One More (Pretty Big) "Whoops" On Ethanol

Forget about what corn-based ethanol is doing to food prices, the basic physics of ethanol as a fuel should be enough to expose our ethanol mandate as the stupidity that it is. Fortunately, you can always count on some functionary branch of the government to provide a real-world test case for the bad policies that emanate from the halls of the Great Sausage Factory. Sure enough, today's example comes from the US Postal Service. They bought a bunch of flex-fuel trucks. Turns out their ethanol vehicles burn more fuel and cost more. So, it is costing more to not achieve the stated goals (of reducing emissions). I don't know the difference in the chemical properties between corn-based ethanol and sugar-based (or cellulosic) ethanol, but this evidence would seem to damn ethanol full stop, regardless of what it is made of or where we get it.

Maybe this will get certain academic economists to cease obsessing about 'negative externalities' and focus on another fundamental economic concept, the 'deadweight loss'.

Reply to A Commenter

William said...
Wow. What an elitist counterbalance to Kosla. The President last night called for 35 billion gallons of fuel production from alternate sourcs mainly from ethanol (more likely from cellulosic ethanol). At the same time we're pumping an additional 100,000 barrels a day into the Strategic Petroleum Reserve. There is a worldwide effort afoot to replace oil with bio sources because of political instability in the Middle East. The Chinese for example are looking at their rapeseed capabilities today to expand biodiesel production. So are the Europeans. Time in NOT on our side. We need to act quickly regardless of how it benefits Khosla's companies.

First, William, thanks for reading and commenting. Let me respond. I don't begrudge Khosla making money in the least. This blog is ardently capitalist. What I do object to are 1) capitalists who angle for government bestowed advantages to compensate for their lack of success in the marketplace, and 2) the government picking winners in a particular sector. Like Khosla, I too have investments relating to alternative fuels but asking for favors from the government is not part of my investment model. These efforts have to stand on their economic merits. I believe that the ethanol industry could be successful ultimately, but that they are on the margin of economic viability and are cynically relying on government to tip the balance. This is what is called economic rent-seeking and I believe it is an abuse and detracts from the development of a healthy, resilient economic environment.

This blog has always advocated "energy diversity". I want to see many alternative fuels, including ethanol, in use, but only to the extent that they are economically viable. There are many folks who feel that some notion of "virtuousness" ought to be applied to alternative energy. On that score, ethanol doesn't really stacked up well either. I would argue that biodiesel from waste oils and tallow are more "virtuous". But such a subjective notion is problematic in that it is difficult to make rational decisions and you invite a cacophony of competing voices that policy makers cannot possibly sort out. This also invites abuse of the political process. The market is the single best mechanism for sorting out a cacophony of views. I applaud Khosla the capitalist, I do not applaud Khosla the lobbyist; and, make no bones, he is assuredly part lobbyist in his efforts on behalf of ethanol.

Additionally, alternatives must be alternatives, not necessarily replacements. A commitment to energy diversity must also allow for an improvement in the status quo, namely better hydrocarbon fuels. In a few decades we have gone from leaded gasoline to where we now have something called Ultra Low Sulphur Diesel and a host of cleaner fuels. Fuels are getting cleaner and better and we should not hinder this process.

This all gives a moderate nod to the theories of anthropogenic global warming and Peak Oil. It makes good sense to have multiple energy options given these theories, but I don't think we should make policy (other than a policy of non-intervention to promote energy diversity) based on either of them. They both are highly speculative theories that leave ample room for justified skepticism. So when you say, "we are running out of time" I can only assume you are referencing either the Peak Oil notion that we will run out of oil or the global warming notion that we will destroy the earth before long if we don't act. I think you are wrong on both counts if that is indeed what you mean. We do not need to develop alternative fuels because of an imminent shortage of hydrocarbon resources, nor do we need to do it to avoid known and quantifiable negative effects on the climate. We simply need to do it as a matter of prudence.

Is This the "Big Whoops" from the BioFuels Loons?

I've written alot about the ongoing stupidity of the ethanol mandate over the years (even going so far as to excoriate my man George W. Bush's sop to this mega-blunder).

Well, now we have what is perhaps the big "Whoops" on the whole ethanol front.  Apparently, the corn that one must grow to produce ethanol is requiring too much pure, unspoiled land.

Environmentalists who once championed biofuels as a way to cut pollution are now turning against a U.S. program that puts renewable fuels in cars, citing higher-than-expected carbon dioxide emissions and reduced wildlife habitat.

