Ethanol and the Calculation Issue
The Bush energy bill gives yet another boost to the production of ethanol, writes Peter Anderson. We are told that this is great news because ethanol helps the midwest, boosts prices for farmers, and makes America self reliant. It's all nonsense, but the best case against such claims is Mises's own argument concerning economic calculation. From the point of view of economic rationality, ethanol makes no sense; if it did, it wouldn't need subsidies and central planning in order to bring it into existence and make it marketable. FULL ARTICLE
Comments (105)
Mises fails to point out the enormous government subsidies that are used to prop up an oligopolistic oil industry. Will he calculate the the cost of military expenses to secure the Middle East who apparently three countries (Saudi Arabia, Iraq, and Iran)are sitting on an ocean of oil and this reserve will likey equate to over 83% of the known crude oil reserves within 15 years according to the Dept. of Energy and EIA?
During the fall of the German Reich in the last days of WWII, General Patton with U.S. forces during the march on Germany could have stopped the Red Army and socialism in Poland if he only had a couple hundred thousand gallons of additional fuel.
Are we to secure Western Capitalism with crude oil from the Middle East or ethanol from the Mid-west and Brazil? Will not the increase in ethanol output from different parts of the World add competition to the oil industry thus changing an oligopolistic market model to operate more on a perfect competitive model? Isn't that what capitalism is about. Offering consumers free choice on what to fuel their cars with? Would this not change the geo-political situation of the Middle East as well as increase world output of food and feed stocks? Umh...
Published: August 18, 2005 11:27 AM
Peter Anderson makes good points but I would like to see the discussion against government interference in personal transportation start at a more basic point: taxing fuel purchases to provide “public� funds to build and/or maintain roads.
If personal transportation is to become a market based industry (and Austrian Economists should so advise), the current network of roads (County, State, US and Interstate) should be privatized and all fuel taxes eliminated.
A logical starting point is the Interstate Highway System. There is some history (Kansas, Oklahoma, and Pennsylvania turnpikes) of private building and maintaining of high-speed, limited access roads for private vehicles.
Sell the Interstate Highways, in appropriate blocks, at public auction and eliminate all federal fuel taxes within x miles* of the sold blocks.
Apply the proceeds of the sales to the National Debt.
Buyers will charge tolls and be responsible for all maintenance.
If the market can actually support private transportation in the form personal automobiles the sale of highways could proceed downward to the county level. If the market cannot support it, why should it exist in its current form?
It is recognized that some monopoly is included in this proposal but who would say there is not already monopoly in high speed, limited access roads or in US, State and County roads.
*An alternative to proximity sales of tax-free fuel would be to allow the tax-free sales only when actually using (a toll has been paid) private highways.
Published: August 18, 2005 11:50 AM
The commentor mixes two arguments. The first is supporting oil and second ethanol. BOTH ARE COMPLETELY WRONG!!!! If oil goes to $60 per barrel then the chemical, auto and other engery and petroleum users will find substitutes for their material. This system requires no subsidy. There is no reason the government has to keep oil cheap, nor is there a reason that it has to reduce the demand for oil, nor is there a reason that consumer can not find their own substitutes for oil.
There is even less of a reason for our government to use VIOLENCE to protect another monopoly like the Saudi or other national oil companies.
As for the oil oligopoly, there simply isn't one. The OPEC cartel is weaker than ever, OPEC countries tend to be poorer and less dyanmic than oil consuming countries, and companies like Walmart have gotten into the petroleum delivery business.
Published: August 18, 2005 11:57 AM
As I recall the press release the claim was that there was a net loss of available energy even if the subsidies were subtracted out. This doesn't compute unless a cheap energy source is being converted to an expensive energy product.
Second, 2 years ago a couple of corn states were selling 89 octaine gasohol for the same price as 87 octaine pure gasoline. With the doubling of crude prices one would expect gasohol to sell cheaper. This is not the case, espcially as it yields a lower MPG. Why? Because all retail fuel prices are still below that which the consumer is willing to pay.
Published: August 18, 2005 12:29 PM
Oil -> Ammonia -> Fertalizer -> Fodder -> Ethanol
And of course the free market already knows this, which is why it would never be done without subsidies (except as a byproduct in food production).
Although, in a perverse kind of way, it warms my heart to see the state flounder in it's attempts to legislate the laws of physics and economics.
Published: August 18, 2005 1:02 PM
I noted a couple of references to "a pure socialist system" in the article. Since I believe the US is only partly socialist, I'm wondering 'what effect, if any, does that have on the analysis'?
Additionally, is there no role for the government to encourage cleaner-burning fuels, if only to seed the market and provide an initial impetus? If so, don't we all benefit from cleaner air? If not, wouldn't leaving the market alone lead to the dirtiest fuel at the cheapest prices and ultimately, the least healthy air? Or would Mises have argued that holding polluters accountable for the myriad losses of health of individuals would be a sufficient deterrent? How would that work in the real world?
Published: August 18, 2005 1:13 PM
"If ethanol production were truly profitable it would not need subsidization because consumers would purchase ethanol-enhanced fuel at a price that would provide a reasonable rate of return to producers."
True, but since the true cost of gasoline would now be well be over $6 a gallon if all military and related costs were factored in (http://washingtontimes.com/commentary/20030722-093718-6082r.htm), the truth is that the market would have weaned us of oil dependency along time ago were it not so heavily subsidized. Instead, securing the flow of oil from the Persian Gulf -- which should be a cost of business, not a tax burden -- has distorted the market out of all proportion, with predictable results.
Published: August 18, 2005 1:26 PM
It seems to me that if burning fossil fuels is a bad that the state must incentivize out of existence, then it should follow the simplest path to doing so: it should raise the tax on its use until competitor fuels are truly competitive. That this is not the chosen method is indicative, at least to me, that the motives of the state really are not pure in this regard.
Published: August 18, 2005 1:37 PM
It turns out that we are running out of oil, according to this article. Oh no! What are we going to do?
http://news.yahoo.com/s/nm/20050818/sc_nm/energy_dutch_ecn_dc
Published: August 18, 2005 1:40 PM
All of the comments against what Peter has said seem to be variations on a theme; oil is subsidized too, nyah nyah nyah. Mises would tell us that all subsidies, including military and pollution subsidies for the oil business, as well as corn and ethanol subsidies distort the market and interfere with calculation. However, it is difficult to imagine that oil subsidies could be anything approaching the 5x multiplier that Tad Patzek and David Pimentel have posited for ethanol. See our article: http://www.libertyguys.org/articles/detail.asp?ArtID=838 for a link to their most recent paper. Biofuel boosters like to act as though economic and energy balance factors don't matter when promoting their views, while we, and Mises would submit that ALL factors, energetics, economics, and political factors must be accounted for. In this case, when they are, ethanol comes up far, far short.
Published: August 18, 2005 2:58 PM
greeni asks;
"... is there no role for the government to encourage cleaner-burning fuels, if only to seed the market and provide an initial impetus? If so, don't we all benefit from cleaner air? If not, wouldn't leaving the market alone lead to the dirtiest fuel at the cheapest prices and ultimately, the least healthy air? Or would Mises have argued that holding polluters accountable for the myriad losses of health of individuals would be a sufficient deterrent? How would that work in the real world?"
Mises would probably agree with you that polluters should be held accountable. Because the EPA shields companies from liability who "comply" with "standards", they do not bear the full cost of their products. Unfortunately, because there is no legally recognized property right to breathe clean air in this country, but rather arbitrary federal "standards" set in part by the companies who will "comply" with them, one cannot sue an oil company, or a motor-vehicle user for trespassing in your lungs with harmful chemicals. If one COULD sue, the dynamic would be very, very different.
Published: August 18, 2005 3:14 PM
Michael asks;
"Will he calculate the the cost of military expenses to secure the Middle East who apparently three countries (Saudi Arabia, Iraq, and Iran)are sitting on an ocean of oil and this reserve will likey equate to over 83% of the known crude oil reserves within 15 years according to the Dept. of Energy and EIA? "
My answer is that the oil needs no subsidy to be produced. Oil is worthless while it is sitting in the ground, and is only of utility when it is lifted, refined, and transported to market. It makes no difference to the market which set of despots collects the toll. It only matters to the people who sell that oil at a retail markup. And those people, who apparently do not believe in markets, or else believe that markets are against their own self-interest, who have caused our military to ivade the Middle East.
Published: August 18, 2005 3:19 PM
If you apply Mises argument to steak verses bread. Everyone knows that logically it takes more BTU's to produce steak than bread. Since steak is an inefficient energy source it would cost more to produce - which it does; however, when consumers have a choice at the grocery store to buy steak or bread - some will buy steak and more will buy bread.
We have no choice at the fuel retail station. It's only bread. And the funny thing about it is the price keeps going up. $60 a barrel boys and it is still climbing. I'm paying five times more for diesel at the farm than I was paying four years ago when I bought off-road diesel at $.53 per gallon - now it's $2.53 and climbing.
My point is if consumers have more choices at the fuel service stations which include farm-produced fuels -- that adds competition.
How high does the price of crude have to go up until we all realize that an oligopolistic market model controlled by Big Oil Multinational Conglomerates needs to be changed through the entry of new entrants (the world Agricultural Industry) to add the competition to force the market to a perfect competitive model and thus reduce overall fuel prices?
