Food Prices and Ethanol--Posner's Comment

Thomas Malthus, though like the rest of us not very good at predicting the future, was a brilliant economist. He was wrong that the human population would increase geometrically (he did not consider contraception as a means of voluntarily limiting population) and the supply of food only arithmetically (he did not foresee advances in the technology of food production). But he was right that achieving an equilibrium between population and food could require starvation, war, or other unattractive methods of limiting population. In this he foreshadowed natural selection, as Darwin acknowledged. Rising food prices are doubtless causing malnutrition and even starvation in some backward countries today, and if they continue to rise, more people will starve. Becker is correct that sensible policies can moderate the price increases, and perhaps restore the trend toward lower food prices, but who can be confident about the adoption of sensible policies? An important factor in recent food price increases is the ethanol subsidies. Ethanol is a "clean fuel" in the sense that unlike gasoline its burning as a fuel does not produce the conventional pollutants, including carbon monoxide. It does produce carbon dioxide, the principal culprit in global warming, but this effect is said to be offset by the fact that the corn from which ethanol is manufactured absorbs carbon dioxide, as trees do. However, the manufacture of ethanol requires a great deal of energy (more energy, some critics believe, than the ethanol itself produces), and in China for example that energy is supplied mainly by coal-burning plants, a fertile generator of carbon dioxide. Moreover, deforestation by fire, common in the Third World, is increasing in order to provide more cropland for the production of ethanol, and deforestation by fire is a major source of atmospheric carbon dioxide. So it is doubtful that ethanol is a significant part of the solution to the problem global warming--indeed it may be part of the problem--and in any event the subsidy is more often defended as an answer neither to conventional air pollution nor to global warming, but instead as a means toward making the United States self-sufficient in energy. The federal subsidy alone is currently running at a level of $7 or $8 billion a year. There are state subsidies as well, and, more important than either type of direct subsidy, there are indirect subsidies in the form of legal requirements that gasoline producers purchase a specified amount of ethanol to mix in with their gasoline. A federal law enacted in 2005 doubled those requirements and is believed to have been a big factor in the ethanol boom and resulting recent increase in corn prices. Ethanol could be bought cheaply from Brazil, but high tariffs prevent the Brazilian and other foreign producers from competing with our farmers and producers. We could not achieve energy self-sufficiency from our own production of ethanol. Even if all the corn produced in the United States were used to produce ethanol, which is unthinkable, the amount of gasoline consumed would fall by only 12 percent. (This is a little misleading; an enormous increase in the demand for ethanol would lead to more cropland being switched to corn from other crops. But that could result in much higher food prices.) Moreover, the amount of other fossil fuels consumed would rise because of the energy requirements for the production of ethanol. We could as I said increase the percentage of our total fuel consumption that is supplied by ethanol by buying ethanol from abroad, and while that would make us dependent on other countries for an important part of our fuel supply, it would not be dependence on other oil-producing countries. That would be a benefit. Because of the instability of many of those countries (such as Iraq and Nigeria), and the hostility to the United States of some of them (such as Iran and Venezuela), there would be value in achieving energy independence, or at least a good deal more independence than we have today. But we cannot achieve it through the ethanol subsidy. We can achieve it (at least insofar as ethanol can contribution to the solution) only by relaxing the tariff on imported ethanol. But this sensible measure seems blocked by one of the absurdities of our political system--the Iowa caucuses, which extract pledges from all plausible presidential candidates to preserve and indeed expand our home-grown ethanol industry--and, more broadly, by the excessive influence of our tiny farm population on U.S. policy. As a result of these factors, ethanol subsidies are bipartisan. Most ethanol is manufactured from corn. The United States is the world's largest exporter of grains, and exports of our corn account for one-fourth of total worldwide grain exports. As a result of the increasing diversion of U.S. corn to the production of ethanol, food prices in the United States and the world have soared. It is estimated that by the end of this year, food prices in the United States will have grown in real terms by almost 5 percent (a 7.5 percent nominal increase in price minus a 2.6 percent inflation rate). Technology is more likely to bail us out before our political system does. What is called cellulosic, as distinct from corn, ethanol--the production of ethanol from a variety of plants, other than corn--holds promise for enabling ethanol to be produced without forcing up the price of corn, but is not yet commercially feasible.

Comments

[Jeff]

Ethanol is clearly not the answer. Instead of talking about ethanol, perhaps you can blog about the macro-energy policy instead. It seems as though politicians are making decisions within a vacuum.