More than a decade after conservationists helped persuade Congress to require adding corn-based ethanol and other biofuels to gasoline, some groups regret the resulting agricultural runoff in waterways and conversion of prairies to cropland -- improving the odds that lawmakers might seek changes to the program next year.

"The big green groups that got invested in biofuels are tacitly realizing the blunder," said John DeCicco, a research professor at the University of Michigan Energy Institute who previously focused on automotive strategies at the Environmental Defense Fund. "It’s really hard for the people who really -- shall we say -- hate oil viscerally, to think that this alternative that we’ve been promoting is today worse than oil."

Wow.  It is almost as if lefties don't think through the consequences of their policies...

Actually, the nub is revealed in the last paragraph, greenies are so driven to rage by the thought of hydrocarbons that they can't think straight.  The whole ethanol idiocy has led to, principally, massive overplanting of corn which has meant higher food prices and natural habitat encroachment.  Way to go Exxon Haters!

RTWT, the greenies were wrong on every count - lower emissions, increase wildlife habitat, all of it.  It would be funny if it wasn't so sad.  But hey, let's listen to these dodos on the next big dumb idea.

Energy Independence Mismatch

I am not sure if the editors of the WSJ intended on making Vinod Khosla look like a boy among men, but that surely was the result of placing his hopeful view of our ethanol future directly opposite Dan Yergin's rational discussion of "energy independence".

Khosla's view is admirable for his optimism and "can-doism" but it is little more than a call for massive government intervention in energy markets presumably in order to save ourselves, but more likely to save his investments in ethanol that are not looking so good as the price of oil has fallen from $80 to $50. He wants expanded mandates for bio-fuels because he knows that government mandates, not economics, are the only hope for any near term marketplace acceptance of ethanol. He further admits to the economic illogic in touting a policy feature he euphemistically calls a "relief valve" but which is just another government subsidy. All of this is supposedly necessary because of terrorism. 'No oil, no terrorism' is Khosla's reductive logical foundation for turning our entire energy system on its head. True, the Saudis fund the spread of Wahhabism, and the Iranians fund Islamic extremism, and it would seriously hamper their ability to do so were we to stop buying their oil. This leaves out so many other considerations I don't know where to begin. What about the Chinese, will they not buy the oil we shun? Why punish other developing nations whose economic maturation depends on their energy sectors and that don't fund terrorism? Will the lack of oil revenues really blunt the idealogical fervor of Islamists and can't they find other sources of funds to finance their terror campaigns? Khosla doesn't seem to want to go that deep. He wants the government to pick a winner, his ethanol, and throw money at it. Yergin on the other hand calls for a greater reliance on what has served us well to date - technological innovation, competition, and trade openness.

Ethanol from Wood Chips and Switch Grass...God Help Us

I see the wisdom in a "don't sweat the small stuff" attitude. Being able to understand what is at the core of an issue and to marshall your energies on real priorities is a hallmark of a good leader. Maybe that is how the White House approached the SOTU address - stand firm on the critical issues of Iraq, fighting terrorism, taxes; and, for the rest, just throw out any old nice-sounding political garbage. After all, you can't be a bulldog on everything. That has to explain the rubbish that Bush spouted about America's addiction to oil and the need for ethanol from wood chips and switch grass.
We need energy diversity and Bush might have thought that was what he was promoting, but that is not what he actually achieved. He fed the large amorphous, unknowledgable, anti-hydrocarbon blob. He may have thought he said that we are too reliant on foreign oil and have not made adequate progress on alternatives to oil, but what the world heard, his adversaries especially, was "oil is bad, very bad." Now, I understand the political impossibility of getting up before the Congress and the nation and saying "Oil rocks. It's cheap, abundant, can propel thousands of pounds of metal and humans long distances, and saves us from having to kill whales or farm millions of acres just to feed horses." But the American people inherently understand this despite the pervasive harping and bad-mouthing of our hydrocarbon-driven society. Thus, you can stand before it and say "like it or not, we use alot of oil, and until the day comes when we have alternatives, we'll be buying alot of it from murderous, socialist jerks like Hugo Chavez when we could be supplying ourselves and employing more of our own folks. Seems pretty obvious, so let's get cracking up in ANWR while we are doing the other smart things, like mandating ultra-low-sulphur diesel or encouraging hybrid technology, that take time to have an impact. It doesn't have to be black or white, we can have a shades of gray energy policy." But no, what does he do, but throw out "Americans are addicited to oil" which is straight out of an enviromental absolutist's playbook. And the one policy proposal to go with this indictment...more ethanol. No nuance no reasoned approach. Most shockingly, no attempt to sensibly frame a complex issue, of which he clearly has extensive knowledge. Bam! Oil bad, more ethanol.
He didn't just punt, he gave upper hand to the legions of radical people and ideas that are at odds with a sensible, free-market driven energy policy. Our energy market is under assault from all sides and the repercussions on the economy and on society are enormous. By legitimizing the demonization of oil he failed to stop the dangerous momentum that anti-free market forces have gained and hastened bad things.

