Posted by: bmeverett | April 10, 2013

Our Alcoholic Energy Policy

Environmentalists like to say that the United States is “addicted to oil.” This metaphor is quite wrong. An addiction is a compulsion to use a product which makes us feel better but reduces our ability to function. We use oil because it gives us mobility – something of enormous value to the average person. The attempts of the environmental community to demonstrate an unacceptable downside to petroleum use have been a case of serial failure: peak oil, urban air quality, peak oil again and now climate change. Our use of ethanol as a gasoline supplement seems a much better candidate for the addiction analogy: it does nothing useful for us, has severe side effects, and we can’t stop using it.

First and foremost, ethanol is expensive. Here’s the math. The US currently uses about 135 billion gallons per year of gasoline. Ethanol contains only about two-thirds as much energy as gasoline, so it takes three gallons of ethanol to replace two gallons of gasoline. In 2011, the US harvested 12.4 billion bushels of corn from 84 million acres. Ethanol plants can produce about 2.8 gallons of ethanol per bushel of corn. If the entire US corn crop were converted to ethanol, the total output would be 35 billion gallons, equivalent to 23 billion gallons of gasoline or about 17% of US gasoline demand. US corn production is 36% of the world’s total, so diversion for ethanol use takes a major bite out of world food supply.

We should note that ethanol plants use the starch in the corn to produce a byproduct called “distiller’s grain” from the residual protein and fat. Distiller’s grain, however, is an inferior product used for animal feed and cannot be used for direct human consumption.

Today’s wholesale ethanol price is $2.50 per gallon, equivalent to $3.75 per gallon of gasoline. Today’s wholesale price of reformulated gasoline excluding the ethanol (known in the industry as RBOB) is $2.95, so consumers pay an additional $0.80 per gallon for ethanol or about $18.5 billion in 2011.

There are also significant indirect costs to ethanol. Ethanol production began in earnest in the US around the year 2000. Since that time, corn prices have more than tripled from $1.96/bushel in 2000 to the current level of over $7/bushel. Some of the increase is due to the current severe drought, but let’s say half of the corn price increase, or $2.50/bushel, is attributable to mandated ethanol production. That means that consumers pay $18.5 billion dollars more for the 60% of the corn crop that went into food rather than fuel.

If we add these two costs together, American consumers are paying an additional $37 billion per year for ethanol or an extra $1.60 for every gallon of gasoline displaced by ethanol. So what do we get for all this money?

Ethanol started as an environmental policy. In the 1990 amendments to the Clean Air Act, the EPA defined areas in the United States – mainly large cities – as “non-attainment” areas where air quality standards had not been met. In these areas, the EPA required the phase-in of a special blend of gasoline called “reformulated gasoline” or RFG. Among the specifications for RFG was the inclusion of an oxygenated compound, in other words a hydrocarbon that contained one or more oxygen atoms, on the theory that additional oxygen would make the gasoline burn more cleanly. This contention has always been controversial, but it became law. The two primary oxygenates available were methyl tertiary butyl ether (C5H12O), also called MTBE and ethanol (C2H6O). By the middle of the 2000s, most states had banned MTBE because, although it carries no known health risks, it smells awful and can get into the water supply. Ethanol, the remaining oxygenate option, was too expensive to penetrate fuel markets on its own, so the federal government gave it generous subsidies to ensure its large-scale use. Although the explicit subsidies have been removed, federal law still requires the blending of increasing amounts of ethanol into the nation’s gasoline supply.

The ability of ethanol to improve engine performance has always been questionable. It’s interesting to note that most of the published reports defending ethanol claim it has important environmental benefits in “older” engines – an acknowledgement that modern automobile engines derive little if any benefit from the use of oxygenates.

Ethanol does have higher octane – between 110 and 115 compared to 87 for regular gasoline and 93 for premium. Ethanol supporters often point to the use of high ethanol blends in racing cars and tout this quality as though it’s a benefit for your engine. It’s not. Octane measures the propensity of the fuel to pre-ignite (also called “knocking” or “pinging”). High compression-ratio engines, such as those used in racing cars, require higher-octane fuels because the pistons create higher temperatures in the cylinder, thus increasing the tendency to pre-ignite. If your car engine is designed for regular gasoline, however, higher octane has no benefit.

How about greenhouse gases? Ethanol is often portrayed as inherently carbon-neutral since the carbon released to the atmosphere when the ethanol is burned is reabsorbed in the next corn crop. This oversimplistic view, however, ignores the considerable amount of energy used to grow the crops (fertilizer, tractors, etc.), harvest the corn, transport it to market, distill it into alcohol, transport the ethanol and then blend it into gasoline. Calculating the net carbon impact of ethanol is complicated. For example, how do we account for marginal cropland that would have remained unused had corn prices not risen so dramatically. If left idle, cropland, particularly near forested area, would gradually grow trees and other wild plants, absorbing a considerable amount of carbon over time. Should this “unabsorbed” carbon be included in the overall calculation? How about the distiller’s grain byproduct? Should some carbon emissions be attributed to the byproducts of distillation?

