The Ethanol Lobby: Profits vs. Food

If you had two customers for the same product and one paid more than the other, which customer would you choose? That's the situation in which ethanol producers in the U.S. find themselves. They could grow corn and other crops for food and get one price, or produce the same crops for biofuel and get a higher price and tax credits. The problem is that by focusing on more profitable biofuels, farmers not only deplete the food supply, they are also producing an alternative fuel whose usefulness is still hotly debated.

Last year 17 billion gallons of biofuels were created and used worldwide. The previous year 100 million tons of grain had been turned into biofuels. According to Ronald Bailey at Reason magazine, enough food was turned into fuel for our vehicles in 2007 to feed 450 million people for a year.

On Apr. 10 this year the Congressional Budget Office published a report saying that "Higher use of the corn-based fuel additive accounted for about 10% to 15% of the rise in food prices between April 2007 and April 2008." That's just for one year.

Ethanol use has much more impact on prices of foods directly connected to corn, whether it be Kellogg's Corn Flakes or beef from the butcher's department at your local grocery store. An especially alarming CBO statistic shows another hidden cost of ethanol: Increased food prices could cost Americans $900 million more for food stamps and nutritional programs for children.

Growing crops for fuel also carries a serious environmental cost. Last month the International Council for Science released a new study, which in turn validated work from 2007 by Paul Crutzen at Germany's Max Planck Institute for Chemistry. These studies show that the amount of nitrous oxide released as a result of farming corn or rape for biofuels had been underestimated by a factor of 3 to 5 times. Nitrous oxide is a greenhouse gas 300 times more potent than carbon dioxide. That inconvenient truth negates any savings from so-called carbon neutral fuels.

Save the Rainforests: Avoid Ethanol!

But let's look at the claim that using biofuels lowers overall carbon dioxide emissions. Essentially it isn't true.

Take Brazil. The region around São Paulo is their main ethanol production center. It was once a major center for cattle ranching, but the ranchers have often been supplanted by sugar cane plantations, whose proximity to the city make them efficient producers of ethanol for the urban market. Cattle and other agriculture have been pushed farther west, requiring that large patches of the Amazon rainforest be cleared. Yes, the world's greatest natural carbon dioxide trap, the Amazon rainforest, is being cut down so the world can have all the ethanol it thinks it needs.But ethanol isn't the No.1 fuel in Brazil either: It's diesel.

According to a Time magazine article from March 2008, not only does deforestation create 20% of the world's current carbon emissions, but in the second half of 2007 alone an area the size of Rhode Island was cleared from the Amazon forest. That year a study in Science magazine stated that when you take deforestation into account, ethanol and biodiesel produce twice as much carbon dioxide emissions as regular gasoline.

The Time article also covered the 2003 study at the University of Minnesota, which found that the increased use of biofuels would double the amount of hunger in the world by 2025, to 1.2 billion people.

Killing the Gulf's Wildlife

The damage doesn't stop there. A 2008 study by Simon Donner of the University of British Columbia and Chris Kucharik of the University of Wisconsin-Madison shows that the increased use of fertilizers required by additional corn production due to ethanol will widely increase the dead zone in the Gulf of Mexico. That is because the runoff from farms throughout the Midwest feeds into the Mississippi's tributaries to the Gulf.

Corn growing and ethanol production also raise issues about water use. Recently the University of Minnesota concluded that the amount of water needed to grow corn for ethanol varied widely, from 1.3 to 565 gallons per gallon of ethanol made—in Western states such as Nebraska, Colorado and California corn crops must be irrigated. In Mercer County, Ohio, residents banded together to stop a $125 million, 50-million-gallon ethanol refinery from being built after they found out that the proposed refinery was going to dump 300 million gallons of wastewater a year into nearby Grand Lake St. Marys.

It is a combination of these issues that keep biofuels from being widely touted by serious environmental groups. It's referred to as green energy only by those selling ethanol to Congress, which in turn forces it on the public by mandate.

Lead by Example

The real problem with ethanol is that in spite of the full court press and misinformation campaign put out by the various lobbying groups that insist this is the cure all to our energy problems, the fact is they don't really believe in the product themselves. Take Indiana, for instance. Indiana is the fifth-largest grower of corn for the nation, according to recent government figures, yet states that they only have 124 pumps selling E85 ethanol in the entire state. It gets worse.

On Mar. 10 of this year the Indiana Economic Digest published an article, "E85 Sales Fizzle in Wake of Low Gasoline Prices." Phillip Lampert, director of the National Ethanol Vehicle Coalition, was quoted in that article: "Sales of E85 are down across the country." Bummer. Nobody wants to buy E85. Of course, Indiana can't hold a candle to Nebraska, whose corn production is almost 50% higher. Nebraska, whose slogan is "Possibilities…Endless" apparently doesn't feel that way about the state's residents using E85 ethanol. To this day only 58 pumps in the entire state of Nebraska pump E85. These groups sincerely believe in the future for ethanol—as long as it's someone else forced to buy it.

Still, in spite of all the downsides to biofuels, there is a way to make ethanol work, reduce America's dependence on oil, and help mitigate the gasoline shortfall that could well come our way by 2015: Simply sell the fuel where it's made.

Ethanol can't be put into gasoline pipelines and shipped across the country because of its propensity to attract moisture, so it has to be sent by truck, train, or barge. So don't ship it anywhere: Think of the incredible energy savings we would achieve by not shipping ethanol all over the country. No diesel needed for any long-distance travel, no energy wasted by local distributors to add it into real gasoline for everyone's use.

Instead, alter the government mandate so that all ethanol has to be sold as an E85 blend within 75-100 miles of the refinery that made it. The upside to this plan is that it would free up gasoline for the rest of the nation, and save more by reducing the energy needed to transport as much oil and gas to the Midwest. This energy-efficient plan would likely save most of America a few cents per gallon on gas.

The car companies could simply sell their E85 Flex-Fuel vehicles in nearby counties in which ethanol refineries exist. The brilliance of the plan lies in its simplicity and obvious energy savings for the nation by keeping ethanol in regions in which it's produced. It's the obvious answer. The people who tell us ethanol is wonderful would become the people who have to use ethanol. What could be fairer?

The "Truthiness" Test

If one seriously believes that ethanol is the answer to our oil problems, our other option is to get into the ethanol business in a big way. Or to engage in real free trade. That means we must immediately drop the 51-¢-per-gallon blending credit for ethanol creation in America and drop the 54-¢-per-gallon tariff on imported Brazilian ethanol. This would allow much cheaper and more energy-efficient sugar cane ethanol to be sold in gasoline at least in coastal cities, again saving the energy needed to ship ethanol across the country.

Here are two great ways to enhance our energy security with ethanol. Neither one will change the environmental impact of using this fuel, nor will either reduce the costs of certain foodstuffs. But if the ethanol lobby puts their full lobbying pressure behind these plans, then we will know they sincerely believe in their product.

If they resist selling ethanol only where it's refined, or block the cessation of blending credits and won't budge on import tariffs, then we'll know they don't really believe in ethanol—they're only in it for the money.

Wonder which way they will go?

Before it's here, it's on the Bloomberg Terminal.