Another challenge for ethanol
Jack M. Geller, Ph.D.
The commercial ethanol industry in Minnesota is less than 20 years old and throughout its short lifespan it has been shadowed by a variety of criticisms and challenges. But at each turn a variety of advocates, from farm groups to environmentalists to economists, seem to have successfully addressed these criticisms head on.
First was the straightforward and constant critique that the industry could not financially stand on its feet without public subsidies. But over the past 24 months, as the price of a barrel of oil exceeded the $60 mark, much of this criticism has died down. Next came the “energy exchange” issue, which argued that if you sum up all the energy it takes to produce a gallon of ethanol (including the energy it takes to grow the corn), you would conclude that it takes more energy to produce a gallon of ethanol than you derive from a gallon of ethanol. But as the technology to distill ethanol along with the technology to increase corn yields improved over time, most of these criticisms have died down, too. A more recent criticism, and one that has yet to be resolved, is the “food vs. fuel” debate. Here the ethanol industry is being blamed for the rapid rise in the market price of corn, which directly affects everything from the price of feed for livestock to corn sweeteners in soda pop to tortillas in Mexico City. There’s clearly some truth here, but most advocates will tell you that there is plenty of corn out there, and economists will emphasize that the forces of supply and demand have a way of finding equilibrium.
But now a recent study out of Iowa State University has given me reason to pause. Economists there make a simple and straightforward prediction: that our efforts to find alternatives to petroleum, reduce our dependence on oil from foreign and often hostile suppliers, and reduce greenhouse gases is creating a rapid rise in the supply of ethanol nationwide that will significantly surpass demand in the very near future. Further, the logical consequence of this oversupply will be a significant drop in the price of ethanol and a big financial challenge for ethanol producers and investors. After all, ethanol is now simply a commodity, and we all know that commodity markets inevitably go through both boom and bust cycles.
While I’m not yet ready to play the role of Chicken Little and say the sky is falling, I have to admit that our experience here in Minnesota seems to lend support to this prediction. There’s no doubt that the supply of ethanol is rising rapidly. In 2005 the largest ethanol plant in Minnesota opened just 10 miles west of my house. This new plant had a production capacity of 53 million gallons. Now two years later, each of the five new ethanol plants currently under construction in Minnesota will essentially double that capacity, at 100–110 million gallons apiece! And that’s not counting new plants being built in other states.
Is the demand really out there for all this capacity? And more importantly, do we have a way to distribute the supply to meet the demand? Bear in mind that when I talk about demand, I’m not referring to our collective interest or desire to use more ethanol, but rather the act of drivers actually purchasing it, and that requires delivering it to the pump. In Minnesota we are clearly a leader in this regard. Years ago we mandated demand through our state policies by requiring that our “regular” gasoline at the pump contain a 10% ethanol blend. So whether you realize it or not, you’re increasing the demand each time you fill up. And here in Minnesota we have more E-85 pumps to meet the needs of drivers of flex-fuel vehicles than any other state in the U.S.
Yet at the same time, we must realize that with a few exceptions in areas where smog control and air quality are a big problem, we are the only state to have mandated an ethanol blend at the pump. And while we may take some pride in having more E-85 pumps in Minnesota than any other state, let’s admit that we still can’t find E-85 at most of the stations where we stop to fill the tank.
So if we really want to increase the growth of the ethanol industry and other biofuels nationwide, maybe we should spend a little less time focusing on production credits, tax incentives and increasing the supply, and a little more time building support for a nationwide E-10 mandate, promotion of flex-fuel vehicles and a national distribution infrastructure to get it to the pump.