“I converted my car to run on old McDonald’s french fry oil, and the mileage is pretty darn good.”

Well, there we have it…energy crisis solved…right? Wrong. You see, for every good idea and every well-thought-out plan that may work on a small scale, there are always problems on a widespread level. Ethanol from corn is a perfect example. We will examine why ethanol has failed in a moment. And why even bother with alternative fuels? Do we really need them?

Let’s think about some alternative fuels and energy sources. Think of nuclear, solar, hydrogen, geothermal, coal and biodiesel. While we’re at it, let’s think about ideas like recycling, conservation, smaller cars, efficient homes and even walking. Yes, walking. These ideas are no longer just for polite cocktail party talk. These things will now be necessities if the world — and, most certainly, the U.S. — is going to continue to function in the face of dwindling easy-to-get-to sources of oil.

One thing is for sure. The vast petroleum needs of a growing planet are not slowing down. In fact, quite the opposite.

We suddenly have a whole new ballgame, as millions and millions of new drivers hit the road in India and China. The economic boom in those places has spurred a new middle class. These are not the regimented masses of just a few decades ago. The new middle-class citizens of the developing world are not content with meager rations, bare-bones quarters and Mao or Nehru jackets. Instead, they are demanding more luxury items and a far superior standard of living. And you know what? They have the money to pay for these things.

So we have a problem. There are a lot of people competing for the world resource pie. But the pie is not growing very fast. In many ways, the size of the pie is static, and in some respects, it’s actually shrinking. Thus, we get the golden rule of supply and demand, which is that those who have the gold make the rules.

The idea of ethanol from corn or other feedstock is not new. Byron King and I have talked about this in our Outstanding Investments letter many times before. Farmers have used ethanol from corn for years on a local basis, and it has served them well.

I visit many farms every year. One small town in Minnesota is a perfect example of how corn-based ethanol’s evolution went from a simple small-scale solution to a nationwide disaster.

In the small southern Minnesota town of Waseca lives a good friend of mine, Geb. Geb is a lifelong farmer and resident. Geb made his career in farming, and his hands tell the tale of many years of hard work and toil. Geb now enjoys retirement and investing, and his son Scott handles the day-to-day operations of the farm.

I visited Geb and Scott’s farm about two years ago. As we walked over his farm, Scott was nice enough to show me the incredible advancements in farming technology. Global Positioning Systems (GPS) in the tractors and combines enable the driver to know exactly which parts of the fields he has already sprayed with fertilizer, in order to save money. And this level of technology is just a start. There are many other things that make this not your father’s farm. Different seeds, different irrigation methods, different weather forecasting. I was impressed.

Later that day, the discussion of ethanol turned into more of a history lesson and led me to realize that corn-based ethanol on a nationwide scale was going to be a disaster. (Remember, this was about two years ago.)

Wouldn’t it be great to grow enough of something in your yard and then have a machine turn it into fuel you could put in your car? What could be better than taking a small portion of your corn crop and converting it into ethanol at either your farm or the locally owned farmers’ co-op down the road? You could then use the ethanol to run your farm vehicles. And if you didn’t need all of it, you could sell a little to the local gas station or your neighbor. It makes an incredible amount of sense on that small-scale level, and it worked like that in the Corn Belt for many years. Fast-forward to 2008 and we find a much different story.

The idea was simple at first. We would use ethanol for fuel, just as they do “back on the farm.” But when the time came to scale it up, everything became super complex. Oil prices surged year over year, and the idea emerged that alternative fuels — like ethanol — would start to replace oil, just as they had done in Brazil years earlier. It was a nice idea. However, without any real planning or study, it was doomed to fail. And now we know that it has failed.

Yours for resource profits,
Kevin Kerr
may 6, 2008

Ethanol Policy was originally featured on Whiskey and Gunpowder

In the past, key commodities markets like gold and oil were the only ones you would hear mentioned in the mainstream press.

Again, all of this has changed, as the commodities markets have evolved. One sector that was mainly reserved for farmers and professional speculators was the grain markets. With the resurgence of ethanol and biofuels, these markets have suddenly become more precious than gold.

Let’s take a look at a few grains, and show you how to use them to your advantage…

Corn’s Explosive Run Won’t Stop Anytime Soon

Ethanol, ethanol, ethanol. In the last few years, due to the ethanol craze, the grains everyone’s heard about are corn and soybeans, and these grains are the most actively traded.

Corn has absolutely been on an explosive run, and the cash and futures prices are soaring, allowing savvy investors to make a fortune playing corn directly. The main cause is the ethanol plants springing up right and left across the country. It’s almost as though you can’t turn on the TV or pick up a magazine without hearing or reading about it. The demand for ethanol is real, and even though the science of ethanol is still questionable, the reality is that it’s now the primary blending ingredient for gasoline. Ten percent ethanol is pretty much standard now at the gas pump, and in many states, E85 is taking hold. E85 is 85% ethanol.

While the arguments rage on about whether or not ethanol is the answer to our fuel needs, the demand is already here. Until there is a viable alternative or a repeal of the 54-cent sugar tariff in the U.S., corn-based ethanol is here to stay, even though there are other alternative energy sources that are much more efficient.

So clearly, corn and sugar are two commodities destined for much higher prices. In the rush for corn and soybeans, one grain that’s being overlooked is wheat.

Can You Really Profit Trading Wheat? YES!!

Wheat is one of those commodities that isn’t sexy. It’s not gold and it’s not oil, so it’s not that exciting to talk about at the club — but there is real money to be made in the wheat market right now…my readers of Resource Trader Alert have been able to make 62%, 68% and even 174% from the options I’ve recommended on wheat.

Still, very few people are talking about wheat — at least for now — and that’s good news.

I grew up in Minneapolis, Minnesota, born and bred. Minneapolis happens to boast the largest cash grain market in the world. There is a small futures exchange and it trades wheat. Chicago also trades wheat and is where I usually suggest you trade. However, wheat is also traded in Kansas, and although the market is a bit thinner, it can sometimes work to your advantage. Some of the best markets to trade are the ones you never hear about in the mainstream. With the grain markets moving so fast even wheat is picking up steam and the trading action is like a tornado.

