Arnold Kling  

Ethanol Enthusiasts

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Lester B. Lave and W. Michael Griffin write,

Brazil, together with some Caribbean nations, is exporting some 200 million gallons of ethanol to the United States annually. But the United States doesn’t make it easy. Brazil pays a 2.5% duty and doesn’t receive the 51 cent per gallon excise tax rebate that U.S. producers receive...

According to some estimates, efficient Brazilian producers now make ethanol at a cost of roughly 72 cents per gallon. Our examination of the sugar cane harvesting and mills convinced us that Brazil could lower production costs substantially below that level.

...U.S. corn growers claim that they could possibly produce 15 billion gallons in a decade. Brazil seems ready and able to export another 15 billion gallons at $1 per gallon. At the same time, we should pursue technologies to produce ethanol from biomass at ever-lower costs. Some proponents claim that cellulosic ethanol could ultimately replace all gasoline use in the United States.

Somehow, a 2.5% duty seems like a pretty minor trade barrier. I'm more worried about the 51-cent subsidy. In a completely free market, would ethanol ultimately replace all gasoline use...or vice-versa?

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COMMENTS (16 to date)
Ragerz writes:

I don't find your question of what would happen in a "completely free market" relevant, because that is not the world we live in. The government builds roads, which in turn increases demand for automobiles, which in turn increases demand for oil. Why should we take that as a given?

What are the benefits of a "completely free market" in this context? Ensuring that dysfunctional and oppressive Middle Eastern countries have enough revenue to produce the next bin Ladin?? We wouldn't want Islamic extremists to lose too much revenue, right? Ensuring that alternative fuels aren't viable alternatives (until massive price increases start making people feel very uncomfortable) due to inadequate economies of scale and inadequate infrastructure?

Just as we build infrastructure that enables oil (roads) it probably makes sense to build infrastructure for alternative fuels.

I think one thing you are ignoring a lot your "perfect free market" question. You can't really say that there is not a dynamic argument for subsidizing the availability of alternative fuels in order to ensure a more smooth transition from oil to alternative fuels. Especially to the extent that alternative fuels create fewer externalities, like rich but crazy terrorists or countries that try to acquire nuclear weapons or less environmental damage.

As far as this tariff against Brazil goes, of course it should be removed. But if you argue that a tariff of 2.5% is pretty minor, can I argue that a gasoline tax of 2.65% (assuming $60 per barrell, which was about where the price was today) on California oil producers is "pretty minor" as well. So, isn't Caplan's argument that those who support Prop 187 "economically illiterate" a little overblown, since this tax is "pretty minor."

ragerz writes:

Note: I changed my email address since I forgot my password to my last one.

Ragerz writes:

Prop 187 should be Prop 87. Bah.

Brad Hutchings writes:

Alternative fuels proponents misunderestimate just how much energy is in a gallon of gas. I think President Bush probably showed the deepest understanding of any public official last week in saying that lower gas prices cause him to worry about the viability of alternative fuels. This, at a time when a barrel of crude is fluctuating around $60. The oil industry still thinks $30 is the long term target. Even Hugo Chavez thinks $55 is a premium long-term price, judging from his summer "offer" to fix the price there.

At $30 a barrel gasoline would cost under $1/gallon to produce. It has more energy in it than a gallon of ethanol, so your car can go farther. Politically though, ethanol is probably a loser until the greenhouse gas issue dies down. Same problems as gasoline.

Ragerz writes:


Very interesting facts. According to this Wikipedia article, pure ethanol releases 13% less CO2 mile for mile than gasoline. (Taking into consideration CO2 released in production.) Thus ethanol has the same problems as gasoline, except not as bad. I don't see how ethanol being better than gasoline in terms of CO2 emissions makes it less politically viable. I would think the opposite.

