Ethanol: Congress, Mandates and the Law of Unintended Consequences

Congress has recently mandated the use of alternative fuels, specifically ethanol, in the latest energy bill to become law. In fact, it has specifically outlined both the amount and type of ethanol which must be produced. But as we will see below, that has and will continue to have some unintended consequences that will be difficult to argue are positive.

The Mandate

It essentially breaks down like this:

2008: 9 billion gal/year renewable fuel vs. prior rate of 5.4 bgy

2012: 15.2 bgy in 2012 vs. prior rate of 7.5 billion

2022: 36 bgy in 2022

So the mandate increases the amount of ethanol in the system by 4.6 billion gallons this year and to 15.2 billion gallons a year by 2012. By 2022, the mandate requires 36 billion gallons of ethanol production be on line and producing.

Corn-only ethanol is supposed to top out at 15 bgy in 2015 and remain at that level of production for the foreseeable future.

Advanced bio-fuels, bio-diesel and cellulosic ethanol, are supposed to make up the difference between the 15 bgy of corn-based ethanol and the final total of 36 bgy by 2022.

That all sounds perfectly wonderful; however, there are some real problems which will most likely cause this plan and its mandates never to come to fruition.

Technical Problems

As it stands at this very moment, the only ethanol product in production is corn based ethanol. Cellulosic ethanol, the great hope of the future, has many technical problems. As the American Petroleum Institute noted in a recent conference, “Significant technology breakthroughs are needed for economic production of ethanol from cellulosic biomass”.

In fact not a single cellulosic ethanol production site exists at this time and only now are there plans for a demonstration site. The “solution” for renewable fuel doesn’t even exist at this time, but is mandated, 8 years hence, to be in full production and pumping out 4.25 bgy of ethanol. At the moment a viable process to fulfill the mandate doesn’t exist. What does exist is a process which is price prohibitive on any scale.

Price problems

One of the promises of ethanol is to reduce Green House Gases (GHG). But the question becomes, at what cost? The technical problems with cellulosic ethanol have been touched upon. But that’s only part of the problem. Bio-diesel is primarily, at least at this stage, a soybean product. And obviously, the only ethanol we have available at the moment, other than that which we might import, is corn based. What has happened to both corn and soybean pricing recently? A chart from US News and World Report, based on Chicago Board of trade numbers, lays it out (see link below). In less than 2 years corn has risen from $2.36 a bushel to $4.69, wheat from $3.48 to $9.05 a bushel and soybeans from $5.72 to $11.82 a bushel.

Notes the USN&WR article accompanying the chart, the problem isn’t just the demand from ethanol and bio-diesel production which is driving up the price, but an apparently unanticipated demand brought on by economic prosperity in other parts of the world.

Higher global demand for meat–particularly from emerging nations–is another driving force behind the boom in commodity prices. As globalization has boosted the income of workers in industrializing countries like China and India, such populations have been able to afford to raise their protein intake by eating more meat. From 1980 to 2002, total meat consumption in developing countries nearly tripled.

Increased meat consumption has stoked agricultural commodity prices, since more grains are needed to feed livestock, says Ryan Davies, a senior trader at Titan Commodities. “Literally 2 billion people are going from a grain-based society to a meat-based society,” Davies says. “It takes a lot more grains to feed a cow than it does to feed a person.”

This trend should continue to influence agricultural commodity prices, with the United Nations anticipating global meat production to more than double from 2001 to 2050–that’s roughly twice the projected rate of world population growth for that period.

So again, we’re caught in a Catch-22 where demand for a commodity we now see as critical to breaking our dependence on foreign oil is also a commodity in much more demand by other parts of the global economy. Thus prices, as the two areas compete for more and more product, will continue to rise.

Benefits

Last but not least are the arguments about the real benefits of ethanol to our goals of reduced GHG and providing an alternate fuel to help break our dependence on foreign oil.

In terms of reducing GHG, the real effect, according to a couple of new studies recently carried in “Science” is that ethanol production may actually increase emissions.

These studies for the first time take a detailed, comprehensive look at the emissions effects of the huge amount of natural land that is being converted to cropland globally to support biofuels development.

The destruction of natural ecosystems — whether rain forest in the tropics or grasslands in South America — not only releases greenhouse gases into the atmosphere when they are burned and plowed, but also deprives the planet of natural sponges to absorb carbon emissions. Cropland also absorbs far less carbon than the rain forests or even scrubland that it replaces.

