Mixing Moonshine with Politics

Is ethanol the fuel of the future or another giveaway to farmers?

Although our economy has morphed into something that would make Adam Smith turn over in his grave, the U.S. still generally permits more old fashioned capitalism than the rest of the world. However, there is one glaring exception. This industry is protected from free market competition with subsidies and welfare payments that single mothers with too many children can only dream of. The undisputed kings of welfare in this country are big farmers and food processors, and they did it the old fashioned way. In many states, they’re the biggest contributors to politicians.

Food vs Fuel

Ethanol is a perfect example of how, once politicians begin writing checks to powerful constituencies, those checks tend to keep coming even when there’s no longer a need for them. Several years ago, price support programs for corn had encouraged excess production that resulted in a lot of corn sitting around in warehouses. World corn prices were in the toilet which left third world farmers at poverty levels and bitterly complaining about farm subsidies in the developed world that kept them poor.

When oil prices started to go up, it was only a matter of time before politicians noticed all that corn sitting around. Converting this to ethanol would make it look as though they were doing something about the energy problem, would get rid of those embarrassing corn surpluses that annoy the third world, and allow them to throw more taxpayer dollars at folks who already know how to play the game and would gladly return a sizeable portion in the form of bigger campaign contributions. It was a politician’s wet dream, which is why both parties supported it.

It apparently didn’t occur to Congress that people weren’t going to eat less simply because food was being turned into fuel. According to Wikipedia, biofuels consumed one third of America's corn harvest in 2007. Each time a large vehicle is filled with ethanol, enough corn to feed one person for a year goes into the tank. Fast forward to the present. With less food now available while the population increases, food prices have skyrocketed. Now, it isn’t corn filling up the storage facilities, its ethanol. As the poor have trouble feeding their families, riots over rising food prices have broken out in the third world.

However, our politicians know that buying the farm vote is what’s REALLY important, so the U.S. Energy Independence and Security Act of 2007 extended the 51 cent per gallon ethanol subsidy and required American fuel producers to use at least 36 billion gallons of biofuels (mostly ethanol) by 2022. This will represent roughly a five fold increase from the 7.23 million gallons expected to be produced in 2008.

Infrastructure Issues

According to the Renewable Fuels Association, there are currently 1,587 filling stations distributing ethanol, out of a total of about 170,000 in the U.S. Not surprisingly, most of these are located in the corn growing states in the Midwest. It’s safe to say this number has to expand a bit for ethanol to have any impact on our demand for gasoline.

Even though more ethanol plants are going to be built, getting it to consumers will take time and a big capital investment. One of ethanol’s problems is that it’s very corrosive when it comes into contact with anything containing iron. This is why cars have to be retrofitted before using it. However, the biggest problem comes in transportation. Not only does ethanol evaporate quickly, but its corrosiveness means it can’t be pumped through existing gasoline pipelines. As a result, it has to be shipped on trucks, trains, and barges in relatively small amounts to special storage facilities where it’s blended with gas.

Even if the necessary infrastructure gets built, there’s another small problem. According to Wikipedia, producing enough ethanol to replace current U.S. petroleum use alone would require about 75% of all the cultivated land on the face of the Earth. From this, it should be pretty obvious that ethanol never was, and never will be, a serious solution to our energy problem.

Brazil

Brazil is currently the world’s low cost producer of ethanol. It isn’t rocket science to figure out that, if there’s a correlation between sugar content and the resulting amount ethanol that’s produced, the best stuff to make it from is sugar cane or sugar beets. For comparison purposes, U.S. corn-derived ethanol costs 30% more because there’s an extra step in the process. Corn must first be converted into starch and then into sugar before being distilled into alcohol. This extra step also means that, at best, the production of corn ethanol produces only slightly more energy than it consumes.

Brazil would happily ship ethanol to the U.S. for less than it costs to make and distribute here, and the savings would give U.S. consumers more money to spend on other items. However, to eliminate this possibility, there’s currently an import duty of 54 cents per gallon on Brazilian ethanol. Apparently, finding another affordable fuel and helping the economy isn’t nearly as important as protecting U.S. farmers from competition.

Pricing & the Inconvenience Factor

The most common ethanol based fuel is known as E85, which is 85% ethanol and 15% gasoline. Several years ago, prices were all over the map. In states with an established infrastructure, it was generally priced at 40-50 cents per gallon less than gasoline. However, in states that had just begun to offer it, the cost of building the infrastructure resulted in E85 being priced as much as 50 cents per gallon MORE than gasoline.

However, it didn’t long for consumers to do the math, and that’s when things begun to go south. When compared with gasoline, E85 reduces mileage by around 30%, which made it a significantly more expensive fuel to use. If you’re an ethanol producer, you know you have a problem when even the Post Office can figure it out.

The additional problem is the inconvenience factor. A consumer that fills their car with gasoline every 7 days would have to fill up with ethanol every 5 days because of the reduced range from lower mileage. Over a year, that’s an extra 21 days that has to be spent looking for a gas station.

Brazil has recognized this and priced their ethanol for about 1/3 less than gasoline. At that kind of discount, many people there are willing to use it. For comparison purposes, ethanol prices in the U.S. in May 2008 averaged 17.2% less than gasoline , which still isn’t enough of a discount. For U.S. ethanol producers, the Catch 22 is that even with the subsidy, the economics of corn ethanol production may not allow them to make a profit if the discount reaches a level that might make consumers consider using it.

This has been confirmed by a recent article in Reuters . Corn at $8 per bushel has caused about a dozen ethanol plants in the U.S. to recently file for bankruptcy protection because of high feedstock costs and lousy profit margins. The affected plants are mostly small or mid-sized facilities and more are likely to announce bankruptcy soon. In addition, many ethanol plants are only operating at 50 percent capacity and previously-announced plants are being stalled or stopped completely.

Down a Rat Hole

Ethanol has been around a long time, and the powerful corn lobby seems to trot it out and then lobby for handouts every time the price of oil goes up. It was also touted as the fuel of the future and received significant subsidies during the last energy crisis in the 1980’s. At that time, the number of ethanol plants increased from less than 10 in 1980 to 163 in 1984. By the end of 1985, 89 of these plants had closed as the price of oil came back down. As Yogi Berra would say, what’s happening now is déjà vu, all over again.

However, current subsidies make the 1980’s pale in comparison. Federal subsidies for ethanol totaled about $6.8 billion taxpayer dollars in 2006 and will increase to about $8.7 billion a year in 2007. The biggest beneficiary, Archer Daniels Midland, has the capacity to produce 1.7 billion gallons. At 51 cents per gallon, that would amount to $867 million annually while Congress searches in vain for loopholes to plug.

However, it isn’t just the criminal waste of taxpayer dollars that’s infuriating. This is the equivalent of fiddling while Rome burns. Congress is subsidizing a fuel that can never solve our energy problem while gasoline prices soar. The private sector knows the fuel of the future is electricity, not ethanol, and there will be a flood of plug-in hybrids and fully electric vehicles introduced in the next few years. Once electricity replaces gasoline as a fuel, the resulting vehicles will go further with less maintenance and cost pennies per mile to drive. To make this a reality, better batteries and a nationwide network of charging stations are needed. Unfortunately, the resources that could make this happen sooner rather than later are being poured down a rat hole.