Ethanol Round II: The Glut.

Today the New York times has an article on the collapse in Ethanol prices. The article is a well written overview of the industry and the current impact and reasons for a collapse in the prices. I’m not going to go through all the points the article makes, go read it here — its really worth it. I’m going to talk about what I think is the most important challenge facing the ethanol industry, the federal government and the farmers who are growing the corn and producing the ethanol.

First off most people don’t understand how fragmented the industry is. Most ethanol producing plants, or at least a good majority of them, are owned and operated by farmer cooperatives. This means that the industry has a lot of room to consolidate which will lead to larger margins and less volatility. In the past 2 years, ethanol plants have sprouted (pun) up in hundreds of places throughout the midwest — these plants are relatively inexpensive to build and the technology is well tested. The real issue however is one of transportation. As you can see production is not a problem — there is lots of corn out there for ethanol and there are lots of people turning it into ethanol, but there are not a lot of people getting it from point a to point b. Ethanol, unlike oil and Natural Gas, is difficult to transport — its an organic good and has a sort of sell by date by which it has to be blended into oil if that is the final destination.

Interestingly this transport issue is a common one in the Energy industry. The electrical grid is suffering from the same lack of underinvestment. Why does this dilemna exist? Well most transport networks — for ethanol (pipelines), for electricity (transmission lines), require massive amounts of capital expenditure, with a lot of sunk costs. I’m not sure about this, but as we saw with the bridge collapse this summer in Minnesota, the federal government has stepped back on its responsibility to build and maintain our networks (roads, grids…).

The article makes an interesting point about the likelihood of the federal government having to expand its subsidies to ethanol farmers to protect them during this glut in the market — maybe instead of funding the expansion of an industry already in an overproduction stage, maybe they could pour that money into getting rid of the transport bottleneck. This will allow ethanol to reach end users for its traditional uses of being blended into oil or as a substitute for MBTE, and potentially allow for continued expansion of our inclusion of ethanol into other energy systems.

Ah but what about the effects of increased ethanol production of food prices? on the environment? I’ve already written about my dislike of ethanol as the ’solution’. I don’t think its a solution, i think its a delay mechanisms, but I also see that if we can leverage ethanol through an improved transportation network then people can be allowed to be more creative with the uses and applications of ethanol. Its a complicated situation for sure, but the federal government will continue to be involved and I just hope its in a more constructive way then just giving farmers a check because the market for their product isn’t strong.

Edwards on Energy, thanks to Youtube/CNN

The following is a selection of the transcript from last nights CNN/Youtube debate.

CHARLESTON, South Carolina (CNN) — QUESTION: Hi, my name is Shawn and I’m from Ann Arbor, Michigan. There is a scientific consensus for man-caused climate change, and I’ve heard each of you talk in previous debates about alternative energy sources like solar or wind, but I have not heard any of you speak your opinion on nuclear power. I believe that nuclear power is safer, cleaner, and provides a quicker avenue to energy independence than other alternatives.

QUESTION: I am curious what each of you believe.

COOPER: Senator Edwards?

 

EDWARDS: Wind, solar, cellulose-based biofuels are the way we need to go. I do not favor nuclear power. We haven’t built a nuclear power plant in decades in this country. There is a reason for that. The reason is it is extremely costly. It takes an enormous amount of time to get one planned, developed and built. And we still don’t have a safe way to dispose of the nuclear waste. It is a huge problem for America over the long term.

I also don’t believe we should liquefy coal. The last thing we need is another carbon-based fuel in America. We need to find fuels that are in fact renewable, clean, and will allow us to address directly the question that has been raised, which is the issue of global warming, which I believe is a crisis.

________________

I thought that was a very interesting question, and beyond my dislike of the format (giving candidates litterally only seconds to deal with issues), I thought Edwards answer to be insightful look at his position on energy.

First of all, the questioner is asking about nuclear power — which can only generate energy to be used for electricity, not fuel for transportation which is what Edwards is talking about here.Sure the first part of his answer is about Nuclear, but his solution to not allowing more Nuclear is not actually a resolution of the electricity generation issue vis a vis Climate Change. Clearly, and I find this immensily frustrating, Edwards had this little spiel all prepared, got a question that dealt with Climate Change and Energy and just launched into a little monologue that, really, had very little to do with the actual question.

Now to the meat of Edwards answer:

Yes, I find Nuclear a scary solution to the problems of clean energy generation — no one has yet solved the problem of nuclear waste and the risks associated with running a plant are immense. However, for going on 30 years now France has successfully generated almost 70% of its electricity from Nuclear without any major mishaps. Nuclear is still a live wire issue in France, in fact during the election both candidates got tripped up and into a little trouble over their views and misquotations of nuclear facts. The reality is this in my mind — Nuclear is the cleanest energy we can produce (if waste is properly managed) but it requires incredibly high level of caution, preparation, regulation, information and (any other -tions?) long-term risk management. The next question thats important to me is whether the US is the kind of place where Nuclear energy can be safely generated? Quite frankly I don’t think so. There are so many things wrong with the energy administration in this country that I often think its a very thin line of competency that prevents the kind of melt downs we got in Chernobyl.

