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Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Analysts: Gas May Soon Cost $4 Per Gallon

Speaking of the high cost of gas these days, the Associated Press’ John Wilen said today that gasoline prices extended their record run at the pump. He wrote:

At the pump, the national average price of a gallon of gas rose 0.2 cents overnight to $3.289 a gallon, according to AAA and the Oil Price Information Service. That’s the latest in a string of records set as gas prices have followed surging oil futures higher…

Wednesday’s surge in gas futures, accompanied by a big gain in oil prices, is expected to send prices even higher at the pump in the near future; retail prices follow the futures market, although with some time lag.

How bad could gas prices get? The AP business writer said:

The report also showed that refiners are holding back on producing gasoline due to low refining profit margins. The combination of low production and higher demand during peak summer driving season — and high crude prices — could boost gas prices even further into record territory…

The Energy Department expects gas prices to peak near $3.50 a gallon later in the spring. Many analysts think prices could rise as high as $3.75 or $4.

It’s no surprise then that with prices rising at the pump, politicians are not only (predictably) attacking Big Oil, but are clamoring for the White House to bust out that “Magic ‘Tussin,” otherwise known as the Strategic Petroleum Reserve. R.A. Dillon of the Fairbanks Daily News-Miner wrote today:

Obama energy adviser Jason Grumey recently told Reuters news service that the candidate would stick it to Big Oil.

Grumey said Obama would take an active role in U.S. oil markets as president, challenging the dominance of large oil companies and perhaps using the Strategic Petroleum Reserve to ease supply concerns and lower prices.

Give me a break. Not that I like high energy prices, but does the Obama campaign really think Americans are stupid enough to believe there’s a simple fix to our energy problems? Apparently so, as they’re portraying the Illinois Senator as the solution to the gas pump blues. Right now, the Obama campaign is running a TV ad in Pennsylvania attacking Big Oil. Dillon wrote:

The 30-second-spot opens with a shot of a long line of cars waiting at an Exxon retail station during the energy crisis of the 1970s.

“Nothing’s changed,” Obama says in the ad. “Except now, Exxon’s making $40 billion a year, and we’re paying $3.50 for gas.”

The Illinois Democrat goes on to say he won’t let Big Oil “block change anymore” and that he’ll push for a tax on “windfall profits” to pay for developing alternative sources of energy and energy assistance for low-income families.

Alternative sources of energy? Like corn ethanol? Time’s Michael Grunwald wrote on March 27:

But on Nov. 6, at a biodiesel plant in Newton, Iowa, Hillary Rodham Clinton unveiled an eye-popping plan that would require all stations to offer ethanol by 2017 while mandating 60 billion gal. (227 billion L) by 2030. “This is the fuel for a much brighter future!” she declared. Barack Obama immediately criticized her–not for proposing such an expansive plan but for failing to support ethanol before she started trolling for votes in Iowa’s caucuses.

So, what’s the problem with biofuels and corn ethanol? Grunwald also noted in his piece:

But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it’s dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous.

Like I said, resolving the energy issue isn’t that simple. Think about it- if it were, Americans would have figured it out during the last energy crisis. I could not find anything about Mr. Grumey’s energy credentials. However, legendary energy investor T. Boone Pickens had this to say last month regarding the U.S. presidential candidates and their understanding of energy. Pickens said, “They don’t know anything about it.”

Sources:

“Gas prices rise to new national record”
John Wilen
Associated Press, April 3, 2008

“Oil companies targeted in Obama’s Pennsylvania ad campaign”
R.A. Dillon
Fairbanks Daily-News Miner, April 3, 2008

“The Clean Energy Scam”
Michael Grunwald
Time, March 27, 2008

Are Americans Bio-Fools?

Anyone read Time? I have a gift subscription, and while my first choice of reading material these days is predominantly financial, when I saw the cover of the latest issue I felt compelled to pick up the magazine and take a closer look. On the cover, an ear of corn is pictured with leaves that have been replaced by $100 bills. The accompanying headline reads “The Clean Energy Myth.” Time’s Michael Grunwald states at the outset:

The Clean Energy Scam. Hyped as an eco-friendly fuel, ethanol increases global warming, destroys forests and inflates food prices. So why are we subsidizing it?

Ouch! The U.S. farm lobby must be going bananas right now. Grunwald explained the drawbacks of ethanol, whose viability as an alternative fuel is being increasingly questioned:

But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it’s dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous. Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline.

Meanwhile, by diverting grain and oilseed crops from dinner plates to fuel tanks, biofuels are jacking up world food prices and endangering the hungry. The grain it takes to fill an SUV tank with ethanol could feed a person for a year. Harvests are being plucked to fuel our cars instead of ourselves. The U.N.’s World Food Program says it needs $500 million in additional funding and supplies, calling the rising costs for food nothing less than a global emergency. Soaring corn prices have sparked tortilla riots in Mexico City, and skyrocketing flour prices have destabilized Pakistan, which wasn’t exactly tranquil when flour was affordable…

But the basic problem with most biofuels is amazingly simple, given that researchers have ignored it until now: using land to grow fuel leads to the destruction of forests, wetlands and grasslands that store enormous amounts of carbon.

