Wow, I'm impressed! Yet another story about the evils of ethanol. I find the whole discussion rather funny, since it seems that few of the people involved in the discussion have any understanding of the economics of farming. I'd like to rebut a few of the author's points. In the interests of full disclosure, I came from a farm originally (corn and soybeans) and still drive the tractors and combine around on occasion.

1. The author claims that the ethanol boom is going to die because the profit margins of ethanol distillers are going down. To anyone familiar with grain prices of late, it isn't a great shock that their profit margins have dropped lately. It was a lot easier to make a profit on ethanol with corn at $2/bu vs. the current $3.40/bu. Keep in mind that the current prices are very good compared to recent history. I remember plenty of times in the 1990's when $2.50/bu would have been a good price. Ag commodity prices tend to be volatile, but over the long term have dropped in real terms substantially; the actual (not deflated) prices paid in the 1970's for corn and soybeans weren't all that much different than prices paid only a couple of years ago. The only way the author's comment makes sense is if you assume that fuel (and hence ethanol) prices will drop in the long-term while corn prices will rise. I'm quite unconvinced on both counts.

2. The author claims that the reason for the ethanol boom is due to government intervention. Perhaps he has a point. Whether this is a problem (as the author seems to believe) boils down to a philosophical question. Do you believe that the benefits to society from a domestic ethanol industry outweigh the added costs of using ethanol vs. petroleum? I happen to think they do. There are many costs to petroleum use that are simply not included in the price at the pump: global warming, environmental degradation, and military commitments abroad to name a few. Moreover, petroleum will eventually run out. Is it better to begin to develop an infrastructure for a post-petroleum era now, or to wait until oil prices really start to increase?

3. The author's point about E85 stations is pretty far off the mark. The best illustration of this is that he uses New York state as his example. In 2004, New York state produced 66 million bushels of corn vs. a production of over 2 billion bushels for Iowa alone. Given the high costs of transporting ethanol that the author cites, is New York state really the place you'd look to find a proliferation of E85 pumps? Of course not; the author sets up a straw man and proceeds to knock him down. As a larger point, it makes much more sense to use ethanol as a blending agent for gasoline rather than in E85 pumps, considering the issues of compatibility with most vehicles and the relative supplies of gasoline and ethanol. As such, making an argument on the basis of E85 pumps is silly on its face.

4. I have seen a discussion in an earlier thread about the use of switchgrass vs. corn for ethanol production. For the average farmer, the discussion is really moot. He grows corn and soybeans in the Midwest because they are the most profitable crops he can grow given the markets he can access. If a farmer in the middle of Iowa grows corn, he can sell it at the elevator; there is one in virtually every small town in the Midwest, and the pricing is fairly transparent and well-known. If he grows switchgrass, where can he sell it? How does he know if he is getting a good price? Where does he get seed, fertilizer, etc.? The reason we have corn ethanol is because it piggy-backs off of a well-established infrastructure for growing, transporting, and using corn.

4. The part of the article I find the most offensive is how the author blithely accepts what critics say about ethanol: that it is "impractical; it boosts food prices and promotes industrial farming" and that it is "a half-baked industrial policy scheme intended to reward politically powerful farmers in the Midwest." This really gets to the heart of the argument about ethanol. Is it a boondoggle to Midwest farmers, or is it an investment in future sustainable energy production? There are strong arguments to be made on both sides of the argument. The author chooses to gloss over the whole issue, assuming that the answer is obviously that it is a boondoggle.

My view on the matter, for what it's worth, is that at some point we will have to transition from petroleum to another fuel source. Liquid fuels have some very nice benefits for transportation uses, including high energy density and a large base of experience in using them. If we can't get liquid fuels from petroleum, we have to look either to coal liquification (with some very serious global warming implications) or biofuels. As such, developing a domestic ethanol industry seems like a smart investment. Perhaps the incentives could be modified a bit, but the general idea of domestically producing biofuels, especially given our nation's long history of food surpluses, doesn't seem like a bad idea.

Some great points here. My comments:

arc:

The only way the author's comment makes sense is if you assume that fuel (and hence ethanol) prices will drop in the long-term while corn prices will rise. I'm quite unconvinced on both counts.

He's not really going there. He's saying that current prices aren't sufficient to sustain the boom - that's why new plants are going on hold.

arc:

Do you believe that the benefits to society from a domestic ethanol industry outweigh the added costs of using ethanol vs. petroleum?

The issue (which he doesn't really raise) is that corn ethanol appears to consume nearly as much petroleum to produce and distribute as it saves. The studies aren't in full agreement on this, but it's telling that even with a significant subsidy, the econmics are still a problem.

arc:

Is it better to begin to develop an infrastructure for a post-petroleum era now, or to wait until oil prices really start to increase?