I'm a wheat farmer. I would love to have my product as the only product at the grocery store. Hell, I would be as wealthy as a Saudi Sheik! Me and the boys could charge $70 a bushel and tell our neighbors who raise cattle to shove it!
Published: August 19, 2005 9:38 AM
The subsidy for corn and the inefficiency incurred in producing ethanol also applies to the soy-diesel and bio-diesel programs. Subsidies buy votes and sustain votes in the US Congress, as well as in other nations that have jumped on to the ethanol and biodiesel bandwagon.
If government gets out of energy subsidies and energy regulation,the unfettered free market may develope other forms of more cost-effective and cost-efficient types of energy.
Harry Valentine
Published: August 19, 2005 11:56 AM
Harry, I completelly agree with you.
For instance, here in Uruguay, South America, the price of a gallon of diesel (gas oil) is US$ 3.14, for gas you have from US$ 4.57 to 4.97 per gallon; price fixed by the government since it has the monopoly for refining and importing crude.
Besides, we are exporters of grains, so producing ethanol or biodiesel, as Brazil and Argentina do, has been considered for several years. With the climbing oil prices, our government is in a renewed push for producing them, always with subsidies. Until now, they have never done so.
Published: August 19, 2005 12:21 PM
Agree with David White. The cost of the war should be added to the federal fuel tax.
Published: August 19, 2005 1:39 PM
This efficiency calculation is very easy.
Corn sells for approximately $2.00 per Bushel
You get approximately 3 Gallons of Ethanol for 1 Bushel of Corn.
Thus Ethanol is worth about 66 cents per gallon. I will throw in 33 cents per gallon to transport, and 15 cents for profit = $1.15 per gallon of ethanol. You lose a 10% of gas mileage with ethanol, so, $1.26/gallon gasoline equivalent.
$1.26 is much less than the $3 per gallon I paid at the pump yesterday. Thus ethanol is economically efficient, no subsidy necessary.
JBP
Published: August 19, 2005 3:48 PM
JBP, how much does it cost to convert corn into ethanol? Because, FOR SOME REASON, you did not factor this into the equation...
A 2 dollar bushel of corn is not ipso facto 3 gallons of ethanol at $0.66 cents per gallon, if you add the energy costs of converting the bushel of corn into ethanol. Time is also a cost, since it takes a bit of time to convert sugar into alcohol.
Published: August 19, 2005 5:50 PM
OK,
From what I read, the net is about 2.6, so you lose .4/2.6 or 15%. So, add 15% to the .66 which gets you $.76. Using my above calculations, that still gets you to $1.38 per gallon, still 1/3 of the $3 I am paying.
The time value of storage doesn't really amount to much. I threw in a huge $.33 logistics charge per gallon which should easily cover holding costs.
Pardon my Latin, but this ipso approximato, unless I am missing something else.
JBP
Published: August 19, 2005 6:34 PM
http://zfacts.com/p/74fn2.html
The above web address give the best overall analysis on ethanol production that I can find and trust. There is considerable debate about how much ethanol it takes to produce 1 gallon of ethanol. I have found nowhere a claim of better than 0.33 gallons to produce 1. Some claim that the production of 1 gallon of ethanol actually consumes >1 gallon of ethanol. Most analysis I could find on the web seems to be centered about 0.6 gallons to produce 1.
Published: August 20, 2005 11:29 AM
We raise corn in Eastern Washington. The BTU's supplied to raise corn and theoretically process corn into ethanol comes from the Columbia River via a hydro-electric system - a free renewable resource. Many of the anlysis of the BTU's used to convert ethanol is using natural gas. If electricity comes from river water supplied by rain produced by the heating of oceans caused by free solar power - wouldn't the use of renewable energy be considered more energy efficient process to convert ethanol from corn?
Can anyone answer how many BTU's it took mother nature to produce crude oil? Why is crude oil known as free energy (until it's pulled out of the ground)? How many mother-nature derived Columbia River electrical BTU's does it take to produce ethanol?
I know it takes 1 BTU of crude to refine .78 BTU's of fuel.
Our argument should be how do we get 1 unit of fluid energy more efficiently from point A to B. Furthermore, we need to discuss engine development that will use ethanol more efficiently and with the same economy as gasoline via providing more horsepower due to ethanol's higher octane. (e.g. new Audi Biopower Sedan)
Why do I as a farmer need to buy $3 per gallon diesel refined from crude oil from Saudi Arabia? I can convert my crops to fluid energy much cheaper and deliver it to my neighbor. Furthermore my neighbor doesn't have to worry about paying taxes to pay the US military to look after my corn field.
My next argument: Take away the military out of the Middle East and watch crude oil go sky high. You'll be praying that us farmers are making alot of ethanol and biodiesel. How else would you get to work? What about your food being delivered by truck to the grocery store? Developing a renewable fuel infractructure should be considered our best insurance policy to keep our economy running in an emergency situation.
What are we to do when Iran has nukes. Negotiate with them to give us cheaper oil for peace? Can you say Atilla the Hun was a good friend to Rome?
Published: August 21, 2005 12:57 AM
Michael Massey,
It really does not matter what energy sources are used to produce the ethanol. Unless the use of fuels in combustion engines is cut by a factor of 10 in the USA, it simply is going to be impossible to grow enough organics to supply the needs-there simply is not enough arable land not devoted to growing food. The replacement for fossil fuels will not be ethanol-even hydrogen (produced from nuclear or renewable electric generation) is far more likely to be the replacement than ethanol.
Published: August 21, 2005 8:59 AM
Re: Yancey Ward Post,
Your post does not make much sense to me. The cash price for corn really is $2.00 per bushel. The case price for gasoline really is $3 per gallon.
You can make ethanol for $1.40 per gallon (see above). That is cheaper than $3. Why not make ethanol, till the price of corn goes up over say $4.00 per bushel, which is approximately the dividing line for $3 gasoline?
JBP
Published: August 21, 2005 7:43 PM
John Powers:
"Your post does not make much sense to me. The cash price for corn really is $2.00 per bushel. The case price for gasoline really is $3 per gallon.
You can make ethanol for $1.40 per gallon (see above). That is cheaper than $3. Why not make ethanol, till the price of corn goes up over say $4.00 per bushel, which is approximately the dividing line for $3 gasoline?"
Your analysis does not take into account at least 3 factors (and probably more - see Patzek and Pimentel's study I referenced earlier).
You are leaving out the cost of subsidies to corn farmers fro producing uneconomic amounts of corn. You are leaving out tax credits and subsidies given to ADM and others to build ethanol plants. And you haven't told us where we can buy this mythical $1.40 retail ethanol. Until these are accounted for, I will leave the underlying energy-balance issues out of the argument.
Published: August 22, 2005 7:11 AM
Michael Massey says;
"The BTU's supplied to raise corn and theoretically process corn into ethanol comes from the Columbia River via a hydro-electric system - a free renewable resource."
Uh, Michael, can I point out that the US Taxpayer paid to build, and pays to operate and maintain that dam? Would it be rude to point out that the dam probably has a negative impact on property upstream and down from the dam?
There is no free lunch, and there is no such thing as free energy.
Published: August 22, 2005 7:16 AM
http://zfacts.com/p/60.html
This should have been the web address for my post on the subject of ethanol.
Published: August 22, 2005 8:32 AM
http://zfacts.com/p/60.html
This should have been the web address for my post on the subject of ethanol.
Published: August 22, 2005 8:32 AM
http://zfacts.com/p/60.html
This should have been the web address for my post on the subject of ethanol.
Published: August 22, 2005 8:32 AM
Vince,
Susidies really do exist in all kinds of products. The cash price includes subsidies, of course.
And you are confusing price with cost. The production cost may be $1.40 per gallon, but if you buy your fuel rather than make your own, you will pay approximately $3.00 per gallon, because that is the price the market will bear.
JBP
Published: August 22, 2005 8:54 AM
Come on guys--all of you. All this talk of the "efficiency" with which ethanol is (or might be) produced is almost beside the point. Let's just grant that some average efficiency is practicable--say 30%, meaning that, for every 100 BTUs sunk into all productive processes, 130 will be available to burn.
What we're up against here is not some complicated financial picture, agricultural management, chemical conversion process, or even economic theory problem. Though I would hesitate to call Physics simple, this is the simplest Physics possible.
A gallon of gasoline has got somewhere around 150,000 BTUs stored in its molecules while a gallon of ethanol is about 15,000. For starters, my T-100 pickup (with a 20-gallon gas tank)can take me from my NJ home to Akron, OH) on a fillup.
With ethanol as fuel (assuming a similarly-efficient engine), I'd need to stop an additional 18 times on the turnpike to make the round trip.
And that's not to mention that, in order for the costs to be similar, with gasoline at 2.50, the ethanol would have to cost no more than 25 cents (or 15 cents at recent more usual gas prices. And, to further illustrate the sheer idiocy of folks corn-hauling themselves like that, the good black stuff comes right out of the ground in various places all over the world previously exploited at costs of 1.50 to 15 bucks a barrel (that's 4 cents to 40 cents a gallon). Even after allowing for refining and distribution costs, the corn likker has got to cost (depending on costs of oil extraction)a multiple of between 30 and 300 times what the gas costs (depending on whether you get it from the Athabasca tar sands or from the Saudi royals).
