries like India and China to understand that the very high price of oil is here to stay. With the existing price of oil, the permanent threat of war in the Middle East, the international geopolitics, and the environmental problems, there seems to be no other easy solution for the energy problem away from the liquid ethanol produced out of sugarcane. This is certainly a very important aspect of the Brazilian economy for the next few years and the rest of the world will have to accept the reality of the liquid ethanol from sugarcane as the right and best solution for the oil crisis.
The problem is that much of Brazil???s ethanol exports continues to face prohibitive tariffs and other barriers to developed markets in the US and Europe. The United States currently places a 54-cent-a-gallon tariff on ethanol imported from Brazil. Consumers in the country are being severely affected, particularly in areas such as the Southeast, where corn does not exist and the logistics to bring ethanol from the center of the country is practically impossible. It is difficult to understand the maintenance these tariff levels, except for political reasons. The developed world appears purposely myopic in relation to the opportunities Brazil presents, maybe it's because that would upset wealthy US and European farmers ??? a price apparently not worth paying.
Almir R. Américo ??? Sao Paulo, Brazil (almiramerico@gmail.com)
Posted By: almir @ 07/01/2008 11:27:26 PM
Comment: As rising food prices continue to threaten food security around the world, Brazilian ethanol is one obvious solution being largely ignored. Brazil set up its efficient fuel alternative program in the 70s, when the first oil crisis hit the world. Now Brazilians drive cars moved by ethanol or gasoline mixed in any proportion. And since long ago gasoline in Brazil is not pure, but blended with 25% ethanol, resulting that internal consumption of ethanol in the country is already superior to gasoline's. Ethanol in Brazil is already much cheaper than gasoline at current international oil prices.
Brazilian ethanol is produced from sugarcane without any governmental subsidies and the fuel has a very competitive price. Researchers are increasing the productivity (more fuel extracted per sq.km. of crops) by adapting sugar canes species to each type of land and topography. The productivity now is more than 3 times the records of 30 years ago and it keeps on raising, being expected to soar very soon when the technology to extract ethanol from cellulosic materials (crop waste) will be available for large scale production.
Ethanol production in Brazil uses just one percent of total arable land, and the country can expand its sugarcane fields without disturbing sensitive land areas (like Amazon), just by tapping land such as depleted pastures. Just raising intensity of cattle production from the current 0.8 animals per hectare to 1.2 animals (a target already far exceeded in many parts of the country) would release about 80m hectares of land for crops. There remains plenty of room for expansion: the country has 355 million hectares of farmable land, of which 7 million hectares under sugarcane of which the amount used to make ethanol fills 3.4 million hectares (compared to 200m hectares of pasture). Another 105.8 million hectares remained available, which allows Brazil to increase ethanol production without affecting the environment or food. By comparison, the additional terrain for Brazilian crops could surpass all of the land now under cultivation in the European Union.