Letters to the Editor: Ethanol, Part I

Oh I wish I had a barrel of rum, and sugar 3,000 pounds,
A college bell to put it in, and the clapper to stir it ’round,
I’d drink to all the good fellows who’d come from far and near,
I’m a rambling, gambling, Hell of an Engineer! Hey!

WE RECEIVED SO MUCH e-mail about last week’s article on using corn to produce ethanol that I was actually humming the whiskey-drinking Georgia Tech fight song to myself. Those of us who put together Whiskey & Gunpowder are fortunate to have such a great and thoughtful group of readers. Thank you for taking the time to write. I just wish that you would tell us your location (state, province, or foreign country) when you send us e-mail. Allowing for some editing due to space, and my comments on occasion, here is what some of "the good fellows" (and sisters) who wrote had to say:

From Herbert in Ohi"If agricultural product-based material becomes the source of transportation fuel, the price of oil will set the price of food. We have been warned. At least we can’t claim it will fit into the law of unknown consequences when it happens."

From Betty, Location Unknown:"Why doesn’t The New York Times say something about the fact that corn is one of the less-efficient sources of ethanol. It has to be processed twice as much as other sources, such as prairie grass, which will never compete for food dollars. The fact is that corn is far likelier to go up in price than it would if not sought after as a substitute for gas, and that nobody speaks about the greed of the agricultural industry. Signed, Disgusted."

Byron’s Comment: Betty, you will have to ask the editors of The New York Times why they do what they do. But if anyone from that newspaper ever writes us a letter, we will publish it. And I do not believe that there is an economic method, just yet, for transforming prairie grass into ethanol. But I know that some very smart people are working on it.

From Gary, Location Unknown:"First of all, again, thank you for the BEST commentary letter on the Internet even when you do get a little conservative! A major thanks for forthrightly challenging the corn-ethanol crowd. That position ranks as one of the most incredibly immoral decisions the U.S. and Europe have made. The production of ethanol from a valuable food crop, with an effective loss of several times the energy value as food versus the energy value as ethanol burned in internal combustion engines, is indefensible. This is true even ignoring [the] point of how little the impact [ethanol will have] in reducing our oil requirements. However, the crowning blow to the logic is the fact that the corn-to-ethanol cycle, when fully evaluated, uses more fossil fuel energy than that resulting from the produced ethanol."

Byron’s Comment: Try this on for size, Gary: When you compare the energy content of a gallon of ethanol versus a gallon of gasoline, you are just comparing the unburned fuel itself. Ethanol contains less than 60% of the energy content of gasoline. So the physical chemistry is what it is. But when you burn either ethanol or gasoline in an automobile engine, your overall energy efficiency plummets even further. Less than 15% of the energy that is released in the cylinders during internal combustion ever reaches the wheels. And much of the energy that is exchanged where the rubber meets the road is used to accelerate several thousand pounds of metal and plastic. The ultimate fuel efficiency that results from moving the human driver and passengers in your standard passenger car is down around 1% or 2%. That is just pitiful, really.

From Ted in Minnesota:"The entire 2004 U.S. corn and soybean crop, converted to biomass fuels, could replace about 10.41 billion gallons of petroleum (7.6 billion as ethanol and 2.81 billion as biodiesel). Petroleum is measured in 42-gallon barrels; the 10.41 billion gallon biofuel total would be equivalent to 248 million barrels of petroleum. The U.S. consumed about 7.49 billion barrels of petroleum in 2004, or about 20.5 million barrels a day. This means that the total biofuel potential of the record 2004 U.S. corn and soybean harvests would offset about 12 days of U.S. petroleum consumption, or about 3.3% of our total yearly petroleum consumption. Given that most of the U.S. corn and soybean crop is already committed to other uses, this analysis indicates that biomass-based fuels will have a negligible role in reducing U.S. petroleum consumption, which in turn underscores that replacing petroleum in the U.S. economy will be a monumental challenge."

Byron’s Comment: This is an excerpt from a much longer letter that Ted included in his e-mail to us, referring to a summary of energy balances that he wrote and submitted to the Oil & Gas Journal in July 2005.

From Nick in Iowa:"I am a farmer from Iowa that just read your article about the ethanol energy story and wanted to clarify a couple of things. First, it’s unlikely that ethanol will cause U.S. consumers to run short of food. There is a large amount of a byproduct called dry distillers grains (DDS) from the production of corn-based ethanol. It’s a made-to-order cattle feed and can also be fed in smaller quantities to swine and poultry. Feeding livestock will become a little more expensive, but will not contract in large measures. Also, the raw grain price in consumer foods is minuscule. Typically, the price of raw grain makes up 5% of the consumer retail price. For example, the cardboard box costs several times more than the corn in the retail price of corn flakes. Overall, retail food prices could creep up a little, but are unlikely to cause any severe rationing at the grocery store.

