More About Gusher of Lies

In a long segment of Gusher of Lies called "The Ethanol Scam", author Robert Bryce confirms my long skepticism of the ethanol project in American energy policy. The nexus of the ethanol agenda and the venerated American tradition of farm subsidy has joined forces to create a truly toxic brew of staggering economic waste and taxpayer exsanguination.

If America is "addicted" to oil, then it's equally true that the corn ethanol industry is a world-class junkie when it comes to subsidies. For decades, American politicians have been talking about the need to reduce farm subsidies, and yet, with the ethanol scam, those subsidies, particularly the $0.51-per-gallon tax credit, are thriving.

Making ethanol from corn borders on fiscal insanity. It uses tax-payer money to make subsidized motor fuel from the single most subsidized crop in America. Between 1995 and 2005, federal corn subsidies totaled $51.3 billion. In 2005 alone, according to data compiled by the Environmental Working Group, corn subsides totaled $9.4 billion. That $9.4 billion is approximately equal to the entire 2006 budget for the U.S. Department of Commerce, a federal agency that has 39,000 employees.

But Big Corn isn't satisfied with the subsidies that are paid out to grow the grain. They are also getting massive subsidies to make that grain into fuel. The $0.51-per-gallon tax credit, which is allocated based on the volume of fuel produced, is only part of the subsidy picture. Including producer tax credits, reductions in state motor fuel taxes, and federal grants, the total subsidies for ethanol range from $1.05 per gallon to $1.87 per gallon. But ethanol contains only about two-thirds of the heat value of gasoline; on a gasoline-equivalent basis, the total subsidies range from $1.42 to $1.87 per gallon. ...the American taxpayer may soon be paying nearly $16 billion per year to subsidize the production of a motor fuel that will do little, if anything, to reduce America's overall oil imports.

...In short, American taxpayers are being taxed three different ways in order to produce corn ethanol: (1) the billions in subsidies for growing corn; (2) the billions in subsidies for turning that corn into ethanol; and (3) the billions of dollars in costs that come from higher food prices.

And what about the real cost of producing ethanol? Any such calculation must include the ratio of heat energy acquired from the product opposed to the energy required to make the product.

...for every 1 Btu invested, an investor gets 1.34 Btus in return. The the details--as always--are in the fine print. The scientists are able to achieve that 34 percent net gain only by including "copoducts energy credits," that is, by adding in the energy value of the by-products that are created during the ethanol distillation process. Among the most important of these by-products is dried distiller's grain used for cattle feed. ...but you can't run your car on cattle feed. Without that credit, the total energy profit is about 9 percent: for every 1 Btu invested, an investor only gets 1.09 Btus in return.

Of course whenever ethanol is mentioned Brazil is pointed to as the success story. Bill O'Reilly, for instance, constantly beats this drum. But the real Brazilian ethanol picture is much different than the legend. First the good news:

Brazil has a huge advantage in ethanol production because sugarcane is a far better feedstock than corn. While corn ethanol provides very little, if any, energy profits, ethanol produced from sugarcane produces about 8 times more energy than is required to produce the fuel. That is, for every 1 Btu invested, an investor gets about 8 Btus of energy profits. Brazil's tropical climate makes it perfect for sugarcane production. Petrobras, Brazil's national oil company, claims it can produce twice as much ethanol per acre as U.S. corn farmers and do so at half the cost.

But the bad news is, that for all the touted miracle of Brazilian ethanol, their oil production--yes oil--far exceeds their ethanol.

In 2006, the U.S. imported about 26,000 barrels of Brazilian ethanol per day, or 17,200 barrels per day of oil equivalent (adjusting for the difference in heat energy). That's not much when stacked next to America's 21-million-barrel-per-day oil habit.

Nor does that Brazilian ethanol matter much when compared with America's imports of Brazilian oil and oil products. In 2006, the U.S. imported an average of 133,000 barrels of crude per day from Brazil. When all crude and pretroleum coke and fuel oil are accounted for, in 2006, the U.S. imported an average of 192,000 barrels of crude and oil products per day from Brazil. In other words, in 2006, the U.S. imported 11 times as much energy from Brazil in the form of crude and oil products as it did in the form of ethanol.

The truth about Brazil's energy "miracle" is that it has almost nothing to do with ethanol and everything to do with Petrobras's ability to continue increasing its oil production--the vast majority of which is coming from Brazil's offshore waters.

Whenever talk about corn ethanol gets too uncomfortable for proponents of ethanol, they will often bring up the promise of cellulosic ethanol, made from wood chips, stalks, or switch grass. It all sound like a dream come true: use agricultural waste to create motor fuel. But like many dreams too good to be true, it's too good to be true. It's an energy looser, requiring more energy to produce than can be acquired from the finished product. For 1 Btu invested, an investor gets only 0.5 Btus in return.

A particularly surprising fact was the enormous quantities of water required to produce ethanol--a frightening thought considering the ongoing depletion of ancient aquifers in the west and midwest. The extraction and refining of conventional oil requires--at most--2.8 gallons of water for each gallon of oil produced. Ethanol, however, requires 880 gallons of water for every one gallon of ethanol produced.

Perhaps the most insidious part of the ethanol scam is the way it has actually increased American gasoline consumption.

By producing flex fuel vehicles (FFVs), American automakers get credits from the federal government on the overall efficiency of their fleets. And therein lies the essence of the FFV scam: When calculating fuel efficiency for a given vehicle, the federal government counts only the amount of gasoline that it consumes.