Definitely agree here, except that I'm not sure what that infrastructure should be. Brazil has done this successfully and is ready to send us some of theirs (which would encourage the developement of the downstream infrastructure that is one more gate on ethanol's success. Unfortunately, the tariff remains in place...

arc:

The author's point about E85 stations is pretty far off the mark.

You're right about using NY, but how does the availability look in Ia? I'm guessing it has a ways to go.

arc:

As a larger point, it makes much more sense to use ethanol as a blending agent for gasoline rather than in E85 pumps

How do those blends do in the pipelines? Are trucks still required?

arc:

I have seen a discussion in an earlier thread about the use of switchgrass vs. corn for ethanol production.

To my knowledge, they haven't worked out the details of large-scale use of switchgrass. It's time has not yet come.

arc:

it boosts food prices

Hard to argue with that?

arc:

promotes industrial farming

Red herring.

arc:

half-baked industrial policy scheme intended to reward politically powerful farmers in the Midwest.

Absolutely true, unfortunately, but so is our entire farm policy package. That's a much bigger subject, however, for another thread. It's fine to invest in the future, but only if that future makes sense. I'm not convinced.

arc:

Liquid fuels have some very nice benefits for transportation uses, including high energy density and a large base of experience in using them.

Agree, but if switchgrass (and its high efficiency) doesn't work out, it seems more likely to me that hybrids/electrics will turn out to be the answer. The stone age didn't end because we ran out of stones.

You have some excellent points here as well, though I would beg to differ on a few of them.

Larry:

He's not really going there. He's saying that current prices aren't sufficient to sustain the boom - that's why new plants are going on hold.

My point here is that the author's argument is based on the current price trends of corn (rising) and ethanol (falling). If you assume that the current price trends will hold in the long-term, his argument makes sense. Given that I think we all expect fuel prices to rise substantially in the long-term and that historically, price spikes in the corn market like the current one have tended to be short-lived (for example, corn reached $5/bu. in 1995, only to crash the following year), the author's assumption appears suspect at best.

Larry:

The issue (which he doesn't really raise) is that corn ethanol appears to consume nearly as much petroleum to produce and distribute as it saves. The studies aren't in full agreement on this, but it's telling that even with a significant subsidy, the econmics are still a problem.

The energy balance of ethanol is a complicated issue, as the disagreement between studies show, but I believe most studies show ethanol to be energy positive. I'm sure that there are better alternatives from an energy balance perspective (for example, biodiesel or cellulosic ethanol), but as it stands right now, corn-based ethanol is the most practical. When cellulosic ethanol (or another biofuel technology) is more developed, then that equation changes.

Larry:

Definitely agree here, except that I'm not sure what that infrastructure should be. Brazil has done this successfully and is ready to send us some of theirs (which would encourage the developement of the downstream infrastructure that is one more gate on ethanol's success. Unfortunately, the tariff remains in place...

You have a fair point that, if we want to encourage ethanol use, the tariff on Brazilian ethanol doesn't make much sense. The Brazilians have a good system for producing ethanol, and sugar cane certainly has benefits over using corn. However, from my understanding, the Europeans are looking to import ethanol from Brazil. I don't think Brazil has enough ethanol production capacity to provide ethanol for the whole developed world. That said, it probably makes sense at this point to get rid of the tariff.

Larry:

You're right about using NY, but how does the availability look in Ia? I'm guessing it has a ways to go.

It does, though the availability is somewhat better in the Midwest. Part of the problem, from my understanding, is that oil companies make it difficult for stations to install E85 pumps to begin with. There are several E85 pumps near where I live, but all of them that I can think of are at a local chain of independent gas stations. What incentive do oil companies, whose logos are on many gas stations, have in promoting E85, which they have little role in producing?

Larry:

arc:

As a larger point, it makes much more sense to use ethanol as a blending agent for gasoline rather than in E85 pumps

How do those blends do in the pipelines? Are trucks still required?

You and the author are right that the transport problem is a important issue. I wonder, however, how difficult it really is to transport ethanol long distances. Corn is transported by rail regularly around the country, and ethanol is much more valuable pound for pound. My point here is that, given the potential supply of corn-based ethanol and current gasoline demand, ethanol can't replace most gasoline usage. As a relatively dilute blend (for example, the usual 10% blend), it gives an octane boost, helps extend gasoline supplies a little, and is compatible with most cars and trucks. I don't think there is enough ethanol currently to even use a 10% blend nationwide. If there were a glut of ethanol in the Midwest (due to problems in transporting corn and ethanol), E85 would make sense, but I'm not sure this is the case currently.

