Is Ethanol the Answer?
In 2006, production exceeded Congress's renewable fuel standard mandate by 25 percent, reaching 5 billion gallons produced. Nearly half of the gasoline being sold in the United States now contains 10 percent ethanol. But that leaves half the market open to conquest. Some 76 ethanol refineries are now under construction, including in such unlikely states as New York and Oregon, adding to the 112 already squeezing fuel from corn. By some counts, 200 more have been proposed.
Of course, oil prices—generally falling since August—could rain on the parade. In fact, Wall Street is so worried that cheaper petroleum will cool ethanol profitability, as it has in the past, that the stock prices of companies that went public with fanfare last summer, VeraSun and Aventine, of Pekin, Ill., have slid 40 percent and 60 percent, respectively.
Bill Gates would be $140 million richer if he had sold his stake in Pacific Ethanol of Fresno, Calif., when gas prices began to spike last spring. As it stands, he's doing a bit better than break-even because of the bounce his company took after President Bush made his pitch in the State of the Union address to increase renewable fuels—a universe now almost entirely made of ethanol—a staggering sevenfold by 2017.
Congress is already on the case: All eyes are on the important farm bill being shepherded forward this year by Iowa Sen. Tom Harkin, chair of the Agriculture Committee, as the perfect vehicle to force increased ethanol demand on the market.
Indeed, ethanol has proved one of the few issues in Washington for which it's nearly impossible to find a sparring partner. Even Sen. John McCain, who gave up on Iowa in his 2000 presidential bid because of his opposition to ethanol subsidies, now says the fuel should be "carefully examined." Sen. Hillary Rodham Clinton, who once voted against the mandate, is calling for $1 billion in ethanol research.
Consequences
A new ethanol surge could cause more problems than it solves. Last year's astounding growth in ethanol gobbled up 20 percent of the U.S. corn crop. That surpasses all the corn Americans consumed last year—whether in cereal, corn-syrup-sweetened soda, or on the cob. And the strain has become severe on the nation's primary use of corn—as feed for dairy and beef cattle, pigs, and chickens. Meat, dairy, and egg producers are reeling from corn prices that have doubled in one year—now trading above $4 a bushel for the first time in more than a decade.
The impact may really be felt when meat prices take off at the start of this summer's grilling season. "The American consumer is making a choice here," says Dick Bond, chief executive of Tyson Foods. "This is either corn for feed or corn for fuel." He indicated his company intends to be active in the farm bill debate on Capitol Hill, and some livestock groups recently wrote a letter to warn the secretary of agriculture of their concerns.
Lester Brown of the Earth Policy Institute warns that ethanol is on track to consume half of the U.S. corn crop as early as 2008. He is calling for a moratorium on new refineries, similar to the one the world's No. 3 ethanol producer, China, announced in December. "We used to have a food economy and an energy economy," says Brown. "The two are merging. We need to ... think through carefully what we're doing."
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