[Jack]

Jeff: Amen! Why are we not having a national debate as to where we'd get the best bang for the buck for our $8 billion plus now largely wasted on ethanol subsidies? Perhaps, the best to be said about it is getting equipment ready for ethanol delivery and consumption that may be mfg by far more efficient means later. For now it appears "the vacuum" is Archer Daniels, Dwayne Andreas and a very powerful farm lobby.

Currently my own nomination for the most readily available, cheapest, and cleanest "alternative" is that of conserving some of what we now waste. Conserving would not increase food prices and would tend to lower the prices of existing energy --- assuming a working market exists which I doubt.

[ChinaCoalWatcher]

According to the EIA, the US goes through 150 billion gallons of gasoline a year (and this doesn't count all the other uses of oil including diesel fuel and kerosene). To produce the equivalent energy content in ethanol would require the harvesting of 600 million acres of corn (vs current record planting of 90 million) - nearly a million square miles and more than all the farmland in the US. Even with Brazilian sugarcane ethanol - over 300 million new acres of production (or about a quarter of the Amazon rainforest) would be required to replace oil for US gasoline consumption. Even cellulosic ethanol would require the dedication of hundreds of millions of acres to the production of only a small portion of the world's demand for transport fuel while severely curtailing the production of calories available for humans and livestock.

Even if that enormous task were undertaken - it would only "free up" about 8 million barrels per day of oil production (about 10%) for other purchasers, and one would expect huge emerging economies such as China and India to very quickly make up the difference.

So the economic effect might not be all that great for marginal consumers of oil - but it would potentially be catastrophic for marginal consumers of food! At any rate, eventually and probably before mid-century, the oil will start to run out and hopefully we'll develop some more preferable options by then than indirect population control.

[Lee]

Another considered and informative pair of posts.

But why the newspaper column style, free-floating from anything that has been said in the blogosphere this week? You'd attract a more sophisticated audience if you dropped it and engaged the other elite economics bloggers --- Brad DeLong, Tyler Cowen, and Paul Krugman. They're part of a friendly but critical conversation that has gained a lot of media influence.

You guys could really tear them up if you'd just engage! Please!

[Lee]

Also, where did you read about cellulosic ethanol--- in that special that the journal Nature ran a few months ago on switch grass and other alternatives?

If so, a link would be appropriate.

[Jack]

It's interesting that the topic of food prices kicked off with several energy posts, but not surprising since the US is subsidizing running our massive fleet of gashogs on food. So I thought some rough conversions might be in order:

A gallon of gasoline is about 115,000 btus

3000 nutritional calories are about 12,000 btus

So for foods made directly from grains or corn driving a 10mpg gas hog one mile consumes a day's worth of calories. As feedstocks, perhaps it takes five or more pounds of grain to grow a pound of meat so you could drive 5 miles for the three pounds of pork that would provide 3000 calories.

And the farm lobby gets away with subsidizing this with our tax dollar?

[Raul]

Most of the ethanol usage analysis seems unanimous about the fact that ethanol replacing fossil fuels is a joke! Really! One only needs to see the numbers to see how impossible the whole idea is. Economists, policy-makers, oil-majors everyone agrees.

Who does not agree? 1. ADM and the farmers who have a vested interest in ethanol based technology. 2. University academics working on these technologies; another vested interest.
3. Politicians and misinformed "greens"

The worst argument I heard has an apologetic tone of the sort: "Ok we know it does not work right now. But look things will get better and so you better pump money in here or else how could we come up with something better?" This one usually comes from the academics!

What is missing from the whole analysis is one word: "nuclear"! I strongly feel that is the one source independant from anything else and fits all desirable objectives: (1) Geo-political energy independance (2) Greenhouse emissions (3) Fossil fuel independance (4)No impact on fuel supply.

I realize that nuclear options have drawbacks but I think they have been overhyped. Any comments or is my position too radical! :-)

[Raul]

Sorry! I meant to write:
(4)No impact on food supply.

