Investing in Ethanol

Investing in Ethanol

By David Fessler, Energy Infrastructure Specialist

“You can’t make a silk purse from a sow’s ear,” as the old 16^th century saying goes.

Translation: You can dress something up but it doesn’t change what it is. Or in the case of bio-ethanol fuel, what it isn’t.

But “putting lipstick on a pig” (a more recent adage) is exactly what ethanol fuel advocates continue to do. I coined the term “Greendoggle” to describe the environmental travesty that’s happening in the bio-fuel sector.

Please don’t misunderstand. I’m excited about all forms of energy: fossil fuels, renewables, and nuclear. My primary interest – and I believe that of most Americans – is to see us get off of Middle East oil in my lifetime.

Moving towards renewables like wind, solar and geothermal make all the sense in the world. Nuclear – in spite of the spent fuel storage issue – is also a viable means of weaning ourselves off of imported oil.

So is domestic natural gas. The U.S. is blessed with a 100-year supply, making it the keeper of the second biggest reserves in the world.

But ethanol fuel isn’t viable. Not at all. Even with its high levels of greenhouse gas emissions, burning coal represents a better solution than ethanol… especially when all the detrimental factors of bio-ethanol are considered.

Who in their right mind would think that taking the world’s primary food stocks (corn, wheat and rice) and turning them into fuel, makes any sense at all?

What are these people thinking?

Let’s take a deeper look. You can draw your own conclusions.

Ethanol’s Big Start Out of the Gate

Five years ago, bio-fuels like bio-ethanol, bio-diesel and bio-gasoline were billed as America’s solution to imported oil. Dwindling supplies of crude, rising prices and increasing worldwide demand drove prices skyward.

America had to do something.

In the move towards renewable energy sources – solar, wind and geothermal – the idea of bio-fuels was also starting to catch fire.

According to the Green argument, carbon produced from bio-ethanol is better than the carbon produced from fossil fuels because it is offset by carbon absorbed when plants (the fuel) are grown.

On the surface, bio-ethanol seemed like a great renewable energy idea. The ethanol race was on. The problem was that America was way behind other countries when it came to bio-ethanol. Something had to be done to catch up.

Washington’s so-called brain trust swung into action. Congress passed a law mandating an annual bio-ethanol production figure of 35 billion gallons per year by 2017.

To kick start the program and ensure its success, the Capital Hill gang threw in a 51 cent-a-gallon subsidy to the producers. Bio-diesel producers received even more: $1 for every gallon produced.

It was a boon to the American farmer. Now he could finally make some real money. Jumping for joy, he threw his crop rotation plans out the window. Now he only had to plant one thing: corn.

In keeping with the hype, everyone started talking about “ethanol corn.” Overnight, feed corn became so yesterday.

Bio-ethanol production plants began sprouting across the Midwest nearly as fast as the corn crop. Their numbers exploded from 50 to 140 in the eight-year period from 2000-2008. Sixty more were under construction. Even more were on the drawing boards.

It seemed as though America’s solution to the imported oil problem was here all along. Right in the dirt at our feet.

Bio-ethanol Reality Check

As farmers shifted their fields to ethanol corn, consumers started to notice a funny thing: Just about every food made with corn was on the rise.

Food producers all of a sudden found themselves paying 3-4 times what they were paying for corn just a few years before. So they did what any savvy businessman would do: Pass increases in raw materials along to the customer.

Similarly, aid organizations were forced to cut their food donations by 50% or more in some cases. Due to the rising price for corn, soybeans, wheat and rice were all in short supply, causing their prices to rise, too.

Silly politicians. They conveniently (stupidly?) overlooked a few key details in their quest for energy independence.

For instance, a 2006 editorial in the Wall Street Journal stated, “Cornell’s David Pimental and Berkeley’s Ted Patzek found that it takes more than a gallon of fossil fuel to make one gallon of ethanol — 29% more.

“That’s because it takes enormous amounts of fossil-fuel energy to grow corn (using fertilizer and irrigation), to transport the crops, and then to turn that corn into ethanol.”

Another study conducted by the University of Minnesota in 2008 was even more sobering. “Converting forests, peat lands, savannas, or grasslands to produce food-based bio-fuels in Brazil, Southeast Asia, and the United States creates a huge bio-fuel carbon debt.

When land-use changes are taken into account, 17 to 420 times more CO₂ is released than the reductions gained when these bio-fuels displace fossil fuels.”

As the demand for corn and other bio-fuel stocks continued to soar, farmers just started planting corn every year, ignoring a century’s worth of data on the benefits of crop rotation.

This meant soybeans had to be grown elsewhere. That elsewhere turned out to be Brazil, which would have been fine except for one little problem… The large-scale deforestation underway in the Amazon Basin (to increase the available land for soybean production) just adds to the insanity of ethanol.

In Sumatra and Borneo, nearly 10 million acres of forest have been burned to create fields for palm oil plantations for bio-fuel. In Malaysia and Indonesia, 25 million acres of prime forest are scheduled to be cleared.

There are two things wrong with this. First, burning the forest produces 93 times the greenhouse gases that burning the fuel produced on them would.

Second, the trees that once stood on the land are nearly twice as efficient absorbers of CO2 than the palm plants grown for fuel stock.

I could go on, but we don’t have nearly enough space to cover the other impacts from increased water use, fertilizers, pesticides, and erosion. We can only hope that saner heads will prevail in the future.

Good Investing,

Dave Fessler