Biofuel Is Insignificant

I'm sick of energy generation technologies that are merely just new ways of spinning turbines. I want a way to generate electricity that actually generates electricity directly; something like solar only better.

I'm all for nuclear.

Phrasing the question in terms of producing all the energy we need for all purposes in terms of biofuel grown in the United States is designed to give you that particular answer.

I am certainly in favor of building nukes to generate electricity but I don't see myself commuting to work in a nuclear powered car any time soon. What I can see happening pretty easily is driving to work in a car who's fuel is 10% or more ethanol.

If all the gasoline sold in the US were at least 10% ethanol, car makers could increase the compression ratio of the engines because we would be using 95 octane fuel. Higher compression ratios means more efficient engines which means more horsepower from smaller, lighter engines, which means better mileage in a virtuous spiral.

What kind of effects will it have on the economy and on our lives if farmers put a lot more acreage under cultivation for corn and most of that corn is used to produce ethanol? For one thing, it will make high fructose corn syrup more expensive. Perhaps high fructose corn syrup will get expensive enough to go back to using cane sugar in Coca Cola. Maybe all sugar will get more expensive so that processed food will contain less of it. After producing ethanol from a bushel of corn, about a third of that bushel is left as "brewer's grain". The stuff makes excellent animal feed. If we produce enough ethanol from corn, the cost of animal feed will go down and meat will become cheaper.

In any event, who says that we have to produce all the ethanol or biodiesel that we use within the United States? Why can't we buy it from South America, the Caribbean or Africa? The nice thing about sending money to those places is that unlike OPEC, they don't use their dollars to finance jihadis who want to kill me and my children.

Mark_in_Texas: Actually, electric cars already run on nuclear power, in the sense that some of the electricity they use to charge their batteries comes from nuclear plants. Hydrogen cars would also be "nuclear powered" because the hydrogen would be created using partially nuclear energy. Similarly, ethanol is a form of stored solar power... but unfortunately only about 1% of the solar energy that hits a cornfield is actually delivered to a car engine, and the other 99% is wasted by inefficiencies. Ethanol is worthless except as a subsidy program for farmers, and even that use I consider to be worthless.

As for sugar, it's only expensive because of tariffs. South American and African sugar could be imported and sold more cheaply than American corn syrup if it weren't for protectionist policies defended tooth-and-nail by the agricultural industry. So instead of sugar, these farmers grow cocaine and sell that to American.

These subsidies and tariffs hurt everyone except shareholders of the giant farming corporations.

I think you're being unfair to biofuels for a couple of reasons, the first of which is that agricultural residues (corn stalks, straw, etc) can be converted to biofuels without reducing the food production of the land. That implies a net plus to the energy picture without any need to actually "convert" land out of food production.

A second issue is your characterization of 18% of the fuel picture being insignificant. We produce maybe 40% of our own oil. Adding 18% of domestic oil equivalent cuts imports by about a quarter, shifting an awful lot of $$ to loop around in our economy and out of the hands of terrorist friendly business interests.

The reality is that biofuels will not hit 18% but they will still be a significant contributor to solving the real problem, adjusting the world to 3B more people living high energy lifestyles.

Without a breakthrough in battery technology, electric cars don't go all that far after they have been charged up on energy from nuclear plants.

This is your blog and you are certainly free to make these absolute statements on the insignificance of biofuels without backing it up with an argument. However, you seem to be a smart guy and I think that you can do better than "only about 1% of the solar energy that hits a cornfield is actually delivered to a car engine". If efficient use of solar energy is the standard, what percentage of the solar energy that shone on the plankton who's bodies eventually become a gallon of gasoline makes it to your engine? A lot less than 1% would be my guess. Probably a lot less than 1% of the energy that squished the plankton corpses into oil over the course of millions of years too.

Currently, it costs approximately $1.00 to make a gallon of ethanol from corn feedstock in the United States. The wholesale price for a gallon of ethanol is around $2.00. Since it is economically rational to produce ethanol until those prices get a lot closer and since there are not too many barriers to entry, we are going to see a lot more ethanol plants being built. Those plants will drive up the price of corn and persuade farmers to grow more of it. Not only does that mean that government payments to not plant corn will not be paid and price support payments will not kick in (I think that we saved about $2 billion last year as corn farmers grew corn instead of collecting government payments no to) it also means that fields that were planted in other crops will be planted in corn this year so that the government will probably be paying out less in support payments for cotton, soybeans and other crops this year.

Sugar is expensive in the US only in comparison to the world price and that is distorted because of EU subsidies to sugar beet growers and dumping of surplus European sugar on the world market.