Kansas City wheat is the second most actively traded wheat contract after Chicago. The reason the KC wheat is special is that it’s the hard red winter wheat. This type of wheat accounts for about 45% of total wheat production in the U.S. and is a higher quality wheat that’s used to make food products. It’s more easily refined and milled.

Last summer, the United States Department of Agriculture said 49% of the spring wheat crop was already harvested and only 32% of it was rated good to excellent. That’s down from 67% a year ago. This year may be even worse, and demand is growing.

The situation gets even grimmer as the United Nations Food and Agriculture Organization is reporting that nearly two-thirds of the winter wheat crop in western and northern China has been wiped out by a prolonged drought. Some other areas have experienced a 40-50% cut in the winter wheat harvest.

The rumbling in the pits is that red winter wheat, while volatile, is one of those crops that simply will go higher in the long term, due to increased demand and ever-decreasing supply. Sounds like a good time to buy.

These Forgotten Grains Could Bring Big Gains

The grains used to be pretty obscure to most investors, and certainly there were no respectable Wall Street traders who looked at corn charts (or at least admitted it). Now if traders aren’t looking at the grain charts, they’re considered strange, so times change.

Other than corn, sugar, soybeans and wheat, there are many other smaller grain markets for the more aggressive investors who want to do their research and take a little more risk.

Canola, oats and a more mainstream commodity like rice are all more markets to take a look at. Personally, of the three, I would look at rough rice. The futures contract is pretty liquid, relatively speaking, and it can be a good-trending market. It certainly doesn’t get as much attention as corn or soybeans, but that can be a good thing.

Sure, corn and soybeans will remain the front-runners in the grain race, but the rush for profits and the ethanol hysteria (like the new gold rush) is far from over.

I could list about 50 more reasons to buy grains right now, but the bottom line is that these markets are very strong and this trend is likely to continue.

The grain charts have risen so fast they will give you a nosebleed if you look at them, but don’t let that deter you as bull markets often have charts like that. As always, use protective stops and a strong defensive trading strategy in these markets, because a correction is always possible.

Yours for resource profits,
Kevin Kerr

June 8, 2007

Trading Grains Can Deliver Serious Gains was originally featured on Whiskey and Gunpowder

However, one doesn’t have to be an expert to see a lot of very obvious flaws in the “ethanol intoxication” that so many Americans (including our president) seem to be so blindly buzzing on these days. Ethanol’s critics claim that current methods of producing the alcohol for use as a motor fuel represent little, if any, actual energy benefit on the balance…

Even the most optimistic numbers paint a picture of marginal benefits: about 1.25 units of bioethanol energy yielded per unit of fossil fuels consumed to produce it.

The most zealous (or ignorant, depending on how you look at it) ethanol advocates are convinced that even this meager benefit is worth revamping America’s vehicle industry and vehicular fuel infrastructure. Tomorrow’s technologies will be more efficient in the transformation of fossil energy to bioethanol energy, they insist. And the fringe benefits, they like to trumpet, include a reduced dependence on foreign oil and a cleaner environment…

This last bit may be technically true — since ethanol does indeed burn cleaner than gasoline. However, most folks who don’t know any better equate ethanol’s “cleaner” emissions with “less global warming” emissions. This is a myth that the pro-ethanol (anti-oil) crowd does nothing to dispel among the throngs of their Prius-driving, Gore-worshipping supporters.

The reality, however, is that ethanol still produces copious amounts of carbon dioxide when burned, much like gasoline. And since it yields LESS mileage and horsepower than gasoline in typical internal combustion engines (which means more of it must be used to go the same distance under the same power), it’s arguable that ethanol consumption is worse for the environment than gasoline — from a “greenhouse gas” standpoint. Ethanol is really only cleaner in the sense that it produces far less carbon monoxide than gasoline consumption…

Don’t get me wrong: Less carbon monoxide is a good thing for the environment, in that it makes the air less toxic to breathe, especially in smog-choked urban areas. But to say, as so many do these days, that burning ethanol in place of gasoline would help to curb global warming — assuming the truth of the far-from-proven notion that it’s caused by man-made CO2 emissions — is just plain wrong. The grand (or tragic) irony that no one in the pro-ethanol camp wants their army of tree-hugger cheerleaders to know is this:

Even if ethanol did represent concrete and significant economic or atmospheric benefits from reducing U.S. oil consumption, an aggressive domestic movement toward the large-scale adaptation of bioethanol vehicular fuels almost certainly represents a net environmental — and quite likely fiscal — NEGATIVE.

And it’s already starting…

Feathers Fly as Croplands Creep

The current tide in ethanol theory is toward the mass adaptation of “bioethanol” alcohol that’s made from crops like corn (even though as source material goes, corn is relatively poor for ethanol production). What most people don’t realize is that even if domestic demand for vehicle fuel were to remain static in the future though a series of magical quantum leaps in vehicle fuel efficiency, it would take far more acreage worth of arable farmland than is currently allocated to corn growth in the U.S. to generate enough corn to make bioethanol even debatably worthwhile…

This means that in order to make the switch to ethanol, MORE land across the “fruited plain” would have to be cleared, cultivated, fertilized, sprayed with pesticides, and converted into cropland. The net result is a lot of extra pollution of waterways, greater soil erosion, increased silting and warming of stream and river fisheries, very likely a certain amount of deforestation (quite a quandary for tree-huggers) – and, last but not least, large-scale destruction of America’s wildlife habitat.

In other words, an environmental nightmare.

These downsides are already being felt, even though the mass adaptation of bioethanol is still in its infancy. Case in point: South Dakota’s pheasant population.

Numbers of ring-necked pheasants, that perennial favorite of American game birds (ironically imported from Asia in the late 1800s), have boomed in South Dakota over the last 20 years — due in no small part to the establishment of the USDA’s Conservation Reserve Program. For those who don’t know, the CRP is a comparatively modest subsidy program that grants financial and technical assistance to farmers and landowners who are willing to restore easily eroded and polluted agricultural acreage to a natural state of forests, wetlands, grasslands, and riparian “buffer zones.”

