 Volume 8, Number 3 Third Quarter 2006 FEATURES The Energy Debate: Is Ethanol the Answer? The Gulf Coast’s Tourism Comeback: Playing for Even Higher Stakes? Hurricanes Spawn Katrina Update: One Year After DEPARTMENTS Southeastern Economic Indicators
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As crude oil prices remain high and supplies tight, the search for alternative fuels has intensified. Can ethanol break petroleum’s stranglehold on the nation’s gas tanks?
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The timing appeared to be right, with a rise in crude oil prices driving interest in alternative fuels. From July 2005 to July 2006, the price of a barrel of oil rose 25 percent, from around $60 to $75. The number of parties exploring construction of ethanol processing facilities in the state quadrupled from five in 2005 to more than 20 in 2006. But Stuckey’s optimism got another boost as the three-day conference convened in Tifton, Ga., in early August 2006.
“Early on we were expecting 200 to 300 [attendees],” Stuckey said. “Even four weeks before, we were still expecting about 200. Then in the last two weeks, people started calling. I’d turn around and there would be another 50 people signing up.”
When the smoke settled at the registration desk, the conference had more than 500 attendees, practically double initial projections. Interpretations of the spike in attendance fall into one of two camps: Ethanol—a fuel derived from organic sources such as corn or soybeans—is the silver bullet needed for U.S. energy problems, helping society at large and profiting those who help provide it. Or ethanol may not be the silver bullet, but a number of people aren’t waiting for something better to come along.
The search for a solution gains urgency
What is not in dispute is why so many people are looking for a silver bullet. Not only have oil prices risen dramatically during the past several years, but risks to energy resources have emerged on multiple fronts. Unstable political situations threaten the supply abroad while the domestic supply has been reduced by weather disruptions such as Hurricanes Katrina and Rita and pipeline corrosion in Alaska. All these factors compound the effects of an already tight global energy market.
Although fossil fuel will remain dominant for a long time, many private and governmental groups are nevertheless seeking energy alternatives in everything from automobiles to power plants. Several renewable energy sources are already in use on a small scale, including wind and solar power. But getting that power into cars is, at best, a long-term consideration. Americans are looking for something they can do now to change the nation’s energy mix. Enter ethanol.
Small role, big spotlight
Although ethanol represents less than 2 percent of the energy used in U.S. gas tanks, it has garnered much attention from high-profile media, including 60 Minutes, CNN, the Washington Post, and the New York Times. Ethanol’s potential to reduce U.S. dependence on expensive foreign oil, as well as to reduce harmful emissions, plays well with many audiences.
The Oval Office has added muscle to the push for energy independence. The administration has called for greater production of alternative fuels, including ethanol, to help reduce dependence on foreign oil, especially from the volatile areas of the Middle East.
The push for ethanol on environmental grounds has multiple components. One piece is the Energy Policy Act of 2005, which requires doubling the nation’s use of alternative fuels by 2012 to 7.5 billion gallons, still a relatively small portion of the 134 billion gallons of gasoline used in the United States in 2005. Another reason is that ethanol is now being used instead of methyl tert-butyl ether (MTBE) for blending in reformulated gasoline. MTBE was found to pollute ground water, so the federal government removed a requirement in recent legislation that had encouraged MTBE’s use. This summer saw the final shift from MTBE to ethanol, whose price rose with the rapid increase in demand.
A final environmental argument is that ethanol has lower carbon dioxide emissions than gasoline, though they are still far from zero. The Argonne National Laboratory, which the University of Chicago operates in Lemont, Ill., for the U.S. Department of Energy, estimates that using E85 (a fuel blend that is 85 percent ethanol and 15 percent gasoline) reduces greenhouse gas emissions by 20 percent. Another study, published in the July 2006 Proceedings of the National Academy of Sciences, found a 12 percent reduction.
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Ethanol fuels profit motives
Interest in ethanol is not limited to energy security and environmental concerns; financial and venture capital firms are getting involved. At a hearing before the U.S. Senate’s Renewable Fuel Standards Committee on June 19, 2006, Daniel More, a director at the financial services firm Morgan Stanley, reported a growing willingness among traditional capital markets to make investments in the ethanol industry. He noted several ethanol companies have used the public equity markets in the past 12 months.
Most recently, VeraSun Energy—the nation’s second-largest ethanol producer, with about 5.1 percent of the market—raised $483 million in a well-received initial public offering. Aventine Renewable Energy and Hawkeye Holdings, the nation’s third- and fourth-largest producers, respectively, are attempting to raise similar amounts through equity financings in the public markets.
In the past, investors found ethanol easy to resist. The high costs of growing, transporting, and processing corn made it much more expensive to produce than oil. But with oil prices as high as $77 a barrel and a federal subsidy for ethanol of 51 cents per gallon, profits from ethanol are now possible. Dale Threadgill, department head for biological and agricultural engineering at the University of Georgia, contends that as long as the price of oil remains above $50 a barrel, ethanol plants should be profitable investments.
According to Stuckey, approximately 40 ethanol factories are under construction in the United States right now. The average ethanol plant produces 100 million gallons a year and provides between 50 and 70 jobs, not counting those in supporting industries such as transportation, she added.
Currently, only one ethanol processing plant operates in the Southeast, according to the America Coalition for Ethanol. But that plant, in Loudon, Tenn., may soon have company. Construction of a $144 million, 90-acre ethanol plant in Camilla, Ga., is scheduled to begin later this year, and other groups in Alabama, Florida, Georgia, and Louisiana are also exploring construction of biofuel processing plants.
The efficiency debate
But the benefit to the labor market in each of these areas takes a back seat to the benefit of having a dependable fuel supply for the nation.
