Is Ethanol the Answer?
Politically it's a winner. But experts aren't sure ethanol can deliver on its promise
Galva, Iowa-This farming town of fewer than 400 people might be most memorable for what it doesn't have: a Wal-Mart, a high school, even a stoplight. But humble Galva and its environs have two things in abundance: corn and, by extension, hope.
"We feel we're on the cusp here as far as things happening," says Rita Frahm, an 18-year resident and president of the county's economic development corporation. That's because Galva is the lucky home of an ethanol plant.
Since opening in 2002, the plant has produced ever increasing dividends, to date putting more than $13 million into the hands of the 420 local farmers and investors who own it. That cash is slowly but markedly changing Galva's landscape. For the first time in 30 years, the town witnessed construction of three new homes at once, and a whole new street, Sixth Street, on which to place the houses. Those dwellings are now occupied by families "who saw an opportunity to stay rather than the community dying," Frahm says.
Heartwarming stories like Galva's-in a state that hosts the first presidential contest-help explain why Washington is so fired up over ethanol. In 2006, production skyrocketed, and Washington is poised to push it still higher. What's not to like? Every gallon theoretically means more money for the iconic American farmer and less cash lining the pockets of foreign sheiks. "There's almost a sense," says Iowa State University political scientist Steffen Schmidt, "that ethanol is morally better than oil."
Washington loves a "win-win," but there are plenty of doubts as to whether the love affair with ethanol qualifies. Even though the ethanol industry profited handsomely last year, it continued to benefit from billions of dollars in taxpayer subsidies. And as ethanol becomes a larger part of the energy mix, it is not clear that Washington is prepared for the fallout. Ethanol already consumes so much corn that signs of strain on the food supply and prices are rippling across the marketplace. Environmental impacts will multiply as more land and water are devoted to the prized yellow grain. And, even if these problems were overcome, ethanol's potential growth could be stunted by an energy system currently tailored to gasoline. Ethanol undoubtedly plays a role in the quest for energy independence and the desire to curb global warming. But some observers worry that ethanol development may take the place of more effective initiatives: forcing automakers to increase gas mileage, for instance, or mandating cuts in carbon dioxide emissions. "Some members of Congress are looking for quick fixes," says one economist who has studied the issue. "It's an easy bandwagon to jump on. But there's a lot of exaggeration about what ethanol is capable of doing."
Ethanol is alcohol distilled from fermented, mashed grain. It took a century for it to make a big splash on the U.S. energy scene, even though Henry Ford built his first Model T in 1908 to run on either gasoline or ethanol. Over the decades, petroleum proved cheaper, and grain alcohol was relegated to college fraternity parties rather than gas tanks. No one looked seriously at ethanol as fuel until the oil price shocks of the 1970s, when Congress decided to subsidize a homegrown alternative-most significantly through a tax credit to oil companies for every gallon of the costly alternative they blended into gasoline. But when oil prices fell again in the late 1980s through the 1990s, the nation's dependence on petroleum imports mushroomed to 60 percent, and ethanol was reduced to a performance-boosting additive for some midwestern gasoline-a nice, subsidized side business for the dominant producer, Archer Daniels Midland.
Around 2000, ethanol started gaining traction when it emerged as the substitute to methyl tertiary butyl ether (MTBE), an oxygenate that reduced air pollution but leaked into drinking water at potentially dangerous levels. At the same time, upstart businesses like VeraSun of Brookings, S.D., were learning to produce ethanol more efficiently. Then came the Iraq war and high oil prices. Suddenly, the price ethanol refiners could fetch for their product from the big oil companies was far higher than the production cost. In places like Galva, where farmers had pooled their money to put up plants earlier, returns rolled in. It was a modern-day gold rush for grain farmers and investors. Today, 60 percent of ethanol production is in the hands of small companies.
