Monday, September 24, 2007

The Feasibility of Biofuels

The October edition of National Geographic Magazine includes a very interesting article on biofuels. I always have to insert a disclaimer when referencing NGM. Several years ago its editor openly stated that they were giving up on attempting objectivity when it comes to environmental issues because “the stakes are too high.” So, while we can’t expect objective reporting in NGM, we can at least derive value by seeing it for what it is.

The article’s author, NGM staffer Joel K. Bourne, Jr. does a very good job of exploring the various possibilities of using biofuels to reduce or replace our dependence on fossil fuels. He examines corn ethanol, sugarcane ethanol, biodiesel, cellulosic ethanol, and even algae ethanol. The illustrated chart side panels accompanying the print article help you wrap your mind around and compare the feasibility of each of the fuels explored.

While corn ethanol is enjoying great popularity in the U.S. at the moment, Bourne says that “even if we turned our entire corn and soybean crops into biofuels, they would replace just 12 percent of our gasoline and a paltry 6 percent of our diesel, while squeezing supplies of corn- and soy-fattened beef, pork, and poultry. Not to mention Corn Flakes.” The problem is that you only get an output ratio of 1.3 to 1 for corn ethanol. You expend almost as much energy producing the ethanol as you get out of it. Also, the production process turns out to be less than environmentally friendly.

Brazil has enjoyed substantial success with sugarcane ethanol, which has an output ratio of 8 to 1. But the U.S. can’t grow sugarcane like Brazil does. The production of cane ethanol in Brazil takes both an environmental and human toll; mainly it seems from the article, due to archaic harvesting methods and expanding croplands. One public official in Brazil is quoted as saying, “If alcohol is now considered a 'clean' fuel, the process of making it is very dirty.” Not to mention the fact that Brazil was only able to develop an ethanol production and distribution system under the heavy hand of its former dictator.

Biodiesel comes from soybeans in the U.S. and from canola in Germany. Biodiesel is derived from a chemical process rather than a distilling process. It has an output ratio of 2.5 to 1, so it’s better than corn by double. But it’s awfully expensive.

What we could grow in the U.S. that might produce well are perennial prairie grasses like switchgrass. These grasses can grow on marginal lands and could be used to improve soil health. Production methodology is still developing. The most common methodologies have a 2 to 1 output ratio, but developing processes promise a ratio as high as 36 to 1. It “could produce as much ethanol per acre as sugarcane.” But, like most other biofuels, they still have to learn to make it a lot cheaper for it to work.

The big pie-in-the-sky resource that the article discusses is algae. They’ve been able to use algae for smokestack carbon dioxide scrubbers, but nobody has quite figured out how to feasibly produce ethanol from it. Oh, they’ve produce algae ethanol, but Bourne doesn’t list the output ratio and he suggests that the process is currently just too expensive. But some keep working on it because the potential is massive. Algae can be grown in any U.S. climate, and unlike annual crops, can be harvested continuously.

Even with all of these possibilities, Bourne says, “There is no magic-bullet fuel crop that can solve our energy woes without harming the environment.” He also quotes one scientist that is a critic of biofuels as saying, “Biofuels are a total waste and misleading us from getting at what we really need to do: conservation.”

Bourne is more careful on environmental evangelizing than many other NGM authors. He carefully weaves it into his writing rather than bashing you over the head with it. He writes more like a reporter than an editorialist. Bourne concludes the article by noting that “the United Arab Emirates has launched a 250-million-dollar renewable energy initiative that includes biofuels,” and then he opines that this is “perhaps a sign that even the sheikhs now realize that the oil age won't last forever.”

Our fossil fuel industry enjoys massive government subsidies, ostensibly because our national economy relies on fossil fuels. But this type of protectionism raises the barriers for entry into the market. Subsidies stymie competition, so they are ultimately counterproductive. The same holds true for the subsidies currently being thrown at corn ethanol production.

