What's wrong with Ethanol - it's more expensive than gasoline!

The August 7, 2006 issue of Barron's has an article on page 17 entitled "The Corn Conundrum."  The article is an analysis of the ethanol market from the perspective of stock market investors.  It looks at several companies that produce ethanol and talks about the values of their stocks.  But if you look at the article you will see clear proof that our ethanol strategy is badly flawed.  Quotes from the article below the flip.

So first there's some good news about ethanol:

In the July 25 issue of the Proceedings of the National Academy of Sciences, a team of Minnesota-based researchers concluded that ethanol yields 25% more energy than the fossil fuels used to produce it.  What's more, the making and consuming of ethanol produces 12% less greenhouse-gas emissions than gasoline

That's probably the most comprehensive study about ethanol to date, and I'm sure there will still be debate about the methodology, and did they consider the fuel burned shipping the ethanol from producer to consumer, etc.  But there had been fears that corn-based ethanol used more fossil fuels to produce than it replaced.  Also:

Without modification, automobiles can burn a blend of 15% ethanol and 85% gasoline, but General Motors and Ford earn extra credit towrad their government fuel-economy obligations when they sell cars equipped to run a blend of 85% ethanol and 15% gasoline that's known as E-85

Great - incenting the car manufacturers to make greener cars.  So far, so good.  Unfortunately, that's about all the good.

Even with spot prices above 75 bucks a barrel for oil, the ethanol market enjoys government subsidies at many levels.  Corn farmers get crop subsidies.  Gasoline refiners who add ethanol can claim a 51-cent-per-gallon tax credit.  Tariffs deter imported ethanol from Brazil

And what is the net effect of all of these artificial subsidies?

Since January, ethanol's wholesale price spurted from about $2 per gallon to more than $3.80

$3.80 per gallon WHOLESALE for ethanol.  Retail probably is well above $4.00 per gallon.  According to Bloomberg, gasoline futures are only $2.23 per gallon.  Yes, I know that comparing wholesale spot prices vs. futures prices isn't exact but given the $1.00 per gallon difference I figure this is close enough.

But here's the worst news...

America's entire corn and soy crop could supply fuel volumes equal to just 12% of gasoline demand and 6% of diesel demand, notes a University of Minnesota ecology professor

The article touched briefly on soy being used in biodiesel that's the 6% diesel.

So to recap:

1) We insist on making ethanol from corn
2) We don't have enough corn to make a meaningful dent in fossil fuel consumption considering we have to eat some of our corn crop and we use it to feed animals too
3) We use subsidies and tarriffs to keep cheaper ethanol from sugarcane out of the country
4) End result is we pay more for something that should be saving us gobs of money.

Yes, there are people researching how to make ethanol from cellulose and trees and grass.  Great for them.  However, while we had this article saying that there was essentially 1.25 units of energy from corn-based ethanol for each unit of fossil fuels put into corn ethanol production, ethanol from sugar cane produces 8 units of energy for each unit of fossil fuels put into production.

The Bush administration is insisting on domestic production, and corn-based production.  Shocking to find out that companies who are leading the way here are those like Archer Daniels Midland - also a big genetically-modified-crop producer and probably a large Republican donor.  If we really were interested in getting off of fossil fuels we would turn to sugar-based ethanol.  Problem is we just can't produce enough of it domestically.  So, we'll keep propping up the midwest corn farmers with billions of dollars of subsidies per year (by "farmer" I typically mean "large agribusiness" not a family farm) and throwing money to produce an ethanol product that is more expensive per gallon than gasoline.

The Bush administration should immediately:

A) Eliminate the tarriff on imported ethanol - or at least phase it out 25% per year over the next four years
B) End the subsidies for corn farmers - by implementing maximum subsidies that can be received by a given organization (a group of farms owned indirectly by a large agribusiness would be counted as a single organization) - this way true family farms are still protected but large agribusinesses lose out on the corporate welfare

The government could achieve similar ends however by doing things like adding a tax on motor fuels that are less than 5% or 10% ethanol/biodiesel or some such.  That would increase demand for ethanol which would help offset the cut of the subsidies.  But "tax increases" are really unpopular.

The net effect would be a boost in ethanol production in places where it is most efficient, a sharp drop in ethanol prices (both sugar-based and corn-based) which would lead to a drop in prices at the gas pump - cutting inflation and passing a benefit onto all consumers in this country.

-Fred