In terms of energy, a gallon of pure ethanol has 27% less energy than a gallon of gasoline. This would mean either 1.) new cars need larger gas tanks or 2.) more trips to the gas station. I am not sure what the effect of this would be in terms of fuel economy with increased gasoline tanks and/or extra gas consumption to get to the gas station. But I suspect it wouldn't be that huge, since most people get gas when they are going somewhere else anyway, rather than making a seperate trip for gasoline and I suspect that a somewhat larger gas tank would not add that much to the total weight of the vehicle. It would be interesting to have data on these points.

Ethanol has one huge advantage over gasoline. It has the potential to decrease revenues to oppressive Islamic governments. What freedom-loving individual could object to that??

Ethanol apparently has another advantage air pollution-wise compared to gasoline, besides lower CO2 emissions. It is, to quote the abover referenced Wikipedia article, "particulate-free."

Finally, another use of ethanol should not be overlooked. It is possible to create hydrogen from ethanol and use the hydrogen as a source of power, rather than the ethanol. I am not sure what the statistics for CO2 polution and energy would be like in comparison.

Overall, to enable these benefits, it makes sense to have some level of subsidization. Since ethanol likely has lower externalities than gasoline, it makes sense to subsidize it.

Dezakin writes:

Ethanol doesnt scale. You cant produce 85 million barrels per day of ethanol equivelant.

Ethanol is not a gasoline replacement. Engines just dont run as well on it.

Ethanol as is doesnt even dent demand. Its agribusiness lobbying at its finest. Coal to liquids have far larger impact on demand and are perfect replacements for gasoline and diesel fuels, and scale up to millions of barrels per day.

In a completely free market (ignoring the non-sequiter about roads and the like) ethanol still would have a place in recycling agricultural waste and for fuel upgrading and processing, as well as the market for biofuels among those who are willing to spend on the 'feel good' luxury, but it will never be a dominant fuel in the market.

RogerM writes:

Ragerz:...ethanol has 27% less energy than a gallon of gasoline.

My research shows ethanol to have 40% less energy than gasoline. Also, if they produce it for less than $1/gallon, why does it sell for about $3.50/gallon in Brazil while the Brazilian government taxes it less than gasoline?

Bob Knaus writes:

Yikes, I'm pretty sure that commenters on this blog are smarter than the average American. If bright people have these kinds of facts in their heads regarding ethanol, no wonder we have such confused biofuel policy.

Here's what I recall, working from memory:

1. CO2 emissions from organically-derived fuels are irrelevant, because plants extract the CO2 from the atmosphere. It is a closed loop. CO2 from fossil-derived fuels (including ethanol) adds to atmospheric CO2 levels, because the CO2 comes out of the ground.

2. Any discussion of fuel price per gallon needs to take into account the 40% lower energy availability from ethanol compared to gasoline. It also affects the size of the fuel tank needed on a vehicle to get the same range between fillups.

3. On a per-acre basis, sugar cane is about 6 times more efficient than corn at converting sunlight to ethanol. Any discussion of the environmental benefits of ethanol needs to factor in the amount of additional farmland required, which could otherwise be left in a natural state.

These seem like simple, relevant facts. Hope they are close to being correct!

John writes:

I am enjoying this debate because it seems to be spilling over into several different topics. The topic I find most interesting is whether or not to government should be subsidizing any particular industry. Many readers of this site would say “no”.

Ragerz writes:
“I don't find your question of what would happen in a "completely free market" relevant, because that is not the world we live in. The government builds roads, which in turn increases demand for automobiles, which in turn increases demand for oil. Why should we take that as a given?”

Ragerz suggests that government is already subsidizing an industry, oil, by participating in another, road construction. Therefore government is obligated to correct its influences in the former industry by encouraging certain alternative industries, ethanol or etc. I would suggest that government’s subsidies in certain alternative industries will only crowd out other potential alternatives that might be better substitutes. For example, I believe electric cars are ideal for urban and suburban markets but not for rural and shipping markets. But because of government support for ethanol and hybrid alternatives, I cannot successfully invest my capital into providing electric cars for the urban and suburban markets due to subsidized competition who are trying to find a “one-size fits all” approach. Thus, I am certain that government is crowding out investment in better alternatives and thus I do not think that Ragerz suggestion that government should right its wrong with another wrong. (Note this is my opinion.)

