Ethanol, Boon to Farms, Won't Cure Oil Addiction: John M. Berry Feb. 9 (Bloomberg) -- Ethanol, touted in President George W. Bush's State of the Union speech as a partial cure for America's oil addiction, is the product of another pernicious habit: subsidizing farmers.
From the beginning, use of ethanol has been sold as a way to lessen the U.S. dependence on foreign oil, which as Bush said in the Jan. 31 speech, is ``often imported from unstable parts of the world.''
In reality, it is a way to boost corn farmers' income, along with that of the industries that supply farmers with machinery, fertilizer and other goods and services.
Even with today's high oil prices, ethanol is too costly to produce to compete with gasoline. To make it viable, the federal government provides a subsidy of 51 cents a gallon when it's mixed with gasoline and sold as motor fuel.
In addition, it takes a lot of energy to grow and transport the corn, the main ingredient of ethanol, and to turn it into a liquid fuel. The latest studies indicate the process consumes about 80 percent as much energy as it produces, though that figure depends on a variety of assumptions such as corn yields and the location of ethanol plants relative to the corn fields.
On the other hand, a lot of the energy consumed is in the form of electricity generated from coal, of which the U.S. has plenty. Another large chunk is from natural gas, which increasingly is in tight supply.
Tariff Help
One big problem with ethanol is that it is more corrosive than gasoline. Gasoline stations need special equipment and tanks, and only a handful of cars and trucks made in the U.S. today can burn fuel that is more than 10 percent ethanol.
To make sure foreign farmers and producers can't get in on the gravy train, there is a ``temporary'' tariff of 54 cents a gallon on imported ethanol on top of an overall tariff of 2.5 percent of its value. Brazil, with a large industry making ethanol from sugar cane, is the main target of the tariff.
If energy security was the overriding consideration in having ethanol available in the U.S., a quick step would be to reduce that temporary tariff. Brazil hardly rates as an unstable part of the world compared with the Middle East.
Unfortunately, that's not what ethanol is really all about, as the clout of the farm lobby demonstrated with the provisions of the American Jobs Creation Act of 2004 and again with the Energy Policy Act of 2005.
Ethanol Subsidy
Prior to passage of the Jobs bill, the ethanol subsidy was in the form of a small reduction in the motor fuel excise tax motorists pay at the pump. The tax on a 10 percent ethanol-90 percent gasoline blend, known as E10, was 14.666 cents a gallon rather than the 18.4 cents on gasoline.
That approach annoyed the highway lobby because it meant somewhat fewer dollars were flowing into the Highway Trust Fund, which helps finance highway construction and maintenance.
So the tax break at the pump was dropped and the larger direct 51-cent subsidy was put in place.
Then last year the Energy Policy Act, which was studded with tax breaks and subsidies for energy production, mandated use of ``renewable fuels'' such as ethanol on a set schedule. This year, 4 billion gallons are to be blended with gasoline and diesel fuel, rising gradually to 7.5 billion in 2012.
There are almost 100 ethanol production facilities today, about 30 more are under construction and dozens more are in various stages of planning, according the American Coalition for Ethanol's Web site. ``Approximately half of the nation's ethanol is made at facilities owned by farmers and other local investors,'' it says.
Sugar Costs
Given the huge subsidy involved, and a government-decreed market, that burst of construction is hardly a surprise.
Brazil itself has weaned itself from oil imports through a huge expansion in its ethanol industry and a government subsidized plan that converted the country's gasoline stations' equipment to handle the corrosive fuel.
That success story has raised a troubling issue: how much corn, sugar cane or other plants can be raised and converted to ethanol?
So much of Brazil's sugar cane is being used for ethanol that the world sugar price has reached a 24-year high of more than 19 cents a pound. The world price used to be only about 40 percent of the price of U.S. produced sugar, which is protected by import quotas. The world price now is up to about 75 percent of the U.S. price.
Farm Lobby
Against this background, it hardly makes sense to subsidize creation of a sugar-based ethanol industry in the U.S. Nevertheless, in another sign of the power of farm lobbyists, last year's energy bill authorized a $36 million demonstration program to that end.
In 2004 about 1.4 billion bushels of corn went into hoppers at ethanol plants in 2004, which added about 30 cents to the value of each bushel. As the mandated use of renewable fuels increases, that figure is sure to rise -- which is great for farmers.
The question is, how far can this process go? The 4 billion gallons of mandated renewable fuel use this year is less than 3 percent of all motor fuel use in this country. Do we have the land available to produce enough renewable fuel to make much difference in total petroleum imports?
In his speech, Bush promised that the government will ``fund additional research in cutting-edge methods of producing ethanol, not just from corn, but from wood chips and stalks, or switch grass. Our goal is to make this new kind of ethanol practical and competitive within six years.''
That's a very ambitious, rather dubious timetable, particularly since ethanol from corn remains far from competitive. In the meantime, unless we take other serious steps -- such as raising fuel taxes or boosting vehicle mileage requirements -- nothing will reduce our addiction to oil.
For purposes of improving national security, ethanol is at best a bit player.
To contact the writer of this column: John M. Berry in Washington at [email protected]