In any event, ethanol can be produced from sugar cane in Brazil for approximately $0.50 per gallon. I suspect that there are plenty of other places in the Caribbean, South America and Africa that can also produce ethanol from sugar cane for that price. After they ship it to the US and pay the $0.54 a gallon import duty, they will still be able to make the same $1.00 per gallon of profit that US ethanol makers are currently enjoying.

Eventually, supply will catch up with demand and those profit margins will shrink to ordinary levels just a little bit more than the cost of production. One thing that will slow that process down is that every time the price of ethanol drops, the demand for it will rise and more ethanol will be produced to satisfy that demand.

You are correct in saying that we will not be energy independent, but if we have the infrastructure in place to make use of biofuels, we will have a lot more freedom of choice in where we spend our dollars for transportation fuel.

Oh, yeah. Using ethanol fuel reduces air pollution and is a lot more carbon neutral than fossil fuels if you care about that sort of thing.

TML: Yes, residues can be converted into biofuel, but how many tonnes of oil per acre are generated using only those residues? Far less. Further, the 18% number could only be achieved if all farmland were converted to generated biofuel. Far less than that will be.

Mark_in_Texas: I apologize if I've come across as dismissive of your position. I'm not! I'm just writing these comments in a hurry. I enjoy the discussion quite a bit, and I appreciate your comments.

Does the $1 cost to create a gallon of ethanol include government subsidies? How much does it cost without those subsidies? I'm all in favor of the free market, and if farmers want to grow ethanol because it's profitable then more power to them. What I object to is when the government takes my tax money and then gives it to a farmer to produce ethanol.

If the free market will support an ethanol industry, then great, I've got no problem with that. But if it won't, which is my suspicion, then the government shouldn't be distorting the market and creating an industry using public money.

The $1.00 per gallon is what it costs an ethanol plant to manufacture corn that they buy on the open market into ethanol. Aside from capital costs and labor, their two big costs are corn and energy, mostly natural gas although some newer plants are using coal because it is cheaper.

As far as I know, there are no federal subsidies paid to build or operate ethanol plants. There may be some local or state tax holidays or loan guarantees as there sometimes are to persuade businesses to locate in an area.

The only subsidies that I know of for corn farmers are the two programs that I mentioned in a previous post that are designed to keep the price of corn above a target level. There is one program where a farmer can borrow money from the federal government with his crop as collateral. If the market price of the crop is below the loan price (e.g. if the loan price were $1.50 per bushel and the market price were $1.40) the farmer defaults and the government effectively buys his crop for more than the market price and puts it in warehouses. That is how you get things like government cheese made from milk that was purchased under this kind of program. Often the government gives the crops away to NGOs like CARE which then distribute it in third world countries, undercutting their agriculture but propping up the urban based governments with cheap food for town dwellers.

The other program is where the government pays farmers to not grow a crop on some land. This usually works out to something like $50 per acre. That way, the government does not have to pay to store and give away the surplus crops.

Last year, the spot price for corn hit $4.00 a bushel although most was sold for less than that. Because the market price for corn was so high, no corn was purchased by the federal government and farmers were planting corn rather than take the federal money to leave their acres idle. The high price of corn means that there was a lot less money paid out in crop subsidies last year (about $2 billion, IIRC). This year, farmers will plant even more corn than last year. Some will be acres put back into production and some will be acres that were used to grow less profitable crops. There will also be more demand for corn as more ethanol plants come on line. It is going to take a few years for this to come into balance.

Meanwhile, one thing to keep in mind is that most of the corn that is being grown is the evil genetically modified frankenfood corn that Europeans will not allow to be imported to their pristine shores and that environmentalists insist is not fit for human consumption. The genetically modified corn gets as much as four times the yield from an acre as previous corn.

Once ethanol is produced, it is mixed with gasoline at a fuel terminal -- the end of the pipeline from the gasoline refineries where the fuel is loaded into tanker trucks and delivered to a gas station near you. There is a tax credit of $0.51 per gallon of ethanol used in mixtures of 10% or greater. That means that there is no tax credit for ethanol used to oxygenate gasoline or raise the octane if the mix is less than 10%, which is how most ethanol is used these days. A 10% ethanol mix (E10) gets a $0.051 tax credit from federal gasoline taxes and an 85% ethanol mix, which requires a car that is set up to use the mixture, gets a $0.43 tax credit per gallon from those taxes.