For ethanol to be beneficial, it has to be effective, meaning it must require less energy to make than it produces. Calculations of the costs of producing ethanol from the most common source—corn—vary. But most experts concede it takes a significant amount of energy and money. The most vocal naysayers are David Pimentel of Cornell University and Tad Patzek of the University of California at Berkeley, whose research finds that making corn ethanol requires 29 percent more fossil fuel energy than the ethanol itself produces.
Michael Wan, a researcher at Argonne National Laboratories, disagrees; by his calculations, it takes 0.74 BTU of fossil fuels to create 1 BTU of ethanol. Critics of the Pimentel and Patzek study, published in 2005, question its assumptions and point out that their study doesn’t include the value of by-products of the ethanol production process that can be used as animal feed. Still, ethanol production requires significant energy.
Joy Peterson, assistant professor of microbiology at the University of Georgia, concedes that Pemintel and Patzek “bring up some valid points, but they started making this argument a while back, and some of the [ethanol production] technologies really changed the amount of money that it costs to make ethanol in this fashion.” The U.S. Department of Agriculture’s own study places the energy balance at a 67 percent gain in the production of corn ethanol.
Easing consumers’ adjustment
One of ethanol’s logistical advantages is how easily it adapts to the consumer’s life with little or no adjustment. Currently, Americans are driving five million flex-fuel cars, vehicles that can burn the E85 fuel blend. But the federal regulations that have encouraged automakers to produce flex-fuel cars have not mandated wider availability of ethanol. Only 774 E85 fuel stations currently operate in the entire United States, according to the National Ethanol Vehicle Coalition.
Another option for American drivers is E10 fuel, which blends 10 percent ethanol with 90 percent gasoline, a mixture that virtually all cars built after 1970 can use.
Pure ethanol doesn’t work in all engines because as a solvent it can eat through certain hoses. This corrosive property also causes problems in transporting ethanol since it can’t be shipped through pipelines like gasoline. As a result, ethanol has to be carried via truck or rail to distribution centers where the fuel is finally mixed with gasoline. This process requires more energy, labor, and vehicles to get the gasoline blend to consumers. These logistics are part of the reason ethanol plants are moving out of the larger corn-growing areas, according to Stuckey.
Consumers who do convert to ethanol will notice another difference from gasoline: energy content, or the amount of energy a fuel source contains. It takes approximately 1.5 gallons of ethanol to power a car as far as one gallon of gasoline can. This difference is important when comparing ethanol’s price to gasoline’s. It means that if gasoline costs $3 a gallon, ethanol would have to cost $2 a gallon for a driver to travel the same distance for the same cost.
Other sources crop up
Other forms of ethanol may prove to be more efficient than the corn-based version. In Brazil, sugarcane is used to produce ethanol with significantly less energy than the corn version produced in the United States requires. Ethanol makes up 40 percent of the passenger vehicle fuel in Brazil, where research and production have been conducted continuously since the oil scare of the 1970s.
By comparison, the U.S. ethanol industry is in its nascent years, still learning about efficiency and possible inputs other than corn. Using sugarcane is probably not viable in the United States because sugarcane is less plentiful and more expensive here. With 2 percent of car energy derived from ethanol in 2005, the United States has a long way to go to catch up to Brazil. Currently, Congress is protecting the U.S. ethanol industry by levying a 54-cent per gallon tariff on imported ethanol.
At Georgia’s Bioenergy Conference 2006, the discussion went beyond corn-based ethanol and included biodiesel and other forms of ethanol. For instance, Peterson at the University of Georgia is working on making ethanol from sugar beets. Another researcher, Brad Buchanan, a farmer in central Georgia, has produced ethanol from waste peaches from Lane Packing Co., a peach grower. Stuckey pointed out how much waste exists in the peach industry because of the short window for peach ripeness.
Creating a new market for Georgia’s agricultural goods—and even its waste—could prove a huge boon for agricultural producers of all sorts, not just corn farmers. In Alabama, David Bransby, an agronomy professor at Auburn University, is conducting similar research on converting switchgrass to biofuel.
Another option for the United States is biodiesel, which has greater energy content and a readily available feedstock in soybeans. A study published in the Proceedings of the National Academy of Sciences found that soybean biodiesel generates 93 percent more energy than its production requires, higher than the estimates from even the most optimistic of corn ethanol calculations. The study also claimed that corn-based ethanol reduces greenhouse gas emissions by 12 percent while soybean biodiesel reduced them by 41 percent compared with gasoline and diesel.
Biodiesel is more land intensive, though, requiring more agricultural inputs than corn-based ethanol—420 gallons of ethanol are produced from each acre of corn while an acre of soybeans yields 60 gallons of biodiesel. As with all current forms of agricultural-based power, the land required to fulfill all the nation’s energy needs would more than cover all the arable land in the United States.
Pieces of the puzzle
Instead, ethanol, biodiesel, and a host of other forms of energy will have to be combined to produce a comprehensive energy solution because no single option appears capable of solving the current fuel problem.
Peterson explains this multipronged approach as she relates her reasons for being involved in ethanol research: “I see simultaneous development of a lot of different technologies. I’m not sure just ethanol is the answer,” she said. “I think there need to be lots of answers. I want us to be better stewards of the environment. And ethanol is one way to address this as well as looking at any kind of alternative energy. Couple that with more fuel-efficient cars, and we’re going to have to tighten our belts.”
So it appears the nation needs to search for not one large but many small silver bullets. And as long as petroleum prices remain high, the search for solutions will attract money as well as attention.
This article was written by Sarah Dougherty, an economic analyst in the regional group of the Atlanta Fed’s research department, and Ed English, a staff writer for EconSouth.