Tuesday, April 1, 2008

Risk Of President Bush's Ethanol Fuel Program To Common Sense

In his April 2006 Four-Part Plan to Confront High Gasoline Prices, Mr. Bush calls for investment in oil alternatives to dramatically reduce our demand for gasoline. One of his arguments for this was:

“America Is Addicted To Oil, And An Increasing Amount Of The Oil We Need Comes From Foreign Countries. Some of the nations we rely on for oil have unstable governments or agendas hostile to the United States. These countries know we need their oil, and that reduces our influence. We must not allow America to be put at risk by the unfriendly leaders of foreign countries.”

OK, it is true America is addicted to oil. Let’s face the facts: America is addicted to consumption. Period. Be it oil, food, or other consumables, we are one large nation of consumers. President’s proposal consists mainly of the Advanced Energy Initiative (AEI), which calls for reducing gasoline consumption while strengthening our economy, our energy supply, and our national security (OK, let’s buy this contoured argument on national security for a while) through four major initiatives:

  • increasing use of ethanol (from corn and cellulose)
  • Biodiesel fuel
  • improving hybrid vehicles (electric/gas)
  • and develop hydrogen technology
On the surface these are noble ideas of weaning America away from oil but are they effective and realistic? Let’s find out. In this article, let’s examine the first of the four parts of AEI, the ethanol from corn and cellulose. So, with that in mind, let’s examine if President Bush’s proposal makes economic sense.

U.S. Cannot Achieve The E85 Fuel Program Goal
President Bush’s goal is E85, or 85% ethanol, in every gallon of auto fuel. As of July 2007, U.S. consumed 388.6 million gallons of gasoline per day, according to Energy Information Administration (EIA). It takes 1 bushel of corn to make 2.5 gallons of ethanol. Therefore, it will take 56,735.6 million bushels of corn to produce enough ethanol to make enough 85% blended auto fuel to meet the consumption level as at July 2007.

(Side notes: 40% of gasoline used in the U.S. already has approximately 10% ethanol. California is at about 6%, increasing to 10% by 2010.)

In 2007, U.S. produced approximately 14,379.72 million bushels of corn, or enough to meet 25.3% of corn required to produce sufficient ethanol to meet the July 2007 consumption. However, converting all of the corn grown in the U.S. is not feasible since corn is vital to our caloric consumption, directly as corn-based products or indirectly as corn-fed poultry, pork, or beef.

This means that we will have to import the ethanol needed to meet our current gasoline consumption. According to EIA, we are already importing ethanol, mostly from Brazil. In the first five months of 2006, we imported 106.6 thousand barrels of ethanol. Lucky for us that Brazil is a friendly country, so far. However, there is a problem with Brazilian supply of ethanol: they are wholly seasonal so the supply, and price, will fluctuate. Not a very comforting feeling. After all, the 1973 gasoline shortage was due to OPEC stopping their shipment of oil to the U.S. You’d think that we would have learned our lesson then.

Like OPEC in 1973, Brazil can stop their shipment of ethanol to the U.S. Remember: a key point in President Bush’s argument for AEI is national security. Specifically, reducing unfriendly nations having undue influence over the U.S. and, thereby, putting us at risk. Risk of what was not stated but an educated person would conclude that the risk is potential for a foreign country that has the ability to affect our supply of fuel and cripple our economy.

I think when President Bush made this statement, he probably had two countries in mind: Iran and Venezuela. Going back on point: Brazil can stop their shipment of ethanol to the U.S. and can do so when we are very vulnerable. How? Look at Brazil’s recent history. Brazil is linked to Venezuela, a country that taunts President Bush and one of the countries that exports oil to the U.S.:

2007 – Brazil and Venezuela builds new jointly owned oil refinery and establish closer trading relations
2004 – Brazil and Venezuela establishes a “Strategic Alliance” to cooperate on defense, energy projects, and oil.
2001 – Brazil and Venezuela announces commercial cooperation.

Given that Brazil is being influenced by Venezuela, there is a potential for Brazil to stop or slow their exports of ethanol to the U.S. So, even if we go full throttle on ethanol as an alternative fuel to gasoline, there is a potential that we are simply replacing oil with ethanol in our dependency on foreign fuel imports.

How Much Corn Do We Need To Achieve E85 Self-sufficiency?
In 2007, total U.S. production of corn was approximately 14,379.72, grown on 81 million acres. Taking the entire 2007 corn production to make ethanol, the U.S. only able to produce approximately 25.3% of daily consumption of fuel as of July 2007. To be able to achieve 100% self-sufficiency with E85, U.S. needs to grow 56,735.6 million bushels of corn. This means that we would have to expand our farmland by a 394% to approximately 319.6 million acres to grow enough corn. The only problem is that there isn’t enough farmland to do this. Moreover, if we were to start expanding corn plantings, this will have severe negative repercussion on the price of other grains as well as drive farmland prices to mania levels.

U.S. has a total land area of approximately 2.3 billion acres. As of 2002, the top three land uses were forest with 651 million acres (28.8%); grassland, pasture and range with 587 million acres (25.9%); and farmland with 442 million acres (19.5%). Remaining 25.8% of the land uses are urban, roadways, and other infrastructures. Diverting additional 238.6 million acres of farmland to corn planting equals to approximately 10.4% of the land in the U.S. Moreover, since corn is best grown in the plains, we will have limited options: replace current crops to corn or tear down urban infrastructure and go back to being an agrarian society. Both options are not realistic.