Larry:

arc:

it boosts food prices

Hard to argue with that?

Is ethanol really the only reason corn prices have risen? I'm sure it contributes, perhaps substantially, but correlation doesn't imply causation. How much of the current price rise is due to ethanol production? If the author wants to make this point, he needs evidence to back it up; even a link would be an improvement over just stating a debatable point as fact.

Larry:

arc:

half-baked industrial policy scheme intended to reward politically powerful farmers in the Midwest.

Absolutely true, unfortunately, but so is our entire farm policy package. That's a much bigger subject, however, for another thread. It's fine to invest in the future, but only if that future makes sense. I'm not convinced.

This is the larger point of my post. Is promoting the corn-based ethanol industry in principle a bad idea? The author assumes that this is true and bases his whole argument on this point. I disagree, for the reasons I've discussed. Now, if you want to debate how the current policy is implemented, that's a different story, and a much more interesting and useful discussion. The author really doesn't go very far in that direction, which is a shame.

Larry:

Agree, but if switchgrass (and its high efficiency) doesn't work out, it seems more likely to me that hybrids/electrics will turn out to be the answer. The stone age didn't end because we ran out of stones.

Not to be too harsh, but this is a frustrating point I see in discussions of our future energy use. Why should this be an either/or question? Could you run a hybrid vehicle with an engine burning ethanol? Of course. At least in my mind's eye, we are going to have to be very clever, and use every tool at our disposal, to achieve sustainable energy production and use. I seriously doubt there is going to be one answer. We will have to make many changes to how we use energy for transportation to reach sustainability. Hybrids will probably have a role. Electrics may have a role, though it's hard to beat the energy density of liquid fuels.

What about the reports on nitrous oxide that is produced when you make ethanol? A greater greenhouse gas than carbon dioxide.

arc:

Given that I think we all expect fuel prices to rise substantially in the long-term and that historically, price spikes in the corn market like the current one have tended to be short-lived

I think that ethanol represents a large and ongoing new source of demand that's like nothing since the adoption of high fructose corn syrup. In fact, it's a little shocking to me that the many-fold increase in oil prices haven't cured the need for ethanol subsidies.

arc:

oil companies make it difficult for stations to install E85 pumps to begin with.

Too bad for them. It sounds like an excellent opportunity for somebody new to come along and compete.

arc:

Corn is transported by rail regularly around the country, and ethanol is much more valuable pound for pound.

That's not the right comparison. It's ethanol vs gasoline, not ethanol vs corn. Ethanol is a big loser right now.

arc:

Is promoting the corn-based ethanol industry in principle a bad idea?

Subsidizing it is a bad idea.

arc:

Why should this be an either/or question? Could you run a hybrid vehicle with an engine burning ethanol?

The argument is interesting because of the subsidies. Widespread adoption of plugin hybrids will take decades but it is a revolutionary idea. It means that liquid fuel consumption will go down by a large percentage - not 100, but large. I don't hate ethanol; I just think the playing field needs leveling. Thus, no tariffs, and no subsidies. Let the best fuel win.

arc:

Hybrids will probably have a role. Electrics may have a role, though it's hard to beat the energy density of liquid fuels.

But battery energy density is increasing by several % each year. It won't be that long until...

Larry, again, some excellent points.

Larry:

I think that ethanol represents a large and ongoing new source of demand that's like nothing since the adoption of high fructose corn syrup. In fact, it's a little shocking to me that the many-fold increase in oil prices haven't cured the need for ethanol subsidies.

A good point about ethanol being a new demand on the corn market. It depends on how efficient the ethanol distillers can be and how future demand compares to future increases in yields. This is going to be an issue for any biofuel, however. They all take up arable land, and there is a price to be paid in higher food costs. On the other hand, higher food prices should spur the ag sector to become more productive.

As far as whether the subsidy is still needed given the recent run-up in fuel prices, that's a fair question, and one worthy of debate. I'm sure the distillers made money hand over fist in 2005, when corn prices were low and fuel prices high. That wasn't really the author's point, however.

Larry:

arc:

Corn is transported by rail regularly around the country, and ethanol is much more valuable pound for pound.

That's not the right comparison. It's ethanol vs gasoline, not ethanol vs corn. Ethanol is a big loser right now.

No, the real issue is whether the added cost for transportation is a prohibitive expense. The author doesn't give any evidence for this; his statements on this issue are largely a paraphrase of the DOE site he links to, which doesn't itself give any specifics. This point would be valid if there were an ethanol glut in the Midwest due to the difficulty of transporting ethanol. The author hasn't provided any evidence as such.

