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Corn-based ethanol's a flawed concept

By Myra P. Saefong, MarketWatch
Last Update: 7:34 AM ET Feb 16, 2007

SAN FRANCISCO (MarketWatch) -- Ethanol as an alternative energy source is a flawed concept -- at least when corn is used to produce it.

And the consequences of using corn to create ethanol are far-ranging - they even impact consumers and the price they pay for meat.

So is it worth it? It depends who you ask.

"There have been numerous studies completed regarding the energy efficiency of ethanol vs. its production," said John Eichberger, vice president of government relations for the National Association of Convenience Stores.

"These range from a positive net energy return in excess of 30% to a negative net energy return of more than 30%," he said. "Researchers on both sides of the issue argue that the other research is significantly flawed."

Even so, policymakers insist that ethanol is a "positive replacement product for crude-oil based fuels and have proceeded down a path to subsidize and mandate its use," said Eichberger, whose trade organization represents the convenience and petroleum-retailing industry.

There's no doubt that renewable fuels are a good idea, said Darin Newsom, a senior analyst at Omaha, Nebraska-based DTN. "That means putting more research into more efficient ways" of making them.

That said, "corn is a short-term end to the means."

"Some of the warts associated with ethanol production are [real] -- it does use a lot of water, electricity and natural gas," said Newsom.

So "the problem with corn-based ethanol is that, at best, you don't get more energy out of it than it costs to grow and make it," said Sean Brodrick, a contributing editor at MoneyandMarkets.com.

"At worst, you lose energy."

A math and science lesson is in order.

An easy-to-read measure of whether ethanol's economically viable can be derived from taking a look at its "energy return on energy invested," or EROI, according to Brodrick.
"It is at the crux of why corn-based ethanol is a boondoggle," he said.

EROI can be expressed as "net energy," he explains. The EROI for corn-based ethanol is 1.2:1, so the net energy is 0.2, he said.

That means you put in 1 British thermal unit to get 1.2 BTUs from it, he said.
"At EROI of 1.2 to 1, the 3.9 billion gallons that the U.S. produced in 2005 required 3.29 billion gallons of BTU energy input, resulting in a 'net energy' of 610 million gallons," he said.

And that's being generous, he said. "There are some computations that show corn-based ethanol has a net energy of zero. Others show it as a net energy loser."

So it all depends on how you look at it.

A "break even" with the cost of production would be largely based on the cost of crude oil and the cost of corn, said Rick Kment, an analyst at DTN.

For example, if crude-oil prices are at $70 to $100 per barrel, very high corn prices can be paid and ethanol can still economically work in the system, he said.

But with $30 crude and $4 corn, "it becomes unprofitable," he said.

At current price levels, DTN estimates a net profit -- after depreciation and all other factors -- to be near 5 cents per gallon of ethanol produced, he said.

That's down from a 50-cent per gallon net profit at the first of the year, and down from $2.50 a gallon in June 2006, Kment said.

March crude-oil futures closed Thursday at $57.99 a barrel on the New York Mercantile Exchange, while March corn futures were trading around a 10-year high above $4 a bushel on the Chicago Board of Trade. And March ethanol stood at $2.08 a gallon on the CBOT.

'Dead argument'

Still, there are many more experts who say there's really no question as to whether corn-based ethanol puts out more than it uses up.

"The argument over the energy balance of ethanol is really a dead argument," said Matt Hartwig, a spokesman for the Renewable Fuels Association, the national trade group for the ethanol industry. "Study after study has proven them [the critics] to be flat out wrong," he said.

Hartwig called attention to the Web site for the biomass conversion research laboratory at Michigan State University.

A Feb. 5 note on the site prepared by Bruce Dale, professor of chemical engineering at the university, said the net energy analysis is "simple and has great intuitive appeal," with net energy defined as ethanol's heating value minus the fossil energy inputs required to produce the ethanol.

But "it is also dead wrong and dangerously misleading."

Tadeusz Patzek, professor of civil & environmental engineering at the University of California at Berkeley, said in a report last year that the "energy cost of producing and refining carbon fuels in real time, e.g., corn and ethanol, is high relative to that of fossil fuels deposited and concentrated over geological time." See the full report.