Deforestation accounts for 20% of all current carbon emissions. Grunwald used the example of the Amazon in Brazil. He wrote:

U.S. farmers are selling one-fifth of their corn to ethanol production, so U.S. soybean farmers are switching to corn, so Brazilian soybean farmers are expanding into cattle pastures, so Brazilian cattlemen are displaced to the Amazon…

…resulting in Paulo Bunyan

Apparently, there is hard science to back up Grunwald’s claims that biofuels are harmful. He wrote:

The environmental cost of this cropland creep is now becoming apparent. One groundbreaking new study in Science concluded that when this deforestation effect is taken into account, corn ethanol and soy biodiesel produce about twice the emissions of gasoline…

“People don’t want to believe renewable fuels could be bad,” says the lead author, Tim Searchinger, a Princeton scholar and former Environmental Defense attorney. “But when you realize we’re tearing down rain forests that store loads of carbon to grow crops that store much less carbon, it becomes obvious.”

Knowing all this, we must return to the question of why we are subsidizing it. The answer? Biofuels are politically-popular. Grunwald wrote:

Members of Congress love biofuels too, not only because so many dream about future Iowa caucuses but also because so few want to offend the farm lobby, the most powerful force behind biofuels on Capitol Hill. Ethanol isn’t about just Iowa or even the Midwest anymore. Plants are under construction in New York, Georgia, Oregon and Texas, and the ethanol boom’s effect on prices has helped lift farm incomes to record levels nationwide.

Someone is paying to support these environmentally questionable industries: you. In December, President Bush signed a bipartisan energy bill that will dramatically increase support to the industry while mandating 36 billion gal. (136 billion L) of biofuel by 2022. This will provide a huge boost to grain markets…

… and, quite possibly, global warming, the destruction of forests, and food prices as well.

Source:

“The Clean Energy Scam”
Michael Grunwald
Time, March 27, 2008

The Next Bubble?

One text that helped shape my outlook on the U.S. economy was America’s Bubble Economy: Profit When It Pops, by Eric Janszen, Cindy Spitzer, David Wiedemer, and Robert Wiedemer. In the book, the authors argued that not one, but several financial bubbles exist simultaneously in the United States. These bubbles interacted with each other and temporarily boosted our economy. However, now they pose a significant threat not only to us but the global economy as well. Back on January 15, Eric Janszen, who is also an entrepreneur, investor, and has his own website, iTulip, was the subject of a post in the Wall Street Journal’s “The Informed Reader” blog. Apparently, Janszen wrote in Harper’s Magazine that a new bubble may be emerging. According to the Journal:

Where will the next bubble turn up? In Mr. Janszen’s view, the alternative-energy industry’s expansion is showing some of the same patterns that allowed values to swell far beyond their true worth during the dot-com and housing booms. For starters, green energy is popular with the media and with politicians. Energy security has become a catchphrase for both Democrats and Republicans. It has received favorable legislation involving loan guarantees and subsidies, just as the Internet got a sales-tax amnesty in the 1990s and deregulation allowed banks to offer more credit to potential homeowners.

Finally, the industry is flush with fresh capital. The Internet bubble was inflated by irrationally exuberant venture capitalists and IPO investors. The housing boom exploded thanks to the packaging of securitized debt. In the case of alternative energy, venture capitalists seem once again willing to supply the new capital.

Ironically, the Wall Street Journal announced earlier today that a new blog, “Environmental Capital,” is being rolled out on its website. According to the very first post:

Welcome to Environmental Capital, The Wall Street Journal’s new daily blog about the business of the environment. It’s not just about melting ice sheets. It’s about the flow of money…

There’s no end of hyperbole in the hubbub about saving the planet. Carbon offsets, renewable energy, hybrid cars- all are sensible ideas drawing massive amounts of investment. How much they do for the planet will depend on the details of how they’re rolled out. We’ll drill into those details.

With today’s announcement by the Fed of additional interest rate cuts, the fastest easing of monetary policy in the United States since 1990 further increases the likelihood of a bubble in “green” energy. In a Bloomberg piece from yesterday entitled, “Fed May Cut Rate Below Inflation, Risking Bubbles,” Craig Torres and Simon Kennedy wrote about the possibility (now reality) of Ben Bernanke and the Fed cutting interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974. According to Torres and Kennedy:

So-called negative real interest rates represent an emergency strategy by Chairman Ben S. Bernanke and are fraught with risks. The central bank would be skewing incentives toward spending, away from saving, typically leading to asset booms and busts that have to be dealt with later.

Marvin Goodfriend, a former senior policy adviser to the Richmond Fed bank, told Bloomberg that negative real rates are “a substantial danger zone to be in.” He said:

The Fed’s mistakes have been erring too much on the side of ease, creating circumstances where you had either excessive inflation, or a situation where there is an excessive boom that goes on too long.

And what if circumstances don’t allow for a bubble in alternative energy to take place, or any other bubble, for that matter? According to the Journal piece from January 15:

Mr. Janszen says the financial sector would probably collapse under the weight of the losses it incurred under the previous bubble. The only thing worse than a new bubble, he says, would be its absence.