Larry:

arc:

Is promoting the corn-based ethanol industry in principle a bad idea?

Subsidizing it is a bad idea.

This is I think a serious oversimplification. Please see below.

Larry:

I don't hate ethanol; I just think the playing field needs leveling. Thus, no tariffs, and no subsidies. Let the best fuel win.

I have two issues with this statement. First, what is a level playing field? The benefits of ethanol largely accrue to society in general: less petroleum pollution, some global warming benefits, decreased dependence on foreign oil. The benefits of petroleum are readily apparent to the end user: higher energy density, more developed infrastructure, probably lower cost. Should petroleum prices reflect the external costs of petroleum use? Is it necessarily bad for society, in the form of gov't incentives, to reward biofuels if they benefit society in less tangible ways than simply cheaper prices? Do you oppose the ethanol subsidy on principle, or because you doubt its effectiveness or implementation?

The second issue is that I think we're looking at this from two different perspectives. You are asking which fuel makes more sense today. I think you're right that gasoline wins. I'm asking, how are we going to deal with life after petroleum supplies dwindle. In that sense, I think that encouraging ethanol production and use makes a lot of sense. Ethanol may not ever be the fuel of the future. I'd say that it makes more sense to encourage many different alternative energy strategies and let them compete with each other to see which has the most potential. Asking them to compete with an industry with over a century of development behind it seems a bit unfair to me, especially given the external cost issues cited above.

The alternative to spending on alternative energy research now is getting caught flat-footed during the next spike in fuel prices. I know that we are all taught in Econ 101 that subsidies are bad. I think this is a case where the consequences of short-sightedness are too dire to allow ideology to get in the way, and where reasonably crafted, temporary subsidies aren't necessarily bad. If you want to debate how the subsidy is structured now, or whether it is still needed, that would be interesting. The author didn't do this, though.

Larry:

But battery energy density is increasing by several % each year. It won't be that long until...

Perhaps, and if so, I'd gladly say that we should let biofuels fall by the wayside. However, I think it is going to be incredibly challenging, if not impossible, to develop a battery that will let a reasonably sized vehicle go 300 miles at a stretch and would take only 5-10 minutes to recharge. Even if a battery lets you go 300 miles at a stretch, if it takes 8 hours to charge, it doesn't do me much good if I need to drive 302 miles. I think you're right that plug-in hybrids have an amazing potential, especially for short trips. I still think most vehicles will need to have an engine running on some liquid fuel, however, even with this technology. The question in my mind's eye is where we get that fuel.

The part that really bothers me in this article is the sloppy reporting and logic. The author uses some current prices from CBOT (out of any historical context), a few profit and share price figures for ethanol companies (again, out of any context), an embarrassingly ham-handed swipe at E85 pumps, and a paraphrase of a website, and attempts to write an article based on this. I know the author is busy writing several columns per week for Slate and Newsweek, but please, this really doesn't pass muster in my book. Anyone else have an opinion?

arc:

This is going to be an issue for any biofuel, however. They all take up arable land, and there is a price to be paid in higher food costs. On the other hand, higher food prices should spur the ag sector to become more productive.

This is why I'm not big on biofuels. The environmental impacts, especially in the developing world are likely to be pretty bad. That's why I like solar and nuclear, and efficiency (a different kind of fuel "source").

arc:

No, the real issue is whether the added cost for transportation is a prohibitive expense.

His point that trucks are more expensive than pipelines is certainly valid.

arc:

First, what is a level playing field? The benefits of ethanol largely accrue to society in general: less petroleum pollution, some global warming benefits, decreased dependence on foreign oil. The benefits of petroleum are readily apparent to the end user: higher energy density, more developed infrastructure, probably lower cost. Should petroleum prices reflect the external costs of petroleum use?

Yes, they should. They partially do, via the gas taxes we already pay. I'm quite comfortable with increasing those taxes, because that rising tide lifts all the other fuel "boats" without trying to pick a winner. Specifically, I'd support a gradually and predictably rising carbon tax that would raise gas prices to approximately equal current European levels over a 10 year period. That would accelerate the shift to alternate transportation fuels that we need.

arc:

Do you oppose the ethanol subsidy on principle, or because you doubt its effectiveness or implementation?

On principle. Governments aren't smart enough to pick technology winners. I have no trouble subsidizing energy research, including research and ethanol or other biofuels. It's consumption/production subsidies I'm against.

arc:

In that sense, I think that encouraging ethanol production and use makes a lot of sense.

Research, yes. Consumption, no.

arc:

However, I think it is going to be incredibly challenging, if not impossible, to develop a battery that will let a reasonably sized vehicle go 300 miles at a stretch and would take only 5-10 minutes to recharge.