The rush of new players strengthened the industry's clout. One of the largest stakes in the No. 2 producer, VeraSun, for instance, is owned by a midwestern venture capital firm, Bluestem, founded by Steve Kirby, former lieutenant governor of South Dakota and a big Republican donor. Among other big investors in small ethanol companies: Microsoft founder Bill Gates and the politically connected Carlyle Group private equity firm, where George H. W. Bush was once a director. The 10 largest ethanol producers and their trade groups have handed out $4.7 million in federal campaign contributions since 2000, says the Center for Responsive Politics. The Renewable Fuels Association has increased its lobbying spending 60 percent in the past seven years, and former Sens. Bob Dole of Kansas and Tom Daschle of South Dakota tout ethanol's national security benefits for a group of farm and energy interests called the 21st Century Agriculture Policy Project. Just as crucial, while far less tangible, has been Washington's veneration of the long-suffering small farmer, now turned ethanol entrepreneur.
It all paid off in 2005, when, with gasoline prices ratcheting higher, Congress wrote into its big energy bill a renewable fuel standard, an unprecedented mandate requiring refiners to double the amount of ethanol they blend into the nation's gasoline by 2012-a major coup for the industry. Congress's decision in that bill not to give the oil industry any protection from MTBE lawsuits made ethanol even hotter. Oil refiners immediately announced a switch to ethanol en masse, dramatically boosting demand.
Energy economist Philip Verleger is one of many who traced last summer's high gasoline prices to ethanol panic. As it turned out, the taxpayer paid twice. First, at the pump. Then, because of the long-standing ethanol tax breaks-now at 51 cents per gallon-the government sent $2.5 billion last year to the flush oil industry to blend ethanol it would have needed anyway.
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.
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."
Ethanol's boosters are confident farmers will plant more acres and increase the yield of corn per acre, with the help of new seed and genetic engineering technology-easing the price pressure. But for now, the futures market shows corn prices climbing further. That's despite the fact that farmers are on track to plant 88 million acres of corn this year-up 10 million over 2006 and more than has been planted in the United States at any time since the 1940s, when crop yields were a fraction of today's.
The frenzy for the new yellow gold is not without environmental consequences, either. Plenty of greenhouse-gas emitting fossil fuels are used to produce ethanol-tractors in the field, trucks on the road, and nitrogen-based fertilizer born of natural gas. Some say that ethanol actually uses more energy than it returns. But only one oft-quoted study arrived at this conclusion by using apparently obsolete data. A Congressional Research Service analysis last year concluded that "most studies give corn-based ethanol a slightly positive energy balance." A tepid endorsement, at best. On climate issues, researchers are concerned with ethanol's reliance on natural gas or coal throughout the production process. "Overall benefits in terms of ... greenhouse gases are limited," concludes CRS. That problem may get worse with the emergence of coal-fired ethanol plants, like one that opened last month in Richardton, N.D. Bob Dinneen of the Renewable Fuels Association points out relatively clean natural gas is the industry standard, and he believes more earth-friendly plants are the next wave, such as those that trap methane from cattle feedlots to fire their boilers. But without mandated emissions caps, refineries may have little incentive to invest in such costly technology.
Farmers most likely will grow their corn on acres they normally would have rotated to soybeans. But that zaps topsoil of nutrients while exacerbating pest problems and use of more fertilizers and insecticides, which can wind up in the water supply. Plus, some land currently held fallow in the Conservation Reserve Program is likely to be put back to work. The complex issues throw environmentalists into a briar patch. "I hate talking about ethanol," says Dan Becker, head of the Sierra Club's global warming program. "There are ways ethanol can be a boon to the environment, there are ways that it could be a disaster for the environment, and the devil's in the details."
Perhaps nothing illustrates the limits of an ethanol-fueled future better than the push for E-85-a mix that is 85 percent ethanol and 15 percent gasoline. It's available in only 1,000 of the nation's 180,000 gas stations, and Big Oil-branded stations haven't been quick to offer E-85. Ethanol boosters are hoping independent gas stations will step in, but it's costly. Trying to expand E-85's availability, the House is likely to pass a bill this year that will direct federal agencies to figure how to make the switchover more cheaply. Rep. Bart Gordon, chair of the House Science and Technology Committee, said such a move is necessary "if this country is serious about reducing our dependence on foreign oil."
