A Small Win Against The Great Biofuel Boondogle

When Congress adjourned in 2011, it did so without renewing the 45-cent-per-gallon tax credit for corn-based ethanol, nor the 54-cent-per-gallon tariff on imported ethanol. Those are two victories, but only small ones in the larger war on ending our nation's insane bio-fuels / ethanol policy. That policy pays off the politically well connected while doing immense economic harm.

The demise of the subsidy and the tariff do nothing to change the fact that demand for ethanol / bio-fuels is wholly a creation of our government. There is no market in site. It is not a question of supply meeting demand. It is a question of the government mandating ever increasing demand on one hand and subsidizing production on the other. It has been a virtual siren call for the worst of crony capitalism, waste, fraud and abuse. And as to removal of the production subsidy, that will likely only mean that we now have to pay more at the pump for E-90 (the gas to 10% ethanol mix mandated by the EPA.)

Ethanol has been around for near a century and has a legitimate use, at levels of about 5%, as an additive to gas to reduce smog in those few areas of our country where smog was historically a major problem. But around 2000, the greens made a push to recast ethanol and biofuels as actual replacements for our fossil fuels – replacements that could reduce carbon dioxide emissions and lower our dependence on foreign oil. And it was Republicans in Congress, urged on by the greens and Dems, who bit on this insanity.

It was a world class sham at the time. But that didn't stop Al Gore from cynically pushing it, nor George Bush from inexplicably signing it into law, first with the Energy Policy Act of 2005, then the Energy Independence and Security Act of 2007. Together, those laws created a requirement that all refiners mix a blend of gasoline with biofuels, setting a target known as the Renewable Fuel Standards (RFS2). The RFS2 contains mandates for different types of bio-fuels, the most important being ethanol made from corn and cellulosic biofuels made from plant scrap and non-edible plants.

So why is all of this so so so screwed. Let us count the ways:

1. Government driven ethanol production is causing massive, world wide food inflation and food shortages. Its effect falls squarely on those least able to afford it, driving well over a hundred million below the poverty line.

Corn today is being produced at or near record levels. Given normal laws of supply and demand, an increased supply would mean falling prices. U.S. corn was priced at $2 per bushel in 2006, at the start of the biofuel mandate. In just 6 years of this madness, the price has risen 225% to 7.50 a bushel today. Last year marked the first time that more corn was used to make ethanol than for any other single use, including its historic use as the primary source of feed for livestock and poultry.

As corn rises in price, so do the incredible number of foods that either contain corn products, use corn in their production, or that are indirectly effected by the switch of many farmers to a corn crop at the expense of other crops. U.S. consumers are paying the most ever for pork chops, ground beef, flour and cheese. World food costs are 68 percent higher than five years ago. That is food inflation on an insane scale. Indeed, food prices today are at their highest ever. Recently, the chief executive of one of the world's largest food producers warned that the global crisis in food production is reaching "dangerous territory" with demand outstripping supply.

While it is true that the causes for this food inflation are multiple, it is equally true that much if not most of it is due to the insane push to create "bio-fuels" out of food crops. And of course, these world record food prices are falling hardest on the poor, both at home and abroad, for whom the cost of food makes up most of their budget. The World Bank has been beating the drum on this for years, screaming to high heaven that the world's biofuel policies are driving people into extreme poverty. In 2008, the World Bank estimated that those policies had driven over 100 million people to below the povery line. Most recently was another call by the World Bank in 2011 to end the biofuel insanity:

The World Bank is calling on Governments around the world to relax laws requiring biofuels to be mixed with conventional fuels for road transport use as global food prices remain volatile.

According to the organization, rising food and fuel prices is causing unrest in some of the world’s poorest countries as more people face being pushed below the $1.25 daily income extreme poverty line.

Driven in part by higher fuel costs connected to events in the Middle East and North Africa, global food prices are 36 per cent above their levels a year ago new World Bank Group numbers released this week reveal.

The bank is calling on governments to divert more crop production away from biofuels and ease export controls to prevent even more people falling below the extreme poverty line.

“More poor people are suffering and more people could become poor because of high and volatile food prices,” said World Bank Group President Robert B. Zoellick. “We have to put food first and protect the poor and vulnerable, who spend most of their money on food.”

