Monday, July 23, 2007

Ethanol: Oil & Energy

As an article in Slate last week made clear, the controversy over ethanol isn't likely to abate any time soon, in light of the expanding opposition to the ripple effects created by our growing use of this fuel. If you've been reading this blog for a while, you know that I'm an ethanol skeptic of long-standing, going back farther than most. However, it's important to understand that ethanol is not simply a product of agricultural interests run amok. It can deliver very substantial energy benefits, as long as we keep its limitations clearly in sight. Unfortunately, our ethanol strategy has not been developed with a clear understanding of those limitations, and that has handicapped our entire national energy policy.

The author of the Slate piece cites many of the concerns about ethanol that I've covered here since I started this blog in 2004. These issues have received increasing attention in the media in the last year. Ethanol's competition with global food markets, contribution to inflation, and indirect environmental consequences are all serious issues that should give policy makers pause on their way to quintupling the existing ethanol mandate. The most basic question, however, is whether ethanol is even good energy policy. The arguments over this point are complex and long-winded, involving the net energy balance of ethanol--how much energy goes into making it versus how much it delivers to the gas pump--and its lower energy density compared to hydrocarbons derived from petroleum. Fortunately, much of this complexity can be reduced to a simple statement that should guide policy in this area: ethanol is a poor energy source but a good oil substitute.

I've devoted a lot of space here to the energy balance of ethanol. Although that balance was solidly negative when I began looking at it in my Masters' project in the early 1980s, recent studies demonstrate that improved farming techniques and updated ethanol plant design have pushed it into the black. A 2002 paper from Argonne National Laboratory is fairly typical in showing the net balance at about 1.3 BTUs of energy out for each 1 BTU of inputs. But while ethanol advocates persist in their apples-to-oranges comparison to the 20% or so of petroleum energy lost along the gasoline value chain, the proper basis of comparison to oil is on the latter's 4:1 or 5:1 total energy return, on a BTU out-versus-in basis. That means that in order to replace the energy content--not the volume--of all the oil we import, we'd need to produce on the order of 700 billion gallons per year of ethanol, or roughly 20 times as much as the ethanol mandate included in the recent Senate energy bill. Whatever you think the upper bound of ethanol production might be, it's a lot less than 700 billion gallons.

That limitation doesn't mean that ethanol is ineffective oil policy. In fact, displacing oil is where ethanol shines. The same Argonne Labs study showed that ethanol's return on its liquid fuels inputs--the diesel fuel to run farm equipment, deliver the corn to ethanol plants and ethanol to blending terminals--is over 6:1. Thus every billion gallons per year of ethanol production backs out almost 600 million gallons of oil. At 15 billion gallons per year of ethanol, which is both the amount that can be easily absorbed into the existing petroleum products distribution system and the consensus limit on US corn ethanol production without a breakthrough, ethanol could displace almost 600,000 barrels per day of oil imports, or about 5% of the total.

The missing link between these two perspectives--and the key to an effective national ethanol strategy--lies in the non-oil energy that goes into making ethanol. Want to quintuple the amount of ethanol we produce? Then we need to quintuple the non-oil energy that goes into it, most of which comes from natural gas, in the form of ammonia-based nitrogen fertilizer (produced from gas) and the fuel to run ethanol facilities and distill the raw ethanol. Ramping up ethanol production to 36 billion gallons per year will require the equivalent of an additional 2 trillion cubic feet of natural gas, or a 50% increase in current US natural gas imports, mostly in the form of LNG. In other words, if you want to make ethanol our alternative fuel of choice, then you are implicitly signing up for LNG in a big way. US energy policy either needs to recognize that, or clear away the obstacles that stand in the way of producing that gas from US sources that have been placed off-limits.

I disagree with Mr. Gross, when he suggests that we shouldn't worry too much about the consequences of higher future ethanol use, because it probably won't all materialize. If the Congress sets an ethanol goal of 35 or 36 billion gallons per year, and puts in place the incentives and subsidies to support that, then I think there's a good chance we'll attain it. But the Congress should also recognize that because ethanol is a poor energy source, it can only fulfill its oil displacement potential, if they ensure an adequate supply of natural gas for the whole country. Otherwise, we will have to add another category to the growing list of ethanol's consequences: the offshoring of US industries that lost their natural gas supply to ethanol, along with higher natural gas prices for consumers and businesses. At the end of the day, ethanol is really a way to turn natural gas into transportation fuel, with some help from photosynthesis. US energy policy must factor in that linkage.

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