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Ethanol Fact and Fiction Or, How the RFA Distorts Facts The U.S. ethanol industry would have us believe that fuel ethanol can replace fossil fuels, significanlty reduce our dependence on imported oil, reduce greenhouse gas emissions and reduce the cost of gasoline. They also state that ethanol production does not take away from food production and does not contribute significantly to food price inflation. None of these statements are true. The Renewable Fuels Association (RFA, http://www.ethanolrfa.org/) is the self-proclaimed voice of the U.S. ethanol industry. The membership of the association is made up entirely of companies who either produce ethanol or have an interest in high corn prices. The membership of the RFA has a strong vested interest in promoting ethanol production and the government subsidies that make it more profitable. The motives of the RFA are to promote ethanol production, not the public interest. Below are statements from the RFA Web site and some facts that contradict those statements. Bottom line: The RFA supports wider use of ethanol only when it benefits its members. The RFA has does not want Americans to have access to less expensive ethanol from Brazil. Statement #2, Increasing U.S. Ethanol production does not increase food prices: "Corn demand for ethanol has no noticeable impact on retail food prices. A central theme in the “food versus fuel” myth is the false assertion that moderately higher corn prices, spurred by ethanol demand, are leading to higher retail food prices for consumers." (http://www.ethanolrfa.org/resource/facts/food/) What is wrong with this statement? Corn prices are not "moderately" higher, they have almost tripled over the last three years. As a side effect of higher corn prices farmers planted more corn and reduced acreage of soybeans and rice. Now prices of those basic commodites have gone up too. Effects on retail food prices are starting to show up. The Consumer Price Index for Food increased by about 2.5% per year in 2005 and 2006. The food inflation rate from September, 2006 to September, 2007 was 4.4%. This increase coincides with a sharp increase in corn prices that is solely due to increased demand for ethanol production. In fact, corn prices are almost triple their historic level in spite of a record 2007 corn crop and declining amounts of corn used to produce the U.S. food supply. The increased cost of corn alone in 2007 is close to $20 billion. Food producers cannot absorb that cost increase, food prices must rise. Bottom line: The RFA does not acknowledge the strategic importance of corn in the U.S. and world food supply, even in the face of a near-doubling in the food price inflation rate. What is wrong with this statement? Ethanol from grain is an extremely inefficient way to produce energy. To replace the U.S. gasoline supply with E85 ethanol would require essentially the entire 2007 world grain crop. All of the world's corn , wheat, rice and other grains produced in 2007 can only satisfy the energy needs of U.S. automobiles. Never mind our trucks, ships, trains, airliners and other transporation needs, or the energy needs of other countries. As a direct result of more corn planted for ethanol, U.S. soybean production declined by 22% in 2007. Prices for soybean oil used for cooking and soybean meal used for animal feeds have increased sharply as a result. We have so far avoided some of the impact of ethanol on food prices because two years ago we had large buffer stocks of corn and soybeans. Those stocks are gone now. From late 2008 we will start to see the full impact of ethanol production on the U.S. food system. Bottom line: Increased ethanol production is taking essential agricultural raw materials away from the U.S. food industry to line the pockets of the membership of the RFA. What is wrong with this statement? E85 has a significantly lower energy density than gasoline. A gallon of pure ethanol has about 66% of the usable energy of a gallon of pure gasoline. E85 therefore has about 71% of the energy content of gasoline. A car that gets 30 mpg on gasoline should get about 21-22 mpg on E85. That 29% (not 10-15%) decline in fuel efficiency is close to the official mileage ratings for flex-fuel vehicles (http://www.fueleconomy.gov/feg/byfuel/FFV2000.shtml). Statement #5, Increased U.S. ethanol production is having a significant effect on U.S. dependence on foreign oil. "In 2006, the production and use of ethanol in the U.S. reduced oil imports by 170 million barrels, saving $11 billion from being sent to foreign and often hostile countries." (http://www.ethanolrfa.org/resource/facts/energy/) What is wrong with this statement? According to the RFA Web site, in 2006 the U.S. produced 4.855 billion gallons of ethanol (http://www.ethanolrfa.org/industry/statistics/). On a gasoline basis, and ignoring that it takes significant amounts of petroleum to produce ethanol, we produced an energy equivalent of 3.2 billion gallons of gasoline. At 42 gallons in a barrel, that translates to 72 million barrels, not 170 million. Taking into account the petroleum used in the production of ethanol only about 60 million barrels of net oil imports were saved, about 0.7% of our total petroleum imports. A second error in this statement is that the top 3 suppliers of U.S. petroleum imports are Canada, Saudi Arabia and Mexico. These are generally not considered to be "hostile" countries. Bottom line: RFA statistics cannot be relied upon to paint a realistic picture of the role of ethanol in the U.S. energy economy. Several years ago, with oil prices of $30 per barrel and $1.25 gasoline, it was not possible to produce grain-based ethanol without subsidies. Today, with oil over $100 per barrel, the energy value of corn is high enough, without a subsidy, to support a viable U.S. ethanol industry. Abolishment of the VEETC would lower the price of corn for both food and ethanol producers. Bottom line: Subsidies are no longer required for U.S. ethanol production, but the RFA continues its support because the subsidies benefit its members. Disclosure Statement: Dr. Thomas E. Elam, President of FarmEcon.com, has no direct financial interest in energy companies, food production, farming or farm land. Dr. Elam owns shares in several mutual funds and a highly diversified portfolio of common stocks and bonds managed by a brokerage company. Managers of those funds may from time to time invest in companies engaged in energy production, food and agriculture. |
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