These lands are invaluable habitat for all manner of wildlife — but especially upland game bird species like quail, pheasants, turkeys, and other species. According to USDA data, pheasant populations alone have jumped 22% for every 4% increase in CRP lands within known pheasant habitat zones…

Now, you may not think that, on the balance, increasing the pheasant population in Midwestern and Plains states is anywhere near as economically important as planting more corn for ethanol. But in South Dakota — the nation’s pheasant hunting capital — the numbers make a pretty powerful case. Every year:

• Pheasant hunting pours $135-153 million into the Mount Rushmore state’s economy
• Nonresident hunters — the vast majority of which come to South Dakota to hunt pheasants — spend $143 million on retail-priced gear and supplies
• Upland bird hunting in South Dakota (again, the bulk of which is for pheasants) supports over $51 million in wages paid, over $6 million in fuel and sales taxes, and over $4 million in federal income taxes.

Bottom line: Pheasant hunting and related tourism is just one example of a major economic boon to not just South Dakota, but many other U.S. states. And a huge percentage of this money — not to mention a huge percentage of the wildlife — is facilitated by privately owned lands that are part of the CRP land restoration program…

But now, because of booming demand for a fuel product that’s driven by misguided notions about its environmental benefits, a lot of this land may soon be in jeopardy. According to an Associated Press article from Feb. 7, President Bush’s latest budget proposal would back burner CRP, freezing new enrollments in the program through 2008.

The USDA expects this move to result in an 8% decline in CRP acreage nationwide over just the next 21 months as farmers eager to capitalize on the ethanol-charged price of corn revert this acreage back to croplands. The agency predicts corn will top $3.60/bushel this year, an 80% increase over 2005’s $2/bushel price.

And since Congress’ 2005 energy bill stipulates that the U.S. nearly double its production of ethanol by 2012, this price will only keep going up. So will the number of acres that are pulled out of CRP’s protection and converted back into waterway-polluting, erosive, wildlife-barren, pesticide-laced cornfields.

Amber Waves of Greed

It’s easy for politicians to get behind ethanol. For them, it’s a solution to several problems. Ratcheting up rhetoric about reducing American dependence on foreign oil opens the door for BOTH increased domestic petroleum production and the pursuit of new energy sources. One of these (bioethanol) also boosts the government’s bottom line in at least three ways: less money spent on CRP; less money spent in farm subsidies spurred by historic overabundances of corn; and greater revenue from now-booming farms’ income taxes, refinery taxes, and, yes, even fuel taxes (ethanol can’t be pipelined — it must be trucked to wherever it’s being blended or used)…

And because of the widespread misapprehension that ethanol adaptation is a net positive for the environment, politicians also get to appear “green” — while pocketing lots more of the only kind of green that really matters to them.

So no wonder Bush and friends are all about ethanol. Big Oil isn’t necessarily hurt by the movement (it may even be helped domestically), Big Agro gets a major boost from it, and the tree-huggers are appeased even as they LOSE a major battle in their fight to protect the environment. And as usual, the feds laugh all the way to the bank!

This brings me to my final point. One of the great ironies about today’s typically uninformed environmental zealotry comes when conflicting conservation goals meet in the political arena. In America today, we’re poised ringside at the opening bell of such a brawl, where one very real species of bona-fide conservation is pitted against another of a largely theoretical stripe…

In the red-white-and-blue corner, we have a champion fighting for most Americans’ desire for cleaner waterways; the restoration of wetlands, forests, grasslands, and buffer zones; wildlife conservation and expansion; and the large-scale preservation of myriad recreational opportunities (especially hunting and fishing, but not limited to them) — along with their enormous and wide-reaching economic benefits.

And in the supposedly “green” corner, we have a champion who claims to be fighting to break the back of foreign oil for everyone’s benefit — but only truly representing the economic interests of a few in the process: Big Agro, Big Oil (especially if it results in more domestic drilling), and Big Guv.

I hope that at the final bell, our grand countryside is still dotted with woodlots, wetlands, rolling grassy plains, hedgerows, briar patches, thickets, and dense river drainages where wildlife abounds — and where clear, cool, unpolluted-by-fertilizer streams and rivers are still teeming with fish…

But I fear it’ll be one great lifeless sea of corn, where no man treads with dog or gun and where no beast larger than a groundhog flourishes — interrupted only by highways teeming with streamlined, generic micro-cars running on $3-a-gallon ethanol fuels.

Does that sound like “America the Beautiful” to you?

Wringing necks for ring-necks,

Jim Amrhein
Contributing editor, Whiskey & Gunpowder

March 15, 2007

A Clear and Pheasant Danger was originally featured on Whiskey and Gunpowder

From Ethan, Location Unknown, about farmers growing more corn to meet demand for ethanol: “They will not use more fuel. All of the land that a farmer has is being used already to grow other crops. Farmers don’t just leave land sitting idle waiting to plant more corn. No farmer can afford to do that. Yes, corn prices will go up, but corn will be grown at the expense of other crops, not in addition to them. And I’m sorry, but if land is marginal and not currently being used, it’s not going to be used for corn, either. Marginal land grows marginal crops. It would hardly be worth the expense.”

Byron’s Comment: The individual U.S. farmer is quite a different thing than aggregate U.S. agricultural production. Large-scale agriculture in the U.S. is in many respects an industrial process that distinctly favors certain types of technology, terrain, and soil conditions. As a rule, the more crops that are grown, the more energy inputs are required. As no less an authority on the subject than the U.S. Department of Agriculture (USDA) has noted:

“The rapid adoption of new technology, improved crop varieties, improved insect and disease control, and other changes have boosted agricultural productivity [in the U.S.] so that more production can be obtained from the same cropland base. Agricultural productivity has more than doubled over the past 50 years.

“Larger farm equipment and increased use of irrigation has favored regions with large, level fields.”

Also, according to the USDA, “at its peak in 1992-95, the Conservation Reserve Program took about 36 million acres of land out of crop production.” This was out of about 440 million acres available, or about 8% of arable U.S. land.” So while one farmer might be plowing right up to the property line, there are other tracts of U.S. farmland that are sitting idle.

