Lee Devlin: May 2008 Archives
You don't have to own an ethanol stock to know that the media and the
people who believe what they have to say have become apoplectic in
their disdain for ethanol over the past year. Many pundits are
parroting each other and blaming ethanol as the root cause for rising
food prices and worldwide food shortages. They do this with such
conviction that you'd think they must spend their free time collecting
bushels of corn to donate to starving people of the world when they are
not pontificating on the topic. There's only one problem with their
assertions: They are 100% wrong.
Rising food prices are the result of rising energy costs. It's May in
Colorado, yet I can get nearly any kind of fruit or vegetable I can
imagine at the supermarket, but they are not cheap by historical
standards. Since none of these products are in season locally, it
means that most of them have to be transported from far away, in some
cases, from half way around the world. Your neighborhood supermarket
is probably similar. A large portion of the cost of food depends on
the energy it takes to produce, harvest, preserve, and transport it. I
should also note that none of these fruits or vegetables use corn as an
ingredient, nor do they compete with corn for the land on which they
are grown.
If you bought your corn by the bushel at the now seizure-inducing $6/bushel price, it would still be less than half of corn's inflation-adjusted historical high price. Yet at this price, it would only require about $40 of corn to completely sustain a person for a year, assuming he could stand the monotony of eating it for every meal. I know I'm being simplistic here, because most of the corn grown in the U.S. is used for animal feed which effectively multiplies its cost to consumers. It takes somewhere between 6 to 30 lbs. of corn to put 1 lb of meat on the table. But still, even if you ate an insane diet of 100% meat and the animals you ate had their own luxurious diet that was made up of 100% corn, you'd still only use about $1.20 a day in corn to satisfy your caloric needs. Even a box of corn flakes cereal contains less than $.10 worth of corn in a box that sells for $3.00. Imagine that, a product that is made from corn has less than 3% of its cost attributable to its main ingredient. So you'd have to be pretty bad at math to blame high food prices on high corn prices. The recent growth of the ethanol industry is not the cause, but rather the result, of rising energy prices.
Corn is cheaper than firewood. If you could eat and digest wood like a
termite, it would still be less costly to eat corn. You may think I'm
making this up, but the data speaks for itself.
Corn has been so cheap for so long that we've had to create a welfare system for farmers to help prevent their farmland from being converted into strip malls. Taxpayers spend nearly $2 billion per year on a program to pay farmers not to grow crops on more than 30 million acres of arable land in the U.S.. Maybe what the American farmer needs isn't more money not to grow food, but a price for his efforts that will get him off the public dole. Directing a portion of corn production to ethanol helps to provide that price.
Instead of fretting over the $.51/gallon subsidy on ethanol, which curiously goes to the gasoline blenders, i.e., the oil companies, it may not be long before unsubsidized ethanol becomes economically competitive as U.S. gas prices rise toward $4.00/gallon, a price that people in Europe would still consider laughably inexpensive. Most Europeans pay more than $8/gallon for their gas.
No mention of ethanol is complete without addressing the 'holy grail' of ethanol: Ethanol made from cellulosic waste. Unfortunately, in order to get investment in cellulosic ethanol production and make it cost competitive with corn ethanol, we first need an industry that demonstrates a long term demand for it, which can only be done by producing more flexfuel vehicles that run on an E85 blend and more stations selling it. So we have a chicken and egg scenario because demand for flexfuel cars is dependent on cost and availability of E85 fuel which today can only be produced by corn in the U.S..
When uninformed pundits take every opportunity to vilify ethanol as some sort of scam, it induces fear and uncertainty and has the potential to derail an industry as it takes its first few tentative steps forward. I know that petroleum companies wouldn't mind if that happened, but it's hard to imagine the motives behind everyone else who is trash talking ethanol, some of whom are self-proclaimed environmentalists.