Ethanol PowWowers Seek Uncoerced Buyers

If you build it, they will come...and if they don't, get me Senator Grassley's office on the phone.

"With the supply of US ethanol growing at a faster clip than many anticipated, the sector now needs to work toward boosting demand for the renewable fuel to consume output coming from ever-increasing production capacity, market players said this week at an industry conference. Demand, not supply of the was the overriding concern to many traders and producers attending the annual National Ethanol Conference held this week in Tuscon, Arizona, sponsored by the Renewable Fuels Association."

Hard to believe, who would want to pay more for less energy?

Let Us Now Praise Beneficent Big Oil

Well, crude oil prices are dropping like a stone and consequently gas prices at the pump are falling too. The US average price is $2.30/gallon. I see that in NJ you can find gas as cheap as $2.05/gallon. I'm sure out in the midwest you can find it for below $2. This means that pain at the pump is down 23% on average and more in many circumstances. Naturally there are very few stories in the media about the beneficent oil companies or our President's capable, or even benign, economic policies. I don't hear Bill O'Reilly admitting he was wrong about price-gouging and offering apologies to ExxonMobil. Too much to hope for I guess.

In hindsight it is even clearer that what many of us were attributing the spike in gas prices to was correct:

• Hurricane Katrina wiped out a big portion of the fuel importing/refining/distribution infrastructure.
• The 2006 energy bill that effectively banned MBTE and mandated more ethanol as of May caused a substantial interuption in the supply chain of fuels.
• Increased demand from China and India created greater competition for crude shipments.
• Inflationary monetary policy helped to boost commodity prices.
• Rampant speculation by traders drove crude oil prices beyond fundamentals

Finally, an amen chorus of Peak Oilers and Global Warming nuts, aided by the media, fueled the hysteria. Even today, as the price of oil stands at $54, many of the supply problems persist. Hugo Chavez's Venezuela is struggling to produce as much as it once did after cashiering massive oil industry know how in the form of PDVSA employees who participated in the general strike of 2003. Nigeria can't seem to stop militant attacks on its oil industry infrastructure. Russia is using oil as a means of diplomacy and restricting shipments to Europe. There is still a premium imbedded in the price of oil that accounts for various and sundry geopolitical messes (sure, throw in Iraq here, if you like).

Many businesses and users of oil had to find energy substitutes when oil was at $80, but with it back at $55 many are all too happy to switch back to the stuff. All those investors in alternative energy are sweating too. Their little green ventures that looked like the next Google when oil was in the stratosphere are going to be losing money every day that oil continues to slide. No doubt Vinod Khosla is moaning to his allies in Congress to give ethanol another political shot in the arm - it is no coincidence that ethanol seems to be getting a fresh push in the halls of the Great Sausage Factory, as is an attempt to permanently ban drilling for oil in the barren wasteland of ANWR.

Oh well, it is a little too depressing for those of us who see hydrocarbon technology as a blessed benefit that has sprung from the creative font of the human mind (and that should be a welcome part of diverse landscape of energy sources). The best that we can hope for is that people remember all of the caterwauling for what it was, a bunch of misinformed blather and phony baloney, the next time we have a spike in fuel prices.

"Yes We Can", Unless We Don't F**king Want To

Ugly.

Twice in the last five years, rising food prices triggered global waves of social unrest. With drought baking U.S. crops, another round of soaring, society-straining price spikes may happen in coming months.
“The drought is clearly going to kick prices up. It already has. What happens when you have speculators is that it goes through the roof,” said NECSI president Yaneer Bar-Yam. “We’ve created an unstable system. Globally, we are very vulnerable.”
...
“In the short run, USDA needs to figure out a way to remove the mandate on ethanol use from corn,” said Timmer. “If we could free up 20 to 30 percent of the U.S. crop, reduced as it is, it would bring corn prices down very quickly.”

Wait.  A certain someone can issue Executive Orders gutting welfare reform and ignoring our immigration laws and  can issue recess appointments when the Senate isn't actually in recess, but we can't just f**king suspend the idiotic ethanol mandate???????

Can Our Ethanol Policy Get Any Crazier? Yes!