"Second, the impact on the U.S. balance of trade won’t be that great. There’s no question that U.S. exports of corn will fall, possibly dramatically. However, large exports of cheap corn have had little overall impact on the trade deficit, compared with the large imports of high-priced consumer goods and, of course, huge quantities of high-priced petroleum. Granted, ethanol will not improve the trade deficit to any great extent, either.

"Third, the tax breaks provided to the ethanol industry pale in comparison with the massive expenses the U.S. Treasury lays out to subsidize the high-production farm programs. High-priced commodity prices enable farmers to make decisions about their farms and livelihoods from the market, and not the government. I am a free-market person and am no advocate of the farm programs. However, I also do not agree with subsidizing the petroleum industry through our military budget. If the true cost of foreign oil were priced on the retail pump, ethanol’s true value would be easier to ascertain.

"Finally, I do agree with you that corn-based ethanol is only one small part of the energy equation. This nation obviously needs a more realistic and comprehensive energy policy, regardless of the impacts of ethanol. Even Iowa farmers know that petroleum prices are still very integral to our cost structure in fuel, pesticides, and fertilizer. I appreciate your continued effort to keeping everyone’s focus on the big picture of energy, and I always look forward to your next essay."

Byron’s Comment: Thank you for your kind words, Nick. You are making an important point about DDS being used as cattle feed. Many ethanol plants are located near cattle feeding operations. Thus, the "mash" that is left over is being sold as cattle feed. But no less an authority than the CEO of Tyson Foods recently commented that U.S. consumers would soon be seeing an increase in the price they pay for meat and meat products due to the rising cost of grain. A recent news article from the Associated Press noted:

"Ethanol plants and foreign buyers are gobbling the nation’s corn supplies, pushing prices as high as $3.40 a bushel, the U.S. Department of Agriculture said Friday [Jan. 12, 2007]. Farmers have not seen prices this high in more than a decade."

I sympathize with your comments about the state of the "free market" in the U.S. There are so many monetary, fiscal, legislative, and regulatory aspects to the U.S. economy that it is hard to know where regulation stops and the free market begins. To paraphrase Sigmund Freud, "What does the free market really want?" Nick, you are not alone in your view on this. Read the next letter.

From Roger in Delaware:"We all know ethanol is next to useless as fuel. Why didn’t you bring up the point that the only reason these plants are being built is they are government subsidized? The free market has no interest at all in alcohol as fuel, because it just doesn’t work. This whole thing is another government fiasco by the liberals and neocons. Private industry has no interest here."

Byron’s Comment: Roger, I think you are overstating the case. Ethanol has many good uses. There is even a NASCAR program to run racing cars on ethanol. Yes, there is a lot of government subsidy to the ethanol industry, such as the mandates to use ethanol as a fuel additive, even if it gums up your engine. And there are tax breaks for ethanol, such as exempting it from highway taxes, as if vehicles that use ethanol do not use the same highways as the rest of us. But it is clear that a lot of private funding is moving into ethanol production. So let’s follow the money. Are we watching the formation of an "ethanol bubble" to mirror the tech bubble of 1999-2001, or the housing bubble of 2003-2006? All I can say about that just now is to be careful about investing in things that you do not understand. The next letter makes the point.

From Joseph in North Carolina:"Ethanol on the first 10 billion gallons [of gasoline] per year is more about E-10 and less about E-85. Spot prices per bushel of corn are high, and so farmers will grow more, especially if they know they can get at least $2.50 per bushel. In North Carolina, farmers need a reason to grow something other than tobacco. Current spot prices are close to $4.

"Like you suggest, the ethanol supply is a drop in the bucket to U.S. [energy] consumption. Corn-based ethanol is just one small piece of the puzzle to U.S. energy independence. Some of those plants you mention may never get built or fail outright."

Byron’s Comment: These are good points, Joseph. The U.S. needs to have a serious national policy discussion about its future sources and uses of energy in general, and transportation fuel in particular. But I have heard otherwise serious people say really dumb things like, "We can run our cars and trucks on ethanol." No, we cannot do any such thing.

The fastest, cheapest, most readily available source of "new" energy supply for the U.S. economy is conservation and efficiency. That is one of the key points that I wanted to make in the article on the rush to construct ethanol plants and distill corn into fuel.

There are many other letters, and we will review some of them in Part II of this discussion. Thank you for reading Whiskey & Gunpowder.

Until we meet again…
Byron W. King

January 16. 2007

The Daily Reckoning