Ethanol in the USA

23 Jan 06

[Here's a link to the comments below]

Adopting ethanol will be a complex undertaking. If this new fuel succeeds in the US, it will be because of significant change across three major industries – ethanol producers, gas retailers, and vehicle manufacturers. Of the three, the producers and vehicle manufacturers have strong incentives to push for increased ethanol use. Gas retailers, on the other hand, run the risk of losing money by installing ethanol pumps.

Ethanol production is increasing

Corn Cob Bob, mascot of the North American ethanol industry

When oil prices are high, ethanol plants generate significant profits. Current oil price levels are stimulating a great deal of new activity in building new ethanol processing plants. In Iowa, for example, the number of ethanol producing plants will increase by more than forty percent from 2005 to 2006, according to The New York Times.

Flex-fuel vehicle production is increasing

GM and Ford together plan to produce 650,000 flex-fuel vehicles in 2006. As Ford CEO Bill Ford noted:

“Ford has produced flexible fuel vehicles for over a decade now, with more than a million on the road. Our introduction of four new models—producing up to 250,000 in 2006—reinforces our commitment.”

Bill Ford, in a speech to Ford Employees, Sep 2005

Limited retail availability of ethanol

Of the more than 180,000 gas stations in the US, ethanol is now available at about 600 of them. The map below pinpoints every ethanol filling station now in existence in the US:

Src: Wall Street Journal

Ethanol gas stations in the US, 2006

If you live in the Northeast, in Florida, or in most of California, and want to use ethanol, you’re out of luck. There is no place for you to buy fuel.

Gas stations do not have clear economic reasons to provide ethanol. For gas stations owned by integrated oil companies, a switch to ethanol would reduce oil revenues, so they tend to resist it.

For independent gas stations the calculation is trickier. If there aren’t many flex-fuel customers, ethanol conversion would reduce the station’s revenues. However, as the number of flex-fuel vehicles increase, a gas station’s sales could rise if it is one of a few suppliers of ethanol in an area. For example, according to The New York Times, one gas station owner in Indiana reported a 14-fold increase in pump volume when he switched one of his station’s pumps from premium gasoline to ethanol.

The auto manufacturers are encouraging conversion of gas stations to Ethanol. Ford has entered into an agreement with South Dakota-based ethanol producer VeraSun Energy Corporation to convert more existing fuel pumps to ethanol. Phillip Lampert, executive director of the National Ethanol Vehicle Coalition, a group that promotes ethanol use, told The Wall Street Journal that the number of gas stations that provide ethanol could increase four-fold in 2006. Even with this increase, the fundamental problem of retail availability remains – only about 1 in 1000 gas stations would provide ethanol.

“Toyota doesn't believe that corn-based ethanol is an environmentally friendly or sustainable solution.”

Bill Reinert, national mngr of advanced tech’y for Toyota U.S., in The Wall Street Journal

Toyota is not alone in its concern. Ethanol demand is driving higher prices for corn, which concerns commentators like Lester Brown of the Earth Policy Institute.

“We're putting the supermarket in competition with the corner filling station for the output of the farm … the result is that more people will go hungry.”

Lester Brown, President of the Earth Policy Institute, in The New York Times

Most experts disagree with Lester Brown. The US currently has more corn acreage than corn demand.

“The United States is paying farmers not to grow crops on 35 million acres, to prop up the value of corn. Much of that land could come back into production.”

Keith J. Collins, chief economist of the Department of Agriculture, in The New York Times

What seems clear, however, is that as ethanol production increases in the US, corn prices and corn production will become increasingly linked to the price of oil.

Ethanol is a limited and imperfect substitute for gasoline. At its best, as in Brazil, it can reduce the growth in demand for oil.

But it is also a transitional fuel. The changes in fuel retailing, for example, represent a first step away from petroleum. They introduce new suppliers into an industry whose operations and structure have been little changed for almost 100 years. In doing so, they may make future changes and transitions (to hydrogen, for example) a little bit easier.

More Information:

Here’s a listing of Flexible Fuel Vehicles available for purchase in the US.
Ford, GM promoting flex-fuel vehicles; article in The Wall Street Journal, 10 Jan 2006.
New York Times 16 Jan 06 story on corn for food or fuel.
Ford expands flex fuel efforts in US and Europe, link to Ford Press Release of 5 Nov 05.
Last week’s update on Brazil’s success with Ethanol.
I wrote an update on E-85 in September 2005.