I'm very sympathetic to the idea that the American taxpayer subsidizes (through the budgets on defense, foreign aid, and foreign affairs) the flow of oil from unstable, resentful, and bellicose regions. But the guy getting drilled isn't the corn farmer; rather, it's the suppliers in more peaceable and predictable areas, some of which are right here at home (his taxes, too, go to subsidize his competition in that manner). One of the reasons I am sypathetic to that argument is that, essentially, it is my own. To my knowledge, I am the first to advance that way of looking at things, not only in this Comments section but in a variety of other places on the internet, going back somewhere about 7 or 8 years.
There's one last point that should be considered in the mixes of pluses and minuses that, so far, I haven't seen--one that should be close to economists' hearts. Many of the sites from which petroleum is or might be extracted are virtually worthless for any other purpose. Deserts in Libya and Arabia come to mind, frozen wastelands around the entire perimeter of the Artic north, offshore in the US, North Sea, etc. (and including Lake Maricaibo in Venezuela. And, for these otherwise relatively useless pieces of land, it is proposed that fertile areas be substituted (and subsidized). And, though I needn't, I'll point out that a further consequence of such subsidized overproduction is "dumping" of surpluses in far-off places like Africa, where the effects are to drive local farmers below the margin while allaying hungry populaces from replacing corrupt, theiving dictators with some somewhat better.
Whether, in some small fractional proportion, ethanol is an effective (and cost-effective)additive to restore octane and efficiency to (now)unleaded gasoline is a different matter. Perhaps. But, if so (and it does not reduce engine longevity as I have heard claimed but know nothing about), it would certainly stand on its own in the ordinary market and would have the support of automotive engine designers in configuration for it (it would show, in their calculations, as promising profit).
Published: August 22, 2005 8:58 AM
Re: Pimentel's "study"
The Cornell Entomology Professor is off by a factor of 40 on his input fuels necessary to farm. He erroneously confuses marginal fuel necessary to produce a gallon of ethanol with total fuel necessary to produce a gallon of ethanol.
Perhaps in Entomology you would use total numbers rather than marginal, but in industrial engineering and managerial accounting, marginal is the common way to compare production efficiency.
JBP
Published: August 22, 2005 9:00 AM
I would not trust Pimentel's study. The best analysis is found below, in my opinion.
http://zfacts.com/p/60.html
Gene Berman,
Your claim that, per volume, gasoline contains 10 times the BTUs of ethanol is incorrect.
Published: August 22, 2005 9:36 AM
Vince, your right Columbia River Water is not free nor is crude oil in the ground as some have suggested
My Point. Crude oil in the ground is more expensive for the U.S. economy than crude oil in the ground in Alaska. Why? Everyone does the analysis of the costs of pumping oil out of the ground but fail to do the incremental analysis of logistics as well as ownership costs, etc.
What's the price of crude to the U.S. economy if the Saudi's do not want to sell to the U.S. but only to China? Or more likely the oil terminals in the Mid East get nuked by terrorists?
If we analyze where is the cheapest oil to pump out of the ground in a mechanical and technical sense and deliver to seaport refineries - it's obviously the Middle East. Add in the political and military cost and I must say Alaska and other U.S. territorial areas to pump oil is least expensive due to political and military issues.
We have no more market leverage on the world market. In the 1970's we imported 1/3 of our crude oil - now, today it 2/3 and increasing. Without market leverage we have a huge security problem. Get the American and Brazillian agricultural sector involved in producing fuels - we gain back our bargaining position.
It's called a cheap oil for food program - Do you guys even get this concept?
Published: August 22, 2005 12:25 PM
Yancey:
You're right on that point. I once looked into the matter 50 or more years ago--long before the modern crisis==and had made up my mind at that time. And, in the meantime, I guess my memory exxagerated the relative figures. I just googled it and see that, like GW, I misunderestimated the ethanol @ 15000 (80K is more like it) and even gave gasoline a 20% boost to 150K (vs. 125,000).
I guess it should make me feel better. Even if taxes go up to provide more corn-farm subsidies, it won't mean all those pit-stops I was imagining. Even further, I noted in a googled piece that certain methods could produce a corn crop with as much as 79% less energy input--that prospect might serve as an upper bound on petroleum prices in the long run (though I would still favor a variable tariff based on the source's specific burden on defense-related expenditure; that would "favor"--fairly--not only domestic (and less troubled) producers but those trying to produce renewabe energy (like ethanol) as well. I didn't say "corn" because I see (from Google) that there are other candidates (something called "hybrid willow" looked interesting).
Published: August 22, 2005 12:38 PM
I disagree with those who discount Patzek's and Pimentel's work, but the fact remains that even using USDA numbers AND cooking the books we find nothing whatsoever economic about using ethanol in place of gasoline for passenger vehicles.
If we Misesians get our way regarding military intervention in the Middle East (it ends) and subsidies for any and all fuels, roads, railroads, farms, etc, then perhaps an economic market for ethanol as a passenger-car fuel will emerge. That would be fine by me - I have no stake in which fuel wins in the marketplace. But the fact remains that the energy input deficit alone is enough to kill ethanol until gasoline reaches $8 - $9 per gallon, without subsidies. Until this occurs, it will not be economic to replace gasoline with ethanol on a national scale.
But suppose I am wrong - suppose ethanol can be made to replace gasoline when the latter's price hits, say, $5.00. What will happen to the price of ethanol as the demand begins to rise? Umm-hmm. Thus without knowing with scientific certainty exactly what the deficit is, I can still accurately guess that the equilibrium price will be far higher than the current price of gasoline.
Published: August 22, 2005 2:13 PM
John Powers;
"And you are confusing price with cost. The production cost may be $1.40 per gallon, but if you buy your fuel rather than make your own, you will pay approximately $3.00 per gallon, because that is the price the market will bear."
I misread what you said. And your observation is correct - the market will bear $3.00 retail gasoline currently. So why don't the oil companies start buying or making ethanol to sell? Because at retail, it is the spread between cost and price (less taxes and regulatory costs) that is the profit. So the bigger the spread between price and cost, the greater the profit. The oil companies know that even with subsidies, gasoline is cheaper to deliver to a retail station than ethanol.
Let me say this also. Because there is a 40% BTU deficit(some here have said 25%, either way, the analysis still holds) between gasoline and ethanol, if the cost of ethanol were anywhere close to the cost of gasoline, we would convert to ethanol almost overnight. What company wouldn't want to sell 40% more product? They would be insane not to.
Published: August 22, 2005 2:26 PM
Vince, realize that oil companies have a larger incentive not to use ethanol other than profit margins at the retail level - due to their investments in infrastructure within the Middle East and around the world. Even if the margin for ethanol is more profitable at the retail level - oil companies have to protect their vertically integrated business structure. That's the biggest threat that ethanol poses for them. A group of farmers could build an ethanol plant within one year and supply more product thus damage their volume based profit structure. Remember its the oil companies who control the pumps. Convenience store owners will lose their franchise if they buy any other fuel other than what their franchise (Texaco, Exxon, etc.) offers. Ask any owner of a fuel station.
Published: August 22, 2005 2:42 PM
Vince Daliessio,
I find some of Pimentel's calculations to be unduly conservative in regards to the energy balance in the production of ethanol, and some of his calculations use outdated numbers for corn harvest yields, fertilizer amounts used (and the energy cost of fertilizer production), etc. I think the energy balance is positive, but is not positive enough to make ethanol a viable alternative today, and I doubt that enough efficiency will ever be gained to make it a better alternative to, lets say, hydrogen as the storage liquid. I just see no real way to overcome the fact that land must be use to grow an even more important commodity than fuel for automobiles.
Published: August 22, 2005 3:16 PM
Well Vince,
Ethanol Production plants are working flat out to make as much ethanol as possible. From what I read, and observe in Central Illinois, they cannot make enough fuel to meet the demand.
I have yet to see any dispute as to why ethanol needs subsidy when there is huge margin to be had on it today.
Does anyone have a better number than $1.40 per gallon@$2.00 corn for ethanol?
p.s.
Pimentel's numbers are just nonsense. He has production costs of approximately $1000 per acre to grow corn. Given that revenue per acre is approximately $360, a farmer would lose $640 per acre he farms.
Published: August 22, 2005 9:52 PM
As someone who is risk averse, I thought about this paper from a different angle.
We will not run out of corn and the quantity of output can be calculated into the future with relative ease. We will run out of oil and the daily quantity of output changes thanks to despots, terrorists, an active and manipulative oligopoly, and the weather in the Gulf of Mexico. Output of oil will decline over time; there’s only so much oil in the ground.
Mr. Anderson’s claim that we cannot calculate the future price of corn is true, but who can calculate the future price of oil? Just as we cannot read Alan Greenspan’s mind, we cannot read the minds of the OPEC representatives and/or the oil speculators who have managed to jack up the price of a barrel of oil. We can, however, more accurately calculate the output of corn and ethanol without the necessary clairvoyance. The weather changes, but the corn output cannot possibly change that much due to changes in rainfall.
We can say definitively that we can produce more corn than we produce now, but can we say that about oil? We are never going to be able to pump more oil out of the same acre of Saudi desert, but we can get more corn out of an acre of arable Iowa land (I’m sure there are limits, but I, like most of you, am not a biologist or horticulturalist or whomever).
