Status Update on the Ethanol Industry

Times continue to be tough for the ethanol industry.  Gasoline demand continues to fall and corn prices remain relatively high.  In April, Aventine Renewable Energy Holdings, an Illinois-based ethanol producer, filed for Chapter 11 (reorganization) bankruptcy, and the largest West Coast ethanol producer, Pacific Ethanol, Inc., filed Chapter 11 on May 18.  Aventine has an annual production capacity of 207 million gallons of ethanol, and operates distilleries in Illinois and Nebraska. Pacific had capacity of 220 million gallons annually.  According to Ethanol Producer Magazine, the current count is that 38 ethanol distilleries (including Pacific) are out of business – with 23 of them built since 2005.  The cumulative production capacity of these plants is 2.4 billion gallons annually.  Given that there are presently 193 ethanol distilleries in the U.S. (according to the Renewable Fuels Association) 38 idled plants represents 19.7 percent of all distilleries, and 18 percent of production capacity.  That’s right on pace with our prediction that a substantial percentage of plants will be out of business within the next five years.  Why?  It’s basic economics.  Even with the vast amount of taxpayer subsidization of the industry, ethanol remains more expensive than gasoline on an energy basis – per British Thermal Unit (Btu).  Ethanol simply contains less heat energy that the same amount of gasoline does.  So, it’s real cost to buyers is more than gasoline.  Sure, it costs less at the pumps in most locations across the country, but the discount is not enough to offset ethanol’s lower energy content which results in less fuel economy.  Not even the taxpayer largesse that continues to be poured into the industry can stop the problems.  Even in the Aventine bankruptcy filing, the company is counting on continued subsidization of the industry through biofuel mandates.  That’s probably a safe bet.  Politicians have not shown any recognition that all the subsidies may simply be getting poured down the drain.  A recent Congressional Budget Office Report confirms that last point (Ethanol-CBO.pdf).  The report, titled “The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions” concludes that ethanol accounted for a 10-15 percent increase in food prices between April 2007 and April 2008.  In addition, the report concluded that ethanol use only cut gasoline consumption by approximately four percent and greenhouse gas by a fraction of one percent.  While the report acknowledges that energy prices in general had a greater impact on food costs, the report points out that with less ethanol production, the price rise would have been reduced.  The report also demonstrates that any short-run benefits of ethanol on greenhouse gas are more than offset by the increased amounts of forest and grassland that are converted into cropland used to grow crops to produce ethanol.  So, ethanol is also a net loser in terms of air quality.  Now the Administration has unveiled plans that the overall average fuel economy of cars increase from 25 to 35.5 mpg by 2016 (passenger cars 39 mpg; light trucks 30 mpg).

So, we have a political mandate to produce ethanol, the use of which decreases fuel economy, and new forthcoming requirements that cars get vastly improved fuel economy. Some politicians are even trying to force an increase in the percentage of ethanol used in fuel--which would further diminish fuel economy. It doesn't take rocket science to figure out what type of cars are going to get produced--smaller-sized hybrids and diesel cars made with aluminum and other lighter-weight parts, and more diesel-powered trucks. The proposed regulations would take effect in 2012, so the strategy may be to buy the car of your choice in 2011. After that, choices could become limited.

For an excellent technical article on the economics of ethanol see, “If Ethanol Is the Answer, What is the Question?”  The article is published in Volume 13 of the Drake Journal of Agricultural Law at page 149 (Spring 2008).  The author, an economist from Butler University, answers the question – “What is the latest government-backed failed energy panacea?"  It’s a good read, and puts a lot of the ethanol propaganda in its place.