Ethanol Energy Issues Confront U.S.

By Perry, Mark

In the politically motivated rush to replace gasoline with corn ethanol, we may be doing ourselves real economic harm. The governmentsupported push for ethanol will not only increase taxes and damage the environment, but it will add to Americans’ burden of high fuel and food costs and especially hurt people on fixed incomes. And it will do almost nothing to reduce dependence on foreign oil – ethanol production this year will replace less than 5% of the gasoline sold. Clearly, there is a limit to how much of the U.S. corn crop can be gobbled up for ethanol without pushing food prices higher and higher. Increased production of corn-based ethanol during just the past 12 months has raised food prices by $47 per person, according to a study by Iowa State University. By end of summer, the price of milk was expected to jump 40 cents a gallon, and up to 60 cents more for a pound of cheese.

Nevertheless, a Senate energy bill is coming up for final approval shortly that would require a sevenfold increase in ethanol from 5 billion gallons this year to 36 billion gallons by 2022. The measure also provides loan guarantees, biofuels research and development grants, and grants for ethanol plant construction for the politically powerful ethanol industry.

As if that’s not enough, Sen. Richard Lugar (R-IN) and Sen. Tom Harkin (D-IA), are cosponsoring a bill that would raise the ethanol mandate to 60 billion gallons by 2030.

Ethanol cannot be justified on a scientific or economic basis, and the only reason the industry has survived and profited is that the government gives corn farmers and ethanol producers very generous subsidies. As the Wall Street Journal pointed out, ethanol is produced by mixing corn with our tax dollars, currently $5.5 billion annually in more than 200 ethanol tax breaks and subsidies.

If extended through 2022, as the Senate energy bill provides, the ethanol subsidies will cost taxpayers an estimated $131 billion, according to the Tax Foundation. Subsidies under the Lugar-Harkin measure would cost as much as $205 billion over the next 15 years.

Ethanol Vs. Gasoline

The scientific problem with corn ethanol is that it contains one- third less energy than gasoline. So a motorist has to purchase onethird more fuel to go the same distance. If you total up all of the fossil fuel that goes into making and transporting ethanol – nitrogen-based fertilizer and herbicides, fuel to run farm machinery and delivery trucks, natural gas for the distilling process at ethanol plants – it takes more energy to produce ethanol than the fuel provides.

Furthermore, the rush to produce ethanol is adversely impacting the environment. In many parts of the corn-belt, water tables are dropping, in some places 10 feet or more in the past decade, because it takes so much water to grow corn and produce ethanol. For that matter, if the government keeps mandating unreasonably high levels of ethanol production, a prolonged drought that devastates the corn crop could cause fuel shortages in the future.

In addition, heavy corn production exacerbates soil erosion, pollutes groundwater supplies from chemical runoff, and increases the level of greenhouse gas emissions from the conversion of grassland to corn production.

The U.S. has an estimated 131 billion barrels of oil and 1,000 Tcf of natural gas available domestically, but off-limits, in and around the U.S. If Congress wants to moderate fuel prices and help consumers and the economy, it should open up these potentially energy-rich areas off the Atlantic and Pacific coasts, and in Alaska, to oil and natural gas production.

But there is a real danger that Congress will remain oblivious to the economic and scientific realities of ethanol and take us down the wrong path by mandating a huge increase in ethanol production. Washington might have a love affair with ethanol for political reasons, but increasing ethanol production will only lead to higher taxes, higher prices for both food and fuel, and damage to the environment, making us all worse off in the process. Congress needs to say no to the ethanol hustlers and end its political addiction to corn.

* Annual ethanol production capacity in 2006 reached 5.3 bgy

-Actual 2006 production of 4.9 bgy

-2006 demand of approx. 6 billion gallons

* 114 plants in 19 states with 5.6 bgy capacity (March 2007)

* 80 plants under construction, combined with eight expansions, will increase industry capacity by an additional 6 bgy (March, 2007)

* Dozens of additional plants in various stages of development

Source: U.S. Energy Information Administration

By Mark Perry, Professor of Finance and Economics,

University of Michigan-Flint, Flint, MI

Author: Mark Perry is a Professor of Finance and Economics at the University of Michigan-Flint and writes a Hog at mjperry.blogspot.com. He can be reached at mjperry@umich.edu.