[neilehat]

All one need do is look at the numbers:
Corn Ethanol: Prod.cost $1.09 per gal.
Energy balance 1 input unit, 1.3 out
Gas cost equivalent $3.71

Cane Ethanol: Prod.cost $0.87 per gal.
Energy balance 1 input unit, 8 out
Gas cost equivalent $3.88

Cellulosic Ethanol: Prod.cost experimental(unknown
Energy balance 1 input unit,
2-36 out (depending on tecno
typ.)
Gas cost equivalent unknown

(data taken from Nat.Geo, Oct.2007)

So now the question becomes, which is more cost effective, efficient and is commercially viable at present. Take your pick, but my favorite is coal conversion technology, either gasification or liquifaction, there are enough coal reserves to last us for a few years and give the biochemists time to get the technology worked out and efficient.

[neilehat]

All one need do is look at the numbers:
Corn Ethanol: Prod.cost $1.09 per gal.
Energy balance 1 input unit, 1.3 out
Gas cost equivalent $3.71

Cane Ethanol: Prod.cost $0.87 per gal.
Energy balance 1 input unit, 8 out
Gas cost equivalent $3.88

Cellulosic Ethanol: Prod.cost experimental(unknown
Energy balance 1 input unit,
2-36 out (depending on tecno
typ.)
Gas cost equivalent unknown

(data taken from Nat.Geo, Oct.2007)

So now the question becomes, which is more cost effective, efficient and is commercially viable at present. Take your pick, but my favorite is coal conversion technology, either gasification or liquifaction, there are enough coal reserves to last us for a few years and give the biochemists time to get the technology worked out and efficient.

[Jack]

Neil: Usually Nat Geos numbers are pretty good but these seem a bit curious.

First, knowing corn eth has a direct subsidy that is most of a buck, how do they come up with just one buck for production cost?

Then with the far better return in energy invested how does the lower "production cost" of cane ethanol end up being pricier that corn?

I'm puzzled.

[neilehat]

Jack, OK let me try and explain the numbers. Prod. cost is all the costs (raw material, labor, utilities, maintenance, capital, loan interest, etc) that are all bundled together; that cost you see is the cost that must be charged to break even. "Gas cost equivalent" is the cost of the product in comparison to the cost of a gallon of gasoline. The difference lies in the fact of the "energy density" of the product. As an example, gasoline contains "3" energy units per volume/mass unit, whereas ethanol contains only "1" energy unit per volume/mass unit. So, in order to get the same energy output of 1 unit of gasloine one must use 3 units of ethanol. Now, the energy density of corn based ethanol is slightly higher than cane based. So that should explain the price differential.

Another consideration, is that ethanol fuel tanks will have to increase approx. "3" times in size in order to compensate for its lower energy density. That's one of the reasons, why E85 is being developed and marketed. So that the energy density issue is not so much of a problem.

It's all really all a simple problem in Science and Math.

[Jack]

Neil: Thanks for trying clear things up but the waters seem even muddier.

Perhaps you're using the "3" as an example, however ethanol with 80k btu/gallon is only 40% less energy dense than 115k btu/gallon gasoline. And we KNOW it's more expensive (by over a dollar) to produce a gallon of ethanol than a gallon of gasoline today. So, an 11.5 gallon tank would be all that would be needed to replace an 8 gallon gasoline tank.

The sugar cane numbers are even murkier. Both the conversion of corn or cane has labor and capital costs in addition to the cost of the raw material inputs, but cane uses one gallon of existing fuel to birth 8 gallons of new fuel. Especially as Geo reports less "production costs" for cane as compared to the miserably inefficient corn process it's hard to imagine why the cane product emerges as being more costly.

As a short cut to the math I'd submit that were Brazil a corn producing nation they'd not come close to being able to run most of their vehicles on ethanol. The current corn process is nothing but a government subsidized "make work" program in which the small energy gains are eaten up by labor and capital costs.

I remain cautiously hopeful that gains will be made in the future, but for now would think it a much better use of $8 billion in annual, and growing, subsidies to help Mexico update its sugar production and buy our ethanol from them which has the side benefit of keeping a couple million Mexicans employed at home. Ahh, but a shame they don't have a powerful lobby.

[jeff]

A better use of subsidies would be to offer a billion dollar prize to the scientist that comes up with an efficient gasoline replacement.

Let the free market work.

[Jack]

Jeff, The prize is much larger than that; currently the US market for crude oil alone is over $700 billion a year. A patent would be better than owing all of google. Pesky problem though finding a cheaper way than tapping pools in the ground.

[neilehat]

Jack, yes it was an example of how it works and it seems to have helped you figure it out. Come now, get into the modern age, it's no longer BTU's but kJ (kilo-joules) or kWh (kilo Watt hours). I'm glad you did the research I no longer have time for. We're much to busy upgrading BP to handle Canadian oil sands or XOM to process liquified coal into fuel.

