Investor's Business Daily
08-23-06
Starved For Energy
INVESTOR'S BUSINESS DAILY
Energy: Despite huge subsidies and tax breaks, the only thing ethanol seems to
be accomplishing is eating up the corn supply. Consider that one tankful of
ethanol could feed one person for a year.
If there were an example of the law of unintended consequences, it would be
ethanol, a fuel aimed at making us energy independent by relying on a
homegrown resource — corn.
A year ago Indiana Gov. Mitch Daniels decided his corn-rich state would make
ethanol use widespread. He designated the town of Reynolds, population 550,
"BioTown USA." Reynolds was to be a showcase, the first town to run entirely on
renewable energy.
But the law of supply and demand got in the way. The question quickly arose: Do
you install ethanol pumps at $50,000 a pop when there are few cars to line up at
them or do you try to sell vehicles that use ethanol when there's no place to fill
up?
There are 6.5 million flex-fuel vehicles in use nationwide, less than 2.5% of all
vehicles. Only 750 of 167,000 stations nationwide offer E85, a mix of 85%
ethanol and 15% gasoline. The nearest ethanol pump for Reynolds residents is
30 miles away.
Then there are the laws of economics. Station owners such as John Harris, who
owned the town's only gas station, found it would have cost him $500,000 to
$750,000 to alter his station to include E85 ethanol and biodiesel pumps.
Considering that even at $3 a gallon, gasoline yields only a 1% to 2% profit
margin for station owners; that's a huge investment. A lot of them depend on
convenience store sales to stay in business. As Harris put it, "That's a lot of
candy bars."
Ethanol was touted as a cheap alternative to gasoline, but receives a huge
subsidy per gallon. It now trades at 50 cents a gallon more than gasoline in
futures markets. As corn prices rise with demand, something will have to give.
Some problems are less obvious, such as hunger. Yes, hunger. As noted by
Lester Brown, president of the Earth Policy Institute, the grain required to fill a
25-gallon SUV tank with ethanol could feed one person for a year. But even if the
entire U.S. grain harvest were made into ethanol, we'd satisfy just a sixth of U.S.
energy needs.
In Iowa, site of the first step for presidential wannabes, 25 ethanol plants are
operating, four are being built and 26 are planned. Iowa State University
economist Bob Wisner says once built, they'll consume the state's entire
harvest. In South Dakota, ethanol plants already consume half that state's crop.
Prices for sugar, corn and wheat are up sharply this year, thanks largely to
soaring ethanol use. The Agriculture Department reports that world grain
consumption will rise 20 million tons this year. Of that, 14 million tons will go into
American gas tanks.
Grocery stores and gas stations now compete for the same resource as do
stomachs and gas tanks.