"We do not value energy per se, but rather the services or 'qualities' that the energy provides," argued Dale. "We need to carefully choose our metric of comparison," he said. Read his comments in full.

One gallon of ethanol contains 84,000 BTUs, which is about 2/3 that of gasoline, according to Neil Koehler, chief executive of Pacific Ethanol Inc. "Since ethanol burns more completely (and cleanly) than gasoline, this lower energy density can be completely offset by increased efficiency," he said.

It's eating at corn

But ethanol's impact on the corn market has been "dramatic," said DTN's Newsom.
"If ethanol demand increases to projected levels, corn supplies will be incredibly low at the end of the 2006-2007 marketing year in August 2007," he said.

The U.S. produced an estimated 4.9 billion gallons of ethanol last year and used more than 5.5 billion, according to the Renewable Fuel Association's Hartwig. Ethanol is blended in more than 46% of the nation's gasoline, he said.

"It would seem that the corn market is poised for a long-term rally in price," said Newsom. He predicts that the high of $5.54 a bushel from 1996 seems like a "reasonable price target."

Meanwhile, limitation in the corn market itself should be considered. "Corn-based ethanol will be of limited supply," said Charles Perry, chairman of energy-consulting firm Perry Management. The U.S has a limited amount of productive land so we "can spare only a limited amount of our corn crop for ethanol."

At the same time, this corn use for ethanol has been "hampering feeding, with some talk in the livestock industry of herd reduction due to higher feed costs," said Newsom.

"Our food prices will go through the roof -- $4-$5 corn makes for very expensive beef, pork and chicken," said Bernie Feshbach, president of investment firm Feshbach & Sons.
Also, "the use of corn makes ethanol a regional (Midwest) issue as the U.S. lacks the infrastructure to move the product around to meet demand," said Newsom.

But the logistics involved with ethanol production could be irrelevant.

"More attention needs to be paid to the personal economics of ethanol since many consumers are more concerned with cost, than with how a fuel is derived," said Geoff Sundstrom, a spokesman for motorist group AAA.

The industry will get a chance to discuss all of these things soon. The Renewable Fuels Association's 12th annual National Ethanol Conference is next week from Feb. 19-21 in Tucson, Ariz.

The group's Web site says registration for the conference is closed because it's reached its capacity. Interested parties are being placed on a waiting list.

Myra P. Saefong is a reporter for MarketWatch in San Francisco.

http://www.marketwatch.com/News/Story/Story.aspx?guid={EC55D7AD-6E1C-4AD8-912F-A2A0BD4D4299}

[edjack]

Sure is. Even ethanol, by itself, is questionable as a solution. But that doesn't stop the tree-huggers.
_________________


Ed BMW CCA member since 1987 (Nr. 62319).
'97 540i 6 speed Aspensilber over Aubergine interior.

[Henry]

"But that doesn't stop the tree-huggers."





Stocks Fall Amid Profit, Credit Unease
By TIM PARADIS
The Associated Press
Friday, October 19, 2007; 3:45 PM


NEW YORK -- The Dow Jones industrial average dropped more than 300 points Friday _ the anniversary of the Black Monday crash 20 year ago _ as investors were frightened by lackluster corporate earnings, credit concerns and rising oil prices.


and

By TIM PARADIS
The Associated Press
Friday, October 19, 2007; 3:45 PM


"And oil prices added to investors' list of concerns when they briefly moved above the psychological barrier of $90 per barrel for the first time."

[edjack]

What are you trying to say, Henry?
_________________


Ed BMW CCA member since 1987 (Nr. 62319).
'97 540i 6 speed Aspensilber over Aubergine interior.

[donaldan]

One major concern is how fast or slow the general public is accepting it. I haven't seen any great rush on the part of the consuming public to fill their cars with ethanol. At the moment, it costs significantly more to burn ethanol in your car. Since ethanol has to be trucked, and very little if any is being transported through pipeline, the cost of transportation is significantly higher. Furthermore, there are probably not enough tankers to handle all the ethanol demanded.