[neilehat]

Jack, yes it was an example of how it works and it seems to have helped you figure it out. Come now, get into the modern age, it's no longer BTU's but kJ (kilo-joules) or kWh (kilo Watt hours). I'm glad you did the research I no longer have time for. We're much to busy upgrading BP to handle Canadian oil sands or XOM to process liquified coal into fuel.

[Wes]

A better use of subsidies would be to offer a billion dollar prize to the scientist that comes up with an efficient gasoline replacement.Let's say there are 100 groups capable of winning the prize. Each group would then spend be reasonably expected to spend 1/100th of the total prize on their research. That means you would have 100 groups each spending $10 million on energy research. If each group is trying essentially the same approach then at the end of the day you only get $10 million worth of research for your $1 billion expenditure.If you could coordinate the research and ensure that each group tried something different then you might approach the limit of getting $1 billion worth of research for your $1 billion expenditure. On the other hand, if you could identify the most competent group ahead of time then you could just pay that group $10 million to do $10 million worth of research.While payment on success is an easy way to identify the most competent (or luckiest group), if you can identify that group before anyone has embarked on the project then you avoid (indirectly) paying for duplicated effort.Let the free market work.The thing about research is that it only needs to be done once. When you're making sandwiches, duplication of effort is fine because not everyone can eat exactly the same sandwich - everyone needs their sandwich. On the other hand, everyone can share exactly the same research discovery. Once you've discovered a better alternative to gasoline, everyone on the planet can use it - duplicating the effort and making the same discovery again is wasted effort.

[neilehat]

Wes, Just one question, and what are we to do with the 100's of billions if not trillions of dollars invested in the energy production and distribution networks that already exist? Simply walk away and pretend that it doesn't exist? It would make the Sub-prime mortgage debacle look like a minor bankruptcy proceeding. If not pull down the entire international banking and finance system. Which would make the Great Depression look like picnic.

As for the "Free Market" it has never existed in the Energy industry. The reality is more like a symbiotic relationship between Industry, Business & Finance, and Government. To set one against the other in a true free market system is to force all of us to freeze and starve in the dark so to speak.

As for the 10 million research grant, that's just the starter for leasing space and office equipment. That doesn't even include setting up the labs, purchasing equipment and hiring the required talent. You might want to increase that by a factor of a hundred.

Just one last word, like Faust we've made our bargain with the devil and we can never go back.

[Jack]

Neil, Your resistance to a quantum leap in energy efficiency is a curiously protectionist argument that runs counter to most of my understanding of economic principles. The last century has really has been one of "creative destruction" as farming and mfg processes have been automated and dislocated millions of employees and rendered older investments worthless. Today, Intel and others compete with, and destroy, their own last generation of chips each time they spend billions creating new, faster and more efficient new chips.

What would happen if one of the "prize recipients" did patent a process that created energy pellets that replaced a gallon of gas that sold for say thirty cents? Obviously the change would not happen over night; as with even the slightly different product of ethanol equipment and delivery systems all have to change.

Of course, as you mention your business would take a hit and a big one over perhaps a fairly short time, but society and our economy too would benefit. Just as outrageous "war time" price gouging has put the brakes on our economy, the opposite, far cheaper energy would mean all of those dollars now enroute to the kings of OPEC would be spent in our own economy with some 20% going to re-fill our depleted Fed Treasury.

The people in oil today? They'd follow many others who were displaced by computers and other automation. The "lost investment?" Some would be salvaged, but much would go the way of copper wire and "switchboards" when fiber and chips replaced them. Result? nearly free telephone service and a bundle of new and wealthy companies.

The other way to look at it is to imagine the far cheaper energy is the norm. Then imagine someone saying "since unemployment is high" let's invest in coal and put folks to work blowing the tops off mountains and crushing coal. In short, ours, and the world's economies are well past the post Depression era of "creating jobs" via "make work" projects and, instead is in need improvements in efficiency and productivity.

But for now, despite oil and coal being outmoded sources of energy that are increasingly destructive to the environment there is nothing on the near horizon that threatens to replace them. In fact, as the price of oil soared past the $50 mark it opened the door for the yet more labor intensive and environmentally destructive processes of flushing oil out of tar sands and liquefying coal along with trying to run our fleet of gas hogs on heavily subsidized and costly food.