From Sterling, Who Knows Where He Is, Even if We Don’t: “When you read Byron King’s article, it leaves you feeling like nothing should be done to extend our energy resources. That is akin to not taking the five hours available to you on Saturday morning [to do something useful]…It does not make any sense doing that. Growing corn on otherwise unused real estate would be a sure way to get something out of it. If you have either lived through it, or have a parent that did, they used to extend gasoline even then by adding alcohol. Back during World War II, when everyone used gas-rationing coupons, I can remember an old gas pump at a filling station in a nearby town that had the word ‘ethyl’ displayed on it. That is what it was for then. Of course, there are other variations of alcohol that are more efficient, but you get the idea…And with the old-style methanol, which is the one I insist on using still as also my grandfather had from the 1920s until he died in 1966, it does very nice things for octane. The local race car gangs use it in their gas to boost the octane even further. And it does melt an ice chunk in the fuel line in the winter. It would be absolutely asinine not to use it to make gasoline go further. As far as using it in diesel fuel and a building heating plant, I don’t know if you can or not. Phooey. Wouldn’t affect the food supply for squat. Might even make the small farm closer to being economically feasible once more. Don’t need anymore of that valuable soil paved over.”

Byron’s Comment: “It leaves you feeling like nothing should be done to extend our energy resources”? Sterling, I know that you are a frequent reader, so you know that I am always writing about ideas for what to do about the future of energy supply and energy policy in the U.S., and the world at large. Let’s see…What have I discussed in some of my Whiskey & Gunpowder articles over the past two years or so? Drilling for oil, maybe? Secondary and tertiary recovery methods? Of course. But drilling alone is just not enough. How about conservation and efficiency? That is the fastest, cheapest, most readily available source of “new energy” available to everyone, everywhere.

I have discussed coal and methanol, particularly the Chinese approach to developing a vast methanol industry based on their own domestic coal reserves. I have discussed windmills and solar. I have written at length on the very fundamental idea of “strategy,” because without it, every plan is destined to fail. But this is a letters column, not a soapbox. So onto other letters.

From Jim, Location Unknown: “I teach a continuing education class for teacher certification about geology and ore deposits. Environmental questions often arise…The cost in loss to arable farmland topsoil to the Mississippi Delta from corn cultivation is as follows: The annual yield of one bushel of corn is at the sacrifice of 1,800 pounds of topsoil down the wind and the river due to erosion.”

Byron’s Comment: Interesting point, Jim. Agriculture is just one aspect of the extremely complex dynamic of the hydrologic cycle. The topsoil that erodes away from the upper Midwest is, for the most part, an ancient relic of the retreat of Pleistocene glaciers. Yes, topsoil can renew itself, but only over a period of many centuries, if not thousands of years. So by accelerating erosion of topsoil anywhere, mankind is foreclosing its agricultural future. This modern phenomenon of soil erosion simply adds to the resonance of the old saying about the Mississippi River, that it is “too thin to plow, too thick to drink.”

Another aspect of modern agriculture is chemical runoff. Fertilizers and pesticides drain from the land into the river system, and eventually make their way to the sea. Just south of the Mississippi Delta is a vast dead zone of water, where agricultural chemicals have congregated due to limited circulation in that part of the Gulf of Mexico. (Not even Hurricane Katrina, back in 2005, could stir it up all that much.) The fertilizers in the water cause algae to bloom. These bugs use up almost all of the dissolved oxygen in the water, so the fish cannot survive. This has wreaked havoc with the Louisiana fishing industry. Things are all interconnected.

From Another Jim, Location Unknown: “Byron is right on the cob, with his corny comments, but one point he made requires qualification. He said that there is ‘no free lunch.’ [But] when a lobbyist takes a politician to lunch, it is usually free for both of them. When [someone] closes out a big deal that saw him make a lot of money for simply making a few bets, then you can more or less assume that his next lunch won’t cost him anything.”

Byron’s Comment: Jim, I understand what you are saying about the power of the lobbyist crowd to extract special favors from the politicians. But this is also part and parcel of the U.S. political system. Lobbying, arm-twisting, and other forms of political and economic persuasion have been going on since time immemorial. In a way, this is another angle on the “free market,” at least the market in ideas. That is, there is a system by which private entities use their influence to, as the saying goes, “educate” the policymakers. But not all education is created equal.

My view of how things get done in the U.S. is that the more important the decision, the more you can expect to see “rational actors” do the right thing. For example, if the stakes of any given decision are relatively small or low-level, then raw politics and backdoor intrigue takes over. For an example close to my home at least, just about anything having to do with the Pennsylvania State Legislature can be viewed in terms of backroom deals, political patronage, and what people call “grease.”

But in contrast, during the Cuban Missile Crisis of 1962, the U.S. risked taking a nuclear strike from Soviet missiles in Cuba and delivering a nuclear response in kind on Russia. The stakes were, I think you will all agree, pretty high. So President Kennedy and his advisers managed to do most of the right and rational things, and worked out a deal with Soviet Premier Khrushchev and comrades to de-escalate the situation.

Wouldn’t it be nice if we could do the right and rational thing in terms of a U.S. national energy policy absent some massive, 1970s-style energy crisis slamming home again? That is, quite frankly, one of our themes in Whiskey & Gunpowder . We are looking for the right answers, or at least the right investments that will lead to the right answers.

From Donald in Texas: “Brazil is reportedly an effective user of ethanol as a vehicle fuel, but it makes it from sugar cane especially grown for the purpose.”

From “Jungle Jim,” Location Unknown: “Brazil has proven that ethanol can be used economically; it’s broken its oil dependency. If we are to remain a nation of any account, we must break ours. Yet every time that the subject is raised, ‘experts’ come forward to denigrate the idea. They are glib and clever, but their answer is always, ‘No.’ They very seldom have any positive alternative to offer, but they sure know what won’t work. The result is that our country increasingly looks like a bad remake of Waiting for Godot. We stand around hoping against hope for something good to happen, but all we hear is, ‘Nothing to be done!’ The irony is that this nation used to be famed for never taking no for answer. Now it’s all we get.”

