(cross-posted at Deny My Freedom and Daily Kos)
That may seem like any other factory, but it is in fact a factory where ethanol is produced. Earlier this year, Bush went around the country, touring in support of ethanol production. The main arguments were in favor of fuel efficiency and in having cleaner emissions from cars. The facts look impressive, to say the least. It’s a renewable source of energy (it is mainly produced by corn, but there are plans to produce ethanol from alternative sources, such as sugar cane), it reduces emissions from cars by 12-19%, and it lowers the level of carbon monoxide released from an automobile’s tailpipe.
Al Gore makes an important point when he says that environmentally friendly policies can coincide with the goals with corporations, which is, quite plainly, to maximize profit. However, at what point are these goals too much aligned with one another? In particular, I am speaking about the rising price of ethanol to the point where it doesn’t alleviate the pain of filling up at the pump – it aggravates it.
Ethanol has been touted by President Bush and others as a possible long-term cure for Americans’ addiction to fossil fuels, especially expensive gasoline. But right now it is pushing pump prices higher in the U.S.
Ethanol, a plant-based fuel, is being used in the U.S. primarily as an additive to blend with gasoline in proportions of up to 10%, not as an outright substitute. Demand for ethanol as an additive has caused its price to soar about 65% since early May to around $4.50 a gallon in U.S. spot markets, according to the Oil Price Information Service. That makes it far more expensive than gasoline, which costs about $2.90 a gallon at the pump on average, according to the AAA driving club.
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“We’d probably have retail gasoline prices between $2.30 and $2.40 a gallon if not for ethanol,” estimates economist James Glassman of J.P. Morgan.
Ethanol trader Sal Gilbertie of brokerage firm Fimat USA agrees the additive is pushing up gasoline prices — but he pegs ethanol’s impact at only around eight cents a gallon, including such factors as a federal tax credit refiners get for using it. He expects ethanol’s influence won’t fully abate until sometime in 2008, when supplies are expected to increase.
Now, don’t get me wrong – I am not arguing that we should not be making ethanol, as it gasoline that is blended with ethanol is friendlier to the environment. It’s clear, though, that by richly subsidizing an industry that would not exist without government help, we have exacerbated the pain being felt in our pocketbooks. When investing in new technologies, start-up costs will obviously exist, making the initial price quite hefty. The problem with artificially creating a market, though, is that this is inevitably going to lead to the bankruptcy of companies that jump into the game, only to find at some point that demand for the additive is reached. What’s more, it’s clear that firms that produce ethanol are raking in huge profits. Do we really need to give them any more money at this point?
Welcome to the ethanol boom, the closest America’s farmers may get to an investment bubble. Since the pro-ethanol State of the Union address in January, shares of Fresno-based Pacific Ethanol Inc. (PEIX ) have doubled, to 37. Green Plains Renewable Energy has risen 40%, to 46, since it began trading in March.
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The fuel, renewable and more environmentally friendly than gasoline, is already being used as a gas additive, replacing another additive that was found to pollute groundwater. The result: a squeeze on supplies that has doubled ethanol’s wholesale price, to $2.75 a gallon, about what gasoline costs at wholesale. With corn prices low and gas prices high, ethanol’s profit margin per gallon is at a record of more than $1. “You don’t need Willie Nelson organizing concerts for these farmers,” jokes Tom Kloza, an analyst for the Oil Price Information Service.
The kicker is this little nugget – so much for fuel efficiency…
What of the promise of ethanol replacing gas? Don’t count on it. General Motors Corp. (GM ) and Ford Motor Co. (F ) have made a push this year to promote vehicles that can run on gas or E85, a fuel that’s 85% ethanol and 15% gasoline. But E85 gets worse mileage than gas, a problem if ethanol is costlier. And right now there are only about 600 E85 pumps nationwide.
Minnesota, which has its own state-run subsidy program, faces a similar problem as well:
But taxpayers are still being billed $26 million a year to subsidize the state’s 11 privately owned ethanol plants, even though they’re generating unprecedented profits.
Wally Tyner, a Purdue University economist, calculated that at today’s fuel prices, an ethanol plant that cost $100 million could be paid off in a year. “They’re hugely profitable, that’s why so many of them are being built,” Tyner told the St. Paul Pioneer Press.
While it’s become increasingly clear that we’re giving away money to ethanol producers instead of providing useful assistance to a nascent industry, there’s an unpleasant dilemma that ethanol has created. Producing ethanol requires energy to begin with, and to cut down on high energy prices (and maximize their profits, of course), companies are turning to the worst polluter of all: coal.
Coal is cheaper than natural gas, the fuel used most to make ethanol. A coal-fired ethanol plant can also generate electricity that can be sold onto the grid, which increases the efficiency of both ethanol and electricity production.
In the most striking example of this efficient combination, Blue Flint Ethanol, a North Dakota producer, is building a plant next to Coal Creek Power Station, a 1,200-megawatt facility owned by Great River Energy. The plant will rely on excess heat from Coal Creek’s boilers to run the ethanol plant. The heat will be used to create the steam necessary to refine corn into 50 million gallons of ethanol each year. Blue Flint Ethanol is a joint venture between Great River and Headwaters Inc.
“This whole concept of having an energy complex is a very efficient way to minimize carbon-dioxide emissions and take advantage of the waste heat from a power plant,” said Bob McIlvaine, president of energy consulting firm McIlvaine Co.
Any sort of contribution that ethanol makes to decreasing air pollution will be negated many times over by coal. This may be an inconvenient truth to many of us, who thought that E85 and other hybrid energy solutions could at least slow down the problem of global warming. Without any sort of regulations on how ethanol can be produced, we may have opened a Pandora’s Box in letting coal be considered a viable energy source again, even though it is the dirtiest of the fossil fuels. In addition, businesses see a side business that could be very profitable for them.
Other companies are pursuing a similar strategy of building small coal-fired boilers that will run ethanol plants and generate electricity. Great River is helping build a 40-megawatt coal-fired boiler in Spiritwood, N.D., that will sell electricity and power a 100-million-gallon-a-year ethanol plant. A group of investors in Goodland, Kan., is building a 20-megawatt boiler that will generate electricity and power ethanol and biodiesel plants. Coal-burning ethanol plants are also under construction in Illinois, Iowa, Minnesota and Missouri.
For the short-term benefit of ethanol – let’s face it, blending ethanol with gasoline does not solve our larger problem of depending on oil; it just makes the time we can depend on oil even longer – we could be incurring a deadlier risk of seeing more and more coal-fired power plants eject massive amounts of pollution into the atmosphere. And the reason? We have given corporations a few too many points of making a profit. You’ll see various taxpayer watchdog groups and right-leaning think tanks rail against ethanol purely from a fiscally conservative point of view. But we failed to defend any sort of environmental standards when it came to producing the additive. Now, we face a situation where gas prices are higher, corn prices are higher, corporations are raking in record profits (both gasoline and ethanol producers), and our air pollution could stand to get much worse before it gets any better.
It’s an inconvenient truth, but ethanol is going to hurt us more than it will help us.