Government has a role in encouraging competition rather than discouraging it. Alternative fuels seeking to compete with fossil fuels already face huge barriers to market entry, including a deeply entrenched and ubiquitous distribution system. Rather than trying to improve the chances of alternatives through subsidies, government should discontinue its programs that artificially stymie competition and promote monopolies in the fuel industry. We might be amazed at what kind of presently unanticipated developments would result from this freedom.


Charles D said...

I am very dubious about biofuels, especially when they divert food products into fuel, thus driving up the cost of food.

I also agree that the government should stop subsidizing the oil industry either directly or indirectly through tax breaks, etc. However, that will not be sufficient to eliminate the barriers to market entry for alternative fuels.

A major government program to subsidize the research and development of marketable alternative energy sources would be needed to level the playing field. Of course, we need to be realistic and understand that such a change is not possible in our political environment. We have oilmen in the White House, and the fossil fuel industry and those dependent on them have enormous clout in Washington and can stymie any serious effort to wean us from the oil teat.

Scott Hinrichs said...

This op-ed piece promotes energy independence. The writers do not suggest an oil free future, but they do write, "Oil’s monopoly on transportation gives intolerable power to OPEC and the nations that dominate oil ownership and production. This monopoly must be broken."

Unfortunately, the article is long on patriotic sounding rhetoric but short on details, other than suggesting more fuel efficient vehicles. Their website has more details. But nothing they've got there is a magic bullet either.

NonArab-Arab said...

Few points: (1) Biofuels and many alternative fuels (think solar subsidies in California and New Jersey) don't face barriers to entry from government intervention, they are pretty much only around because of government subsidies and volume mandates. Ethanol is a prime example. Last summer as the slapdash energy bill had come into effect and refiners knew they wouldn't get MTBE liability protection anymore, the only place to turn to get sufficient octane (that 87/89/91/93, etc. number you see at the pump) was ethanol. Farmers had been ramping up new plants knowing that a volumetric mandate would guarantee a market, and then the MTBE issue just made it more urgent. More than that, the MTBE issue created an even bigger than normal spring gasoline market panic (that's the time of year when refiners are doing maintenance and the wholesale and futures gasoline markets go berzerk wondering if there will be enough put into storage by Memorial Day to ensure a summer cushion) because ethanol as its only significant replacement can't be blended and shoved into a pipe for delivery from Texas to New York - it has to be splash blended at the last minute before going out to the gas station otherwise it'll separate. That meant supplies of finished gasoline were at the mercy of there being sufficient railcars and trucks to get the stuff from Iowa to New Jersey or Dallas or LA and that any hiccup or logistics bottlenecks could (and did) cause market spikes. The whole Jersey Turnpike even went dry for a brief period because Sunoco (which somehow has finagled a local retail gasoline monopoly on the turnpike) had problems with the new ethanol logistics. Anyhow, longwinded, but point is last summer the mandates and MTBE laws worked together to guarantee ethanol a market and very high prices. This year? Totally different story. Every farmer and his mother has jumped on the ethanol bandwagon, massive new supplies are coming online, the current mandated volumes have almost been reached well ahead of schedule, and margins for these small ethanol plants are running near break-even or even negative. The only thing keeping many of these guys in business is either being one of the bigger players (think Verasun or Pacific Ethanol) with a more efficient process, or else being in the right time and place with the right process to profit slightly more than the next guy from the tariff on Brazilian ethanol. That tariff (I think it's 52c/gallon, very close to that if I'm off) basically guarantees a government-subsidized cost advantage over far more efficient Brazilian ethanol (though Brazil has plenty of government regulation issues too). So the Iowa corn farmers are hanging on by the skin of their teeth at this point only thanks to government subsidies. Don't get me wrong, there's lots of issues to debate on pros or cons here, but from a sheer market perspective, that's what I see happening.

