Ethanol On Life Support

With overall gasoline consumption declining and with inventories still high, the ethanol industry will be lining up at the Federal trough to accelerate the mandated move to E-85. This mandate will be negative for food prices and for environmental (soil, water, and air) quality. It is somewhat disappointing to see Cargill dabbling in trying to resurrect ethanol plants, when it was Cargill that was among the first to rightly point out the folly of putting food into the fuel tank of an SUV. This might have been a distressed asset play, but it looks like their experiment may be coming to an end.

E-85 would require substantial improvements and upgrades to the pipes, seals and fittings of gas stations, a sector that is not very attractive for investment right now. The auto manufacturers are wondering how much the E-85 mixture would affect the life of our expensive catalytic converters and other engine components. Only the Renewable Fuels Association would argue that ethanol would put us on the path to energy independence.

Poet, one of the consolidators in the ethanol industry, has reportedly lowered their pilot production plant costs per gallon of cellulosic ethanol to about $2.35, which is progress. However, the costs of having reliable cellulosic feedstocks in proximity to a nationwide plant system would intuitively seem uneconomical. Cellulosic is preferable to corn-based ethanol, but it is a second-best choice. If we were serious about giving life to this biofuel, we should probably eliminate the tariff on Brazilian, sugarcane-based ethanol. This would take the pressure off corn prices and stop a mad rush to increase acreage for this crop that has such intensive input demands for water and fertilizers.

Like NINJA mortgages, corn-based ethanol was an idea without environmental or economic benefit that was hyped completely out of proportion. Let's not be afraid to take the patient off life support.