If you bought your corn by the bushel at the now seizure-inducing $6/bushel price, it would still be less than half of corn's inflation-adjusted historical high price. Yet at this price, it would only require about $40 of corn to completely sustain a person for a year, assuming he could stand the monotony of eating it for every meal. I know I'm being simplistic here, because most of the corn grown in the U.S. is used for animal feed which effectively multiplies its cost to consumers. It takes somewhere between 6 to 30 lbs. of corn to put 1 lb of meat on the table. But still, even if you ate an insane diet of 100% meat and the animals you ate had their own luxurious diet that was made up of 100% corn, you'd still only use about $1.20 a day in corn to satisfy your caloric needs. Even a box of corn flakes cereal contains less than $.10 worth of corn in a box that sells for $3.00. Imagine that, a product that is made from corn has less than 3% of its cost attributable to its main ingredient. So you'd have to be pretty bad at math to blame high food prices on high corn prices. The recent growth of the ethanol industry is not the cause, but rather the result, of rising energy prices.
Corn is cheaper than firewood. If you could eat and digest wood like a
termite, it would still be less costly to eat corn. You may think I'm
making this up, but the data speaks for itself.Corn has been so cheap for so long that we've had to create a welfare system for farmers to help prevent their farmland from being converted into strip malls. Taxpayers spend nearly $2 billion per year on a program to pay farmers not to grow crops on more than 30 million acres of arable land in the U.S.. Maybe what the American farmer needs isn't more money not to grow food, but a price for his efforts that will get him off the public dole. Directing a portion of corn production to ethanol helps to provide that price.
Instead of fretting over the $.51/gallon subsidy on ethanol, which curiously goes to the gasoline blenders, i.e., the oil companies, it may not be long before unsubsidized ethanol becomes economically competitive as U.S. gas prices rise toward $4.00/gallon, a price that people in Europe would still consider laughably inexpensive. Most Europeans pay more than $8/gallon for their gas.
No mention of ethanol is complete without addressing the 'holy grail' of ethanol: Ethanol made from cellulosic waste. Unfortunately, in order to get investment in cellulosic ethanol production and make it cost competitive with corn ethanol, we first need an industry that demonstrates a long term demand for it, which can only be done by producing more flexfuel vehicles that run on an E85 blend and more stations selling it. So we have a chicken and egg scenario because demand for flexfuel cars is dependent on cost and availability of E85 fuel which today can only be produced by corn in the U.S..
When uninformed pundits take every opportunity to vilify ethanol as some sort of scam, it induces fear and uncertainty and has the potential to derail an industry as it takes its first few tentative steps forward. I know that petroleum companies wouldn't mind if that happened, but it's hard to imagine the motives behind everyone else who is trash talking ethanol, some of whom are self-proclaimed environmentalists.
I had an opportunity recently to attend a presentation by Solix, a startup company located in Fort Collins, CO that is developing a method to produce biodiesel fuel from algae. I also had a chance to take a look at Solix's proof-of-concept photobioreactor.
The Solix process works by optimizing the conditions to grow a particular type of algae which is high in lipids. Lipids are fats which are relatively easily to convert to vegetable oil and thus into biodiesel. The algae are grown in water-filled raceways called photobioreactors that are sealed off from the atmosphere to avoid contamination from microorganisms and other algae species. It also helps prevent evaporation of the water which is used to grow the algae. Because of this approach, it should be possible to produce biodiesel from this method with 98% less water than it takes to produce it with more conventional crops like soybeans.
Corn ethanol, with nearly 5 billion gallons produced in the U.S. annually, can be made at the rate of approximately 450 gallons per acre of corn. Crops like soybeans and rapeseed produce between 50 to 150 gallons biodiesel an acre. According to Solix, algae-based biodiesel from their photobioreactors may be able to produce as much as 8000 gallons of biodiesel per acre.
Another advantage of algae is that it's not necessary to situate the reactors on land that is suitable for other forms of agriculture. A common criticism of biofuels today is that they raise food prices by competing for the same land as food crops. It's conceivable that the photobioreactors could be placed in a desert environment, although one of the challenges for growing algae is to keep the water at a very consistent temperature of around 70 degrees Fahrenheit so that will likely also influence optimal placement of the photobioreactors.