Many moons ago, George W. Bush gave a SOTU speech where he dropped a ridiculous sop our silly and destructive "bio-fuels" policy. I said at the time, "Ethanol from Wood Chips and Switchgrass...God Help Us."

Well, there has been no sign of any divine intervention, but there has been a miracle of sorts...the EPA has discovered unicorns, evidenced by their imposition of fees on said unicorns.

Ethanol From Garbage?

This is good news. It's about the only way a sane person, who isn't a corn farmer or a politically-connected venture capitalist, could get excited about ethanol.

Whoops! Part...%$&...I Lost Count

Via our fine friends in North Dakota, which has been a hotspot for the ethanol industry in recent years, things aren't going so well in the ethanol biz these days. Whoops.

Update On Another Green Fantasy

In 2006, when President George W. Bush spoke of ethanol from wood chips and switchgrass during a SOTU address, I said "God help us."

I see the wisdom in a "don't sweat the small stuff" attitude. Being able to understand what is at the core of an issue and to marshall your energies on real priorities is a hallmark of a good leader. Maybe that is how the White House approached the SOTU address - stand firm on the critical issues of Iraq, fighting terrorism, taxes; and, for the rest, just throw out any old nice-sounding political garbage. After all, you can't be a bulldog on everything. That has to explain the rubbish that Bush spouted about America's addiction to oil and the need for ethanol from wood chips and switch grass.

Well, here is a bit of follow-up on that point. Willing it such and throwing money at it has not made it such.

Most important, the Nancy Pelosi Congress passed and Mr. Bush signed a law imposing mandates on oil companies to blend cellulosic fuel into conventional gasoline. This guaranteed producers a market. In 2010 the mandate was 100 million barrels, rising to 250 million in 2011 and 500 million in 2012. By the end of this decade the requirements leap to 10.5 billion gallons a year.

When these mandates were established, no companies produced commercially viable cellulosic fuel. But the dream was: If you mandate and subsidize it, someone will build it.

Guess what? Nobody has. Despite the taxpayer enticements, this year cellulosic fuel production won't be 250 million or even 25 million gallons. Last year the Environmental Protection Agency, which has the authority to revise the mandates, quietly reduced the 2011 requirement by 243.4 million gallons to a mere 6.6 million. Some critics suggest that even much of that 6.6 million isn't true cellulosic fuel.

Chalk up another green fantasy dashed against the rocks of reality. Meanwhile, we are discovering and producing a treasure trove of useable energy previously thought impossible and yet we are actively undermining it. As the good professor is wont to say, the country is truly "in the very best of hands."

Vindication on Ethanol Silliness, Now Can We Stop the BS?

Long ago, when George W. Bush said "ethanol from wood chips and switchgrass", I said "God help us." I even said to beware of slick venture capitalists with Democratic ties, like Vinod Khosla, looking to grease their bets with taxpayer cash. (and I actually drew some fire for my criticism of Khosla)

Well, the WSJ today has the 110% vindication of Donny Baseball in re this fiasco.

Forbes on the Ethanol Glut

Two weeks ago I said the race is on to have the Great Sausage Factory bail investors out of sinking ethanol investments. This weekend I got my Feb. issue of Forbes and they give a more detailed account of this development.

UPDATE: More on same from Bloomberg.

Energy Policy Myths

A letter to the editor in Saturday's WSJ caught my eye. It was from Andrew Morriss, who I've seen quoted by Don Boudreaux over at Cafe Hayek. Morriss identifies and tackles three myths that pervade our energy policy debate. Alas, one myth he forgot to tackle, perhaps because Joseph White's original article didn't flog this particular myth, was the notion that alternative fuels like ethanol are the solution to our energy independence. Not to worry though, said myth has eminently qualified floggers enlisted in its perpetuation. No less than Bill Clinton was touting ethanol as Brazil's energy independence silver bullet (pay no attention to the giant P-50 drilling rig offshore). Don Luskin has the story and a title of pure copy-writing genius.

Higher Prices at the Pump

It's all over the news, we are going to pay more for gasoline this summer. You probably won't here about the Nigerian rebels that have shut down 25% of that country's oil production, and you definitely won't here about the hash of an energy bill that the Great Sausage Factory gave us. The May switchover to ethanol from MTBE as an oxygenate additive is going to mess with the highly complex gasoline supply chain and higher prices will result. All this for some perceived environment benefit. Alas, the vastly more environmentally fervent Europeans haven't banned MTBE and retain the flexibility to blend it in their fuel, which they are doing when the price of ethanol make substitution of MTBE economical. There is a deeper debate here, but my main point is that retaining flexibility for the supply chain to react and adjust is a key factor in keeping prices stable, and even to reducing them. Somehow though our putatively very smart elected leaders think that mandating and hamstringing industry to react and adjust is the way to go. Yet more evidence of what I have said before "we have high gas prices in the US because we want high gas prices." No, we don't consciously desire and demand high prices, but we consistently enact policies (or refuse to oppose policies) that ensure, due to the laws of economics, higher fuel prices.