The World Bank says that a further 10 per cent increase in global food prices would push a further 10 million people below this line. This is in addition to the 44 million people who have been driven into poverty since last June as a result of price spikes. The World Bank estimates there are now about 1.2 billion people living below the poverty line.

To add to the point about "unrest in some of the world's poorest countries," this rise in food prices has played a major role in kicking off the recent revolutions throughout Middle East. This food price inflation is likely the single most serious problem facing our world.

But things are not going to get better, nor even stabilize. All of these problems, including the price of corn, are set to get exponentially worse as the Bush era laws and the EPA force a massive expansion of biofuel production through 2022. In 2006, Congress mandated through the RFS that 4 billion gallons of ethanol be purchased by refiners for mixing in gas. By 2008, as the economic pain RFS2 was becoming blatantly obvious, the RFS2 mandated that refiners purchase 9 billion gallons of bio-fuel to mix with gas. In 2012 the number will be 12 billion gallons of ethanol. You think we have problems now, wait til we start to get close to 2022, when Congress has mandated that refiners use 36 billion gallons of biofuel

It should also be noted that the EPA takes the position that all of this use of corn for biofuel is having a negligible impact on food prices. It is risible and, indeed, criminally false. The Competitive Enterprise Institute recently filed a complaint against the EPA asking that the EPA be required to reappraise their position on the costs of the ethanol mandates:

CEI and ActionAid filed their complaint under the federal Data Quality Act, claiming that EPA glossed over the negative human and economic impacts of its recent biofuel regulations. In fact, the complaint points out that EPA's published analysis of its ethanol mandates does not even mention resulting hunger and starvation. Moreover, the claimants attest the analysis erroneously minimizes the mandates' economic impacts.

For example, EPA predicted a decrease in world food consumption of only 0.04 percent and "a relatively modest increase in annual household food costs associated with the higher prices commanded by corn and soybeans." Yet the complaint cites a peer-reviewed study published earlier this year that found EPA's biofuel mandates have severely aggravated chronic hunger and poverty in poor areas. It estimated at least 192,000 deaths from the regulations, exceeding the World Health Organization's estimate of annual deaths from global warming by 51,000. The study concluded, "Thus, policies intended to mitigate global warming may actually have increased death and disease in developing countries."

Others have been decrying biofuel mandates since 2008 due to their human and environmental impacts. Henri Josserand of the United Nations Food and Agriculture Organization (FAO) explained food represents as much as 60 to 80 percent of consumer spending in developing countries. Drastic changes as EPA has enacted force people in those nations into extreme poverty and incite deadly food riots. South African finance minister Trevor Manuel called the mandates "criminal." Indian Finance Minister Chidambaram harshly criticized the measures, noting "in a world where there is hunger and poverty, there is no policy justification for diverting food crops towards bio-fuels."

And it is not just the rise in costs that is punishing the worlds poor. There are many horrifying anecdotal cases of poor people in third world countries having their small plots of land expropriated without compensation so that the land could be turned over to the production of biofuel crops.

2. Corn is vital not just as a food, but to food production. Yet, as of 2011, the U.S. now uses more of its corn to feed our tanks than for any other single purpose.

As noted above, 2011 marked the first time that more corn was used to make ethanol than for any other single use, including its historic use as the primary source of feed for livestock and poultry. The rise in cost of corn by 225% in just five years has wreaked havoc among livestock and poultry producers, where the major cost of bringing their animals to market is the cost of corn. The poultry industry has seen a rash of bankruptcies, including our nation's largest producer, Pilgrim's Pride, in 2008. The situation is no better in the hog industry. Smithfield CEO Larry Pope wrote in 2011, in the WSJ, that his corporation, which has only a 2 to 3% profit margin to begin with, has had to substantially downsize, closing six processing plants and a slaughter-house in an effort to minimize costs. He further discussed that he is now shrinking the size of Smithfield's packaged goods while bumping up the prices. As he concludes:

Mr. Pope says the "losers" here "are the consumer, who's going to have to pay more for the product, and the livestock farmer who's going to have to buy high-priced grain that he can't afford because he's stretching his own lines of credit. The hog farmer . . . is in jeopardy of simply going out of business 'cause he doesn't have the cash liquidity to even pay for the corn to pay for the input to raise the hog. It's a dynamic that we can't sustain."