From Yet Another Guy Named Jim, Location Unknown: “I agree with Byron…If we planted more corn on acreage equal to several times the area of Illinois, it still would supply less than half of our liquid fuel consumption. It’s not a total loss: The byproduct of an ethanol plant can be fed to cattle and swine. But diverting corn to ethanol production will have an impact on food production. Those who say, ‘If Brazil can do it, why can’t we?’ should realize corn is mostly starch that has to be converted to sugar by a malt enzyme. Brazil starts out with cane juice ready for fermentation and produces several cane crops per year. Subsidized ethanol is just another way to buy the farm vote.”

Byron’s Comment: I received quite a few e-mails referring to the Brazilian program for producing ethanol from sugar cane. I did not discuss the Brazilian program in the recent Whiskey & Gunpowder article on ethanol because I was focusing on the construction of ethanol plants in the U.S. But let’s discuss Brazil, while we are on the subject.

Brazil really does have quite a robust ethanol program going on, the product of 30 years and more of consistent national policy and massive investment. That alone should offer a sobering contrast to the on-again, off-again approach to a national energy policy in the U.S. But pointing out the flaws of the U.S. approach to producing ethanol from corn is not the same thing as saying “no.” And there is no harm in making an honest assessment of the U.S. approach, to include pointing out the contrasts with the Brazilian program.

Brazil is located, for the most part, in a tropical climate and, as some of the letters note, cultivates up to several crops per year of sugar cane that is specially bred for the purpose. Sugar cane is cultivated on a six-seven-year cycle, and its growth and cultivation requires far fewer inputs of manufactured nutrients than corn. (For example, sugar cane fixes nitrogen from the air through Gluconacetobacter diazotrophicus, and hence does not require nitrate fertilizer.) Sugar cane cultivation uses up about 1% of Brazil’s arable land, and tends not to be a significant cause of soil erosion, because the soil remains covered most of the year, or all year round. Most sugar cane fields in Brazil are not irrigated, and the sugar cane is watered solely via rainfall. Almost all of the sugar cane waste from making ethanol is fed to animals, mulched, and/or otherwise returned to the soil.

Chemical inputs to sugar cane cultivation in Brazil are so low, in most instances, that most Brazilian sugar cane farms would meet or exceed the standard U.S. definitions for “organic” agriculture. Many Brazilian sugar cane farms have entire ecosystems of flora and fauna that have evolved, literally, in the shade of the cane crops. Numerous almost-extinct species have come to thrive in and around sugar cane plantations. Compare this with the so-called “monoculture” agriculture model that dominates in many parts of the U.S., or the almost sterile soil in many agricultural areas of the U.S. that can only support crop growth via liberal application of natural gas-derived or oil-based fertilizers.

But manufacturing ethanol to use as automotive fuel is more than just an agricultural process. There are demographic and cultural variables, as well. Brazil has a population of about 184 million, or about 61% of the U.S. population. Yet Brazil has a fleet of vehicles that is only 12% of the total American fleet (28 million vehicles in Brazil, versus over 230 million vehicles in the U.S.) There is almost nothing comparable to “suburban commuting” in Brazil. Urban development in Brazil never led to affluent classes of people living in distant suburbia and commuting to work and shop. Most affluent and middle-class people in Brazil live near their workplaces and schools, or commute by train, bus, or subway to their workplaces and other destinations. In fact, in Brazil, the suburbs are pretty much synonymous with squalor and poverty. (On that subject, as applied to the evolution of U.S. suburbia, see James Kunstler’s arresting and remarkable book The Long Emergency .)

The net energy result is that Brazil’s gasoline consumption is only 4 billion gallons per year, which is supplemented by ethanol consumption of an equal amount. So 50% of what would otherwise be total gasoline demand is replaced by ethanol in Brazil. Compare Brazilian gasoline consumption of 4 billion gallons per year with a total of over 140 billion gallons per year of gasoline consumption in the U.S. In other words, Brazil’s gasoline consumption is about 2.9% (yes, you are reading it right, less than 3%) of U.S. gasoline consumption. No wonder that Brazil can meet its needs with ethanol.

So when I point out all of these facts, I am not trying to be “Dr. No” to peoples’ illusions of the future energy supply for the U.S. My view is that the “sugar cane” ethanol model of Brazil is simply not a realistic comparison to the U.S. effort to pretend to obtain its transportation fuel needs from corn-derived ethanol. In many respects, the U.S. is fooling only itself.

It is not industrially, socially, or politically difficult for Brazil to replace 50% of its gasoline requirement when that nation consumes only 8 billion gallons of transportation fuel per year. And it is helpful that Brazil has a tropical climate, in which a unique plant thrives, growing in the rain and under tropical conditions, and utilizing less than 1% of Brazil’s arable land. Good for Brazil! It is just that you cannot extrapolate Brazil’s program and scale it up to the massive and voluminous U.S. requirement for transportation fuel, certainly not by using corn.

The U.S. can do no such thing that Brazil is accomplishing. Circumstances are just plain different. So the U.S. is wasting its resources and time in a boondoggle effort to make significant amounts of transportation fuel from corn that will eventually prove to be futile. The American political class needs to stop viewing Peak Oil, and the ominous future energy situation of the world, as just another political issue. It is long past time to get rational and serious about developing a long-term energy policy for the country.

I hope that these comments have provided you with some food for thought, if not a desire for a stiff shot of Old Overholt Pennsylvania Rye Whiskey. Thank you for reading Whiskey & Gunpowder .

Until we meet again…

Byron W. King

January 17, 2007

Letters to the Editor: Ethanol, Part II was originally featured on Whiskey and Gunpowder

Oh I wish I had a barrel of rum, and sugar 3,000 pounds,
A college bell to put it in, and the clapper to stir it ’round,
I’d drink to all the good fellows who’d come from far and near,
I’m a rambling, gambling, Hell of an Engineer! Hey!

