Down at my local filling station, there’s a sticker on every fuel pump. It’s prominently displayed, at eye level, because it’s a legally required notice. The sticker states, “Product May Contain up to 10% Ethanol.”
This means what it says, which is that the refiner has mixed ethyl alcohol (“ethanol”) with the gasoline, at a ratio up to 10% by volume. What’s ethanol? It’s alcohol derived from corn. It’s also “deathanol,” in my view. Let’s discuss this.
First, set the stage. Since 2007, U.S. law has required that you fuel your car with a 90-10 mix of petroleum-derived fuel and “renewable” fuel — in this case, ethanol from corn, which, according to myth (see below), grows in the soil.
At the macroeconomic level, that same law of the land has created a major energy policy conflict, with global implications. That is, by mandating ethanol in motor fuel, the U.S. government has deliberately merged the global food supply with the world’s energy supply. Now at the grocery store, you — and others across the world — compete with consumers buying gas down at the filling station.
Ethanol is the worst of both worlds. It directly leads to high food prices while delivering overpriced fuel to your cylinder heads. Meanwhile, it subtracts from national security.
Really Big Numbers
Let’s start with numbers — and I warn you, they’re big. In 2012, U.S. drivers consumed about 133 billion gallons of gasoline, or not quite 3.17 billion barrels. The 10% ethanol requirement translates into about 13.3 billion gallons of grain alcohol, which is about 317 million barrels.
It’s hard to wrap one’s brain around numbers like this (at least it’s hard for me to do it), so let’s illustrate the amount. Start with how much is 3.17 billion barrels, the total amount of gasoline that the U.S. consumed in 2012.
Think of a supertanker, like an ultra-large crude carrier (ULCC). It’s 1,000 feet long, 250 feet wide, with a draft of 40 feet. In dimensions, an ULCC is bigger than an aircraft carrier, although most of the ship’s innards are storage tanks. A typical one of these ULCC beasts hauls about 2 million barrels of product. So for 3.17 billion barrels, consider a fleet of ULCC tankers numbering 1,585 vessels.
Heck, there are only 175 ULCC tankers in the whole world, so 1,585 cargo loads is over eight times the entire global fleet (it’s good that tankers make multiple round trips, throughout the year). If you lined them all up, end to end, 1,585 ULCC tankers would stretch about 300 miles — or all the way around the island of, say, Manhattan 10 times over.
Let’s get back to that 10% ethanol requirement, or 317 million barrels. That’s not quite 160 loads in ULCC vessels. End to end, it’s about 30 miles of ULCC tankers. That’s a lot of hooch.
Hitting the Blend Wall
Now let’s get to the details. In modern America, every gallon of ethanol has its own unique identity. Indeed, every gallon of ethanol has a 38-digit Renewable Identification Number (RIN), administered through the Environmental Protection Agency (EPA). Really… 38 digits. Only in America.
Refiners have to track each gallon of fuel they produce — including the ethanol — via RIN. That is, when refiners mix “renewable” alcohol with old-fashioned gasoline, they have to account for the RIN before shipping fuel out to the gas stations of the country.
The bottom-line idea here is to force refiners to use alcohol and manufacture that 90-10 ethanol mix. Absent sufficient RIN evidence, refiners have to pay a fine to the EPA. So as you might imagine, there’s a market for RIN credits within the refining industry.
That is, refiners buy RIN credits from ethanol producers and use this as proof that they’re complying with the national fuel laws. The good news is that RIN credits have been relatively inexpensive, until recently. The bad news is that RIN prices have recently exploded. From a little over a penny in June 2012, the cost of compliance is up to $1.10 as of the first week of March.
As you can see, the cost of RIN credits is spiking in 2013. This is due to what’s called the “blend wall” within the refining industry. That is, there’s a mandate from the EPA for refiners to use more and more ethanol, which requires RIN for each gallon. But at the same time, overall motor fuel demand is declining across the country.
Recall that in 2011, the U.S. consumed 133 billion gallons of fuel? That’s down from 140 billion three years ago. Yes, the U.S. is actually using less motor fuel as time goes by. You might think that’s a good idea. Let’s peek under the hood on this, though.
Why is the country’s overall fuel demand declining? Several reasons, starting with higher fuel prices at the pump — I’m sure you’ve noticed. Also, there’s improved fuel-efficiency in new cars. Plus, the U.S. population is aging and older people simply drive less. And of course, the lingering recession keeps people and businesses off the road. Voila, less fuel demand.
So we have less fuel demand, which from a policy point of view is a good thing. Yet the EPA still mandates larger and larger amounts of ethanol going into the shrinking volumes of the country’s fuel supply. Hence, RIN credit prices have exploded.
What’s a refiner to do? There’s less and less demand in the marketplace for the fuel that refiners produce. Meanwhile, refiners can’t put more than 10% alcohol into the “real” gasoline, because alcohol will damage all but special-built engines — “E-85″ and other engines with seals and gaskets optimized for high percentages of alcohol.
One solution for refiners is to export gasoline and reduce volumes inside the U.S. That legally avoids the RIN issue. These exports show up clearly in the U.S. trade data, and it’s not entirely a bad thing if you care about the country’s balance of payments.
The other solution for refiners is to bite the bullet and pay increasing costs for RIN credits. This all gets passed along to buyers at the pump, and doubtless has added a dime, or more, per gallon to the national fuel bill in the first quarter of 2013 — in the face of stagnant or declining oil prices.
The Corn Ethanol Myth
Why use corn alcohol? It gets back to that myth that corn is, somehow, “renewable” because it grows in the soil. Maybe it used to grow, renewably, in the olden days. Not anymore, however.
