Fueling around

Europeans didn’t know that corn existed before Columbus "discovered" America. It had been cultivated by indigenous North Americans for thousands of years before the Italian brought home what was to become a favorite food for many. The more adventuresome even figured out how to distill corn into something more to their liking.

Fast-forward five hundred years, and those yellow kernels are embroiled in a political food fight. Ethanol, or ethyl alcohol, is being served up as a way to slake our thirst for foreign oil. Ethanol is even on the menu of the Iowa Caucus, the first major primary of the 2008 election year. It also is featured prominently in the latest energy bill passed this June by the Senate. One economist at Iowa State University predicts that enough new distilleries will be built in the state to make it a net corn importer. "We’ll be the Arabs of the Midwest," says a manager of an Iowa farm cooperative.

Supply-side economics

Although major questions about ethanol’s government support, delivery, cost-competitiveness, and environmental impact remain unanswered, I doubt any presidential hopeful will stand in the way of the ethanol juggernaut—especially in Iowa. Still, embracing ethanol without vetting all the issues associated with its production and use would be a big mistake. Don’t get me wrong; I believe ethanol will be a piece of our energy puzzle. But it may not be as big a piece as advertised.

The Renewable Fuels Corp. reports that there are 111 ethanol refineries nationwide with an annual capacity of 5.4 billion gallons. Another 78 refineries and eight expansion projects in various stages of development will add another 6 billion gallons, easily meeting the 2005 Energy Policy Act’s goal of 7.5 billion gallons by the year 2012. To put those numbers in perspective, the Earth Policy Institute notes that refineries will consume half of U.S. corn production by 2008. Farmers have planted 90.5 million acres of corn this year—the most since 1945, according to the U.S. Department of Agriculture (USDA).

Because the U.S. accounts for 40% of the global corn harvest, our increased domestic consumption and reduced exports are driving up worldwide prices. For example, in Mexico, where corn is a dietary staple, President Felipe Calderón had to impose voluntary price caps on the crop because tortilla prices quadrupled since last summer. Sugar-derived ethanol from Brazil could help meet domestic demand and free up some U.S. supply, softening prices, but Washington insists on protecting U.S. sugar producers with a 54-cents/gallon tariff on ethanol imports. Might ethanol policy impale us on the horns of a moral dilemma: having to choose between lowering the cost of driving and keeping poor Mexicans from starving?

Inconvenient truths

A recent Iowa State University study concluded that increased demand for ethanol has added $47 to the average American market basket over the past year. In turn, heightened demand for corn as ethanol feedstock has farmers forgoing planting other grains, which are now feeling their own upward price pressures.

How green is ethanol, anyway? Canada committed $2 billion in incentives for increasing its ethanol production because it is widely believed that ethanol-containing transportation fuels burn more cleanly than petroleum derivatives. Yet a recent Environment Canada study found no significant difference in the greenhouse emissions of regular unleaded and unleaded diluted 10% with ethanol (E90). What’s more, some note that because ethanol isn’t a very stable gasoline additive, it evaporates faster than pure gasoline in hot weather, increasing smog at just the wrong time.

And what of the cost to taxpayers of federal and state sops for ethanol production? The biggest is certainly the 51-cents/gal ethanol tax credit that is scheduled to expire in 2010. By then, about 12 billion gallons a year of refinery capacity should be eligible. However, bills that have passed the Senate Committee on Energy and Natural Resources would make 36 billion gallons eligible by 2022, and Senators Lugar (R-Ind.) and Tom Harkin (D-Iowa) are sponsoring another bill that targets 60 billion gallons by 2030. Dozens of new loan guarantees and subsidies for ethanol also are being proposed without any concern about their funding.

Finally, what good is producing ethanol if it’s hard or costly to distribute to the point of sale? Ethanol is very corrosive, so it can’t be sent through gasoline pipelines. Harkin’s solution is to grant rights-of-ways along U.S. highways for new ethanol pipelines. Another legislator has even proposed creating a Strategic Ethanol Reserve.

Invisible hands

With every kernel spoken for in the U.S., you’d think $20 billion a year in agricultural subsidies wouldn’t be needed to offset the costs of distilling corn and distributing ethanol. According to the USDA, rising corn prices have contributed to a decrease in farm subsidies of $10 billion over the past five years. However, payments to farmers will continue at over $2 billion a year regardless of the price of corn.

I think a more-effective public policy (to support any new technology) is to boost demand through legislation and let producers respond to it. For example, how about mandating that all new cars be able to run on ethanol or gasoline? It would add only about $100 to the sticker price.

Washington also could accelerate technology development by incentivizing investment in demonstration projects and basic research. That approach has done wonders for alternative energy technologies like photovoltaics and wind, and evolutionary ones like clean coal combustion. Often, however, the feds forget that once an industry has matured, it’s time to take off the training wheels and let the market drive prices.

—Dr. Robert Peltier, PE Editor-in-Chief