The 2007 Energy Independence and Security Act (EISA) requires that ethanol carry at least a 20% carbon benefit versus gasoline, but does not specify how that benefit is to be calculated or what happens if the requirement is not met. The Department of Energy’s Argonne National Laboratory, for example, recently concluded that corn-based ethanol reduced total carbon emissions by 19-48% relative to gasoline. In other words, corn-based ethanol either just meets the requirement or fails dismally, depending on how it’s produced. Opponents of ethanol, such as the Natural Resources Defense Council, claim that ethanol causes more carbon emissions than it saves.

Beyond these highly questionable benefits, ethanol also has some real drawbacks. As noted above, ethanol contains only two-thirds the energy content of gasoline. Therefore, blending ethanol into gasoline reduces the vehicle’s range and requires the driver to stop more frequently to buy fuel.

There is also a major controversy about the corrosive effects of ethanol. Alcohols in general cause more corrosion than pure gasoline. So-called “flex-fuel” cars use special materials and lubricants in the engine and fuel systems to reduce this corrosion, but many people believe that regular cars, and particularly marine engines, incur damage from ethanol blends.

Whatever the cost-benefit balance, the current federal ethanol policy is causing a lot of problems. The 2007 EISA required that ethanol blending in the gasoline pool increase from 4 billion gallons in 2006 to 33 billion gallons in 2020. The first problem is where to get all this ethanol. If we use corn as the feedstock, we need the entire US corn crop by the year 2022. Recognizing this problem, the law specifies that a maximum of 15 billion gallons out of the total 36 should come from corn. Another 16 billion gallons should come from the use of cellulosic feedstocks and the rest from other kinds of biofuels. Cellulosic ethanol is a much more complex process using wood, cornstalks and cobs, wheat straw and other waste materials. It’s much harder and more expensive to make ethanol this way, so the federal government simply directed that it would happen by phasing in the mandate, starting with very small amounts in the years 2010-2014 and then ramping up quickly thereafter. The problem is that there is no commercially viable method for making cellulosic ethanol, putting the oil companies in the interesting position of paying fines for failing to procure a product that doesn’t exist.

The second problem is the unexpected leveling off of gasoline demand in the US. The Energy Information Administration’s projections of US energy demand made in 2006 concluded that gasoline demand would increase continuously at 1-2% per year as the population grew and spread out across the country. The reality has been quite different. Increasing prices and constant improvements in vehicle efficiency caused gasoline demand to peak in 2007 and begin to decline at about 1% per year. The EIA now projects a continuation of this trend out into the future. This decline is, of course, what everyone always wanted, but it makes ethanol blending difficult. The mandated ethanol volumes were supposed to hit 10% of gasoline demand this year and 20% by 2022. In fact, the current blending requirement is 12½% this year, rising to nearly 30% by 2022.

So far, ethanol has been accommodated primarily by using a blend called E10, which is 90% gasoline and 10% ethanol. We are now at the point where the required ethanol volumes cannot be accommodated in this way. For a number of years, ethanol proponents have been pushing an E85 blend (15% gasoline and 85% ethanol), which can soak up a lot of ethanol, but can only be used in specially manufactured “flex-fuel” cars. E85 also requires separate fuel pumps and storage tanks at service stations, a costly requirement the oil industry has understandably opposed. E85 would carry a serious range debit. E10 reduces vehicle mileage by about 3% (a one-third debit on 10% of the fuel), but E85 reduces mileage by 27%, likely to be a real inconvenience to motorists.

In one of the worst energy policy decisions in recent memory (and that’s a mark of real distinction), the Environmental Protection Agency (EPA) has begun to allow the use of E15 (85% gasoline, 15% ethanol). The EPA claims it is just responding to “requests for waivers” of Clean Air Act requirements, but in fact authorizing E15 blends is the only way that the gasoline pool can accommodate the required amounts of ethanol. E15 is no problem for flex-fuel vehicles, but the automobile manufacturers are screaming about the potential damage E15 blends might do to regular vehicles. In fact, several of the car companies have indicated that using E15 would void the vehicle’s warranty. Here’s a really nice potential situation: the federal government may require you to use a fuel that will cost you more money, offer no clear environmental benefits, raise food prices and now perhaps damage your car. Why?

The answer is depressing. The ethanol industry may find its origins in energy policy, but it is now no more than a farm subsidy. You may not like ethanol, but corn farmers really love it. Imagine a government policy that triples your income and makes your land much more valuable without your needing to do anything. Even as we discover more and more drawbacks and fewer benefits from ethanol, its constituency has become so entrenched and powerful that we are stuck with this mess. If ethanol were a policy promoted by the Democratic Party but opposed by the Republicans, we might see some hope for a change if the Republicans could regain power. No such luck. Six states (Iowa, Illinois, Nebraska, Minnesota, Indiana and South Dakota) produce 70% of our corn crop. These states have 12 powerful senators – six Republicans and six Democrats. These senators will prevent any effort to cut back on this disastrous program which has shifted so much money from you to their constituents. This process is not helped by the early Iowa caucuses where any presidential candidate of either party must support ethanol to have any chance of surviving this critical step in the election process. Some writers have called this “worshipping at the ethanol altar”. Conservative principles rarely trump constituent interest.

There are numerous reasons to avoid heavily subsidized industries, like ethanol, wind and solar. The first is that they are inefficient and drain capital from more productive uses. The second is that they often create constituencies so powerful we can never get rid of these programs once their poor results are evident. Sorry, but we are now addicted to alcohol.


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