Today, it takes much more than mere soil to grow corn. Indeed, if you eliminate modern mechanization, irrigation and agricultural chemicals, you won’t grow too much corn, in soil or anywhere else.
For the first half of the 20th century, U.S. corn yields were stuck between 20–30 bushels per acre. Then came World War II, when the U.S. government sponsored a crash program to build ammonium nitrate plants, the output of which went into explosives for munitions.
What does this mean? Well, ammonium nitrate is a form of chemical energy. The World War II-era plants took large amounts of energy — natural gas and electricity — and reformed it into a tangible product. During the war, munitions companies packed the ammonium nitrate product into bombs, ammunition and such.
After the war, the need for large amounts of high explosives went away. But the ammonium nitrate plants stayed in business, producing fertilizer for agricultural markets. From 1950–1980, more and more ammonium nitrate went onto the soil of U.S. farms, and corn yields grew dramatically.
In all fairness, the U.S. corn yield increased due to other things, as well. Postwar, U.S. farmers adopted more mechanization, improved irrigation (in places), used better farming techniques, improved seeds and pesticides and more. But there’s no denying that energy-rich ammonium nitrate played a major role in moving the yield curve.
It’s notable that since 1980, U.S. farmers have applied slightly less ammonium nitrate fertilizer, yet corn yields are still improving. This reflects a combination of several things, starting with rising energy costs — and rising fertilizer prices — driving efficiencies in application. Basically, farms use less fertilizer because it costs more (and that’s because energy costs more).
Also, since 1980, technology for efficient fertilizer application has improved, to the point where many modern farmers use global positioning system technology to place precise quantities of fertilizer within inches of where they want it. Couple this with better seed, improved mechanization and better harvesting technology.
The bottom line, though, is that without large amounts of energy input — from mechanization and ammonium nitrate fertilizer — the corn harvest would crash. That is, corn doesn’t just grow in the soil, it grows via applications of energy.
When it comes to the “net energy” of ethanol — how much energy goes in, versus how much you get back out — ethanol is a loser. On its best days, ethanol is a break-even form of energy. When you throw in all the energy it takes to grow corn, harvest it, haul it, process it, ship alcohol, blend it and then haul it some more… ethanol is a net loser. It’s more “deathanol” than an energy supplement.
Fueling Cars With Moonshine
The global population is now over 7 billion, with about 200,000 net new mouths showing up wanting to be fed every day. Across the world, grain consumption is growing by about 40 million tons per year. Meanwhile, the U.S. devotes about 40% of its annual corn crop to alcohol for fuel, and in fact devotes more corn to ethanol than to food and/or cattle feed.
Frankly, it’s bizarre. Imagine if a defense contractor developed a weapon that could ruin the economics of food production and thus threaten millions around the world with hunger. Imagine that this weapon subtracted from the energy base of the enemy, helping keep the other guy’s economy in permanent recession. Taken to extremes, this weapon could prompt social instability, if not revolution.
Would the Pentagon buy such a weapon? Would policymakers and civilian “deciders” determine to employ such a weapon? Would critics label this new weapon a criminal enterprise?
Well, this weapon already exists. Indeed, every fuel pump in America has a little sticker on it bragging about it. It’s the moonshine in your tank. It’s the deathanol at the pump.
Thanks for reading.
Original article posted on Daily Resource Hunter
Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.
You have no vision!
Nobody expects corn ethanol to be the answer, but it has to start somewhere. The first computer was not a laptop. It takes time to evolve. Corn ethanol is what we know now. It will evolve into something else in time.
No, it’s just not your vision, Lynn.
Ethanol does get the farmers’ vote, though… and that’s all that matters.
Rumor has it Byron King is a smart guy. A smart guy would have made clear some facts about corn in America: 1) 99% of corn that is grown is FIELD corn, which cannot be directly eaten by humans. Humans eat the 1% of corn that is SWEET corn (the can of Jolly Green Giant corn). And 2) field corn is made into ethanol, animal feed and lots of other products, including stuff that humans eventually CAN eat (corn syrup/starch/oil etc.) but it needs to be mentioned that field corn can be used for making ethanol AND the products that humans can eat at the same time. There is no fuel-or-food choice to be made. Lots of people make this mistake.
It’s about time someone made food prices high. I don’t want 7 billion people or traffic jams in hawaii.
He forgot the fact that after ethanol is removed from the kernel and there is a byproduct. Ethanol byproducts is used to feed livestock at a less costly price than whole corn. You can’t say that it’s efficient.
Plant the hemp. Or switch grass for that matter. Corn is not efficient to grow as food, much less fuel.
The US Social Security program is complete mess. The funds needed to pay these benefits are quickly drying up, and agreeable solutions are in short supply. But all is not lost... There actually IS a viable way to "save" Social Security. But as Dave Gonigam explains, you're probably not going to like it. Read on...
This summer, the worst Ebola outbreak ever recorded hit sub-Saharan Africa. But the greatest danger, as Stephen Petranek explains, is that the virus will have a chance to mutate into a form that spreads more easily. And if that happens, there will be far reaching consequences - from both a health and an investment side. Read on...
Everyone in the world has a unique talent or skill that someone else might find useful. Whether it's editing video, speaking Spanish or even eating paper, chances are there is someone out there willing to pay for what you have to offer. Today, Chris Campbell shows you one way to find those consumers and how to make your skill work for you...
For the last few years, gun enthusiasts have been concerned that the Feds would find a way to block their access to firearms. Now those fears appear to be subsiding... and so do gun sales. Greg Guenthner explains how to navigate this market in the coming months and years. Read on...
The gold mining sector is one of the most difficult areas of the market to navigate successfully. But there is money to be made here. Henry Bonner sits down with one of the giants of this industry and picks his brain about how to find winners in this market and the four things every great investment has in common. Read on...