Congress has been far more tentative in dealing with bigger delivery questions. No pipelines exist to move ethanol from the Midwest the way that gasoline is pumped out of the Gulf Coast; rail works well now to transport most ethanol, but 25 percent moves by truck (burning diesel petroleum along the way). As production increases, the transportation strain is sure to worsen.
And even if E-85 were widely available tomorrow, it could be pumped only into the 2.5 percent of the nation's cars that are flexible fuel vehicles. Automakers have pledged to churn out many more, but Congress created a perverse incentive allowing them to produce more gas guzzlers if they manufacture enough flex fuel cars. Carmakers earned enough of a break on their Corporate Average Fuel Economy Standards that the nation will burn 17 billion more gallons of gasoline from 2001 to 2008 as a result.
Thanks to such loopholes and foot dragging on improvement in CAFE standards, average new vehicle efficiency has dropped since 1988-a problem that comes home to roost with ethanol. Because of its lower energy content, it takes 1.5 gallons of ethanol to drive as far as 1 gallon of gasoline. Consumer Reports calculates E-85 ended up costing motorists about a dollar extra per gallon last year because of the need to buy more fuel. Renewable fuels lobbyist Dinneen points out that carmakers could solve the problem with improved engine technology. But with the fleet on U.S. roads now, and gasoline consumption continuing to creep upward, even today's incredible growth in ethanol production barely makes a dent in the nation's oil dependence. Ethanol now amounts to just 4.3 percent of gasoline sold by volume, and just 2.9 percent by energy content.
While corn-based ethanol production has room to grow, the industry acknowledges there's a ceiling-about 15 billion gallons yearly by most accounts, or three times the production in 2006. That's 20 billion gallons short of Bush's renewable fuels goal. Even with alternatives like natural gas vehicles, plug-in hybrids, or hydrogen cars, major advances in ethanol are necessary.
In the laboratory, so-called cellulosic ethanol can be wrung from fibrous materials like cornhusks and rice hulls, as well as fast-growing reedy crops that require little fertilizer or tending, like switch grass, and timber industry excess. This would ease reliance on edible grain and spread the economic benefits beyond corn communities. Another bonus: Biotech enzymes rather than heat energy would break down the cellulose to fuel, reducing greenhouse gases to a fraction of those produced by corn.
But it has never been tried commercially, and it's unlikely that the fuel will go from zero to 20 billion gallons in 10 years. Just to get to 1 billion gallons of ethanol production, the corn industry took 13 years. The government estimates the capital cost of cellulosic is very likely five times that of corn. The expense surely would be driven down if production scales up, but a "chicken and egg problem" exists, says Harkin. "Investors are not investing in cellulosic plants because there's no supply," he says. "And farmers are not planting switch grass or other energy crops because there's no market." He has pledged to "jump-start" both demand and supply with research money and loan guarantees in a new farm bill.
But it will take more than money for new cellulosic technology to substantially weaken the grip of the nation's oil addiction. Lee Lynd, Dartmouth College engineering professor and cellulosic pioneer, who founded Mascoma, a company that is building a pilot plant outside Rochester, N.Y., believes cellulosic will make "a much more limited contribution to energy supply" if behaviors don't change as well as technologies. Ethanol would make its greatest dent if Americans drove less and highly efficient cars were deployed widely, he says. Others agree. "Ethanol has a role to play in making the nation's energy situation more reliable," says economist Robert Wescott. "But it's not a panacea." That brings the debate back to the nitty-gritty fuel economy and conservation issues politicians have been mostly avoiding for years. They'd rather feel good, for the time being, about ethanol.
This story appears in the February 12, 2007 print edition of U.S. News & World Report.