THE POWER OF POWER: Corn-Fed Fuel

It’s difficult to fault the motives of those on either side of the ethanol divide.

Critics are genuinely concerned about diverting croplands from food to fuel and the effect such a shift has on the economy and environment. Many worry about subsidies that are fueling the ethanol boom.

Ethanol enthusiasts, on the other hand, are motivated by a sincere desire to provide relief at the gas pump and help the United States expand its energy options. Many believe ethanol offers a green alternative to fossil fuels.

Whatever the motives, one thing is certain: Washington’s bear-hug embrace of ethanol is changing America’s landscape, figuratively and literally.

 

The “New Gasoline.” In the United States, 95 percent of ethanol is derived from corn. Elsewhere, as in Brazil, it comes from sugar cane.

The Clean Fuels Development Coalition (CFDC) claims that for every barrel of ethanol produced, “1.2 barrels of petroleum is displaced at the refinery.” A Congressional Research Service (CRS) report explains that when blended with gasoline, ethanol can, under the right conditions, reduce emissions and extend gasoline supplies. Ethanol can even be used “as an alternative to gasoline in automobiles specially designed for its use,” CRS adds.

According to studies published by CFDC, ethanol also cuts down on “tailpipe carbon-monoxide emissions by as much as 30 percent.” Citing studies by Iowa State University and Merrill Lynch, the American Coalition for Ethanol argues that “the growth in ethanol production has caused retail gas prices to be 29 to 40 cents a gallon lower than would otherwise have been the case” and that “oil and gas prices would be 15 percent higher, if not for the availability of ethanol.”

This wonder fuel, however, comes with its share of caveats. “Since ethanol has a somewhat lower energy content than gasoline per gallon, more fuel is required to travel the same distance,” CRS reports. Also, more water is required to produce ethanol than gasoline. Not only is corn a water-intensive crop, but ethanol-production facilities need huge amounts of water to pump out ethanol, something the city of Tampa, Fla., learned when U.S. EnviroFuels announced plans to build a plant at the port there. The St. Petersburg Times reported in 2007 that the company told Tampa officials it would need 400,000 gallons of water a day.

“A modern ethanol plant uses about three gallons of water to produce one gallon of ethanol,” according to the report, which estimated that by the end of 2008, the demand from new ethanol plants in the United States would require “a 254?percent increase in the volume of water used by the industry over the previous decade.”

Ethanol’s voracious appetite for water is not its only environmental side effect. New research suggests that if the land is not already under cultivation, converting it into corn or other ethanol-ready crops can actually increase greenhouse-gas emissions, since the conversion itself can release large amounts of carbon dioxide into the air.

There are also distribution drawbacks. A CRS survey found that E85, a popular kind of ethanol with a very high ethanol-to-gasoline ratio, has limited availability. In 2006, for instance, only 556 filling stations offered E85 nationwide, compared to 120,000 that offered conventional gasoline.

Even as the number of E85 stations grows, national distribution obviously is a long way off. Indeed, 65 percent of the E85-equipped stations are found in Iowa, Nebraska, Illinois, Minnesota and South Dakota. Not surprisingly, most of the country’s 131 ethanol plants are clustered in and around these states – far away from the more congested traffic centers on the coasts. It’s important to remember that ethanol cannot be transported via gasoline pipeline. Since trucking ethanol to the coasts would undermine its energy-saving goals, and building ethanol plants closer to the coasts could exacerbate water shortages, ethanol doesn’t seem to be an ideal answer for the thirsty cities in the western United States.

The most nagging question about ethanol remains an economic one. Ethanol has been aided – some would say propped up – by subsidies dating back three decades. In fact, the first significant ethanol subsidy at the federal level was a $60 million loan program passed in 1977. Its entry into the mainstream energy industry has always enjoyed support from friends in high places:

  • President Carter hailed his “gasohol program” as a way to “spur the investments that we, together, must make for a more secure energy future.”