3. Ethanol is not a viable cost effective alternative to gasoline.

As a threshold matter, even if all of the corn crop in the U.S. were given over to the production of ethanol, it would only supply 4% of our nations energy needs. It takes over 26 pounds of corn just to create one gallon of ethanol. Ethanol is highly corrosive and burns too hot for most engines to handle. Gasoline ignites at 495 F. Ethanol burns much hotter, igniting at 685 F. Indeed, the EPA has recently mandated a new mix, E-85 containing 15% ethanol, but it can only be sold for use in late model cars. Its use in older vehicles or in small engines, such as lawn mowers, will destroy the engine. The only reason the EPA is pushing this bad idea is because so much ethanol is now being mandated that E-90 will not alone be able to meet future RFS2 mandates. Thus the EPA is just going to require us to add 50% more ethanol to the mix to meed the mandates.

And on top of all those benefits, ethanol is a grossly inefficient fuel. It contains 34% less energy per unit volume than gasoline. The more ethanol in the tank, the worse gas mileage your vehicle will get.

Lastly, when one considers the indirect costs to our nation for this ethanol boon doggle, it become crystal clear that ethanol is not a cost effective substitute for gasoline. For instance, to run a single car 10,000 miles in a year on ethanol would require 11 acres of corn, enough to feed seven people for a year. And there was this itemization done last year by Zero Hedge, which still holds true today but for the 45 cent-per-gallon subsidy:

Real Cost For A Gallon Of Corn Ethanol
Corn Ethanol Futures Market quote for January 2011 Delivery	$2.46
Add cost of transporting, storing and blending corn ethanol	$0.28
Added cost of making gasoline that can be blended with corn ethanol	$0.09
Add cost of subsidies paid to blender	$0.45
Total Direct Costs per Gallon	$3.28
Added cost from waste	$0.40
Added cost from damage to infrastructure and user’s engine	$0.06
Total Indirect Costs per Gallon	$0.46
Added cost of lost energy	$1.27
Added cost of food (American family of four)	$1.79
Total Social Costs	$3.06
Total Cost of Corn Ethanol @ 85% Blend	$6.80

4.  Ethanol is not a "green" panacea that will protect us from carbon emissions

Ethanol was sold to America as cutting back on greenhouse gas emissions. But there are numerous studies that suggest the opposite, that the ethanol mandate actually results in the creation of more greenhouse gases when one considers not merely such gases released in the production process itself, but also changes to land use, a point most recently made in a report issued in October, 2011 by the National Academies of Science. Moreover, as the NAS makes clear, the U.S. land use restrictions do not apply in other countries, where vast swatches of rain forest are being cleared to meet the West's ethanol mandates. Even EPA studies acknowledge these facts, as explained by the WSJ in 2009:

[A study] by the Environmental Protection Agency's Office of Transportation and Air Quality . . . explains that the reduction in CO2 emissions from burning ethanol are minimal and maybe negative. Making ethanol requires new land from clearing forest and grasslands that would otherwise sequester carbon emissions. "As with petroleum based fuels," the report concludes: "GHG [greenhouse gas] emissions are associated with the conversion and combustion of bio-fuels and every year they are produced GHG emissions could be released through time if new acres are needed to produce corn or other crops for biofuels."

The EPA study also explores a series of alternative scenarios over 30 to 100 years. In some cases ethanol leads to a net reduction in carbon relative to using gasoline. But many other long-term scenarios observe a net increase in CO2 relative to burning fossil fuels. Ethanol produced in a "basic natural gas fired dry mill" will over a 30-year horizon produce "a 5% increase in GHG emissions compared to petroleum gasoline." When ethanol is produced with coal burning mills, the process "significantly worsens the lifecycle GHG impact of ethanol" creating 34% more greenhouse gases than gasoline does over 30 years.

And this doesn't even begin to consider the problems of increased water usage, increased fertilizer usage and erosion.

. . . [T]he most worrisome of recent criticisms of biofuels relate to their impacts on the natural environment. In the U.S., water shortages due to the huge volumes necessary to process grains or sugar into ethanol are not uncommon, and are amplified if these crops are irrigated. Growing corn to produce ethanol, according to a 2007 study by the U.S. National Academy of Sciences, consumes 200 times more water than the water used to process corn into ethanol.

In the cornbelt of the Upper Midwest, even more serious problem arise. Corn acreage, which expanded by over 15 percent in 2007 in response to ethanol demands, requires extensive fertilization, adding to nitrogen and phosphorus that run off into lakes and streams and eventually enter the Mississippi River watershed. . . 