It would be great if we could come up with a more efficient, cheap, riskless, renewable energy source. It would be great if I could fly. Until I grow wings, however, I’ll take the 4:10 pm Southwest flight to San Antonio.
Published: August 23, 2005 12:30 AM
John Powers says;
"Ethanol Production plants are working flat out to make as much ethanol as possible. From what I read, and observe in Central Illinois, they cannot make enough fuel to meet the demand."
Not to quarrel too much, but IEPA mandates the use of ethanol in gasoline sold in IL. This artificial demand drives the whole market there and thus makes the example completely unsuitable as an argument in favor of ethanol.
Published: August 23, 2005 8:07 AM
Mike Massey says;
"oil companies have a larger incentive not to use ethanol other than profit margins at the retail level - due to their investments in infrastructure within the Middle East and around the world."
As good an argument as any for getting us out of the Middle East entirely.
"A group of farmers could build an ethanol plant within one year and supply more product thus damage their volume based profit structure."
I am waiting to see even ONE GALLON of ethanol produced on an economic, as opposed to a political basis in this country. Until then, the argument has no substance.
"Remember its the oil companies who control the pumps. Convenience store owners will lose their franchise if they buy any other fuel other than what their franchise (Texaco, Exxon, etc.) offers."
This is incorrect. While many gas stations are franchise operations, the convenience chains like WaWa, Meijer, Royal Farms, Sheetz, etc, have no connection to the integrated structure at all, and buy fuel from whoever has the best price. They would be completely free to dedicate a tank and a pump or two to ethanol or ethanol blends, but they don't - why?
Published: August 23, 2005 8:13 AM
Well Vince,
Considering that Ethanol is very similar to Grain Alcohol, I can guarantee you that at least one corn based product has been economically produced since the founding of the USA: Bootleg Whiskey.
JBP
Published: August 23, 2005 8:56 AM
LOL JP. That has as much bearing on the matter at hand as milk costing $X per gallon. Even the cheapest corn likker would cost over $20 per gallon retail, hardly an economic substitute for gasoline at current prices, but suspiciously close to my posited $9 equilibrium price!
Published: August 23, 2005 9:08 AM
Vince said, hastily;
"Even the cheapest corn likker would cost over $20 per gallon retail, hardly an economic substitute for gasoline at current prices, but suspiciously close to my posited $9 equilibrium price!"
Of course, I meant to say $10 / gallon.
But also we must consider possible alternate user applications of high-grade ethanol, and what that would do to another profitable industry - do you really think they would be allowed to sell unadulterated 180 proof at the pump? I assure you that the Distilled Spirits Council would put paid to that.
Published: August 23, 2005 9:19 AM
John Powers,
Even at $1.40/gal (I will just accept that this really is the price for ethanol of quality for use in automobile engines), wholesale ethanol($2.10/gal on an adjusted basis for the lower BTU content) is still more expensive than wholesale gasoline ($1.86/gal for unleaded on August 18th). Factor out the producer subsidies ($0.54/gal) at the federal level to get $2.64/gal for ethanol. Now it is fair to write that gasoline also has some direct subsidies (much smaller than ethanol's) and indirect subsidies, but I also have not accounted for all of ethanol's other subsidies. Even if I counted the entire defense budget as a gasoline subsidy, this would only about double the price of wholesale gasoline in the United States (and this assumes that all of the US oil consumed comes from outside of the borders of the United States).
However, the better argument against ethanol is this:
The United States consumed over 150 billion gallons of gasoline in the last year. The entire country produced 3.5 billion gallons of ethanol. To replace gasoline, we would have to produce 225 billion gallons of ethanol if we could do it without energy cost, which we can't. To make a conservative estimate of how much ethanol would actually have to be produced, let us say that every two gallons produced would consume 1. Then we would need to produce 338 billion gallons of ethanol. This requires 135 billion bushels of corn and, at 125 bushel's/acre yield, 1.08 billion acres of land would be needed. How much land is this? It is 1.6 million square miles, or 1/2 of the land area of the United States. I seriously doubt that even 1/3 of the US is even arable.
In summary, any attempt to replace gasoline with ethanol will result in ethanol that has a true cost well north of $1.40/gallon.
Published: August 23, 2005 9:43 AM
The potential use as an intoxicant can be dealt with by any one of several "denaturing" ingredients rendering the product unfit for consumption. Even "good" moonshine has always been pretty bad stuff, by the way, though the Chinese and Koreans seem to consider it somewhat like a delicacy (mai-tai and chung-jung, respectively); Jeff Foxworthy and Larry the Cable Guy would recognize either one of those as "new stuff right out of one of the Sutton brothers' stills."
My dad (then a gov't. Ag chemist) designed a distillery (for a $2000 consult fee) for a former big distiller--Publicker Industries (now a Superfund site). Publicker's gambit was to sew up the used liquor-barrel supply 20 and more years into the future via purchase contracts and then "sweat" the last vestiges of alcohol from them. Then, he (successfully) sued the ATF and legally forced them to give him free tax stamps for the product--on the grounds that the tax had already been paid by the original distiller.
Published: August 23, 2005 10:06 AM
I have a question that I can't seem to find the answer for on the web.
When ethanol is blended into gasoline, do they use 200 proof or do they use 180 proof?
Published: August 23, 2005 10:15 AM
Gene and Vince,
The image of winos hanging around filling stations offering to gas you up for free was somewhat humerous.:~)
Published: August 23, 2005 10:17 AM
Ok Yancey,
I already factored in the BTU diffference @ $1.40. Again, subsidies are included the cash price. You would not put .54 back in again. That is double counting it.
I agree, there is not enough corn-ground to supply all the demand for ethanol, but there should be some price pressure on cash corn till cost of ethanol reaches $1.86, as you mention as the wholesale cost of gasoline.
JBP
Published: August 23, 2005 12:04 PM
Gene Berman sez;
"Publicker Industries (now a Superfund site). Publicker's gambit was to sew up the used liquor-barrel supply 20 and more years into the future via purchase contracts and then "sweat" the last vestiges of alcohol from them. Then, he (successfully) sued the ATF and legally forced them to give him free tax stamps for the product--on the grounds that the tax had already been paid by the original distiller. "
To my mind, Publicker is the poster child for the regulatory-industrial complex - first rent-seeking, then, after it failed in the market despite this, having the costs of the harm it's operation caused socialized by the now-moribund Superfund.
If we are both talking about the South Philadelphia site, they also managed to kill a couple of demolition workers by leaving product lines still full of flammable product when they turned out the lights and walked away. The workers cut into them with a torch, with drearily predictable results.
Published: August 23, 2005 1:27 PM
John,
You must add the 54 cents back to get closer to the real cost of ethanol (In May, the wholesale cost of a gallon of ethanol was $1.40- I looked it up before I wrote the previous comment), and the $1.40 was not BTU adjusted. At this point in time, it just isn't a competitor for gasoline on a cost basis. It is included in blends not because it provides a cheaper fuel, but because government has mandated that it be included.
Published: August 23, 2005 1:29 PM
Yancey,
Well, no. You just used wholesale price rather than cost, but close enough.
The calculation I performed above is a reasonable approximation of wholesale cost. The 54 cents is really a nebulous figure. Where does the 54 cents go? Who gets it?
I farm, and I can guarantee you I do not get $1.50 (approx .54x3) per bushel in subsidy from the government.
The only way to do this calculation, is to use cash prices, then question why is a subsidy needed, if cash price works on it's own.
$1.40 works as it is less than the $1.86 wholesale price of gasoline.
JBP
Published: August 23, 2005 2:04 PM
I've only scanned this thread, but i think I saw some numbers and arithmetic presented, which is ok. However, what crossed my mind is that if my economic understanding is correct, economists do not need to worry if entrepreneurs will find a profitable new path to take in a potential market. It is merely for us to observe that it is in their nature to do so.
Unless the state has been implementing institutional road-blocks to the provision and use of alternative fuel types, i think we can conclude that the predictions and speculations and anticipations of the profitability of producing ethanol in competition with gasoline has been made and it has so far been found wanting.
It is cool to theorize, but where the rubber meets the road is where the entrepreneur proposes to risk his or other people's money in a venture which he anticipates will produce a worth-while profit in the future. Unless i skipped something important, the numbers have already been run, and the verdict is already out. There is presently no gain to be made in ethanol as a gas substitute.
In fact, i will go one further and say, if the government is proposing to subsidize something to promote its use, it's a forgone conclusion that it is not economic (except, as usual, to that small favoured group who always benefit from a subsidy).
Published: August 23, 2005 3:00 PM
To Vince and John-
Both Brazil and the U.S. have the capacity and land resources to easily produce all the ethanol that would be required to replace the U.S. demand for gasoline. Brazil can produce ethanol at half the cost of the U.S. Brazil also has replaced its need for petroleum fuels by over 40% with ethanol. Brazil has undeveloped land resources of 100 million hectares that could be placed into biofuel production.
Brazillians have a choice when they fuel up. The government mandated that fuel stations must provide gasoline, ethanol and natural gas for fuel options. Currently ethanol is cheaper than gasoline and those Brazillians with flexible fuel vehicles choose to buy the cheaper fuel. Ethanol is required by the government to be blended at 24% with all gasoline sold. This volume provides the nascent support for both industry as well as infrastructure such as designated pipelines, etc.
