Seeker Blog

Ultimately, the answer to just one question determines ethanol’s actual usefulness as a gasoline extender: “If the government hadn’t mandated this product, would it survive in a free market?” Doubtful — but the misinformation superhighway has been rerouted to convince the public its energy salvation is at hand.

Ethanol subsidies may be an example of a policy that is politically correct but net-negative.

Ed Wallace’s Ethanol: A Tragedy in 3 Acts for Business Week documents the history of the ethanol story from 1979 [the first $.40/gal tax credit] to the present. I’ve not studied ethanol in any detail, though I had the impression that Brazil’s ethanol program was a “success”. However, it appears that Brazil’s 1:8 energy conversion rate is dependent upon using sugar cane as the source crop. Since Brazil has the geography and climate suitable for sugar cane, the thermodynamic conversion is positive there, even after the 25% drop in fuel efficiency for E85. It isn’t made clear whether ethanol is economically competitive for Brazil. But that’s Brazil - according to Wallace, sugar cane isn’t viable in the US, where “studies have shown” that agricultural crops have either a negative or barely positive energy conversion rate. And that’s before accounting for the drop in fuel efficiency at the consumption end.

Epilogue: Get this Wasteful Show Off the Road

The other negative aspect of this inefficient fuel is that numerous studies have found that ethanol creates less energy than is required to make it. Other studies have found that ethanol creates “slightly” more energy than is used in its production. Yet not one of these studies takes into account that when E85 is used, the vehicle’s fuel efficiency drops by at least 25% — and possibly by as much as 40%. Using any of the accredited studies as a baseline in an energy-efficiency equation, ethanol when used as a fuel is a net energy waste.

Furthermore, no one has even considered the severe disruption in the nation’s fuel distribution that mandating a move into ethanol would cause. Over the past month, gas stations from Dallas to Philadelphia and parts of Massachusetts have had their tanks run dry due to a lack of ethanol to blend. The newswires have been filled with stories bemoaning the shortage of trucks, drivers, railcars, and barges to ship the product. Ethanol can’t be blended at refineries and pumped through the nation’s gasoline pipelines.

The recent price spikes for gasoline have forcibly reminded the people of Chicago and Wisconsin of what happened when ethanol was forced on them during the summer of 2000. Moreover, the promise of energy independence that Brazil has explored through ethanol is widely misunderstood. Recently a Brazilian official, commenting on our third and most recent attempted conversion to ethanol, said that when Brazil tried using agricultural crops for ethanol, it achieved only a 1:1.20 energy conversion rate, too low to be worth the effort.

FINAL BOW? On the other hand, ethanol from sugar cane delivered 1:8 energy conversion, which met the national mandate. Unfortunately for us, sugar cane isn’t a viable crop in the climate of our nation’s heartland. But the part of Brazil’s quest for energy independence that the media usually overlooks is that ethanol wasn’t the only fuel source the country was working on: Its other, more important, thrust was to find more oil. To that end, last week Brazil’s P50 offshore oil platform was turned on. Its anticipated daily output is high enough to make Brazil totally oil independent.

Kudos to Wallace for the reader-conversational aspect of this article. At the end of the article Wallace responds to reader questions and comments [the author’s email address is at the end of the article - evidently he reads incoming email].

Wallace does not attempt a full life-cycle analysis of ethanol. I.e., an analysis which capital and operating costs [including environmental costs] for every stage of production, distribution, and consumption. So, even in the Brazil case, it isn’t clear how the life-cycle economics of ethanol compare to alternative fuels. Wallace implies but doesn’t demonstrate that the US economics are net-negative.

It’s probably not necessary to mention that, if the ROI on ethanol was competitive with oil finding & production economics, we would probably see oil companies investing in growing ethanol crops. So why is Congress still subsidizing and promoting ethanol?

UPDATE: Evidence I’m not well-informed regarding federal regulations. Today’s Wall Street Journal reports on the unproductive posturing in D.C., including this background on ethanol stipulations in last year’s energy bill. Note, the editorial writer, Brendan Miniter, posits that “Substituting ethanol is even a good idea…” but argues for eliminating the ethanol mandate.

Last year’s energy bill actually contributed to this year’s price spikes and shortages with new mandates that in effect strip out one antipollution gasoline additive (MTBE) and add in another (ethanol). Energy experts don’t describe it that way. Instead they tell us that the MTBE requirement is disappearing as of May 5. But with the additive now said to pollute groundwater, any oil executive worth his salary knows that leaving it in one day longer than federal law requires it to be there is an open invitation to be sued.

Congress could have given oil companies a little flexibility by including liability protection in the energy bill. It chose not to. And it’s true that oil companies can decide where to sell ethanol-blended gasoline. But the new rules require four billion gallons of it be sold somewhere in the U.S. this year and even more next year. That’s great for corn growers, but not so good for consumers as oil companies figure out where to sell the new fuel.

With MTBE on its way out, something has to take its place. Substituting ethanol is even a good idea, except that it’s only gotten more expensive since Congress mandated its use. And it’s a lot easier to add a subsidy for the corn-based fuel to a piece of legislation than it is to add the fuel itself to a gallon of gas. Ethanol can’t be mixed at refineries. Instead it has to be shipped separately to terminals closer to local gas stations and blended there. That requires new equipment and new supply chains. Ethanol also doesn’t mix well with the old MTBE gas, so service stations have to empty and scrub their tanks before taking delivery of the new fuel. That’s creating hiccups in the system we see as spot shortages. Congress could make the changeover a lot easier if it would repeal the ethanol mandate. But that’s a non-starter on the Hill