Ethanol: Solution or Stopgap?

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By Michael Infranco

Amid the clamor over the price of oil hitting $100 a barrel and our heavy dependence on foreign sources of supply, ethanol has reemerged as an alternative fuel that seems to have all the right stuff: it’s renewable, it’s affordable, and it’s American-made.

But is ethanol the real deal? Can it really help wean the U.S. off foreign oil? Or is it the 21st-century equivalent of Jimmy Carter’s shale-oil Holy Grail?Ethanol itself is a colorless, volatile, flammable liquid that’s the intoxicating agent in liquors and is also used as a solvent and in fuel. It is made by converting the carbohydrate portion of biomass into sugar, which is then converted into ethanol in a fermentation process similar to brewing beer.

While its use as an intoxicating agent is here to stay, is it worthwhile to make a serious push to use ethanol on a widespread basis as a vehicle fuel?

According to the U.S. Department of Energy, “In 2009 alone, the ethanol industry created and supported more than 400,000 new jobs across the country that cannot be exported or outsourced. In addition, ethanol production contributed $53.3 billion to the nation’s GDP and generated $8.4 billion in federal tax revenues, resulting in a surplus of $3.4 billion for the Federal Treasury.”

However, N.C. State University economist Mike Walden says that fuel efficiency, production efficiency and public subsidies are key issues to consider when it comes to ethanol.

Walden further notes that ethanol gets only two-thirds of the miles per gallon of conventional gasoline; that studies show that producing ethanol actually takes more energy than what you get out of it as a fuel; and that ethanol can’t compete head-to-head with gasoline without public subsidies.

With such glaring negative implications, all the fuss over ethanol may be as simple as dollars and cents, but it’s more likely a function of U.S. political and economic policy.
Ethanol is far from a new idea. In fact, “the factors behind ethanol’s resurgence are eerily reminiscent of the 1970s and early 1980s, when interest in ethanol rebounded after a
long period of dormancy.” So, if ethanol has gone from great to passe, and now back to great again, what has changed?

For starters, the price of oil has surged to record heights, sparking renewed interest and making ethanol a more profitable business. It should be noted that when oil prices declined in the early 1980s, the profitability of ethanol declined as well. Thus, if oil demand falls or supplies rise, a drop in oil prices could once again relegate ethanol to second-tier status.

Next, ethanol wins points for replacing methyl tertiary butyl ether (MTBE) in gasoline. Oxygenates such as MTBE and ethanol help gasoline to burn more thoroughly, reducing tailpipe emissions, and were mandated in several areas to meet clean air requirements.

But many state governments have banned or restricted the use of MTBE after the chemical was detected in ground and surface water at numerous sites across the country. That fueled demand for ethanol to serve the same purpose.

But the biggest boost for ethanol as vehicle fuel has been the Federal government, as directed by Congress.

No legislation has been a bigger boost to ethanol production than the Energy Policy Act of 2005, which increases the amount of biofuel (including ethanol) that must be mixed with gasoline sold in the U.S.to 7.5 billion gallons by 2012–triple the current requirement.
The Act also includes tax credits of $0.51 per gallon of ethanol at 190 proof or greater, though there is now a possible Senate agreement to eliminate ethanol subsidies. That 51-cent incentive is equivalent to about $1.35 per bushel of corn used.

Other Federal subsidies target initial production years and smaller plants. On the local level, some states have subsidies for ethanol production, and others provide such financial incentives to ethanol producers as support for infrastructure and job-training assistance.

With such a large government requirement, the ethanol industry has rapidly ramped up production capacity. According to the Great Lakes Bioenergy Research Center, in June 2010, 201 ethanol facilities in the United States had the capacity to produce 13.5 billion gallons of ethanol.

The USDA estimates that 27 million acres of cropland–which is 6.5 percent of the total 406.4 million acres of agricultural cropland reported in the 2007 Census of Agriculture–are needed to produce required levels of ethanol in the U.S.

Increased demand for ethanol has affected corn prices, with follow-on effects in other foods. A bushel of corn on the Chicago Board of Trade jumped from $1.86 at the end of 2005 to $6.80 as of yesterday.

But where corn farmers gain, consumers suffer, with beef and poultry prices on the rise as animal farmers pay more for feed corn. Food makers that use corn syrup as a sweetener have also felt the sting of higher prices.

Despite rapid industry growth, ethanol remains a topic of extensive debate. Proponents advocate the benefits of “energy independence”, and detractors express displeasure with Federal incentives.

The debate has even reached New York City, where Mayor Michael Bloomberg noted that subsidies for corn-based ethanol penalize sugar-based ethanol which, he said, is “a lot better for the environment.”

Left to fend for itself, would ethanol make it in the U.S. as a viable product? The answer is probably “No.”

Despite all the positive talk about job creation, energy independence and renewal resources, solely on its own merits, ethanol takes roughly as much energy to produce as the fuel provides. Some studies have said that it takes more energy to produce a gallon of ethanol than the energy derived from it, while others portray ethanol production as slightly energy-positive.

In addition, there is no debate that a vehicle running E85 (a blend of 85 percent ethanol and 15 percent gasoline) gets lower gas mileage (roughly 33 percent lower) than the same vehicle on gasoline, which raises overall fuel costs.

In fact, if there were a natural and viable market for ethanol, oil companies–rather than investing in large offshore platforms prone to hurricane damage, or doing business in highly challenging regions–would be better off buying millions of acres of farmland and growing ethanol crops to use for fuel.

Nevertheless, this may not mean that ethanol production should be curtailed or eliminated. Ethanol is just one entry on a list of energy sources that should be viewed as part of a journey, rather than a destination. We should target ethanol for its most efficient uses, whether by consumers near refineries or for municipal vehicles and public transportation providers.

We also should continue to invest in ethanol to build on current production technologies. Future breakthroughs in technology may close the cost gap between ethanol and gasoline, making it a much more viable fuel from a business standpoint.

While there is no substitute for gasoline in today’s market, investing in alternatives and working to improve choices that work well in various niche markets may ultimately let the U.S. improve its energy security. And tougher CAFE rules are likely to reduce overall fuel demand for transportation.

In other words, the debate is certain to rage on.

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This column, originally written by Michael Infranco, was orginally posted on GreenCarReports.com, an editorial partner of Talking Points Memo.

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