What are the limits on ethanol production?
According to NREL’s John Sheehan, at this months Energy Analysis Brown Bag, ethanol production from corn is set to reach 4 billion gallons this year, and 7.4 billion gallons per year by 2011, based on current and planned production capacity. (As an aside, on August 10, the Douglas County News-Press published a very pointed editorial from him on the travesty of IREA funding disinformation about global warming.) Given that a bushel of corn will produce 2.8 gallons of ethanol, that will make ethanol demand for corn in the
US 1.4 billion bushels in 2006, and 2.6 billion bushels in 2011. Since the annual corn production in the
US is around 11 billion bushels, ethanol production is already having a significant impact on the price of corn for food.
As Lester Brown, President of the Earth Policy Institute pointed out in the Aug 21 issue of Fortune(the particular article I’m referring to does not seem to be available online), the market is already setting the price of agricultural commodities at their oil equivalent value.
Unlike Lester Brown and John Sheehan, I think this will be a good thing for the world’s poor. Yes, food prices will go up, but the poor are not only consumers of food; they are also producers and potential producers. In the
US, the percentage of poor rural residents has been consistently higher than the percentage of poor urban residents throughout the last 50 years. In
Africa, the world’s poorest continent, farmers can often not make a living because they cannot compete with subsidized first-world farmers.
If world food prices rise because of demand for biofuels, this may at last reverse a great injustice, where subsidies for first world farmers have prevented third world development. Allowing myself to get wildly optimistic for a moment, if fuel demand permanently boosts agricultural commodity prices (which seems very likely), that might even open the way to removing subsidies for European and North American farmers. The Doha round of world trade talks failed in large part because of rich world unwillingness to cut agricultural subsidies, which is a great shame, because cutting subsidies would be a great boon to first world taxpayers, as well as third world farmers.
I think the best way to play the biofuels boom as an investor is by betting on the trend of rising agricultural prices. While large agricultural companies like ADM have already seen the benefits of this trend, the currencies of third world agricultural based economies should benefit, as well as the price of agricultural land in the US. Much US farmland may benefit twice from renewable energy, since land in windy areas also has the opportunity to gain income from wind leases. This was a large part of the theme of the Intermontain Harvesting Energy Summit I attended this spring.
On the downside, stimulating agricultural production can lead to deforestation. Greenpeace can push for all the moratoriums it wants on soy from deforested areas, but that won’t keep soy oil or ethanol from deforested areas going into our tree-hugging gas tanks. Global commodities, such as soy, corn, soy oil, and ethanol will just go to countries and companies who don’t participate in the boycott, removing their demand from the world market, and lowering the world price for everyone else. This is the same principle we use in our favor when we buy Green Power: the actual electrons running my laptop are probably from a coal fired plant, no matter if I pay for green power or not. What I’m actually purchasing with green power (in theory… may green power markets still have kinks that need to be worked out) is the fact that I’m stimulating green power production as much as I would if all my power actually did come from green sources.
Another worry about the rapidly rising biofuels capacity is distribution. John Sheehan’s estimate of 7.4 billion gallons of ethanol in 2011, and 700 million gallons per year of biodiesel would amount to a around 5% of gasoline consumption and less than 2% of diesel consumption. Since the current fleet of engines can run with no problem on 10% ethanol (in
Brazil “gas” typically contains 25% ethanol.), we would not need to use any E85 to use all the planned ethanol production. Similarly, B20 can be used in all but the coldest parts of the country year round, so converting just 2% of diesel consumption to biodiesel could also be accomplished through existing distribution.
I find it likely that the constraints on biofuel production will come in the form of the price of the feedstock, which will be driven by oil prices.
While ethanol and biodiesel will be necessary parts of weaning us off our dependence on oil, current technologies cannot go very far to getting us there without a much greater push towards more efficient automobiles. Raising average fuel economy by just 10% would reduce fuel use and greenhouse gas emissions over twice the amount the flat-out biofuels production we’re seeing will.
We can easily double the fuel efficiency of our current fleet with a combination of plug in hybrids (powered by cheap wind) and more efficient engines. Only when we’ve done that can we hope that cellulostic ethanol and biodiesel can start to supply our remaining fuel needs.