The primary inputs for growing algae are water, CO2, and sunlight. This activity would be best accomplished closer to the equator, where seasonal sunlight levels and temperatures don't vary as much as they do further away from the equator. Another possible method to increase production would be to put the photobioreactors near a conventional coal-burning electric plant and harvest the significant amounts of CO2 generated by the plant. As attractive as it sounds, the production of biodiesel shouldn't depend on the coal plant operating indefinitely since that wouldn't be a sustainable long term strategy. Whenever capturing CO2 from an existing process is discussed, it's not long before you'll hear it called 'carbon sequestration', but that is really not an accurate description. While capturing CO2 can reduce the amount of fossil fuel-generated CO2 released into the atmosphere by displacing an equivalent amount of oil, it's fair to expect that any CO2 captured in the form of biodiesel would be released into the atmosphere in short order, probably within weeks, so it's really not a form of carbon sequestration. It's better described as a 'carbon mitigation' strategy. There are other commercial products that can be harvested from the algae such as carbohydrates and those will have uses such as animal feed.
There are not very many examples of commercial algae cultivation today. There are some facilities producing algea for neutraceuticals and pharmaceuticals that sell for as much as $750/lb but that is a completely different economic payback scale than bio-diesel which would only bring about $.50/lb at current prices. When the techniques to produce bio-diesel from algae were first developed back in the 1990's, diesel fuel was hovering around $1/gallon and so biodiesel from algae wasn't considered economically viable. Now that diesel fuel has gone over $4/gallon in the U.S., various methods to produce biodiesel are seeing a lot of renewed interest.
Links:
The Solix process works by optimizing the conditions to grow a particular type of algae which is high in lipids. Lipids are fats which are relatively easily to convert to vegetable oil and thus into biodiesel. The algae are grown in water-filled raceways called photobioreactors that are sealed off from the atmosphere to avoid contamination from microorganisms and other algae species. It also helps prevent evaporation of the water which is used to grow the algae. Because of this approach, it should be possible to produce biodiesel from this method with 98% less water than it takes to produce it with more conventional crops like soybeans.
Corn ethanol, with nearly 5 billion gallons produced in the U.S. annually, can be made at the rate of approximately 450 gallons per acre of corn. Crops like soybeans and rapeseed produce between 50 to 150 gallons biodiesel an acre. According to Solix, algae-based biodiesel from their photobioreactors may be able to produce as much as 8000 gallons of biodiesel per acre.
Another advantage of algae is that it's not necessary to situate the reactors on land that is suitable for other forms of agriculture. A common criticism of biofuels today is that they raise food prices by competing for the same land as food crops. It's conceivable that the photobioreactors could be placed in a desert environment, although one of the challenges for growing algae is to keep the water at a very consistent temperature of around 70 degrees Fahrenheit so that will likely also influence optimal placement of the photobioreactors.
The primary inputs for growing algae are water, CO2, and sunlight. This activity would be best accomplished closer to the equator, where seasonal sunlight levels and temperatures don't vary as much as they do further away from the equator. Another possible method to increase production would be to put the photobioreactors near a conventional coal-burning electric plant and harvest the significant amounts of CO2 generated by the plant. As attractive as it sounds, the production of biodiesel shouldn't depend on the coal plant operating indefinitely since that wouldn't be a sustainable long term strategy. Whenever capturing CO2 from an existing process is discussed, it's not long before you'll hear it called 'carbon sequestration', but that is really not an accurate description. While capturing CO2 can reduce the amount of fossil fuel-generated CO2 released into the atmosphere by displacing an equivalent amount of oil, it's fair to expect that any CO2 captured in the form of biodiesel would be released into the atmosphere in short order, probably within weeks, so it's really not a form of carbon sequestration. It's better described as a 'carbon mitigation' strategy. There are other commercial products that can be harvested from the algae such as carbohydrates and those will have uses such as animal feed.
Links:
Biomass Resources
State Programs
