Bloomberg.com
07-23-07
Forget the Ethanol Myth -- Avoid Biofuel Bubble: John F. Wasik
By John F. Wasik
July 23 (Bloomberg) -- An old Midwestern maxim deems a corn crop healthy if it's
``knee-high by the fourth of July.''
Yet when it comes to the expectations that corn-based ethanol will cure
America's dependence on foreign oil, the hype is way over everyone's head.
Running the numbers on how much land could be put into production for cornbased ethanol makes it clear how little of the fuel could be produced to help curb
America's energy gluttony.
There isn't enough suitable land for corn growing to make a significant dent in
America's voracious energy needs. Yet that hasn't stopped ethanol investors or a
wave of irrational exuberance from Wall Street to Brazil.
You can see the ethanol frenzy at more and more gasoline stations.
The number of fueling outlets providing gasoline with ``E85,'' or gas containing
85 percent ethanol, is now more than 1,200, compared with less than 750
stations last year, to service more than 4.5 million flexible-fuel vehicles,
according to the National Ethanol Vehicle Coalition. There are 110 ethanol plants
running in the U.S., with 73 more under construction.
Bolstered by President George W. Bush in his State-of-the- Union speech, it's
projected that U.S. ethanol production will reach 35 billion gallons per year in a
decade -- double the current level.
Rain and Soil
Yet there's a resource issue that's rarely mentioned in all of the ethanol
cheerleading.
In order to grow corn, you need lots of land, water, fertilizer and fuel. Most of the
commodity is cultivated in Iowa and Illinois where the rainfall is usually sufficient
and the soil rich enough for high-yield corn.
Say you were able to cultivate every acre of Illinois for corn-based ethanol. This
is purely hypothetical as it would involve bulldozing Chicago and other cities and
towns in the Prairie State. As an Illinois resident surrounded by cornfields, fleeing
demolition is not my relocation fantasy.
One of the potentially most productive corn-growing states on the planet would
yield about 5.7 billion bushels of corn and 16 billion gallons of ethanol, according
to Charles Washburn, professor emeritus at California State University in
Flagstaff, Arizona. He has researched the subject over the past 45 years.
Illinois Not Enough
The Illinois mega-crop would provide only 0.8 percent of annual U.S. gasoline
and diesel-fuel use, Washburn estimates, subtracting the energy it takes to
create ethanol.
Of course, U.S. energy consumption isn't a static beast. Washburn further
projects that ``a new corn field the size of Illinois would be required to meet our
transportation energy growth every seven months.''
Even if every bushel of U.S. corn, wheat, rice and soybean were used to produce
ethanol, it would only cover about 4 percent of U.S. energy needs on a net basis,
Washburn estimates.
The U.S., in its quest to reduce its reliance on expensive imported oil, may soon
consume as much as half its domestic corn crop for fuel production, though the
economic benefits have yet to materialize. Ethanol produces one-third less
energy than a gallon of gasoline at an average wholesale cost of 33 percent
more, according to a U.S. Government Accountability Office study.
The demand for corn bound for ethanol use has farmers planting more of the
golden kernels than they have in 63 years on more than 90 million acres.
Since corn growing is energy- and fertilizer-intensive, that means more water
pollution and less corn for food stocks.
Food Prices
Most fertilizer is produced from natural gas, a byproduct of oil drilling that is rising
in price.
The other byproduct of the ethanol obsession is more- expensive food. Higher
corn prices have boosted the cost of producing beef, poultry and thousands of
processed products.
Food prices have climbed an average of $47 per person due to the ethanol surge
since last July, according to an Iowa State University study published in May;
corn--<a href="blpnews:linkid=INJ3FHZWVHBM"></a>price price futures
reached a 10-year high of $4.28 a bushel in February. All told, ethanol has cost
Americans an additional $14 billion in higher food prices.
These increases have also pushed up sugar prices, which rose to a three-month
high in New York on July 18 on speculation that demand for the commodity will
strengthen to help produce ethanol, an alternative to oil. Brazil is the largest
sugar grower.
Meanwhile, the U.S. government has yet to discover whether its 51-cent-pergallon ethanol subsidy is efficiently stimulating production of the fuel. One thing
the bureaucrats know for sure: It cost the U.S. Treasury $2.7 billion last year with
possibly more subsidies on the way.
Ethanol Folly
The ethanol reality hasn't fully sunk in on Wall Street. The ABN Amro Biofuels
Index has fallen 3 percent this year. Houston-based Gulf Ethanol Corp., which
has a market value of about $24 million, has gained 40 percent.
Archer Daniels Midland Co., based in Decatur, Illinois, has added 14 percent. It is
the largest U.S. processor of ethanol.
Those who bet exclusively on ethanol will suffer the same fate as those investors
who took the plunge on fiber-optic, Internet and computer-router companies in
the late 1990s. They will concentrate their risk when prices are at a peak -- and
then get burned.
For a broader sampling of biofuel and alternative-energy stocks, try an
exchange-traded fund such as Market Vectors Global Alternative Energy ETF,
which tracks a basket of companies that invest in wind, solar and biofuel
technologies, or the Powershares Wilderhill Clean Energy Portfolio.
Corn ethanol isn't a viable short-cut to reducing energy consumption.
Ethanol is also a sorry stopgap for the overdue need to mandate higher fuelefficiency standards in buildings, homes, buses, cars, trucks and vans.
When the verdant cornstalks are ``as high as an elephant's eye,'' we often forget
that products based on agricultural commodities are seldom good long-term
investments.
In addition to market forces and rampant speculation, nature can enter the
picture with a vengeance in ways that we can't anticipate.
(John F. Wasik, author of ``The Merchant of Power,'' is a Bloomberg News
columnist. The opinions expressed are his own.)
To contact the writer of this column: John F. Wasik in Chicago at
jwasik@bloomberg.net .