My other point: Hybrid vehicles could be developed to use ethanol as a source of hydrogen fuel. This could triple the energy output of a gallon of ethanol. Remember that combustion engines only use 20% of the energy in a liquid fuel of gasoline or ethanol. Technology to strip hydrogen gas from a liquid fuel to flow into a fuel cell will double or even triple the energy output of a liquid fuel. Then combine the ability of hybrid technology to allow for an electrical recharge - the need for a liquid energy source could be reduced further with nuclear or wind power.
Other minor point: Saab 9-2 Biopower sedan uses a turbo charger to push more air into the fuel injection system to allow the higher octane within ethanol to be utilized thus giving this lower BTU fuel more push (higher Horse Power) or in a since a better utilization of the combustible energy within the fuel; thus, achieving equal fuel economy when comparing both fuels.
Published: August 23, 2005 3:09 PM
Well Paul,
If you were a billionaire ethanol producer, and I was Senator Dick Durbin, and I proposed to give you $10 Million in exchange for your support, how could anyone tell if ethanol production is economically viable or not? Most billionaires would take the cash and ask for more next year, doesn't matter if they are chincilla farmers or cleaning up brownfield sites, they just take the money.
Governments provide subsidy becuase the subsidized want the money, regardless of the economics of the subsized product.
JBP
Published: August 23, 2005 3:22 PM
OK Mike,
It does not seem likely that a great volume of corn will go to ethanol if people will pay more for using corn as cattle feed rather than fuel.
There must be some point where it is uneconomical to use corn as fuel.
Also, I tend to doubt the stories about the efficiency of the Brazillian ethanol industries. ADM builds twinned plants in Decatur, Illinois and in Brazil that produce the same outputs. I can't imagine that ADM would use significantly more efficient production facilities in Brazil than in Decatur.
JBP
Published: August 23, 2005 3:25 PM
The 54 cents go to the producers of ethanol, not the farmers, at least not directly. Again, even if I ignore the subsidy, ethanol is not cost competitive with gasoline since it contains 65% of the BTUs per volume unit. Without the direct subsidy, the situation is even worse. On balance, I think ethanol is more highly subsidized than gasoline. I am uncertain on this point since it is conjecture just how much of the US defense budget exists solely because we are dependent on foreign oil.
Published: August 23, 2005 4:53 PM
Sugar cane farmers can produce more gallons per acre than corn. Wheat straw, corn stover, sugar beets, potatoes, barley, wheat, cheese whey, grass from your lawn will soon be an economical source of ethanol through the advances of biotechnology. $60 per barrel oil helps too
Published: August 23, 2005 5:00 PM
Hi John:
It sounds like you are against a subsidized ethanol industry. If so, we agree.
Published: August 23, 2005 6:01 PM
OK Yancey,
The point of my arithmetic is to calculate the non-subsidized marginal cost of production of the next gallon of ethanol, which still stands around $1.40. Yes, the producers may receive subsidy, but that does not change the marginal cost of production.
I already factored in the lesser btu for ethanol. I am about to declare $1.40 to be the definitive cost.
JBP
p.s. to Michael, from everything I have read, you are correct about sugar cane being a better source for ethanol than corn.
Published: August 23, 2005 6:13 PM
John, 1/3 of a bushel of corn becomes cattle feed after the corn is processed to ethanol. 1/3 of a bushel goes to liquid ethanol, the other 1/3 of a bushel becomes CO2 gas. Interesting - I read an article of the feasibility to build an ethanol plant near a cattle feedlot as well as take the CO2 gas and pump it into old abandoned oil fields to extract more oil out of the ground. Cattle manure would be used to power the ethanol plant.
It's amazing what can happen when one thinks outside the box. Farmers and other entreprenuers tend to surprise the closed minded economists as well as idiot entomologists (Pimental) due to the amazing unlimited ability of mankind's brain.
Published: August 24, 2005 1:05 AM
So we get more efficient cultivating corn, refining ethanol, and utilizing poop. America is great.
Published: August 24, 2005 3:03 AM
John Powers,
Again, your $1.40 price/gal includes the subsidy. To get the ethanol equivalent for gasoline, you need more than a gallon of ethanol. Accounting for both of these facts shows that ethanol is not price competitive with gasoline. As the price of gasoline rises, it may be that ethanol catches up, but it cannot replace gasoline at our current consumption rates. The government is pissing money down the drain trying to support its use as a fuel.
http://www.axxispetro.com/ace.shtml
Published: August 24, 2005 8:03 AM
Yancey,
Thanks for the link.
$1.40 really doesn't include subsidy. It is the marginal production cost. Look at the above calculations, it also includes the BTU differential.
I am confident that the wholesale price of ethanol rises so that
retail price - profit - subsidy = wholesale price.
And of course
wholesale price - wholesale profit = wholesale cost.
JBP
Published: August 24, 2005 8:42 AM
John Powers,
Your initial calculations are completely meaningless (maybe I should have written that explicitly in an earlier comment). That is the point I have been making. The wholesale price for ethanol that you were calculating does not match the reality of today. The actual wholesale price of ethanol is much higher than the calculation that you provided in your very first comment. The actual price of ethanol today, even ignoring the subsidies, and taking into acccount the greater energy content/volume of gasoline, demonstrates that ethanol is not competitive with gasoline at the moment.
Published: August 24, 2005 11:40 AM
Well I disagree,
You are definitely confusing price and cost.
Price - Profit = Cost
I calculated wholesale cost. You stated wholesale price.
Re-arranging
Price - Cost = Profit
If one cannot get by that, I don't think one can understand how capitalism works.
JBP
Published: August 24, 2005 12:03 PM
John Powers,
But you were also comparing your calculated wholesale cost of ethanol to the retail price of gasoline. This biased your conclusion, did it not. In addition, your calculation totally ignored the cost inputs required for fermentation and processing of the crude ethanol. Also, your allowance for 10% less gas mileage is also lowballing the actual difference- per unit volume, gasoline contains about 1.5 times the BTUs of ethanol, so your allowance for cost must be greater than the 10% you used. Your guess at the marginal cost of producing ethanol is just flat out wrong. I don't know how to put it any other way.
Published: August 24, 2005 12:22 PM
Mr. Yancey,
Well work it out with me then, rather than making such bold claims. Just trying to do the math here.
1) Yes, wrt wholesale cost vs retail price. I am trying to determine if this is profitable, in any sense.
2) I subtracted 15% for the energy necessary for fermentation and processing of crude ethanol. Seemed reasonable from the folks I have talked to.
3) I am basing the 10% loss of gas mileage on E85 users reports. That is, E85 users are getting 10% less MPG than Gasoline uers. Do you have a better number? 50% does not sound right. I will ask 10 E85 users if you can't come up with a more accurate number.
I think we have spent more time on this calculation than Pimentel and Patzek combined. Used more arithmetic as well.
JBP
Published: August 24, 2005 1:30 PM
OK,
The DOE thinks it is more like 30%
http://www.fueleconomy.gov/feg/byfuel/FFV2005.shtml
So..I adjust the above and that gets ethanol production costs up to $1.61 per gallon.
Brings me back to the original statement. If ethanol is $1.61 per gallon (equivalent mpg) to produce, and I pay $3.00 for a gallon of gasoline, why does ethanol need subsidized?
JBP
Published: August 24, 2005 2:13 PM
John Powers,
This is what you wrote in your first comment:
This efficiency calculation is very easy.
Corn sells for approximately $2.00 per Bushel
You get approximately 3 Gallons of Ethanol for 1 Bushel of Corn.
Thus Ethanol is worth about 66 cents per gallon. I will throw in 33 cents per gallon to transport, and 15 cents for profit = $1.15 per gallon of ethanol. You lose a 10% of gas mileage with ethanol, so, $1.26/gallon gasoline equivalent.
$1.26 is much less than the $3 per gallon I paid at the pump yesterday. Thus ethanol is economically efficient, no subsidy necessary.
You do not account for fermentation and processing, as you claimed in your last comment. You lose greater than 30% mileage/gal, not 10% as you claimed. On a broader point, you completely dismiss the wholesale price of ethanol that I linked to, but find no problem comparing your complete guess of ethanol's cost with gasoline's retail price and conclude that ethanol is competitive. In other words you fit your arguments to the outcome you desire. I don't know what the marginal cost of ethanol is, but the wholesale price gives one a good clue as to the neighborhood. I see absolutely no reason not to compare the wholesale prices of ethanol to the wholesale prices of the cheapest grade of gasoline. This comparison clearly shows ethanol is not competitive. As I wrote before, this might change if gasoline continues to rise in price faster than ethanol, but that point has not been reached, even with ethanol's direct subsidies.
Published: August 24, 2005 2:20 PM
Mr Yancey,
I included 15% loss for fermenation and procssing. Then, I included a 30% loss of mpg efficiency, as calculated by the DOE. Do you have better numbers?
The wholesale price of ethanol is completely irrelevant. If I am a wholesaler, I will charge you whatever you will pay. This is totally unrelated to my cost of production.
If the market will pay me $1.00 per gallon, that is what I will have to take, if there is no better option. If you will pay me $100 per gallon, I will take that and make a profit. But by no means is the production cost = wholesale price, nor do I see why you would ever conclude such a thing.
You can compare wholesale prices of gasoline to wholesale prices of ethanol all you want. It is not the calculation I am trying to make.