Together the two studies offer sweeping conclusions: It does not matter if it is rain forest or scrubland that is cleared, the greenhouse gas contribution is significant. More important, they discovered that, taken globally, the production of almost all biofuels resulted, directly or indirectly, intentionally or not, in new lands being cleared, either for food or fuel.

Of course that applies to both corn or cellulosic based ethanol.

“When you take this into account, most of the biofuel that people are using or planning to use would probably increase greenhouse gasses substantially,” said Timothy Searchinger, lead author of one of the studies and a researcher in environment and economics at Princeton University. “Previously there’s been an accounting error: land use change has been left out of prior analysis.”

These plant-based fuels were originally billed as better than fossil fuels because the carbon released when they were burned was balanced by the carbon absorbed when the plants grew. But even that equation proved overly simplistic because the process of turning plants into fuels causes its own emissions — for refining and transport, for example.

The clearance of grassland releases 93 times the amount of greenhouse gas that would be saved by the fuel made annually on that land, said Joseph Fargione, lead author of the second paper, and a scientist at the Nature Conservancy. “So for the next 93 years you’re making climate change worse, just at the time when we need to be bringing down carbon emissions.”

And what of its ability to break our dependence on foreign oil? Well, that too is quite debatable, because there’s that little discussed fuel economy penalty, which averages about 26%. That’s because ethanol, while having a higher octane that gasoline, has a lower energy content. The debate isn’t about whether or not ethanol has the lower energy content, but how much that lower content is:

The National Ethanol Vehicle Coalition and others believe that the fuel economy penalty is in the neighborhood of 10 – 15%.

Data collected and published by the EPA and DOE and by Consumer Report suggest that the fuel economy penalty for most FFVs operated on E85 averages about 26% with a range from 21% to 35% in 2007.

So accepting the 26% for the sake of argument, what does that mean in terms of real cost for E85 gasoline (gasoline typically mixed with 15% ethanol)?

Given the above cited average fuel economy penalty of 26% for a model year 2006 or 2007 FFV [Flexible Fuel Vehicle] operated on E85, this means that on a cents per mile basis, the retail price of a gallon of E85 would have to be 26% less than the retail price of gasoline in order for the fuel operating costs on E85 to be comparable with those on gasoline.

With an E85 fuel economy penalty of 26%, an FFV operator would have to refuel about 4 times with E85 for every 3 times that that it would fill up with gasoline. The ability to handle these extra fill ups would require the fuel handling infrastructure (delivery tanks and carriers) to increase capacity by 35 – 36%.

Or to break it down into numbers that are understandable for everyone:

The retail gasoline price average for Sunday 1/28/2007 was $2.143 per gallon according to the AAA website. Using this price, E85 would have to retail for $1.59 in order for the fuel operating costs on E85 to be comparable with those on gasoline.

A buck fifty nine a gallon? Not in this lifetime. Obviously as those figures are a year old and we’d kill for $2.14 a gallon gas, those figures aren’t valid anymore, but the proportional reduction remains valid. And, given the cost of producing ethanol right now, hardly a product that will gain for us the economies necessary to break our dependence on foreign oil. In fact, it can be argued that because of the fuel economy penalty, we might end up using more. And that is especially true if this outlook remains valid:

Don’t expect most agricultural commodities to come back to Earth anytime soon, as global demand for grains remains strong and new federal policy measures mandate more biofuel use. Newsom says corn futures could increase by as much as 25 percent by the end of 2008, and soybean prices could go up by slightly more than that. Wheat remains the wild card–if farmers can move past the weather-related problems that hobbled production in 2007, wheat prices could pull back, Newsom says.

But while individual crop prices may stray from projections, one thing appears certain: “The maintaining of historically high prices is most likely here for at least a few years,” says Randy Mittelstaedt, the director of research at R.J. O’Brien, a commodities and futures brokerage firm. “Global demand is strong, U.S. demand is strong…and we are looking at just a huge increase in demand on the ethanol side.”

It appears that instead of reduced GHG and less dependence on foreign oil, the recent Congressional ethanol mandates may end up producing more GHG, more dependence on foreign oil and, as a special bonus, higher food prices as well.
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First published at QandO.

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