Ethanol —Things Are Getting More Complicated
A year ago, ethanol production was booming and prices were soaring. Corn growers were happy and the new fuel had Congress' support. Today, it's a different story.
Fill 'er up!
Ethanol production increased so far and so fast that maybe it had to crash. But recently the fuel made from corn has lost some of its profit, its environmental promise and its political backing, according to articles appearing in the past few days.
Wednesday morning, the Los Angeles Times reported that disagreement over ethanol subsidies had stalled the energy bill in Congress. Although every presidential candidate (but Republican John McCain) has pledged support to ethanol in the corn-obsessed Iowa primary, in Washington, D.C., ethanol has increasing opposition outside the Corn Belt, according to Times reporter Roger Simon.
Farm groups and pro-ethanol Democrats want the new energy bill to increase fivefold the amount of ethanol that must be blended into U.S. gasoline by 2022. Opposing this increase are cattlemen, who use corn for feed, environmentalists and food industry groups, who worry that higher corn prices will lead to increasing food costs.
Meanwhile, a headline on the front page of the Wall Street Journal reports, “Ethanol Craze Cools as Doubts Multiply.” (Subscription required to see this one.) Lauren Etter writes:
“In the span of one growing season, ethanol has gone from panacea to pariah in the eyes of some. The critics, which include industries hurt when the price of corn rises, blame ethanol for pushing up food prices, question its environmental bona fides and dispute how much it really helps reduce the need for oil.”
What’s wrong with ethanol? Where do you start? Etter writes:
“A recent study by the Organization for Economic Cooperation and Development concluded that biofuels "offer a cure [for oil dependence] that is worse than the disease." A National Academy of Sciences study said corn-based ethanol could strain water supplies. The American Lung Association expressed concern about a form of air pollution from burning ethanol in gasoline. Political cartoonists have taken to skewering the fuel for raising the price of food to the world's poor.”
Wall Street Journal Graphic
Meanwhile, as production has soared, prices for ethanol have dropped. Worldwide, ethanol production increased from a little over 10 billion gallons in ’06 to 13.4 billion gallons this year. The U.S. accounts for half that total. Ethanol prices peaked at about $5 a gallon in 2006. Today, it brings $1.85. The profit on a gallon of ethanol has simultaneously dropped from $2.30 a gallon last year to just a quarter today.
(For a good background on world ethanol production, see this article from USDA’s Economic Research Service.)
The politics of ethanol are interesting because they split groups that normally are allies. Farm groups are splintered. Now you have the livestock, meat and food industry groups allying with the oil industry (which doesn’t like the idea of any liquid fuel replacing oil). Cattlemen are opposed to corn growers. And farm state Democrats and Republicans are opposed by environmental Democrats and oil Republicans.
The House is expected to take up the energy bill next week. Once it passes, the House bill must be reconciled with the Senate version.