5. The RFS2 Mandates Force Refiners To Pay For A Non-existent Product – Cellulosic Ethanol

RFS2 mandates that refiners buy and mix biofuels in ever increasing amounts and by specific types. By 2022, the RFS2 requires that refiners purchase 36 billion gallons of biofuel, broken down into no more than 15 billion gallons of corn-based ethanol and no less than 16 billion gallons of cellulosic ethanol.

When Congress passed the Energy Independence and Security Act of 2007, they expected cellulosic ethanol to be the next great panacea. They were snorting 100% pure fairy dust.

Cellulosic ethanol is biofuel made from crop waste and non-edible plants. It is supposed to limit competition with food crops and limit greenhouse gas emissions by up to 85%. Whether any of that is true, only time will tell because, at this point, its all speculation. Despite our government throwing billions at its development since 2005 and despite mandating that refiners buy it, not a single gallon of cellulosic biofuel has yet to be commercially produced.

No one has yet figured out how to make cellulosic ethanol on a commercial scale at anything even approaching cost competitiveness. In their October, 2011 report, the National Academies of Sciences opined that oil would have to hit almost $191 a barrel and a cap and trade program or carbon tax would have to be in place before cellulosic ethanol would be cost competitive. Stating that the RFS2 is “decoupled from the costs of biofuel production and economics,” the NAS saw virtually no chance that cellulosic ethanol would be able to meet the 2022 targets set out by Congress.

(Update from Q&O quoting the NYT)  There is nothing on the horizon for commercially available cellulosic ethanol in 2012:

One possible early source is the energy company Poet, a large producer of ethanol from corn kernels. The company is doing early work now on a site in Emmetsburg, Iowa, that is supposed to produce up to 25 million gallons a year of fuel alcohol beginning in 2013 from corn cobs.

And Mascoma, a company partly owned by General Motors, announced last month that it would get up to $80 million from the Energy Department to help build a plant in Kinross, Mich., that is supposed to make fuel alcohol from wood waste. Valero Energy, the oil company, and the State of Michigan are also providing funds.

Yet other cellulosic fuel efforts have faltered. A year ago, after it was offered more than $150 million in government grants, Range Fuels closed a commercial factory in Soperton, Ga., where pine chips were to be turned into fuel alcohols, because it ran into technological problems.

Nonetheless, despite all of these facts, the EPA continues to require refineries to purchase a certain amount of cellulosic ethanol for mixing each year. How can that be when the product doesn't exist?

Oil companies and fuel importers complain that the federal standards are unfair. Because cellulosic ethanol has not yet been produced commercially, refiners must buy waiver credits from the EPA to meet their obligation.

“Once again, refiners are being ordered to use a substance that no one is producing in commercial quantities — cellulosic ethanol — and are being required to pay millions of dollars for failing to use this non-existent substance,” Charlie Drevna, president of the National Petrochemicals and Refiners Association, said in a prepared statement. “This makes no sense.”

David Egner, a spokesman for the group, estimated that refiners will pay $6.8 million for cellulosic waiver credits in 2011, and if no cellulosic biofuels are produced in 2012, more than $8 million next year.

How's that for a bit of insanity. It does nothing but raise the price of gas at the pump for all Americans because EPA sets minimum purchase requirements for a non-existent product. So how does the EPA justify this?

[T]he EPA noted that the embryonic non-corn biofuels market needs an environment that encourages investment.

“In order to provide the appropriate economic conditions for the cellulosic biofuel industry to grow in accordance with the objectives of the statute, it is important that these fuels, once produced, have a viable market.,” the EPA said in its statement.

In other words, the EPA is creating a market for which there is no natural demand, for which there is no existing product, and for which there is no foreseeable circumstance where the product will be cost effective. Yet we get to pay for the privilege.

6.  Whenever the government gets involved in trying to create a market for a favored product, crony capitalism, massive waste, fraud and abuse are the inevitable result.

The biofuel sector, besides its recently ended direct subsidy, gets to take part in the programs and loan guarantees that gave us Solyndra. But in at least one way, the biofuel sector is far, far more insidious. The Obama administration is using our military to create and sustain biofuel markets, irrespective of how cost inefficient this is and how dangerous it is to our national security.

Obama's Secretary of the Navy, Roy Mabus, has signed up the Navy to purchase 50% of their total fuel needs (16 million barrels) from biofuels by 2020.