Incidentally, governmental road construction does not appear to have appreciably grown the hay industry to service any increased demand for horses to travel those roads, but I could be wrong.

Thanks for the interesting thoughts.

Mr. Econotarian writes:

Ethanol cannot be carried through existing pipelines because is absorbs water, unlike gasoline. It is also much more corrosive than gasoline. Thus its cost of distribution is much higher than gasoline.

It is possible that future ethanol pipeline technology would come along, and that new ethanol pipelines could be built (despite NIBMYism), but it is a stretch.

Brad Hutchings writes:

Ragerz... Hey, I'm not dissing ethanol ;-). What I am saying however, is that even when gasoline is close to historical price highs, it is still a fantastic deal in terms of the energy it carries for the price. Even in Europe, with horrendous taxes added on, the market recognizes it as a pretty good deal. Look at a gallon jug of milk. The same amount of gas will take you and your family loaded into a Yukon 18 or so miles on the highway!

It has its downsides, such as geopolitical problems of suppliers, and (potentially) global warming. But ethanol too could have such downside. Brazil isn't exactly a paragon of capitalism. And ethanol isn't hydrogen. Ethanol is problematic for older cars, not compatible with much of the transport and storage systems used to get gas to retail. Without oil sustaining $80+ a barrel, it's just not going to catch on. The only thing that gets oil up that high is crisis, and people of the Earth get worn out on crises quickly. Heck, even Iran probably couldn't saber rattle the price of oil past $61 if it wanted to this month.

Matt writes:

Ethanol is nothing but a jumping off point. Butanol is much better (more energy content, can be used in existing cars up to 100%, can be shipped in existing pipelines), and is finally starting to get a little more recognition. Plug-in hybrids will also be very important. I don't know how much we can scale up biofuels production, but I've heard estimates we can produce 100 billion gallons a year. The U.S. currently consumes 140 billion gallons of gasoline a year.

And if we really wanted an even playing field in the markets, we'd cut off the billions of dollars in tax breaks and subsidies that the oil producers get.

Dezakin writes:

"I don't know how much we can scale up biofuels production, but I've heard estimates we can produce 100 billion gallons a year."

Which is less than 1/10th of global demand, and unlikely to be produced with biofuels anyways. Allways remember the competition:

CTL, capable of millions of barrels per day.
GTL, capable of millions of barrels per day,

High temperature electrolysis of CO2 and steam, capable of billions of barrels per day.

John Thacker writes:

The government builds roads, which in turn increases demand for automobiles, which in turn increases demand for oil.

But the roads themselves are completely paid for out of gasoline taxes and tolls. That's a lot more than one can say for other forms of transportation, which generally do NOT pay for themselves out of user fees.

Kent Gatewood writes:

If Brazil can produce ethanol for $42 a barrel($.73x42 gallons a bbl/.73 energy adj), will they export it or keep the ethanol for the home market until they don't need to import oil.

World demand for oil would fall as would the price of oil thus lowering America's price for imported oil?

K writes:

The US is a huge automobile market. Neither ethanol or anything else is going to replace much of our gasoline consumption within five years and perhaps for a decade.

Ethanol does have an immediate use in car fuel. A small percent of ethanol raises octane which allows higher compression. And that produces more power hence more mileage.

But that higher compression has to be built into the engines by the factory. The current US standard is 87 octane although I recall seeing 85.

Require octane of 90 within two years. Ethanol can be used or not depending on price and refining alternatives. Existing cars will run the same. And the small (relative to gasoline) amount of ethanol available can be put to good use without problems.

Auto makers, being guaranteed 90 octane, can adjust designs and better mileage will follow.

It won't make a big difference but it will help without the massive contortions of mandating and leaping to pure ethanol or 85% blend.

The fact is that nothing is going to make a huge difference this year or next. But some programs make more sense than others.

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