WE RECEIVED SO MUCH e-mail about last week’s article on using corn to produce ethanol that I was actually humming the whiskey-drinking Georgia Tech fight song to myself. Those of us who put together Whiskey & Gunpowder are fortunate to have such a great and thoughtful group of readers. Thank you for taking the time to write. I just wish that you would tell us your location (state, province, or foreign country) when you send us e-mail. Allowing for some editing due to space, and my comments on occasion, here is what some of "the good fellows" (and sisters) who wrote had to say:

From Herbert in Ohi "If agricultural product-based material becomes the source of transportation fuel, the price of oil will set the price of food. We have been warned. At least we can’t claim it will fit into the law of unknown consequences when it happens."

From Betty, Location Unknown: "Why doesn’t The New York Times say something about the fact that corn is one of the less-efficient sources of ethanol. It has to be processed twice as much as other sources, such as prairie grass, which will never compete for food dollars. The fact is that corn is far likelier to go up in price than it would if not sought after as a substitute for gas, and that nobody speaks about the greed of the agricultural industry. Signed, Disgusted."

Byron’s Comment: Betty, you will have to ask the editors of The New York Times why they do what they do. But if anyone from that newspaper ever writes us a letter, we will publish it. And I do not believe that there is an economic method, just yet, for transforming prairie grass into ethanol. But I know that some very smart people are working on it.

From Gary, Location Unknown: "First of all, again, thank you for the BEST commentary letter on the Internet even when you do get a little conservative! A major thanks for forthrightly challenging the corn-ethanol crowd. That position ranks as one of the most incredibly immoral decisions the U.S. and Europe have made. The production of ethanol from a valuable food crop, with an effective loss of several times the energy value as food versus the energy value as ethanol burned in internal combustion engines, is indefensible. This is true even ignoring [the] point of how little the impact [ethanol will have] in reducing our oil requirements. However, the crowning blow to the logic is the fact that the corn-to-ethanol cycle, when fully evaluated, uses more fossil fuel energy than that resulting from the produced ethanol."

Byron’s Comment: Try this on for size, Gary: When you compare the energy content of a gallon of ethanol versus a gallon of gasoline, you are just comparing the unburned fuel itself. Ethanol contains less than 60% of the energy content of gasoline. So the physical chemistry is what it is. But when you burn either ethanol or gasoline in an automobile engine, your overall energy efficiency plummets even further. Less than 15% of the energy that is released in the cylinders during internal combustion ever reaches the wheels. And much of the energy that is exchanged where the rubber meets the road is used to accelerate several thousand pounds of metal and plastic. The ultimate fuel efficiency that results from moving the human driver and passengers in your standard passenger car is down around 1% or 2%. That is just pitiful, really.

From Ted in Minnesota: "The entire 2004 U.S. corn and soybean crop, converted to biomass fuels, could replace about 10.41 billion gallons of petroleum (7.6 billion as ethanol and 2.81 billion as biodiesel). Petroleum is measured in 42-gallon barrels; the 10.41 billion gallon biofuel total would be equivalent to 248 million barrels of petroleum. The U.S. consumed about 7.49 billion barrels of petroleum in 2004, or about 20.5 million barrels a day. This means that the total biofuel potential of the record 2004 U.S. corn and soybean harvests would offset about 12 days of U.S. petroleum consumption, or about 3.3% of our total yearly petroleum consumption. Given that most of the U.S. corn and soybean crop is already committed to other uses, this analysis indicates that biomass-based fuels will have a negligible role in reducing U.S. petroleum consumption, which in turn underscores that replacing petroleum in the U.S. economy will be a monumental challenge."

Byron’s Comment: This is an excerpt from a much longer letter that Ted included in his e-mail to us, referring to a summary of energy balances that he wrote and submitted to the Oil & Gas Journal in July 2005.

From Nick in Iowa: "I am a farmer from Iowa that just read your article about the ethanol energy story and wanted to clarify a couple of things. First, it’s unlikely that ethanol will cause U.S. consumers to run short of food. There is a large amount of a byproduct called dry distillers grains (DDS) from the production of corn-based ethanol. It’s a made-to-order cattle feed and can also be fed in smaller quantities to swine and poultry. Feeding livestock will become a little more expensive, but will not contract in large measures. Also, the raw grain price in consumer foods is minuscule. Typically, the price of raw grain makes up 5% of the consumer retail price. For example, the cardboard box costs several times more than the corn in the retail price of corn flakes. Overall, retail food prices could creep up a little, but are unlikely to cause any severe rationing at the grocery store.

"Second, the impact on the U.S. balance of trade won’t be that great. There’s no question that U.S. exports of corn will fall, possibly dramatically. However, large exports of cheap corn have had little overall impact on the trade deficit, compared with the large imports of high-priced consumer goods and, of course, huge quantities of high-priced petroleum. Granted, ethanol will not improve the trade deficit to any great extent, either.

"Third, the tax breaks provided to the ethanol industry pale in comparison with the massive expenses the U.S. Treasury lays out to subsidize the high-production farm programs. High-priced commodity prices enable farmers to make decisions about their farms and livelihoods from the market, and not the government. I am a free-market person and am no advocate of the farm programs. However, I also do not agree with subsidizing the petroleum industry through our military budget. If the true cost of foreign oil were priced on the retail pump, ethanol’s true value would be easier to ascertain.

"Finally, I do agree with you that corn-based ethanol is only one small part of the energy equation. This nation obviously needs a more realistic and comprehensive energy policy, regardless of the impacts of ethanol. Even Iowa farmers know that petroleum prices are still very integral to our cost structure in fuel, pesticides, and fertilizer. I appreciate your continued effort to keeping everyone’s focus on the big picture of energy, and I always look forward to your next essay."

Byron’s Comment: Thank you for your kind words, Nick. You are making an important point about DDS being used as cattle feed. Many ethanol plants are located near cattle feeding operations. Thus, the "mash" that is left over is being sold as cattle feed. But no less an authority than the CEO of Tyson Foods recently commented that U.S. consumers would soon be seeing an increase in the price they pay for meat and meat products due to the rising cost of grain. A recent news article from the Associated Press noted:

"Ethanol plants and foreign buyers are gobbling the nation’s corn supplies, pushing prices as high as $3.40 a bushel, the U.S. Department of Agriculture said Friday [Jan. 12, 2007]. Farmers have not seen prices this high in more than a decade."