(2) Yes, the administration is very cozy with the US oil industry, but having worked directly or indirectly with several key administration players, I can tell you their grasp of how oil and energy markets work (and the strategic implications) is just plain terrible. Keep in mind, Cheney came from Halliburton, an oil service company that saw lots of project management, not an integrated major or even midsize independent that deals with oil flows and market economics on a daily basis. Bush's "experience" if you can even call it that was as a failed teeny-tiny wildcatter. My point is that these guys are buddy-buddy with lots of industry folks and as such give them lots of access and influence, but don't mistake that to think they understand the market or the strategic implications of oil flows very well. I can tell you from direct experience they don't.

(3) All the energy independence talk and breaking OPEC's dominance is silly in the extreme. I've never seen anyone who understands oil supply and demand balances ever show anything but scorn for that type of silly discussion. OPEC is an organization that represents a market force that has existed in the oil industry in different forms for over a century. First it was John D. Rockefeller and Standard Oil, then it was the so-called Seven Sisters oil soft cartel, then it was the Texas Railroad Commission, then finally in the 70s it was OPEC. What I am talking about is the fact that a totally free oil market as existed in the early days of the industry quickly showed itself vulnerable to massive boom and bust cycles. Prices that gyrated incredibly violently. Producers and consumers disliked this reality for obvious reasons and a sort of unspoken compact (resisted and not always followed to be sure, but generally stable with occasional sharp exceptions) was formed whereby the key marginal oil producers (i.e., those with spare capacity) managed and restrained production in order to keep prices stable. They of course erred in their own favor as to what they felt represented a "fair" stable price, but constrained by consumers and plenty rich off of this rent-seeking activity (remember, it's an extractive industry, not a productive one), most folks were happy with the price level most of the time. The Rockefellers did it, the Seven Sisters did it, and finally the Texas Railroad Commission did it, all because in their day and age they controlled the marginal barrel of production and had an interest in a stable price. In the late-60s to early-70s the geology shifted. Rising demand in the US meant that Texas no longer had the world's marginal barrel of production and most importantly, it ran out of spare production capacity. The Texas Railroad Commission removed the government-imposed production restraints for good because every barrel was needed in the US. That's when the power shifted to OPEC and the Persian Gulf producers in general. They had massive spare reserves and spare production capacity. They inherited the role of all the prior cartels. That geologic and market reality has not changed. You can replant every acre of wheat with corn and produce every barrel of ethanol possible from that corn and you will only dent that reality for a few years, not change it. The only way to change it is an entirely new energy paradigm, be it hydrogen, algae, fusion, whatever. In the meanwhile, the conventional oil reserves are running lower, dependence on OPEC is growing, demand continues to grow globally at breakneck speed even with these high prices. No doubt an economic downturn will come and another boom-bust cycle be revealed, but the tightness will return and biofuels won't change the game. I don't want to dismiss them entirely, my view is that to prevent a global depression based on energy supply shortages, we need every little bit we can get. Some from biofuels, some from other alternatives, some from greater energy efficiency, etc. But all that simply buys you another 50-100 years of dependence on OPEC's marginal barrel. Fail to do that and you get a spike to $1000/barrel oil, $50/gallon gasoline, people powering their cars with garbage-to-liquids technology because even it is cheaper than contentional fuels, and a global depression and painfully forced changes to a new energy paradigm with a lot of people dying in the process and civilization-level destruction and change. But do all these little things to add new fuel supplies and you buy yourself time to hopefully do a managed transition to a new energy paradigm. Dependence on OPEC does not disappear though unless you're willing to shoot yourself in the kneecaps to get it.

Scott Hinrichs said...

NAA, Thanks for the analysis. Some of what you write about (especially the MTBE) is discussed in the NGM article. Your discussion of how cartels have provided price stabilization provides important insights.

I do have a formatting suggestion. You may want to consider dropping in paragraph spaces more frequently to make your writing more reader friendly.

NonArab-Arab said...

Yeah sorry, I get going and just can't shut up or organize :)