I would assume that the market would drive the equivalent (subsidized) price to approimate each other, but again, I am not calculating how to subsidize ethanol, but how much it actually costs to produce a gallon of ethanol equivalent to a gallon of gasoline.
JBP
Published: August 24, 2005 2:59 PM
I recall from my gearhead days that straight ethanol would require carburetor (fuel metering) jet size be increased by 40%. Now that fuel injection and electronic engine control have advanced, a 30% increase in fuel volume is reasonable.
Published: August 25, 2005 7:19 AM
Mr. Powers:
Neither I nor Mr. Ward can know precisely your motive in making the specific arguments you do but, repeatedly, figures are chosen which, as Mr. Ward has observed, seem selected for their value in supporting a particular position (Yes!) for ethanol. While not accusing the farm guys of self-interested manipulation or distortion of the various facts, it's at least understandable that they, themselves, on account of that self-interest, might be somewhat more likely to entertain delusive arguments than those in more neutral position. It's even understandable that (since we all want "better") most might be somewhat vulnerable to error toward optimism.
But Mr. Ward has repeatedly tried to use the figures most likely to make the essential comparison as lucid as possible. Use of the wholesale market prices does just that. In fact, to one who understands economic reasoning (i.e., Economics), that price (and most especially for products produced in large quantities of essentially fungible units)is an effective surrogate for the marginal cost of production. "What the market will bear" is not some outcome of individual, situational greed but, rather, a most careful weighing by producers as well as consumers and, on the producers' side, a keen awareness of competitive pressures. Every deviation from the formula "marginal cost + average rate of profit characteristic of the industry" (and which average rate is closely related by similar pressure to average rates in business generally)in EITHER direction--higher or lower--will be punished immediately, both by loss of profitable sale.
I want to explain something to you that is essential to understanding. Please don't think I'm being condescending: if more people understood the simple truth I'm about to state, many aspects of life and politics would be easier, less controversial.
People unconstrained do what they want. If they want to invest to make profit, they invest; if not, they do not. Those who so wish who also see what looks like an opportunity fulfilling the criteria they seek, acquire their desired amount of the investment concerned.
Economics teaches us to "read peoples minds," not by what they write or say but by what they DO. Those who support subsidies for ethanol (or anything else)are saying, in as clear language as humans are capable of expressing, "This prospect does not look profitable to me--I wouldn't invest in it." Forcing (taxing) others to make a portion of one's investment for them has always been popular with many on the potentially receiving end. But if you bear in mind that the people active in making investments, whether as businessmen or passive investors, are always interested and anxious to make profits, the very fact that they are NOT--in general-- actively making such investment marks the investment concerned as a bad one. No "figuring" that you can possibly do (or that I or Mr. Ward might possibly offer as more accurate) can possibly be substituted as superior to the net "No" of the market participants. And, while it is true that occasionally some brilliant individual proves that he was right about a particular investment and all the rest of the market wrong (or slower in perception), that proof ALWAYS occurs IN the market (and not in written form, whether in grant-supported scientific papers, policy analyses, nor even in the most knowledgeable of "Comments" sections).
In closing, I'd advise that, if you want to know as much as you're ever likely to know about the prospects for ethanol, forget all reading about ethanol, gasoline, internal combustion engines, chemistry, thermodynamics, or petroleum geopolitics. Instead, read HUMAN ACTION. It's very obvious (from your arguments) you've never done so.
Published: August 25, 2005 7:26 AM
I'm with Gene on this one - we are all self-interested to one degree or another. But in a free market system, the bad effects of self-interest are minimized, and the good ones maximized over time. In a government-subsidized and regulated system, the self-interests of the most powerful and persistent will triumph over everyone else's, to everyone's detriment.
Published: August 25, 2005 3:12 PM
Gene,
What an eloquent bit of nonsense you write.
Do you think the wholesale price of, say, seminconductors is equal to the marginal production cost? How about software? Do you think the wholesale price of software is equal to the marginal production cost?
For the life of me, I cannot understand why so many otherwise sensible people cannot calculate production costs.
Any middling accountant could do this in a day or two, yet you seem to think that some of the most overcooked numbers in the world are more accurate than those numbers that can be calculated independently.
If you look at the calculations, and my point, you will see that I am 100% against subsidy. From the math, it really seems like ethanol is a moneymaker without subsidy, so any subsidy is just rent taking by the politico/ethanol industry.
JBP
Published: August 25, 2005 4:40 PM
Mr. Powers:
I never said, nor did Mr. Ward, in his original argument meant for your instruction, that the marginal cost was equal (equal means "the same") to the wholesale price. What both of us attempted to get across (unsuccessfully, it seems to have turned out) is that the marginal cost (which includes both material and labor costs and an aliquot portion of capital depreciation and other fixed costs) plus some amount of profit "normal" in that specific sector is a valid avenue for approximating the "cost" of something. If you want to get a "handle" on the "cost" of something, there is simply no surer figure to use. The principle is not different in either semiconductor manufacturing or software production; the fact that a comparatively great difference exists between the marginal cost of production and the wholesale price is merely another way of stating that the average rate of profit expected in those industries is quite a bit higher than in others for reasons that have to do with the nature of the business and the degree of risk involved. If you were to manage such a company and under-deliver on ROI expected--that is, characteristic of your market sector--you might be looking for other employment. Mr. T. Boone Pickens looked at that wholesale price of petroleum product, applied (subtracted) the costs of processing, and concluded that the ROI that some managements thought adequate could only pass muster with figures (all done by highly paid accountants, you can bet your bottom dollar) not properly recognizing changed conditions and the increased value of their reserves. Gross profits too low, stock price likewise, and presto!--new managers AND owners (and accountants, probably, as well).. It's easier to make assessments like that in high-volume, comparatively low unit cost industries but the principle is the same in any case.
At the risk of being tedious, I'll point out that fuels of various sorts and lubrication are only the largest-volume uses for petroleum. There are many other uses, especially of certain fractions
used in plastics, pesticides, perfumes, medicine, and others, mostly characterized by smaller volume and higher average profit margins. In order to achieve the average overall profit on petroleum output, the existence of these higher-priced (and more profitable) uses for certain fractions of the original product certainly acts to diminish that which need be ascribed to the fuel portion in order to achieve that average. If a smaller quantity of petroleum were pumped than currently, it is reasonable to assume that the feedstock from which these fractions are derived would be similarly curtailed and the prices of those fractions might certainly rise (and those of the end products as well). I am only saying that because of the multiplicity of uses for the oil, the prices of all these products are lower than would be the case otherwise. If one were to
attempt an overview, it would seem that, to the extent that ethanol replaced gasoline as an automotive fuel, any rise in prices of those other materials which resulted from the diminished supply would, essentially, be an additional (or external, insofar as a producer might be concerned) "cost" of using ethanol. How all these might stack up and play out, I haven't the foggiest. But, since you've been patient, I've got a story for you that illustrates, in a tiny way, the complex of benefits (and their complexity) provided by the "awl bidness".
One company--Mitsubishi--has, for at least 40 years, specialized in buying certain effluent streams from oil refineries all over the world. These they refine to a certain further degree and sell various resultant products to, again, many companies. One small part of this is called meta-toluene, all of which goes to one customer (or did, in days when I knew something about it)--Stauffer Chemical Co., who processed it into meta-toluic acid. Again, this entire production, from all the largest refining operations worldwide, went to, mostly, one customer, Pfizer, in a small plant in North Carolina. Other companies tried to get into the business at different times but never made a real "go" of it. Pfizer made only one product from this meta-toluic acid (made from all that collected meta-toluene), called N, N-di-meta-ethyltoluene. They, in turn, sold their output to a handfull of companies who used it for a variety of insect (especially mosquito) repellants. The stuff is called DEET in the trade.
One year, Stauffer Chemical had a strike where they made the meta-toluic acid. They couldn't be too concerned: even though the stuff was vital to
the repellant people, it was a small fraction of the production of that plant. Pfizer's unit was tight but had enough for its customers for about six months IF they cut off their biggest, S.C. Johnson, (OFF!). They did just that, because, shortly before, Johnson had enticed Hercules to step into the business by promising them large orders at a quarter-cent a pound under Pfizer's price. Naturally, the good folks at the NC plant were pissed and, when Hercules couldn't produce on account of the strike at Stauffer, were only too glad to take care of their smaller, more loyal customers and let the repeated, 100,000 and quarter-million-pound purchase orders from Johnson just pile up, unanswered. Their manager wouldn't even take calls from Johnson.
At that juncture, the US gov't. offered surplus insect repellant for sale--it had come back from Viet Nam--over a half-million spray cans of it, each weighing 6 oz. and containing a quarter-pound of the DEET--over 125,00 lbs. of the active ingredient. A fellow who saw this advertised (and knew of the situation) called Johnson and asked if they'd like to buy 125,000 lbs. of DEET. "We could be interested" came the reply "as long as the price is right." "How about $3 a pound?" he was asked. "Yeah--that's OK" (regular price about 2.40 at the time). "Would you like $2 better?"
"Of course, I'd like $2 better--what kind of question is that?"
"Can you meet me in Mexico City Friday to make the deal?" "Sure--what hotel will you be in?"
"Better yet--how about Tokyo next Monday?" "Yes, I can be there. What kind of scam is this, first $3, then $2, first Mexico, then Japan?"
