Commentary

Is Ethanol the ‘Energy Security’ Solution?

Politicians often refer to ethanol as a “renewable fuel” that could secure the United States’ “energy security.” They author legislation with such titles as “The Renewable Fuels Act” or “The BioFuels Security Act” to direct more taxpayer subsidies at the ethanol industry. The media often picks up on this language, describing ethanol as “green fuel” that can provide America with “energy independence,” as contrasted with oil that the United States must import from Canada, Mexico, the Middle East and Latin America.

But is ethanol a truly renewable energy source, and is it more secure and dependable than oil? The answer to both of those questions, surprisingly, is no.

First of all, ethanol is not currently produced in a “renewable” manner — the production process is almost completely dependent on fossil fuels such as coal, natural gas and diesel. Furthermore, a recent study published in the Proceedings of the National Academy of Sciences shows that even the nonrenewable production of ethanol could displace at most 14 percent of U.S. gasoline consumption — if all of the corn grown by American farmers were devoted to ethanol production.

If ethanol were produced in a manner that did not require fossil fuels, only a trivial amount of fuel would make it to the pumps. To see why this is so, consider a 2002 U.S. Department of Agriculture study — one trumpeted by ethanol proponents — that estimated how much energy is used at each stage of the ethanol production process. If we assume that the USDA’s calculations are correct, but instead of using fossil fuels to provide the energy at each stage we suppose that a portion of the produced ethanol itself is used, we make the process self-contained or sustainable. In this case, processing all the corn in the country would displace about 3.5 percent of our gasoline consumption. That is about as much as the Natural Resources Defense Council estimates we would save if we simply inflated our tires properly. Also, bear in mind that the United States is responsible for about 70 percent of global corn exports, so even small diversions of corn supplies to ethanol could have dramatic implications for food prices and the health of the world’s poor.

Another ethanol shortcoming is that it is not very secure. While it is true that U.S. corn yields have increased substantially over the past few decades, researchers have observed that the year-to-year percentage gain has steadily declined. The rate peaked around 4 percent in the early 1960s and was less than 1.5 percent in 2001. That growth rate is not expected to keep up with food demand.

Moreover, variability in U.S. corn yields appears to be increasing, a point that is underscored by this summer’s drought. Researchers predict that, even under the best-case global warming scenario, corn yields are likely to decline by 22 percent in the short-run.

For the sake of argument, let us be optimistic and assume yield variability will remain within historical parameters. We can then use data from the National Agricultural Statistics Service to estimate the frequency and size of ethanol disruptions that we should expect in the future. We then can compare this variability to the variability in oil imports.

Specifically, let us consider the time period 1960-2005, a period that included, among other oil shocks, the Six-Day War, the Arab oil embargo, the Iranian revolution, and the outbreak of the Iran-Iraq War. If variations in the supplies of both corn and oil during this period are a reasonable guess about future variability, then in any given year we should not be surprised if corn yields decline by 11.9 percent. In contrast, a typical decline in Middle Eastern oil supplies would be only 6.8 percent. Moreover, in one out of every 20 years, we would expect corn yields to decline by 31.8 percent, while the corresponding disruption in the oil supply would be only 14.9 percent. Thus, based on history, displacing gasoline with ethanol would exchange geopolitical risk with yield risk. History suggests that yield risk is about twice as high.

Lastly, relying on ethanol exposes the economy to an entirely new risk: the link between ethanol supply disruptions and ethanol demand shocks created by their common dependency on weather conditions. For example, a summertime heat wave would increase the demand for ethanol as drivers travel longer distances on vacation to escape the heat, spend more time on congested roads, and use their cars’ air conditioning more intensely. At the same time, because corn yields are especially sensitive to rainfall shortages during July and high-temperatures during August, the heat wave also would likely reduce corn yields, thereby increasing the price of corn and the cost of producing ethanol. In this way, weather would adversely affect both the supply of and demand for ethanol. Gasoline does not suffer this risky linkage; though drivers would still travel further on vacation and use their air conditioning during a heat wave, there is no apparent connection between summertime heat and the supply of gasoline.

The actual strength of this weather-induced relationship is unknown, but it nevertheless provides another reason to suspect that there may be better energy alternatives to ethanol. Perhaps, instead of using coal and natural gas to create ethanol, it may be more efficient to use natural gas or liquefied coal to power cars directly. Or, maybe, if we want a renewable solution, we could use solar panels to generate electricity for electric cars (solar panels capture far more solar energy than corn). These may or may not be good alternatives, but the point is that there are alternatives to ethanol that consumers should explore. Because the technologies and energy markets are incredibly complex, we shouldn’t have great confidence that politicians, using billions of dollars in subsidies, will pick the best one. Legislators could better serve the public by mandating the use of alternative fuels or a cap on particular emissions and then allowing the market to reveal the best options for accomplishing those goals.

James Eaves is an assistant professor in the Department of Finance and Insurance at Laval University. Stephen Eaves is the vice-president of Eaves Devices. This essay summarizes an academic article that will appear in the journal Energy Policy and the Cato Institute’s Regulation Magazine.