Can We Not Rely On Cellulose For Ethanol Production?
What about ethanol produced from cellulose? According to government’s own study, they hope to have the capacity to produce 250 million gallons of cellulose-based ethanol by 2013. Too little; too late. Also, this figure is only a projection based on best-case scenario. Current estimates for cellulose based ethanol process indicates that it takes about 100 million acres of land to grow sufficient switchgrass to produce enough cellulous ethanol to offset approximately 25% of our current oil consumption.

Increase Use Of Ethanol (from Corn and Cellulose) And Biodiesel
Professors David Pimentel and Tad W. Patzek performed an in-depth study in 2005 to assess the economic viability of using ethanol and biodiesel as alternative fuel to gasoline. Their findings were very clear:
  • “Energy outputs from ethanol produced using corn, switchgrass, and wood biomass were each less than the respective fossil energy inputs.
  • The same was true for producing biodiesel using soybeans and sunflower.
  • Findings in terms of energy outputs compared with the energy inputs were:
    • Ethanol production using corn grain required 29% more fossil energy than the ethanol fuel produced.
    • Ethanol production using switchgrass required 50% more fossil energy than the ethanol fuel produced.
    • Ethanol production using wood biomass required 57% more fossil energy than the ethanol fuel produced.
    • Biodiesel production using soybean required 27% more fossil energy than the biodiesel fuel produced
    • Biodiesel production using sunflower required 118% more fossil energy than the biodiesel fuel produced.”
So, using ethanol and biodiesel as alternative fuel to gasoline is not going to get us off foreign oil and the study clearly shows that we may need the current level of oil imports just to make the alternative fuels, unless we want to start burning billions of tons of coals like China.

Common Sense Interpretation Of Bush-speak Reveals The Errors
Bush-speak: AEI will strengthen our economy and energy supply.
Common Sense Interpretation from Energy Information Administration’s Energy and Economic Impacts of Alternative Fuel Source:
  • “…biofuel production generates large supplemental streams of bulky co-products with limited marketability.”
  • ”biodiesel and ethanol cannot be blended at petroleum refineries and batched through existing pipelines…railroad cars and tanker trucks made from biofuel-compatible materials must be used to transport…biofuels to market.”
  • ”…limited rail and truck capacity has complicated the delivery of ethanol and contributed to regional ethanol supply shortages and price spikes, as occurred between April and June 2006.”
  • ”The necessary infrastructure for collecting, processing, and distributing large volumes of biofuels would have to be expanded or, in many cases, created. Without substantial infrastructure investment, it would be difficult or impossible for producers to avoid bottlenecks in the transportation and delivery of biofuels to market.”
  • ”…biofuels production to reach approximately 65 billion gallons by 2025, could require more than 25 billion gallons of corn-based ethanol and 25 billion gallons of cellulosic ethanol, a technology that is not commercially available at present.”
  • ”It could also require a roughly 8-fold increase in ethanol imports…”
  • ”…domestic corn and soybean prices could increase dramatically from current levels, significantly increasing domestic prices for food and feed...”
  • ”Moreover, the competition for arable land that would result from increased corn production at the levels needed…could significantly raise all food and feed prices in the United States.”
  • ” It is not clear that sufficient land resources would be available for large-scale expansion of corn and soybean cultivation, given the intense competition with conventional agricultural products for arable land.”
  • ” Surging demand for biofuel feedstocks under the RFS policy would exert upward price pressure on corn and soybean commodities and influence the markets for food, feed, industrial feedstocks, and exports.”
  • ” Ten pounds of crude glycerol is generated as a co-product for every 100 pounds of biodiesel, and the glycerol generated from 300 to 600 million gallons of biodiesel production per year would be equal to nearly one-half of the current glycerol market in North America, causing a substantial oversupply and depressing prices.”
  • ” While it is expected that both technologies—advanced biomass generation and cellulosic ethanol production—will be feasible, their actual costs, performance, and first dates of commercial availabilities are uncertain, because no such commercial plants exist at present.”
  • By all metrics, the proposed increase in ethanol as a substitute to fossil fuel will reduce the GDP, increase inflation, lower disposable income, reduce industrial output, and reduce consumption.
Summation Of The Risks
  • Risk of increasing commodities prices
  • Risk of increasing the volatility commodities prices
  • Risk of increasing the inflationary rate of food and animal feedstock
  • Risk of increasing our dependency on imports of fuel
  • Risk of increasing biomass waste that needs to be disposed of properly
  • Risk of substantially inflating farmland prices
  • Risk of reducing economic growth
  • Risk of sporadic fuel shortage from inadequate transportation system to bring ethanol to the users
  • Risk of turning our breadbasket into an industrial ethanol production sprawl
  • Risk of causing another “Dust Bowl” since corn does not root deeply and drains nutrients from the soil
Conclusion
I am fully for developing and using alternative fuel sources. So, don’t take this as a knock on AEI initiative. Rather, I am appalled by the lack of strategic planning by the current administration on all matters of domestic and foreign policies. Due to the lack of strategic planning, we are now at the point of having created inflationary pressures on food prices and farmland prices without any material benefit.

So to console myself, I look forward to an episode of Invention Nation (IN) on the Science Channel. At least, these guys at IN are trying to do something practical about alternative energy sources.

Regards,
Ed Kim
riskyops.blogspot.com
DISCLOSURE: The author holds long positions in oil refineries at this time.
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