The automakers claim that an FFV will be burning E85 (85% ethanol/15% gasoline mix), not gasoline, for part of the time. That allows them to inflate the fuel efficiency numbers that they must meet under the federal government's Corporate Average Fuel Economy standards. For instance, GM seized on the federal credits by making one of its biggest SUVs, the Suburban, into an FFV capable of using E85. In the real world, the Suburban gets less than 15 miles per gallon. But thanks to the credits, the E85-capable Suburban is magically transformed into a vehicle that gets more than 29 miles per gallon. Of course, that mileage occurs only on paper, not on the highway.

...So how much fuel has the E85-FFV scam cost the U.S.? In early 2007, U.S. News & World Reportmagazine report that the U.S. "will burn 17 billion more gallons of gasoline from 2001 to 2008" as a result of the scam.

So next time a politician--whether Democrat or Republican--begins touting the virtues of ethanol, recognize it for what it is: a pipe dream.

Gusher of Lies

Of all the slogans bandied in this political campaign season, perhaps the one that most depresses me is, "energy independence." Doubly wounding is the fact that it's touted by both parties and many of my own friends. After my reading of economics, which has admittedly not been particularly broad, but at least has been of high quality--Milton Friedman and Thomas Sowell--I remain convinced that the idea of American energy independence is a fantasy only sustained by a fundamental misunderstanding, and even ignorance, of how the world energy economy functions. To gain further understanding myself, I'm currently reading Gusher of Lies: The Dangerous Delusion of "Energy Independence" by Robert Bryce.

Consider some startling facts I've already gleaned from the book:

*The Motiva expansion project at the Port Arthur, Texas refinery, announced in 2006 as a joint venture between Aramco and Shell, will most likely produce 50% more motor fuel per day than the total output of all of the ethanol plants in America during the entire year of 2006.

*To replace all of the diesel fuel burned in America with biodiesel, farmers would have to plant some 716 million acres in soybeans (the favored source for making boidiesel)--that's an area about 1.6 times all the cropland now under cultivation in the United States.

*A study by the International Energy Agency reported that replacing just 5 percent of the world's oil with biofuels would require up to 20 percent of all the land on the planet that is now under cultivation.

*Even with large government subsidies, it took 13 years before the corn industry was able to produce 1 billion gallons of ethanol per year. And it took about 25 years before corn ethanol production reached 5 billion gallons per year.

The author is no fan of politicians and seems to reserve special obloquy for conservatives, however his work is carefully endnoted with original sources, and I find much of his argument (though admittedly not all) unassailable. Here's an excerpt from a section that clarified much for me:

Implicit in the arguments for energy independence is the belief that if the U.S. quits buying foreign energy, then it can deny funds to selected petrostates. Alas...energy isolationists who proffer this argument are ignoring the reality of the global marketplace. Oil is a global commodity. Its price is set globally, not locally. Traders at the New York Mercantile Exchange compete with bidders from Tokyo to Tulsa, and in the process, they are constantly determining the fair price of oil... Low-quality heavy crude containing high quantities of sulfur gets sold at a discount, while high-quality light sweet crude fetches a premium price.

The modern oil-trading system is remarkably efficient. And that efficiency prevents any buyer or seller in the marketplace from effectively designating the final consumer of crude or refined products. This fact was best summarized by S. Fred Singer, an emeritus professor of environmental sciences at the University of Virginia. "We can think of the oil market in an over-simplified way as a giant bath tub into which oil pours from many sources, where it sells at a single world price, and from which users purchase oil without regard for its origin," wrote Singer in a 2003 opinion piece for the Washington Times. He continued, "It is immaterial how much oil the U.S. imports from an unstable source. It is immaterial if our imports from Saudi Arabia rise, if they do not sell oil to us, they will sell to someone else."

As Scott Tinker, the director of the Bureau of Economic Geology at the University of Texas, points out, even if the U.S. did manage to decrease its oil consumption, that decrease "won't have a global impact on major oil exporters. In fact, quite the opposite. The big oil-exporting countries are recognizing that the future market for them is the Mid- and Far East, in countries like India and China. Increasing demand in the regions will overshadow decreased consumption in the U.S., keeping global demand above global supply."

In other words, Americans may think they are doing the right thing by burning ethanol-flavored gasoline and driving Priuses, but whatever oil the U.S. doesn't buy from the Saudis will still get sold. Every barrel of oil that goes onto the the world market is purchased by someone, somewhere. Buyers cannot deny their currency to one supplier in favor of another. Every player--no matter what percentage of their oil comes from imports--is subject to price fluctuations in the marketplace.

In other words, any attempt at energy independence will be enormously expensive, and it won't insulate the U.S. from fluctuating global oil prices. Nor will it mean that the Saudis, the Iranians, the Venezuelans, or any other oil-rich regime will suddenly be strapped for cash. And yet, there is a persistent delusion that the U.S. can control the global energy market by withdrawing from it and, in doing so, deny funds to the petrostates in the Persian Gulf and force a few reform movement in the Arab and Islamic worlds.

None of this is to say that we shouldn't be doing research in alternative energy sources, or that we shouldn't be extracting our own oil resources. It merely means that in doing so we won't be securing energy independence for ourselves, but rather doing what we have always done in the history of our country when we have exploited out natural resources and exercised scientific initiative: generating wealth.