The future is hard to see, but there is no fundamental limit that we are approaching.

arc:

I still think most vehicles will need to have an engine running on some liquid fuel, however, even with this technology. The question in my mind's eye is where we get that fuel.

Plugin hybrids do require liquid fuel. But only a fraction as much as today's vehicles. Most driving is commuting. Most commutes could be handled by 1st or maybe 2nd generation plugins without their engines turning on. It would constitute a true revolution.

arc:

The part that really bothers me in this article is the sloppy reporting and logic. The author uses some current prices from CBOT (out of any historical context), a few profit and share price figures for ethanol companies (again, out of any context), an embarrassingly ham-handed swipe at E85 pumps, and a paraphrase of a website, and attempts to write an article based on this. I know the author is busy writing several columns per week for Slate and Newsweek, but please, this really doesn't pass muster in my book. Anyone else have an opinion?

I make a habit of demolishing this author's work. He needs to do a better job.

My two pennyworth,

Its not just the US that inflation is happening. In parts of south east Asia the price of palm oil, used there as a food first and a fuel second has risen high enough to make it useless as a feedstock for biodiesel.

There have been food riots in the Yemen and Mexico over the price of staples this year. Sure there'll be price inflation in the US, but in the short term the US can stand that. It's the world's poor in poor nations that rely on their states buying grain that are at the sharp end of the ethanol bubble.

There is an elephant in the room. Why should ethanol be made in the Midwest, when there are much more efficient feedstock (sugar cane) in the tropics, which are effectively prevented entry to the US by tariff barriers. These barriers disadvantage the bulk of the US population who are not farmers and who do not benefit from artificially high prices for ethanol. Wouldn't it make more sense to generate a mutual dependence between parts of the world where there is considerable poverty and the US, where there is considerable wealth and a demand for fuel?

Why should ethanol be made in the Midwest, when there are much more efficient feedstock (sugar cane) in the tropics, which are effectively prevented entry to the US by tariff barriers.

Because there is a real benefit in not swapping our dependence on oil from Saudi Arabia, Iraq, etc. for dependence on ethanol from Brazil or anywhere else. I'd rather drive my car on fuel sold by American farmers than by Hugo Chavez. I know this position makes no sense to economists who argue in favor of the most efficient producer, but the world is still a hostile place and reducing our dependence on foreign energy sources seems like a good idea.

You have a good point about inflation in food prices with biofuels. I think that to a certain extent that is inevitable with using biofuels. As far as the US is concerned, considering that we pay so little of our GDP on food, this doesn't seem like a show-stopper. For poorer countries, it's a different story. That's part of why I think Larry's comments from earlier in the thread are important. Biofuels alone are not going to solve our energy problems; there simply isn't enough arable land to handle all of our demand for both food and fuel. I think if we become much more efficient about how we use energy and how we produce biofuel per acre of land, there's hope. I just don't see liquid fuel technology going away in the foreseeable future. Biofuels seem to me to be the best route to get a sustainable source of these fuels, and a vital component to our energy future (though certainly not the only component). This is an issue I see repeatedly with biofuels critics: if you don't think biofuels are a good idea, what is your alternative?

I think your elephant in the room is a bit less of an issue than you imagine. Yes, sugar cane is more cost-effective than corn-based ethanol. However, I don't think there is enough capacity even in the tropics to satisfy the entire developed world's energy demands, unless you want to cut down all of the rain forest and turn it into a giant sugar cane plantation. Remember, Europe will also be in the market for this stuff. Also, if ethanol is so prohibitively expensive to transport that it makes no sense in the US, how exactly does transporting it from overseas make sense?

Finally, I see a flaw in your thinking that is common in these discussions. Everyone wants to find the magic bullet that will solve all of our energy problems. This is a fallacy, I think, and a way to avoid making the hard decisions we will have to make. Can we build a sustainable economy with large parts of our population commuting long distances to work every day? Our economy has in a way been subsidized by cheap energy for a long time; how do we handle it when energy supplies become a limiting factor for economic growth? What is our responsibility with respect to climate change and energy use? Do we care enough to put our money where our mouth is? I know the issue of sustainability is a little different than the original thrust of the article, or your comments, but that is really I think the heart of the biofuels argument, and indeed any discussion of our energy future. Thoughts?

We as Americans need to look at reforming how we get around -- one big reason we use so much fuel is the way our cities and suburbs sprawl out. That will take a long time to fix but it needs to be done.

Another reason we use so much fuel is we conduct military activities all over the world. Ironically, one reason we ARE all over the world is to protect our fuel supplies.