I sympathize with your comments about the state of the "free market" in the U.S. There are so many monetary, fiscal, legislative, and regulatory aspects to the U.S. economy that it is hard to know where regulation stops and the free market begins. To paraphrase Sigmund Freud, "What does the free market really want?" Nick, you are not alone in your view on this. Read the next letter.

From Roger in Delaware: "We all know ethanol is next to useless as fuel. Why didn’t you bring up the point that the only reason these plants are being built is they are government subsidized? The free market has no interest at all in alcohol as fuel, because it just doesn’t work. This whole thing is another government fiasco by the liberals and neocons. Private industry has no interest here."

Byron’s Comment: Roger, I think you are overstating the case. Ethanol has many good uses. There is even a NASCAR program to run racing cars on ethanol. Yes, there is a lot of government subsidy to the ethanol industry, such as the mandates to use ethanol as a fuel additive, even if it gums up your engine. And there are tax breaks for ethanol, such as exempting it from highway taxes, as if vehicles that use ethanol do not use the same highways as the rest of us. But it is clear that a lot of private funding is moving into ethanol production. So let’s follow the money. Are we watching the formation of an "ethanol bubble" to mirror the tech bubble of 1999-2001, or the housing bubble of 2003-2006? All I can say about that just now is to be careful about investing in things that you do not understand. The next letter makes the point.

From Joseph in North Carolina: "Ethanol on the first 10 billion gallons [of gasoline] per year is more about E-10 and less about E-85. Spot prices per bushel of corn are high, and so farmers will grow more, especially if they know they can get at least $2.50 per bushel. In North Carolina, farmers need a reason to grow something other than tobacco. Current spot prices are close to $4.

"Like you suggest, the ethanol supply is a drop in the bucket to U.S. [energy] consumption. Corn-based ethanol is just one small piece of the puzzle to U.S. energy independence. Some of those plants you mention may never get built or fail outright."

Byron’s Comment: These are good points, Joseph. The U.S. needs to have a serious national policy discussion about its future sources and uses of energy in general, and transportation fuel in particular. But I have heard otherwise serious people say really dumb things like, "We can run our cars and trucks on ethanol." No, we cannot do any such thing.

The fastest, cheapest, most readily available source of "new" energy supply for the U.S. economy is conservation and efficiency. That is one of the key points that I wanted to make in the article on the rush to construct ethanol plants and distill corn into fuel.

There are many other letters, and we will review some of them in Part II of this discussion. Thank you for reading Whiskey & Gunpowder.

Until we meet again…
Byron W. King

January 16. 2007

Letters to the Editor: Ethanol, Part I was originally featured on Whiskey and Gunpowder

Huh? OK, let me see if I follow the logic. The background issue is that the world needs to find substitutes for depleting supplies of oil and natural gas. We know that, and you may well have heard it here first if you are a longtime reader of Whiskey & Gunpowder. We also know that ethanol is one of those potential oil substitutes. People have been running vehicles on ethanol for well over a century. But oil has been so cheap for so long that there was never any need or economic scale in using the hooch for internal combustion. (I mean, the kind of internal combustion within a vehicle engine.)

And we know that a lot of corn is presently being diverted to manufacture ethanol. This is a fast-growing industry, and we will discuss that below. But have we really reached the point where the headline writers are so value neutral on the issue of food versus fuel that they shamelessly imply that there is some sort of economic or moral equivalency between using corn to manufacture ethanol and refer to “concerns about corn as a food”? Give me a break.

Ethanol Plants and Half the Corn Crop

In true journalistic fashion, the Old Gray Lady framed the food-versus-fuel issue in the first paragraph of the story:

“Renewing concerns about whether there will be enough corn to support the demand for both fuel and food, a new study has found that ethanol plants could use as much as half of America’s corn crop next year.”

What? The U.S. will use half its corn crop next year to manufacture ethanol? This raises a kernel of concern with me.

As I am sure you all understand, corn that is used to manufacture ethanol will not be available for other things, like eating. Nor will this ethanol-destined corn be used to feed other animals, or turned into other foodstuffs, let alone exported to raise foreign exchange for the U.S. And of course, the price of corn will rise.

So corn-based food, and products derived from corn, will become more expensive. And I know, so you don’t have to remind me, that farmers will respond to the price signals and grow more corn. But I hope you also realize that the farmers will do this by using more tractor fuel, fertilizer, pesticide, herbicide, and myriad of other substances derived from oil and natural gas. And the farmers will put into production the more marginal agricultural lands, with the less productive soils, which will then become depleted of soil moisture and nutrients. There is no free lunch.

Ethanol Plants Under Construction

According to a recent study by the environmental group Earth Policy Institute, the number of new ethanol plants being constructed nationwide has been underreported by more than 25%. According to EPI, there are 79 ethanol plants currently under construction in the U.S. When completed, by 2008, these new plants will more than double the annual U.S. ethanol production capacity, to 11 billion gallons.

This EPI estimate is a remarkable difference from the number of ethanol plants listed as being under construction by both the U.S. Department of Agriculture and an organization calling itself the Renewable Fuels Association, the main lobbying group for the ethanol industry. The Renewable Fuels Association has listed 62 plants as being under construction. The lower estimate of 62 plants has led forecasters to underestimate the amount of grain that will be needed for ethanol production. But even this does not begin to tell the entire tale.

The U.S. currently has 116 ethanol plants in production. The 79 more that are under construction will come online within about two years, allowing for some construction delays due to worldwide shortages of critical inputs and components. (The usual suspects…cement, galvanized steel, copper tubing, etc., thanks to the ongoing construction boom in China.) In addition, there are at least 200 other ethanol plants in the planning stages in the U.S., with a capacity estimated at an additional 3 billion gallons per year.

