The Whole Picture

Majority of Americans Support Ethanol

The "studies" showing ethanol takes more energy to produce than you get out of it are quite dated and obsolete. Ethanol production is continually getting more efficient. It is also becoming cost effective, even without subsidies. Within 20 miles of my house I can purchase ethanol (E85) for $2.85 while E10 is selling for $3.95 and gasoline without ethanol is $4.05. Even without the subsidies, E85 would be about $3.36. I used to own a chain of convenience stores and know several people in the industry. Right now they are earning 20 cents more margin per gallon on E85 than gasoline. The net difference is this: $4.05 - ($2.85 + $0.51 - $0.20) = $0.89 or about 22% less. I have talked to several people who use both E85 and gasoline. Their gas mileage drops by 15-20%. So, E85 is more economical if available locally. Their biggest complaint is one of convenience. They can only purchase ethanol when they are driving near a station that offers it. Of course, this is why margins are so much better for ethanol.

Unfortunately, ethanol requires costly modifications or replacement of pumps, tanks, and fuel lines. This has prevented many gas stations from adding E85 as an option. If there is one good reason for a subsidy, it is this: the subsidy helps promote the ethanol infrastructure.

Quite frankly, I would like to see this go further. The best way to prevent huge spikes and volatility in the price of any item is to make sure there are plenty of subsititutes. In our current state, oil obviously has very little price elasticity -- despite gasoline prices increasing by over three times in one decade, we are actually using more gasoline than we were then. Imagine what would happen if you could pull up to a gas station and have your choice of gasoline, natural gas, propane, ethanol, electricity, and compressed air. Then, imagine if every car is "flex-fuel," by which I mean every car can work on at least two different fuel types.

When I owned convenience stores, we often discussed adding E85 capability. Our biggest concern was the government. We were afraid we would make the investment only to see the government change direction in the same way it did with CNG (compressed natural gas) and EVs (electric vehicles in California).

Making vehicles "flex-fuel" is not expensive. In the case of ethanol, the cost is only a few dollars.

My suggestion ... 1) stop subsidizing alternative fuels, 2) increase taxes on gas from oil by 50 cents over 10 years (5 cents / year), 3) require all vehicles sold be flex-fuel within 10 years by incrementing the amount that should be flex-fuel by 5% each year.

One last note: let's be a little more fair about the effect of ethanol on food prices: 1) the increased demand for grains from China and India exceed the worldwide demand from ethanol by a factor of two, 2) the byproduct of ethanol production is used for feed for cattle so that only half of the food value is lost, 3) a large portion of the grain price increase is from the fall of the dollar and 4) one of the biggest reasons grain prices are up so much in third world countries is because the cost to transport the grain has skyrocketed along with the price of oil. I'm not saying that ethanol doesn't compete with food, but it is a much smaller part of the equation than many like to think.

Increasing Ethanol Demand and the Likely Price Implications for Corn

While there is no doubt that increasing demand for ethanol is contributing to higher corn prices, the article does not give enough credit to other contributors to higher prices. The amount of corn used for ethanol has increased by about 2 billion bushels over the last five years. However, approximately 1/3 of the calories in corn is left-over for feedstock, so the "adjusted" amount of corn being used for ethanol has increased by about 1.3 billion bushels in the last five years. During the same time, China has switched from a corn exporter to a corn importer -- with a net difference of about 0.5 billion bushels over the same period. Other countries, such as India, have similar situations. When increase non-US demand is combined, the sum is similar to the increase we have for ethanol. If you look at the projections over the next few years, the rate of increase for other countries is accelerating, while the growth rate for ethanol is starting to subside. Last year corn use for ethanol increased by about 1 billion bushels, but this year it is expected to increase by about half that at 0.5 billion bushels. And, of course, you cannot forget the impact of the falling dollar on international commodities. In summary, ethanol is not the "big cause" of increased prices, but one of the "big 3" contributors.