The secretary of the navy reached out to prominent industry leaders during a Washington, D.C., summit Jan. 25, in an effort to have them incorporate the use of alternative fuels in their push for a clean economy.

During the Clean Energy Summit, Secretary Ray Mabus began his review of the effects converting the Department of the Navy (DoN) from fossil fuels to alternative fuels will have on the economy on a basic level.

"A clean energy economy supports American workers and creates new jobs," said Mabus. Mabus continued by trying to increase understanding of the implications of fossil-fuel by discussing our country's dependence on it. . . .

He relayed information about DoN flying an F/A-18 with a camelina-based biofuel and a MH-60 Seahawk helicopter on an algae-based biofuel. Mabus said substitutions such as this would reduce the need for altercation caused by limited availability.

"Neither feedstock impacts the food supply," said Mabus. "Camelina can be planted in rotation, and algae – well, it's grown in a pond."

Benefits of alternative fuel extend beyond the abundance of ingredients necessary for their creation. Mabus said that implementing alternative fuels will save the American people money. . .

How screwed is this? The only things Mabus should be talking about is how the Navy is going to keep the Straits of Hormuz open and how it will meet the threat of China's massive expansion into a blue water fleet. Yet here is he talking about the Navy becoming an Obama jobs program and a prop for the left's green energy mania.

Obama is in the midst of decimating our military, announcing hundreds of billions in defense cuts just today. What makes this truly dangerous – and what makes an utter mockery of Mabus's claim that this push to make the Navy green will save money – is that none of the biofuels the Navy is being forced to buy are anywhere close to cost competitive. This last month from IBD:

SolyndraGate was no isolated case of corrupt government misspending. The U.S. Navy was just forced to buy 450,000 gallons of biofuels from an Obama-connected firm at an outrageous $16 per gallon. …

Now we find the Navy partnering with the Agriculture Department to purchase hundreds of thousands of gallons of alternative biofuel in place of standard JP-5 fuel for Navy aircraft — the biggest federal purchase of biofuel ever.

It’s part of the White House’s “we can’t wait for Congress” strategy as the 2012 election year looms. But JP-5 typically costs less than $4 a gallon. . . .

As J.E. Dyer noted over the weekend on the Hot Air Green Room, “a member of Obama’s presidential transition team, T. J. Glauthier, is a ‘strategic advisor’ at Solazyme, the California company that is selling a portion of the biofuel to the Navy. Glauthier worked — shock, shock — on the energy-sector portion of the 2009 stimulus bill.”

Solazyme had already gotten a nearly $22 million chunk of change out of the taxpayers thanks to the 2009 stimulus. We heard the ludicrous excuse last week from Obama Navy Secretary Ray Mabus, as quoted in the National Journal, that “we are doing this for one simple reason: It makes us better fighters” because “our use of fossil fuels is a very real threat to our national security and to the U.S. Navy ability to protect America and project power overseas.”

What about the “very real threat” to the Navy of not having enough money for the ships, fighters and ammunition it needs to protect America? President Obama’s assault on the Pentagon could scrap 60 of the Navy’s ships, including two carrier groups.

SUMMARY

The use of food stocks for fuel has been a national and international disaster that only promises to get worse as the ethanol mandates increase through 2022. It is causing food inflation on a surreal scale and it is significantly harming livestock industries that rely on corn for feed. It is causing poverty and increasing death throughout the world. Ethanol, which is a grossly inefficient fuel source, is in no way a viable substitute for fossil fuels. It is expensive and, in terms of its green bona fides, it is at best carbon neutral. And indeed, it is doing far more harm to the environment than any environmental benefit it provides.

If ever there was a program that needs to end and end now it is the ethanol / biofuels mandates and the Defense programs to purchase massive amounts of wildly costly biofuel. It is one thing for our government to fund research and development, quite another for them to not only pick winners in the marketplace, but to create a marketplace through forced demand. Ethanol and other biofuels cannot succeed in a free market, and the government's push to create the markets are invitations to waste, abuse and crony capitalism on a grand scale. Ethanol's total costs make it wholly inappropriate as the vehicle to reduce our dependence on foreign oil. The best way to do that is to exploit our vast domestic energy resources of oil and natural gas. End this boondoggle now. Update: Welcome, Larwyn's Linx readers.