Imagine walking down the street in your home town and suddenly someone jumps out, sticks a gun in your face, takes your wallet, vacuums it of cash, tosses it back to you empty. You turn to a cop who witnessed the whole thing, and he just smiles and say, "It's okay; it's helping the farmers."
Huh?
Well, that's ethanol in gasoline in a nutshell.
Ethanol, while great in a martini, is a boondoggle of unprecedented proportions in cars. And the 2005 Energy Bill passed by Congress and signed by Bush mandates that ethanol use nearly doubles by 2012, from 4.5 billion gallons to 7 billion gallons.
Why did gas prices spike shortly thereafter when oil prices were pretty steady (steady high, but they didn't go up as much as gasoline)? Because the price of ethanol went through the roof as there wasn't enough to meet Congress's mandate.
But it helps the farmers.
Patrick Bedard of Car & Driver did a great article in the July issue debunking many of the myths of ethanol. The entire article is there for free. But some highlights (paraphrased and some calculations by me):
1) Ethanol as mandated will only replace 0.7% of oil (domestic and imported) if demand for oil doesn't rise (not bloody likely).
2) At some point you run out of land. To replace foreign oil with ethanol will require 113,100,000 acres of corn. That's 176,719 square miles. That's Kansas, Nebraska, and one third of Iowa combined. At what point does food compete with gasoline?
3) A study at UC Berkley stated "that only 5 to 26 percent of the energy in today’s corn-based ethanol is 'new.' The other 74-to-95 percent represents the recycling of fossil-fuel energy to produce ethanol. Compared with historical assessments, this study represents a relatively optimistic outlook for ethanol." So an optimistic estimate is 0.74 to 0.95 BTUs to make 1 BTU of ethanol. It may take more than 1 BTU of fossil fuels (oil, natural gas, coal) to make 1 BTU of ethanol (in other words, every gallon of ethanol produced makes us that much more dependant on foreign oil).
4) Ethanol won't do much, if anything to help the environment. "The U.S. Department of Energy was less optimistic, concluding that E85 [85% ethanol, 15% gasoline, which will eat normal car engines alive] produces only a four-percent reduction in carbon dioxide."
5) Oh, and since a gallon of ethanol doesn't as much energy as a gallon of gas, your mileage will vary--downward. A 10% mixture of ethanol and gasoline will get you about 7% worse mileage, all else being equal. With E85, fuel mileage drops about 25%. For fuel you're paying more for because ethanol costs more than gasoline.
But it helps the farmers.
So, now gas (and ethanol) prices are coming down (except in central Washington State). And we still have this boondoggle. And some folks invested a lot of money in ethanol, including Bill Gates. As Jessica Holtzer says in this article in Forbes:
[L]ower-priced oil threatens the happy confluence of events that has whipped investors into a frenzy. Since peaking at $77 a barrel in July, oil prices have fallen by 25%, though they edged up slightly to around $60 a barrel last week on speculation that OPEC would cut production. Meanwhile, the constellation of government supports so crucial to ethanol's viability is not set in stone. Will the ethanol fad fade like so many other government-backed energy schemes before it?
A small word of advice to investors: do not put money into anything requiring government largess to make a profit. What Congress gives, Congress can taketh away.
Ethanol is simply a transfer program from taxpayer/consumer to farmers who have powerful senators (and an early caucus but the problems with our presidential primary system is another post). It steals from taxpayers by subsidizing each gallon with 51 cent per gallon subsidy. It steals from consumers by costing more, providing less energy, driving up the price of corn-based products. Oh, and there's a tariff on foreign ethanol to make sure Iowan farmers don't have to compete for your dollars with farmers in, say, Brazil.
Morally and ethically, it's a legal mugging.
But it's good for the farmers.
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