Ethanol: Salvation or Panacea?

The average person does not realize that the amount of corn required to fill a 25-gallon SUV gas tank with ethanol can feed one person for a year.  If the entire U.S. grain harvest were converted into fuel for cars, it would satisfy only about 17% of U.S. demand, according to Fortune Magazine. 

Grain-to-ethanol plants are illegal in China.  With 20% of the world's people, the Chinese see the absurdity of burning a critical food source in automobiles.  In addition to misdirecting the use of valuable food sources in a world populated by so many hungry and starving people, ethanol and bio-diesel fuels make no economic sense.  Ultimately, cellulosic (sawdust, corn stalks, switch grass, etc.) will be good non-food alternative energy sources.    

In addition to consuming large amounts of corn to make ethanol, water shortages are common near ethanol  manufacturing plants as a result of their needing seven gallons of water to make one gallon of ethanol.  Also, in some circles it is often debated that a gallon of ethanol requires more energy to make than it saves.  It doesn’t appear that the ledger is balancing at this time. 

Even with a federal ethanol subsidy of $.51 per gallon and additional farm state subsidies (for example: Minnesota has a $.20 per gallon ethanol subsidies), many ethanol plants are losing money and some older plants are closing due to the lack of demand for ethanol fuel commonly known as E-85. 

Since January 2005, the ethanol industry has nearly doubled its capacity and 73 new ethanol plants are now under construction.  But plans for additional plants have stalled.  In all the critics tabulate that corn ethanol subsidies totaled $7 billion in 2006 with $2.5 billion going to the blenders (blenders are ethanol plants).  Why are so many plants losing money? Raw material cost (corn) has soared in response to ethanol plant demand, at the same time the market price of ethanol has fallen from over $4.00 per gallon in 2006 to less than $2.00 per gallon today because of a current supply glut.  Put simply the demand isn’t quite there yet.  Further stifling demand is a lack of retail distribution.  Ever try to find an gas station that distributes ethanol?  You may know of one or two but you certainly can’t name a dozen.  That’s because there are only a few hundred in the whole country.  To spur buying activity, ethanol is currently priced well below gasoline.   

The Department of Energy has directed $385 million to be spread over the next four to six years to develop cellulose ethanol plants.  Currently $2.5 billion annually is spent by the U.S. government on corn-based ethanol subsidies.  In conclusion, it appears this industry is ahead of itself and it appears that estimates of ethanol usage will fall short of current estimates. 

(Some of the information contained in this article appeared in Leuthold Perception publication – November 2007.)