Let's hope that a new source or many new sources do come along soon. Jack

[neilehat]

Jack, We live in the "Here & Now", not some romanticized fanatasy of the science fiction writer. The problem is here, the problem is now, and it must be solved NOW. We can't afford to wait for some mythical silver bullet to come along and solve the problem for us. In order to do that, we have to use the resources and technologies available and at hand. As for your "energy pellets" they already exist as nuclear fuel, but due to the collapse of the symbiosis between industry, finance and government, that technology has been put on the shelf out of reach. So what are we back to? Fossil fuels; coal, oil & gas. Do you realize that reason for the increase in petrochemical products, electrical and natural gas cost is primarily due to the elec. power companies converting their boilers over to Nat. Gas, sucking up the excess supply and implementing the Law of Supply and Demand. Now where are those pesky "quantuum leap energy pellets" when we really need them?

In the real world, science lurches forward at a snails pace, but the problem is here and the problem is now. Until those "Quantuum Leap Energy Pellets" come out of the lab, we're stuck with fossil fuels. I for one don't want to freeze and starve in the dark. As most others don't.

[jimbino]

I take issue with the statement that ethanol burning does not produce carbon monoxide. Am I wrong in thinking that incomplete combustion of ANY carbon-based fuel can produce carbon monoxide?

[jimbino]

I take issue with the statement that ethanol burning does not produce carbon monoxide. Am I wrong in thinking that incomplete combustion of ANY carbon-based fuel can produce carbon monoxide?

[neilehat]

jim, You're right. Without going into the arcane details of combustion mechanics or stoiciometry, the complete combustion of hydrocarbon fuel will result in H2O & CO2. Whereas, the incomplete combustion can and will result in CO2, H2O, unburnt Hydrocarbons, CO, NOx, SOx, Particulate Matter, and other combustion byproducts dependant on the type of contaminates in the fuel and combustion air.

Ah, yes! The importance of maintaing the proper amount of "excess air" and flame temperature and geometry. Subjects worthy of a dissertation or two.

[Jack]

Neil: Sorry about the "sci-fi" but surely your deep concern of the investment in fossil fuel infrastructure being rendered worthless overnight put us out there quite some time into the fantasy world.

And yes, I'm aware of where we are today and what precious few options we have. It's been a somewhat frustrating ride for me to watch as Congress and several oil admins and a whole pile of industry lobbyists have flown us up a blind canyon since the warning bell went off back in the mid-70's and we were but 40% dependent on imported oil. Do you suppose selling us a fleet of gas guzzling dreadnaughts was an act of national sabotage?

Interestingly, Cspan was reviewing the Carter years this week and his speech on our energy problems could have been repeated today with virtually not a changed word. At the time he held out considerable hopes for a combo of CAFE stds, lower per capita consumption/waste, solar, wind and improved hydro-power. After CAFE standards and some rational response to jacked up oil prices you'll recall we broke the OPEC cartel, oil prices tanked and didn't come back for quite a long time.

I suppose that Reagan coming in and sending Carter's White House solar installation to the museum was a clear signal to all of banking us sharply up the course that ended in the blind canyon were we are today.

Yes, I live in Alaska and follow energy politics and am well aware of dumping such a precious fuel and petrochemical feedstock as is NG into power generation, a process I suspect will be looked upon by those to follow much as we look upon killing a sperm whale to provide lamp oil.

Perhaps, it is good in the longer run that "someone" has been sitting on the 50 inch pipeline project to bring Alaska's domestically produced gas to mid-America and front-run costly LNG plants in order to import NG from abroad; it's amazing what connected and adept bands of lobbyists can achieve.

As for freezing in the dark which would be no fun at all in Anchorage I'm not up for it myself nor advocating even melting in the bright hot sunshine of the sunbelt where A/C pushes up utility costs higher than ours here in Anchorage. As you point out, once in a blind canyon there's not much else to do buy pull the throttle wide for full power and hope we can climb out. While you do your part in the predictable "emergency" on providing ever more costly and environmentally destructive means of bring oil to us, it's my hope that we'll soon be going forth with the cleanest, cheapest, and least polluting source of "new power" which would be that of conserving what we now waste.

Where are guys with foresight like Carter when you need them? With the pellets? Funny thing being a nuclear scientist and skipper of a nuke sub, that at the time he wasn't much of an advocate for nuclear power. Suppose it might be due to fore sight on the "exhaust" problem? Jack