"Just repeat after me, I will go anywhere, pay damn near any price, and publicly kiss your ass to get this stuff that will make 2 million units of OFF! and without which there won't be can one on store shelves this coming mosquito season."
And, when the Johnson guy had dutifully repeated the above, he was told "I'll be in your office tomorrow morning at 11 AM to tell you the story and make a deal for the DEET."
And I was--and did.
Published: August 26, 2005 12:19 AM
Gene,
How does this help calculate the production cost for Ethanol?
JBP
Published: August 26, 2005 7:20 AM
It doesn't, John. It's just a (true) story for your amusement (and mine in remembering). I can't say much more than has already been said on the matter (by several).
But I will point out a couple more things that should be considered in comparing oil to ethanol.
The current high price of oil may very well be anomalous. In fairly recent memory, I believe it's been south of $25, though I don't follow those things--so don't take me to task if I'm off by a few bucks. In some places, the costs of recovering a barrel are as low as $1.50/barrel and there are some of those whose outputs can be, with relative ease, greatly expanded. One contemplating ethanol as a replacement for gasoline is faced, when considering the considerable investments involved, with prospects that the oily ones can merely lower prices to a point that makes the ethanol "numbers" even worse than they do now. Only fools (and those subsidized) rush in. Likewise, other investments, requiring the adaptation of carburetion and exhaust systems, may be required, whether by auto manufacturers or aftermarket providers. One thing is sure: if there were a clear path to saving money through the use of ethanol (and thus a clear profit of at least the size normal in the oil industry), not only would non-subsidized ethanol make its way to market but auto manufacturers themselves would be busily designing models or retrofits ready to make their contribution (and earn their share of profits under the altered paradigm). Do you see such telltales?
Published: August 26, 2005 8:37 AM
Well yes, that was a fine story about SC Johnson and industrial chemicals,
In answer to your question, there are ethanol plants sprouting up like weeds in Iowa and Illinois. There are also massive facilities in South America for making ethanol for sugar cane. E85 compatible vechicles are coming off the assembly lines in huge numbers.
The big question I have, and have solved to some extent, is at what point(s) are they making money? It seems to me that not only is ethanol profitable on its own, but also getting a huge subsidy from Uncle Sam and probably Uncle Lula in Brazil.
You pose another question about non-subsidized ethanol making it to the market. I don't know how it could. If a producer can get a government handout for ethanol, he is probably going to take it regardless of it being profitable without subsidy. Something about gift horses and not looking in their mouths.
JBP
Published: August 26, 2005 9:08 AM
Gene Berman,
Thanks for the story. It was a really good one!
John Powers,
I used the wholesale prices for both commodities for the very reason that they were the best information available as to the marginal costs. As I pointed out again and again, your calculations of the marginal cost clearly missed some key costs (of unknown magnitude for sure, but important, ie fermentation and processing) underestimated the relative energy content of gasoline vs. ethanol. In addition, you overestimated the recoverable amount of ethanol from corn (it is about 2.6 gallons/bushel, not 3). As far as I could tell, the only part that may have been accurate was the price of a bushel of corn. If you really want to get at the marginal cost of ethanol, one might try to find a producer on the public market that produces it as a sole product. Their SEC filings would give one a better estimate than your calculations.
Published: August 26, 2005 9:48 AM
Hi Yancey,
Yes, your numbers may have been the best available to you, till we started doing the calcuation.
Do you have better numbers? I am tired of reading stories in the New York Times, WSJ, etc that use aggregate numbers, third hand observations, and studies from Cornell insect professors (which are pure nonsense) rather than arithmetic to calculate production costs.
Now that we have started doing the calulation, how about filling in the unknowns and approximations rather than looking to fictional SEC filings for data?
I really don't think I have underestimated the mpg of gasoline vs. E85, based on ancedotal evidence and the DOE measurements (quite possibly also fiction, but since they were more conservative towards ethanol, I used them rather than data from my neighbor's truck).
2.6 is the net result of energy produced from a bushel of corn, counting a unit loss (approx .4) for fermentation processing etc. I got this from an ADM researcher, which may be biassed.
I tossed in 33 cents a gallon for logistics, which seems well large enough to cover any bias towards ethanol.
JBP
Published: August 26, 2005 11:28 AM
John Powers:
Neither I nor others are going to convince you but, in trying to establish the truth of matters, the numbers are entirely insufficient to provide the actual information you (and others) seek.
Numbers do not lie. But people lie frequently with numbers and in other ways, for various reasons, in addition to making inadvertant or ignorant errors.
Forget the numbers! If making an accurate assessment of the situation were only dependent on having reliably accurate numbers available, we wouldn't be having this discussion at all. The business would ALREADY be established or in an advanced state of start-up WITHOUT SUBSIDY! That's a fact that only an appreciation of Economics (and particularly of the type--Misesian--for which this site exists). Accounting is a useful regimen and an aid to understanding the relationship of some entities to one another. But it is totally useless in trying to understand the problem at hand (except insofar as understanding the relationship of certain quantities or magnitudes to one another).
If it were possible for me (or others) to actually provide complete and convincing argument for the general position we share--within the general confines of this space--there would be little purpose to the study of Economics--it would, indeed, be child's play, akin to basic arithmetic. But the problems addressed by the field are among the knottiest and most confusing to have beset men and have led them into such contrary-to-purpose activities and practices as it is possible to imagine. It might well be said that a basic ignorance of Economics, rather than the innate aggressiveness of humankind, is and has been, since the beginning of time, the everyday root of belligerent behavior. Men with a knowledge of Economics know full well that their interests, as well as those of the overwhelming mass of men, lies in curbing such innate aggressiveness as might exist and in behaving in other manners than barely concealed hostility.
What I want to do, with whatever arguments I present, is to persuade you to read Von Mises. That's it in a nutshell. If I win, we both win.
And vicey-versa. I probably waste a lot of breath but I try to pick my targets with some care.
Published: August 26, 2005 12:06 PM
John Powers,
Your corrected numbers for mileage differential are close to correct (30% vs the 10% of your initial post). This is not a guess. The thermal energy released from ethanol as compared regular gasoline is an established fact. Indeed, if your initial calculations had largely made sense, I might not have replied at all. That they were clearly wrong could not be allowed to pass, however.
Published: August 26, 2005 1:15 PM
Hi Gene,
I repeat, why can't people take a deep breath, and do some basic arithmetic, rathing than making such vast statements.
I think it is a lot more fun to make sweeping statements like those you might see from Paul Krugman (not one of my heroes), and yes Ludwig von Mises (one of my heroes) than to do cost accounting. But can't someone do an Excel spreadsheet to show production costs, just to have a baseline?
I am reminded of a meeting I had with an executive at General Electric Fuel Cell Systems about fuel cells last year. I asked why don't they roll the dice and go into mass production of some home-use fuel cell. His (perfectly sensible) response was, "What for, we make a ton of money from government grants without taking any risk, who knows if they will ever work".
I tell you, we have done more math in the last week on this blog than so called "researchers" do in years of publications. I am much more convinced by arithmentic and algebra than the political meanderings of the math-illiterate on a such loaded issue.
JBP
Published: August 26, 2005 1:22 PM
Mr Yancey,
Thanks for the correction. That leaves me at $1.61 per gallon.
So the best numbers available have it...ethanol is profitable without subsidy.
JBP
Published: August 26, 2005 1:35 PM
No, John, referring back to your very first comment and allowing for the most obvious corrections to your assumptions (10 cents per gallon for fermentation and processing[probably an underestimate, but I will err on your side], allowing for the BTU difference, and the generally accepted 2.6 gallons of ethanol/bushel of corn) gives me, using your corn price, transportation, and "profit" allowance, gives me $2.02 cents for ethanol equivalent to a gallon of gasoline which is the only comparison that matters at all.
Published: August 26, 2005 2:14 PM
OK then, $2.02 which is within 25% of my number, which includes 33 cents of fluff.
Good enough. Now...shouldn't a profit seeking enterprise be prepared to bridge the gap between $2.02 and $3.00 a gallon? I think Ethanol is taxed at a much lesser rate than Gasoline.
Gene or Yancey, you have any money you want to blow on an ethanol plant?
JBP
Published: August 26, 2005 3:48 PM
Alaska has a pipeline that can carry 2 million barrels per day to a be shipped to the West Coast refineries. Today only 900,000 barrels per day is piped. Why? We depleted those oil fields. We do have more to pump. Because we stopped drilling elsewhere (due to ignorant environmentalists) we are increasingly importing more crude and relying on Chevez, Fahim, and Abdul to carry our economy through.
OK - if I'm a General of the U.S. Army: 1) Do I rely on Venezuela and the Middle East to supply my army with its fuel needs or 2) do I rely on the American Farmer who's sons are in the conflict driving the tanks?
You gentleman must realize we are at war and will always be at war measuring our success of the viability of Western Civilization with battles won or lost. Why did the U.S. and Great Britain win WWII because we had more fuel than Germany did. Germany lost the war the day they could not take the oil fields and logistical oil region in and around Stalingrad. They lost North Africa and the Middle East another strategic fuel source.
I'm afraid the day will come that those who wish to recreate the Islamic Civilization that had once ruled the world during Europe's dark ages will achieve their purposes through our greatest weakness - importation of crude oil.
Saudi Arabia has three strategic crude oil distribution ports that if attacked and sucessfully destroyed say with nuclear weapons - gentleman you can kiss all those economic theories and calculations goodbye...