Gallons and Barrels and Energy Production

There are, according to convention dating back to the Pennsylvania oil boom of the 1860s, 42 gallons in a barrel. So the forecast annual U.S. production of 11 billion gallons of ethanol translates into about 262 million barrels of that type of fuel produced over the course of a year. And I am not even adjusting for the energy density of ethanol, which is far lower, only 59.5%, than an equivalent barrel of petroleum. The standard, accepted measurement of energy density for ethanol is 26.8 megajoules per kilogram. This clearly compares unfavorably with the energy density of gasoline at 45 megajoules per kilogram.

That is, 262 million barrels of ethanol will yield less energy when burned, less than 60%, than an equivalent volume of gasoline derived from oil. We won’t go into a long discussion of that just now. Nor will we get into the energy return on energy investment (EROEI) of ethanol, which is about break-even at best. No, we won’t go there. Let’s keep on looking at comparisons.

Sure, 262 million is a lot of barrels of ethanol, and any way you look at it, the ethanol industry is putting big numbers into the energy equation. But let’s look at some other big numbers. 262 million barrels of ethanol per year translates into about 718,000 barrels per day. (Divide by 365 days in the year.) In terms of volume, this is the energy equivalent of replacing about two supertankers full of imported oil every day. OK, not bad, and this looks like a lot of fuel if you are standing next to one of the two supertankers, but how much is it really? This is less than 6% of U.S. daily oil imports.

Let’s look some more at the number, 718,000 barrels of ethanol. This number of barrels, coming out of 195 ethanol plants (116 existing plants, plus 79 under construction), averages about 3,680 barrels of ethanol per plant, per day. (More division. And yes, some plants will produce more than others.) The number 3,680 may be a lot of barrels if you happen to own the average ethanol plant, but it is a drop in the bucket of U.S. national aggregate demand for liquid fuel.

Many Plants, Relatively Low Production

Another way to look at it is that each ethanol plant, on average producing 3,680 barrels of product, will yield the ethanol equivalent of what is commonly considered to be a small onshore oil field. But consider EROEI as well. On an ongoing basis, the oil field is producing oil with only the “energy input” of the pumps that lift the oil out of the ground. The ethanol plant requires far more energy to operate, on an ongoing basis, than does the oil field. Or for another type of comparison, few deepwater oil platforms are economic to operate if the initial production is under, say, 5,000 barrels per day. Something has to pay for those expensive day-rates for the rigs, not to mention all the labor, steel, and high-tech equipment that makes those holes in the bottom of the sea. And really, when you do the math, 718,000 barrels of ethanol translates into less than 3.5% of U.S. daily oil consumption of about 21 million barrels.

Here is another comparison. 718,000 barrels of ethanol per day is somewhat less than the amount of oil that the U.S. produces daily from its vast array of humble, old stripper oil wells, about 900,000 barrels per day. According to the U.S. Department of Energy, the U.S. has 393,000 oil stripper wells in service. And there are about 260,000 natural gas stripper wells in service. These wells are typically operated by small, independent companies and pull product out of older fields that are long past their peaks. The definition of a stripper well applies to oil wells delivering no more than 10 barrels per day and gas wells delivering no more than 60,000 cubic feet per day.

Although the stripper well industry is extensive, it is not a part of what people call “Big Oil.” Yes, the stripper well industry provides a good deal of employment at, literally, the ground level of many rural areas. And it is honorable work, performed by many fine individuals, a fact to which I can attest from personal experience in the oil patch over many years. But the stripper well industry is not in any way capable of supplying the U.S. with anything approaching its cumulative daily energy demand for liquid fuel. And the corn-based ethanol industry is still quite a bit smaller than the stripper well industry.

Back to Ethanol

So let’s get back to that forecast of 718,000 barrels of daily ethanol production. What appears at first to be an impressive number in terms of energy supply (11 billion gallons per year) is actually relatively small. In fact, it is almost in the “rounding error” of the nation’s daily liquid fuel consumption of about 21 million barrels of oil per day. Quite frankly, the U.S. could “save” more than 3.5% of its daily oil use if the nation’s carmakers built, marketed, and sold smaller cars, and if the nation’s drivers collectively bought them. Or we could see much the same result if drivers collectively slowed down and drove their big vehicles at 60 miles per hour, or if more freight went via railroad, instead of truck over the highways. And would it be too much to ask the soccer moms and hockey dads of the country to consolidate their trips so as not to waste gas? Or what if more people decided to take a bus or light rail to work every now and then? And wrap your brain around this, for comparison: The amount of grain that is required to fill a 25-gallon tank with ethanol, one time, could otherwise feed one person for a year.

So will the U.S. really wind up running its motorized culture on corn-based ethanol? According to Cornell researcher David Pimental, if the entire U.S. grain crop were converted to ethanol, it would satisfy about 15% of U.S. automotive fuel needs. The answer is no.

No Energy Salvation

The take-away point here is that the full-court press now ongoing in the U.S. to build plants and manufacture ethanol from agricultural corn will not provide any sort of long-term energy salvation for the nation. This major industrial and agricultural effort will yield ethanol product equivalent to about 3.5% of daily U.S. oil consumption. According to the statistics, as published in The New York Times, no less, ethanol production from existing plants and plants under construction is on track to consume about half of the U.S. corn crop. In some localities of the U.S. Midwest, almost all corn is already under agreement to be sold for ethanol production, essentially leaving no corn for other local farming needs. This will certainly cause a ripple effect throughout many farming communities, all the way to the shelves of the grocery stores.

From a national security standpoint, large-scale ethanol production from corn will not make the nation more secure in any measurable way. It will certainly destabilize the nation’s food supply and disrupt traditional export patterns.

Maybe there is a better idea out there for making ethanol from cellulose waste products. And it is not as if a diversity of energy resources is ever a bad idea. So some production of ethanol from corn makes sense. But sometimes, just because something is a good idea, it does not necessarily follow that more of it is a better idea. It is the same thing with corn-based ethanol. Pro-ethanol agricultural, industrial, transportation, and tax policies will not provide the country with anything like the volumes of motor fuel that it needs to run the existing transportation grid. And manufacturing ethanol from corn will dramatically disrupt the U.S. food supply. Eventually, the nation will reap what it sows.

Until we meet again….
Byron W. King

January 11, 2007

Reaping What You Sow was originally featured on Whiskey and Gunpowder