Ethanol as Energy Alternative

Ethanol has drawbacks as energy alternative

By William Reed

There is an illusion that ethanol can provide the liquid fuel America needs to meet increasing energy demand in the years ahead. That illusion is particularly counterproductive if we're serious about preventing government energy subsidies from getting out of hand.

Ethanol needs a tax write-off for one simple reason: Made from corn, it costs more to produce than gasoline.

To encourage the production of ethanol, the federal government provides a 51-cent-a-gallon tax break to refiners and blenders that mix ethanol into their gasoline. This adds up to about $2 billion a year. An additional tax reduction goes to "small" ethanol producers, those who make up to 60 million gallons of ethanol a year. Bio-diesel gets a $1-a-gallon federal tax credit. A number of states, mainly in the Midwest corn belt, are adding as much as 20 cents more with credits, tax reductions, and other incentives.

And although last year's corn harvest was the second largest in history, the government shells out more than $4 billion a year in subsidies for corn production.

While using ethanol in a 10-percent blend with gasoline could extend gasoline supplies, the question is: At what cost? Can we afford to divert farmland from food production to fuels on a massive scale and incur higher food costs? The Department of Agriculture has warned that the upswing in ethanol production is pushing up the cost of cattle feed, and the likely result will be higher meat prices.

Considering that in the past three months the price of ethanol has jumped 54 percent to $3.67 a gallon -- more than double what it costs to manufacture -- companies that produce ethanol are enjoying an enormous profit, at the expense of the American consumer and taxpayer. Archer Daniels Midland, the Illinois-based conglomerate that controls nearly one-fourth of the ethanol market, will earn an estimated $1.3 billion from ethanol alone during the current fiscal year. No wonder ethanol companies are hot investments on Wall Street.

Despite the subsidies, ethanol is an extremely expensive fuel. If you take into account all of the energy from fossil fuels that's needed to run farm machinery, fertilize, harvest and transport the corn to ethanol plants and distill the corn into ethanol, it takes almost as much energy to produce ethanol as it provides.

The reality is that it costs more to produce a gallon of ethanol than a gallon of gasoline, even with tax incentives. Ethanol contains about 70 percent of the energy content of gasoline. This means drivers with flexible-fuel cars that use E-85 -- 85 percent ethanol, 15 percent gasoline -- are buying a fuel with fewer miles per gallon than gasoline, so they must make more stops at filling stations.

What's more, ethanol prices are higher on the Gulf Coast, because ethanol is made primarily in the Midwest and shipped by barge, railcar or truck to blending terminals. Ethanol can't be sent by petroleum pipeline because it binds with water.

Reducing our country's dependence on foreign oil through the use of ethanol is a worthwhile goal, but there are less costly and more effective ways to accomplish it. It's estimated that if all of the ethanol production were used to reduce Persian Gulf imports, the reduction would amount to less than 10 percent.

America has no shortage of oil. According to the U.S. Minerals Management Service, there are an estimated 59 billion barrels of oil in the coastal waters off the lower 48 states. That's enough oil to replace current levels of imports from the Persian Gulf for nearly 60 years. And there are also substantial oil resources in the mountain West and Alaska. But most of the oil is on federal lands, where access is either severely restricted or banned. Congress should make it a top priority to open up these areas to energy production.

Our nation's corn crop should be used primarily for food production, not for the manufacture of ethanol. The greatest hope for ethanol lies with development of techniques to produce it from cellulose plants like switchgrass and straw and even agricultural waste. But these techniques are years away. Instead of subsidizing corn-based ethanol, it would be far more prudent to remove the wraps on domestic petroleum production.

William Reed is president of System Controls Inc. in Birmingham, Alabama.