 

  • President Reagan boasted about how his first-term policies increased ethanol production from 75 million gallons to over 450 million gallons.

 

  • President Clinton argued that “ethanol production increases farm income ... and reduces America’s reliance on foreign oil.”

 

  • President George W. Bush trumpeted his administration’s role in boosting ethanol production to the point that “in 2005, the United States became the world’s leading ethanol producer.”

 

  • President Barack Obama argues ethanol “ultimately helps our national security, because right now we’re sending billions of dollars to some of the most hostile nations on earth.”

 

Ethanol has cost $25.6 billion in federal subsidies. Today, subsidies for bio-fuels run as high $7.3 billion per year. “The market for ethanol fuel is heavily dependent on federal incentives and regulations,” according to the CRS report. A federal tax credit of 51 cents per gallon, for example, allows producers to bring costs in line with gasoline. This helps create what critics call an “artificial demand for ethanol.”

Thomas Elam, an agriculture economist with FarmEcon, concludes that “federal support policy has significantly increased the attractiveness of ethanol and biodiesel production to levels well beyond that furnished by market forces alone.”

Of course, many other U.S. industries benefit from government subsidies. The oil industry, for instance, has enjoyed an estimated $150 billion in tax breaks in the past four decades. However, as Jerry Taylor and Peter Van Doren of the Cato Institute observe, petroleum subsidies today are less than $1 billion annually, “six to eight times less than ethanol subsidies.”

The burgeoning U.S. ethanol industry is also aided by tariffs and duties on foreign ethanol. A tariff on Brazilian ethanol has been in place since 1980. In the understated words of the CRS report, a duty of 54 cents per gallon “has been a significant barrier to ethanol imports.”

“This means consumers are paying twice,” says Diane Katz, director of risk, environment and energy policy at the Fraser Institute. “First, they’re subsidizing domestic ethanol, and second, they’re being denied cheaper ethanol from abroad.”

On the strength of tax incentives and subsidies, ethanol production quadrupled between 2000 and 2006. In 2007, the United States pumped almost 7 billion gallons of ethanol, and that number is certain to grow. The Energy Independence and Security Act of 2007 mandates the production of 36 billion gallons of renewable fuel by 2020.

 

Unintended Consequences The rising – and artificial – demand for ethanol has had a ripple effect beyond the filling station. Spurred by government intervention, farmers are planting more corn and selling it for ethanol production. About a quarter of the corn crop was converted to ethanol in 2007. According to The Economist, “This year, America’s maize harvest will be a jaw-dropping 335 million (metric tons), beating last year’s by more than a quarter. The increase has been achieved partly at the expense of other food crops.”  

It is worth noting that, in 1981, U.S. farmers planted 88 million acres of wheat; this year they will plant just 64 million acres.

Most observers believe changes in planting and usage patterns have contributed to an increase in beef, pork and poultry prices, since cows, hogs and chickens depend on corn feed. The Grocery Manufacturers Association reports that in the past three years: egg prices are up 69 percent, milk prices are up 22 percent, ground beef prices are up 10 percent, chicken prices are up 12 percent, and bread prices are up 35 percent.

Some blame rising transportation costs for these increases, but Robert Murphy of the Institute for Energy Research argues that “defenders of bio-fuel mandates are exaggerating the role energy prices have played in the recent spikes” and ignoring “the obvious impact of a policy that requires nearly 20 percent of the corn crop to be diverted for use in motor fuels.”

Ethanol is not the only culprit for the greatest wave of food inflation in decades. Droughts in Australia, floods in the U.S. Midwest, energy costs, and changing diets in India and China also get some of the blame.

However, by inducing farmers to grow corn for ethanol and mandating energy suppliers to produce ethanol, Washington has created a case study in the law of unintended consequences.

Alan W. Dowd is a senior fellow with the Fraser Institute and a contributing editor for The American Legion Magazine.

 

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