I, for one, will not use ethanol. Not only is it more expensive per gallon. I lose about 20% to 30% fuel economy on top of it.

Until consumption is increased, we cannot realize the true economy of scale so the production cost is very high at the moment. From strict economics point of view, it becomes a "chicken and egg" question.

In spite of all the government subsidies and the food inflation maladies notwithstanding, the consumers eventually will determine how viable it is going to become. For sure, I don't like to have my tax contribution being sucked into supporting a government scheme (tree hugger scheme?) that may be a economic desaster.

I heard that the rush to build ethanol plants have now come to a virtual standstill. What have you heard?
_________________
Don

[Henry]

Yes. Ethanol from corn is less efficient then from other plant sources. And, apparently, it cannot be sent through pipes. But there's quite a bit more to this story.

For instance...

"Brazil’s 29-year-old ethanol fuel program uses cheap sugar cane, mainly bagasse (cane-waste) for process heat and power, and modern equipment, and provides a ~22% ethanol blend used nationwide, plus 100% hydrous ethanol for four million cars. The Brazilian ethanol program provided nearly 700,000 jobs in 2003, and cut 1975–2002 oil imports by a cumulative undiscounted total of US$50 billion.[1] Today, Brazil gets more than 30% of its automobile fuels from sugar cane-based ethanol.[2]
The Brazilian government provided three important initial drivers for the ethanol industry: guaranteed purchases by the state-owned oil company Petrobras, low-interest loans for agro-industrial ethanol firms, and fixed gasoline and ethanol prices where hydrous ethanol sold for 59% of the government-set gasoline price at the pump. These pump-primers have made ethanol production competitive yet unsubsidized.[1]
In recent years, the Brazilian untaxed retail price of hydrous ethanol has been lower than that of gasoline per gallon.[1] Approximately US$50 million has recently been allocated for research and projects focused on advancing the obtention of ethanol from sugarcane in São Paulo.[3]"


Fast forward to the big picture. At first glance this has nothing to do with ethanol. But there's quite a bit more to this story. Ethanol is only a small part of it.


Home-Heat Prices Are Flaring Up
Winter's Chill to Bring Higher Bills for Oil, Gas
By Steven Mufson
Washington Post Staff Writer
Saturday, October 20, 2007; Page D01


For the nearly 8 million U.S. homeowners who use oil for heat during the winter, distant political tensions and financial speculation on commodity markets will soon arrive on the doorstep.

Crude oil prices have soared about $10 in two weeks, briefly touching a record of $90 a barrel yesterday before dropping to $88.60. Although many oil analysts said that the fundamentals of supply and demand do not explain the rising prices, they say that at least some of those price increases would find their way into home heating bills. ...and...

"The surge in oil markets to $90 -- the mirror image of last winter's fall -- seems underpinned more by financial flows and political risk than by fundamental factors," Lehman Brothers said yesterday in a report titled "Frenzied Oil Futures Frustrate Fundamentals."

Lehman's analysts said they expect "a correction." But having failed to predict the latest increase, they hedged by saying that "several risks could push prices higher still."

[edjack]

However, the prediction is for a mild winter. Some say this will soften price hikes.

Bottom line: there is no one easy answer. A good short-term solution is to get more diesel vehicles into the mix. Much better solution than hybrids, IMHO.

Fuel cells and hydrogen power are mere gleams in the eyes of engineers and scientists.
_________________


Ed BMW CCA member since 1987 (Nr. 62319).
'97 540i 6 speed Aspensilber over Aubergine interior.

[donaldan]

"A good short-term solution is to get more diesel vehicles into the mix. Much better solution than hybrids, IMHO. "

Amen. I would add that it is also a long term solution. The infrasturcture is already in place. It is a proven technology. Over half of the new cars sold in Europe are diesels. Above all, no government subsidy is needed! Diesels are the only cars I rent when I am in Europe. It is simply a pleasure ! Love those torquey engines.

Brazil's affinity to ethanol is peculiar to its vast sugar cane agriculture. It would be hard for any other country to duplicate it.
_________________
Don