Global Warming Versus The Black Swan

OK, so I'm not immune to reading a trendy book now and again. Right now, Nassim Nicholas Taleb's "The Black Swan" is the hot book of the moment in my business. I have mixed feelings about the book, but it undeniably has its virtues. Particularly in its discussion of the failure of expertise. Taleb hues to the belief that the world is simply too complex for "expertise" to really exist, and he discusses at length the demonstrable failure of so called experts' predictive efforts. This isn't a new concept, the dismal receord of prediction and forecasting is well known, so much so as to be part of the 'wisdom of the common man'. Still, Taleb arrays the evidence and the argument against expertise impressively, and as he demolishes economists, securities analysts, CIA intelligence analysts and all manner of forecasters, I can't help but thinking about global warming. The global climate is mind-blowingly complex, just the sort of system for which expertise is essentially unattainable. The implications of this are that it is a near certainty that current consensus predictions of global warming and the damage it will cause will be proved wrong. The current forecasts of what temperatures and climate conditions will be 50 years hence may be too pessimistic or even too optimistic, but they are all but certain to be wrong. We may indeed be in life threatening climatological danger, but it won't be because of excessive man-made greenhouse gases in our atmosphere, or we may be in no danger whatsoever. We are simply unable to know. (Of course, scientific absolutists will vociferously disagree but that doesn't mean their predictions will be any good.) If that sounds too fatalistic, it is. That is proably why humankind has had a fatalistic outlook for much of its existence, and much of the world still does. What are the policy implications? We should probably encourage smart things that reduce pollution at the margin, but mostly we should not inhibit spontaneous technological discovery (which, for example, could yield a 'Black Swan' advancement in fuel technology) by picking winners today (i.e. ethanol) and we should maintain a level of flexibility just in case the consensus is dead wrong. Certainly what we should not do, is elevate global warming prevention to the central organizing principle of society as Al Gore suggests.

Let's Hear It for Choice: Diesel Is Here

Clean, efficient diesel cars are here now and there are more to come. This is good news for consumers looking for the hard benefit of fuel-efficiency and/or a few squishy utils of environmentalist self regard, giving them an alternative technology to hybrids. Hopefully, this technological competition will drive down the costs for both (which may even result in actual positive economics for Prius owners). Further, increased penetration of diesel into the passenger vehicle market will hopefully hasten the ramp up of refinery capacity to produce ULSD, which should ease fuel prices (see here and here). Finally, a subtle, but important, benefit of diesel uptake in the US will be to ground the debate over energy policy in reality, or at least move the debate in that direction. Diesel technology is real, it is available and it is going to have compelling economics. It will be harder for pie in the sky schemes (cellulosic ethanol) and bad technologies (hydrogen) to garner policy traction and secure economic rents in the face of our emerging diesel experience. Diesel may prove that we can take existing technologies and make them orders of magnitude better in terms of efficiency and environmental impact. If the nation's policy comes to broadly accept that we can have a huge impact by making existing technologies (read hydrocarbons) incrementally better, then we'll be alot better off.

Greatness of the "Potomac Watch" Column Carried On

I think it is fair to say that Kim Strassel has emerged as a rising star of opinion journalism in the realm of political economy and public policy. Last week she uncovered the messy wreck that resulted when the bad idea of drug reimportation hit the brick wall of economic reality. This week she deciphers the collective "Whoops!" emanating from all those ethanol evangelists in Washington. If she keeps up she is destined for Crown Jewel status on the editorial staff of the WSJ.

Good Problems to Have

In the upcoming US election our society will be engaging in a massive national debate on how to divvy up our colossal national wealth. We'll be asking 'should we be giving more or less money to (blank).' In the blank space you can insert a slew of various slices of society from those aspiring to attend college, to sick, young children of modest income families, to farmers, to refiners of ethanol, to investors, to teachers, to makers of military aircraft, and even such non-traditional interest groups such as Iraqis, Aghanis, Palestinians, and Sudanese. Isn't it great that we can wrestle with these questions of where to spend our money, when, in the cradle of western civilization, they can't even pick up the garbage?