Ethanol comments

1. What about the allegations that it takes more energy to produce a gallon of ethanol that that gallon puts out when burned as fuel? Is that no longer the case?

http://journeytoforever.org/ethanol_energy.html

http://news.minnesota.publicradio.org/features/2005/03/21_steilm_ethanolenergy/

2. I realize that these are highly abbreviated "sound bite" notes, but I think you missed the main environmental issue with ethanol, namely that the all-in energy cost of its production (which generally comes from fossil fuels) is greater than its energy content. So to identify it as a renewable resource is pretty misleading (you didn't, but you hinted at it at the end). If not for the massive subsidies paid to corn growers, plus tax benefits for "renewable" fuels, ethanol would cost far more per energy unit than gasoline at the pump and be totally uncompetitive.

(Hydrogen, which you mention at the end, is also totally bogus as an "alternative" energy source. It's main current use is as a smokescreen for the Bush administration to put off doing anything now about CO2 emissions. Hydrogen is not a primary energy source, because it's not found in energetically usable form on Earth. It has to be made from some other primary source, such as natural gas.)

Here are a couple of links to recent news articles with references to two energy researchers who reached the conclusion (and counterclaims from USDA and industry). http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/06/27/MNG1VDF6EM1.DTL (general interest), http://www.news.cornell.edu/releases/Aug01/corn-basedethanol.hrs.html (more technical details).

3. Toyota is right. When you examine the entire "food chain", inlcuding water, fertilizer, salinization of soil, energy per mass, etc this it a very poor ecological substitute for existing fuel.

Much better and simpler to reduce the mass of existing transportation vehicles. That's zero ecological cost, and can be extraordinarily high profit.

My responses

Thanks to all who wrote in. Last time I wrote about ethanol, I got a lot of guff from folks who worked at oil companies. Now the comments have an environmental flavor.

I don't know about all the technical parts. I did look at the articles that #2 referenced above. The articles were not clear about whether increased efficiencies would address these issues.

But really, the point of my update was to be descriptive rather than prescriptive. These things are happening now, for better or worse.

It's difficult to foresee whether they will succeed, but significant amounts of money are being invested in increased ethanol producing capacity in the US, and there's profit to be made doing it.

Eric

More comments ...

4. I actually believe that ethanol WILL be the fuel of the future (the Hydrogen economy is a complete crock IMHO, as many academics have recently pointed out). However, I do not believe that ethanol based on foodstocks will succeed. Rather, I believe that ethanol based on sea plants will succeed.

Salt water fermentation is actually more efficient than fresh water fermentation (the bio organisms exists). This will lead to production in all equatorial regions, and dramatically simplify shipping routes (essentially North-South routes for whatever the destination).

Attached is a rouch write-up and slide set that frames some of the thinking here. The principal author used to be chief inventor for the communist party in Russia. He is very highly trained in the TRIZ methodology of inventive problem solving and directed evolution ie he uses a formal, systematic methodology to derive solutions such as this one.

5. I looked back through your archive of weekly articles, and noticed that we had almost the same exchange back in September, prompted by a NYT article around then about the economics of E85 that made the same point about the negative total energy output of the production process, as well as other aspects of the economics. (That I could completely forget this exchange from just 4 months back is another sign of encroaching Alzheimers…)

The fundamental point about the whole thing, I think, is that the driving force behind substitution of ethanol for fossil fuel is political – not in a good way, as in “lets be energy self sufficient” (which this doesn’t help achieve), but as in “the senators from ADM have enough clout to force continued subsidies to this otherwise uneconomical industry”.

Recently California has phased out use of MTBE as a pollution reducing “oxygenate” additive in gasoline (due to health concerns), and been required by the EPA to replace it with ethanol, although there is evidence that adding ethanol actually worsens some pollution problems, and that the pollution issues that originally led to the oxygenate requirement have been substantially decreased for other reasons. Again, a political decision, in this case by the white house, not based in either economics or science.

The bottom line is that to discuss the trend to increased ethanol use as though it’s being driven by purely economic considerations leaves out the main factor in the story, which is politics.