I truely believe we need to concentrate on the strategic benefits for Western Civilization in which ethanol, biodiesel, nuclear power, and newer engine design to accomodate various sources of fuels and electricity that would keep our economy humming.
Furthermore this is the most important point - alternative sources gives us market leverage and buying power - a hold of the crank - to crank down prices that despots (who have the majority stocks of cheaper oil - now and in the future) are willing to increase to the stratosphere.
Governments worried about national security do have the right to protect their citizens from monopolistic and oligopolistic market manipulation of crude oil prices. Cultivating newer market entrants into the fuel marketplace is a vital national security interest and should continue - unless you want our boys fighting wars without fuel in our tanks. Ask any German who bravely fought with Panzer tanks at the Battle of the Bulge that question. Ask that old Kraut if he enjoyed driving his tank without fuel when the Tommys and the Yanks met him for battle.
You gentlemen can step in your tanks ready for battle with the Arabs with your reliable petroleum. I'll step in mine running on ethanol made from the bullshit you guys are dishing out.
Published: August 27, 2005 4:36 PM
If it comes down to seizing an oil-rich country in a wartime setting, I think we've pretty well proven out ability to do that.
Do you know who the single largest supplier of oil to the United States is? It's Canada. We buy a lot of oil from the Middle East because it's cheap, but if it comes down to putting gas in tanks there are a lot of other places to get it. All this talk about "our boys" fighting on empty is nonsense.
Go ahead and make ethanol if you want to waste your time and money on some paranoid delusion. Just don't make other people do it.
Published: August 27, 2005 10:51 PM
Ryan,
From the calculations detailed above, it is profitable to make ethanol. So, where is the waste of time, money, and paranoia?
Why not just let the market seek profits and relax the sweeping genrealizations?
JBP
Published: August 28, 2005 11:45 AM
Ryan,
Who bought PetroKahzakstan, a Canadian oil conglomerate in Central Asia? China.
Who is making deals right now with Canadian oil companies for long term fuel purchasing agreements? China.
Who financed the purchase, I should say seizure of Yukos? China.
Wake up Ryan and smell the coffee.
Published: August 28, 2005 1:26 PM
John Powers,
I never said we shouldn't let people produce ethanol if they chose to do so. I'm against government subsidies of ethanol. If ethanol requires a subsidy, it is not profitable. Ditch the subsidy, and you can go make all the miracle-fuel you want. If it can't be done without a subsidy, it's not profitable. Period.
Michael Massey,
Your coffee smells like bullshit, so I'll pass on sniffing it. You should probably lay off it too.
The United States maintains a strategic petroleum reserve. Currently, we've got just over 700 million barrels available. While that wouldn't sustain sustain our current level of domestic consumption for long, it's enough to keep our military going for years.
If it comes down to it, the USA has proved reserves of 22.45 billion barrels, with likely a lot more if we have to support ourselves in times of war. The issue of oil vs ethanol is not a matter of keeping our tanks running; they'll be fine regardless. The people who will feel the pinch if our supplies are cut off are domestic consumers at the gas pump.
Published: August 28, 2005 3:57 PM
So Ryan,
Since we have determined it can be produced without subsidy profitably, why wouldn't someone in the ehtanol industry just take the subsidy?
I repeat from above
"If a producer can get a government handout for ethanol, he is probably going to take it regardless of it being profitable without subsidy. Something about gift horses and not looking in their mouths."
JBP
Published: August 29, 2005 8:57 AM
Ryan,
Ethanol can be produced without subsidies at $30 per barrel. The reason for the push with subsidies in the past is to build an alternative fuel industry when crude oil was below $30 per barrel.
At $70 per barrel you want to tap the strategic reserve. So let's tap it and by the way lets tap into Alaska (that takes 5 plus years to get into production).
Takes one year to build an ethanol plant. We could build hundreds of them within a year. We have the corn. We have the wheat straw, wood waste, cow manure, corn stalks and cobs, sugar cane, wheat, potatoes, grass clippings from residential yards, etc.
So you think $30-40 per barrel for renewable fuels is a waste of time when prices are hovering up to $70 per barrel?
The corn farmers alone could produce 27 Billion gallons of ethanol (including enough residual feed for the nation's stock animals) within a year. Add importation of Brazillian ethanol. Add ethanol from cornstalks and wheat straw. Add ethanol from wheat and barley. Add what the Canadians can come up with. Farmers can drive the price of fuel down to a more comfortable $30-40 per barrel.
If the Arabs and Iranians get a little hungry - then we the U.S. have a cheap oil for food program. That would be a better position for the U.S. to be in than $70 per barrel crude and having to suck out of our reserves.
Published: August 29, 2005 12:39 PM
Michael,
I didn't say we should tap the strategic oil reserve right now. I said we [i]could[/i] do it if we needed oil to keep the war machine running. Your hysterical doomsday prediction where "our boys" fight from empty tanks was based in a hypothetical war, not the market price of oil vs ethanol or anything else. I [i]do not care[/i] what else you have to say about how great ethanol is. Subsidies are wrong and create problems within the economy, thus ethanol should not be subsidized.
John,
Your statistics (which are easily made up, as 85% of statistics are) are not relevant. The point is, I'll believe ethanol is profitable when I see companies producing it without government subsidy and making a profit. If ethanol is the miracle that you're claiming it is, why isn't it already being produced? Why aren't the corn farmers already selling their corn to profitable ethanol producers instead of begging for subsidies? If your numbers are so reliable and accurate, go get rich making ethanol instead of just talking about why we need to subsidize it.
Published: August 29, 2005 4:57 PM
Subsidized Fuel = Socialism = Calculation Problem = Anti-Misesianism.
The point of the article is that the best, fairest economic system is a free-market system, and that the natural workings of such a system, including profit and comparative advantage are all legitimate, as long as there is no force or fraud.
Conversely, any government intervention, whether it takes the form of subsidies, mandates, regulations, or military intervention abroad, on behalf of anything or anyone is not legitimate.
If one can't understand that, one has to wonder what is the purpose of posting on an Austrian economics blog , really.
Published: August 30, 2005 9:55 AM
John Powers,
Ethanol costs only $30/barrel? Even if I use your calculation (clearly wrong, by the way), I get a cost of $68/barrel. Using the more reliable cost of $2/gallon to produce ethanol from subsidized corn, you get $84/barrel. Why do you find it necessary to continually change the numbers you use?
Published: August 30, 2005 11:10 AM
Hi Yancey,
As someone adds a more accurate estimate, I tried to put that into the calculation. Please put in more accurate numbers, if you have them.
$2.02 is a tolerable calculation for production and distribution of a gallon of ethanol. I paid $3.18 for a gallon of gasoline yesterday.
Someone could easily make better than a 33% profit margin selling ethanol.
JBP
Published: August 30, 2005 11:29 AM
Hi Ryan Fuller,
Corn sells for about $1.92 per bushel right now; this is a historically low price. Oil is $70 a barrel; this is a historically high price.
There is a huge construction boom in Iowa, Illinois etc right now for ethanol prodcution plants. Ethanol is being produced in record volumes. From the above calculations, ethanol is both profitable AND subsidized.
My assumption is that the ethanol boom will go bust when oil prices go bust, perhaps at the same time the Chinese economy goes bust.
I am 100% against subsidies. Have posted 20 times on this blog and never mentioning anything in favor of subsidizing corn.
Published: August 30, 2005 11:41 AM
JBP says;
"There is a huge construction boom in Iowa, Illinois etc right now for ethanol prodcution plants. Ethanol is being produced in record volumes. From the above calculations, ethanol is both profitable AND subsidized."
This is almost solely due to subsidies and mandates. If they didn't exist, and oil prices continue to rise, ethanol production might eventually also. But that doesn't add legitimacy to the mandates and subsidies.
Published: August 31, 2005 11:31 AM
John is right about one thing - when the US economy goes bust, so will the Chinese, and both of those will depress the oil price.
Published: August 31, 2005 11:33 AM
Vince,
How do you determine that ethanol production is "almost solely due to subsidies"? Don't you think $70 oil and $3.25 Gasoline might have something to do with it?
If we had a construction boom with $20 oil and $.75 gasoline, I would tend to agree with you. But we don't.
JBP
Published: August 31, 2005 2:39 PM
m. massey states "We raise corn in Eastern Washington.....Why do I as a farmer need to buy $3 per gallon diesel refined from crude oil from Saudi Arabia?"
isnt your gas most likely coming from canada or alaska??
Published: June 7, 2007 5:03 PM
y. ward states...."This requires 135 billion bushels of corn and, at 125 bushel's/acre yield, 1.08 billion acres of land would be needed. How much land is this? It is 1.6 million square miles, or 1/2 of the land area of the United States. I seriously doubt that even 1/3 of the US is even arable."
even if ethanol were to replace half of the gasoline fuel demands - (i guess around 500 million acres, 1/4 of the area of the u.s.) that would require a lot of land currently being used for other crops, livestock etc. would the pressure for additional corn acreage push the price up for items currently being grown in these areas? a great deal of the north central and northwest is very hilly and rocky...not suitable for large scale (combines) corn crops, at least thats how it appeared to me. and i guess the vast open areas of the southwest are to arid???
Published: June 7, 2007 5:54 PM