The main driver, right now, in the use of ethanol in gasoline is the threat of lawsuits against manufacturers of MTBE. Because of those lawsuits, nobody will put MTBE in their gasoline any more and nobody will sell MTBE to gasoline manufacturers. The only acceptable substitute for MTBE is ethanol.

Well, this post has already gone on too long. It is understandable that people would consider ethanol fuel to be a politically driven government boondoggle because for many years when oil prices were less than $30 a barrel it was. However, today it actually makes economic sense.

Mark_in_Texas: You obviously know a lot more than I do about corn and the ethanol industry, and it's been a pleasure to have your comments. If you feel motivated to collect your thoughts into an essay form I'd be happy to put them up on my site as a guest post. Very informative stuff. It's very hard to find this sort of information on the internet for some reason (maybe I don't know how to look for it properly).

Mark_in_Texas: Although this WSJ editorial says that corn farmers are getting billions in subsidies for ethanol production. That article pretty clearly disagrees with what you've said here.

There was a study (which I will track down) that showed use of Ethanol would acually increase the levels of ozone pollution in Los Angeles.

Als as far as MTBE, it usually the oil companies that get sued over it because they have the deepest pockets. But in the greatest irony is the government made them use MTBE then they sue them for the contamination that resulted from the use of MTBE.

The rise in the price of corn does have downsides, i.e. some people actually eat corn. I remember hearing that the price of tortillas in Mexico has doubled in part due to ethanol being used as a fuel. Greater demand for putting food into our vehicles means rising food prices, which means that people are literally going to starve to death.

Bio-fuels can work if we concentrate on things like used cooking oil that would have been thrown out otherwise and agricultural residues as noted earlier. Its not going to replace oil, but it can reduce the need for oil.

Manish: I'm not sure if anyone is going to starve to death if tortillas double in price, but it will increase the burden on the poor who depend on such staples.

Michael

Thanks for the kind words. I might like to take you up on your offer but my work and home situations right now dictate that it won't be any time soon.

I read that Wall Street Journal article. My theory is that just as New York Times and BBC contributors must take a blood oath to hate George Bush, Wall Street Journal editors have to take a similar oath to hate ethanol. I have been following the story on ethanol pretty closely for about three years now and despite the frequent vague citations of government subsidies in articles critical of ethanol fuel, the only specific programs that I have been able to discover are the normal ag price support programs that are not paying out any money these days because corn is selling for such a high price. There is a tax credit paid at the fuel terminal and there is a program to pay some of the cost for a gas station to change equipment to pump E85 fuel. Neither of these directly pay anything to farmers. If there are other subsidies, I have not been able to find out about them.

THE factor that is driving the price of ethanol so high right now is the transition from using MTBE in gasoline to replacing it with ethanol. That is driven by the threat of lawsuits. I suppose that you could call the failure of Tom Delay to get protection from lawsuits for MTBE makers and gasoline distributors a subsidy, but at the time, the media was calling the attempt a corrupt sweetheart deal. Without protection from lawsuits, the gasoline companies would have to be insane to use MTBE.

Pirate

Despite the claims that ethanol would evaporate out of gas tanks in Los Angeles faster than ordinary gasoline and exacerbate the southern California smog problem, the fact is that since they started using ethanol in their fuel blend, there have been fewer dangerous smog days per year. When a study predicts one outcome but the opposite thing happens, my tendency is to think that there was something wrong with the original study.

Manish

The increase in the price of Mexican tortillas has more to do with consolidation in the Mexican food industry than increases in the price of American corn. Most of the corn used in Mexican tortillas is grown in Mexico and it costs at least twice as much as American corn. They have politicians there who protect their farmers too.

I am not sure exactly what fraction of the price of Mexican tortillas is due to corn, but in the US, the cost of corn in a box of corn flakes went from $0.04 per box to $0.08 per box. I suspect that the economics are somewhat similar in Mexico.

The main group feeling the pinch from higher corn prices are feed lots and farmers raising animals. They were quite happy when corn was selling for less than $2 per bushel even if corn farmers often lost money on a crop at those prices. This will probably show up in the near term in higher prices for meat. In the longer term, one third of every bushel of corn that is made into ethanol is left over and sold as "brewers grain" for animal feed. It is high in protein and fiber. As more ethanol is produced from corn and more corn is produced to supply the domestic ethanol industry, there will be more brewers grain on the market available as animal feed.

Used cooking oil can only supply a tiny fraction of our transportation fuel needs. There are individuals and communities out there who collect used cooking oil, process it into biodiesel and run their cars on the stuff, but even if every bit of it were used, it could not supply even 1% of our transport fuel needs.