Back to Edwards however. The reason Nuclear hasn’t been permitted in the US has little to do with the cost and safety record as to a general beaucratic and political opposition to Nuclear. Energy companies would love to open up the Nuclear market — sure its more expensive than coal, but when up and running and consider the increased likelihood of a carbon constraining regulation sometime soon a Nuclear plant is likely to be more profitable than a coal plant.

Now to Edwards second paragraph, where he gets into solutions not to our electricity generation problem but to the issue of fuels for transport. The truth is, wind, solar and biofuels are unlikely to generate enough electricity for the US and only solve part of the problem. Biofuels, as a starter, is an idiotic idea as an electricity fuel — when burned it still emits a ton of carbon (sure sure, you can claim the life cycle argument that growing corn/soy/other feedstocks negates and more the carbon emitted, but then you have to deal with pretty heavy ecological issues and the food vs. fuel debate). But simply we could never grow enough biofuel feedstock to make a dent in our electrical needs. Wind is a beautiful idea, and one I wholly support, but the reality is that with limitations on where Wind sites can be sited (NIMBY syndrome: Not In My Back Yard) and the nature of Wind as a source of energy (the actual stuff that blows through the windmills) it can never meet our electricity demands. People project Wind being able to provide 10% maybe 12% of our electricity demands, but unless efficiency and conservation efforts are effective, even that percentage is unlikely.

That leaves me with Solar. One thing that people often don’t realise is that Solar is incredibly inefficient, and that unfortunately, without a lot of R&D and time the technologies we have at hand today are unlikely to get any better soon. Thats pretty sad, since apparently we could power the whole world with something like a second of pure sunlight (this little fact is mostly hearsay and i’m too lazy to look it up, but its pretty close to true). I’ve also heard that if we covered 5% of Arizona in solar panels then we would be able to generate enough for the whole of the US. How wonderful you think! but wait there are some big constraints, 1) how do you get the energy from Arizona to New York for example? Transmission lines are already clogged and energy looses power for every inch it travels, 2) What about nighttime? Solar’s foil is that it is only productive during the least energy hours of the day. We, humans, use energy most early in the morning and at night and Solar only produces at high enough levels in the middle of the day. There are some interesting advances in storage of energy, but even that is a long time coming.

Last, but not least, the idea of liquifided coal. I agree with Edwards that coal is pretty dirty, terrible to mine on an ecological level and yes, indeed, another fossil fuel. Liquified coal can be used in cars, theoretically, or gasified to be burned cleanly in power plants. I think to even mention that he doesn’t like liquified coal is silly. First because the realities of politics dictates that the coal industry is a huge and powerful lobby and will definitely get its way especially if a carbon regulating bill is passed. And secondly, coal is plentiful and in the US (Energy Independance). I think it would be much more clever of him, and honest, to say “Lets figure out how to make coal clean, mining safer and better for the environment, and continue to use it while aggressively pursuing and subsidising renewable energy.”

So thats my take on his Energy response. And to be honest, I was disappointed in his answer, somehow I expect more from Edwards but I guess this goes to show that the candidates are not as informed as we would like this early in the campaign.

For a much shorter, funnier and more general take on the debate check out www.eightfor08.com.

Is it the environment or the poor we want to help?

I spent most of yesterday ashamedly not doing much work, at work. [As a personal aside, I really don't like the feeling I get when i know i've wasted a day. The positive side effect is I did spend a lot of time reading interesting news sources and generally catching up on the details of current events.

Anyhow, back to my topic of the post. I'm a pretty regular reader of the Economist, but I'd never until yesterday, ventured in to their blog list. I recommend that you take a look. Its even more breif in its factual coverage than a lot of the articles, but the opinions are deeper and the comments cleverer and that's what makes the reading fun. Readers can respond to posts or to articles from the main edition, and the authors will get back to them on this forum, making for some interesting interactions.

What caught my eye today was a short post on the effect biofuels have had on the price of food. Most readers will understand the food vs fuel dilemna, but the article the post references from The Financial Times is about the effect of the hike in prices on the UN World Food Programme. I have to confess that the impact of higher commodity food prices would affect UN food distribution hadn't even crossed my mind until reading about it this morning.

I've already gone over on this blog some of my reticence about Biofuels/Biodiesel/Biomass as sources of energy and food vs. fuel is close to the bottom of my list of impacts I care about. Mostly, because as I understand it its not a problem of actual production, its a problem of subsidies. That is, something that could be resolved with better management of agricultural incentives. We can, and have, always produced too much commodity foodstocks, so there is room for biofuel feedstocks, the problem is that farmers are either paid to not produce (this is switching since the cost of feedstocks has now jumped high enough for it to be more profitable to plant than just get paid) and that prices have been artificially inflated by a lot of press and speculation. I predict, and this isn't original at all, that before the end of the next growing cycle, prices will drop back down to a reasonable level. There is, quite simply, enough corn to go around, and there will be even more soon with all the planting people have done. Not to mention that the most common biofuel is actually sugarcane-based ethanol and not corn-based ethanol -- and though we do eat sugar, there are a lot of other sources of it.

Whats striking to me is that the temporary hike in prices is having a pretty detrimental effect on the world's absolute poorest -- those that litterally cannot feed themselves. I think this plays into the North-South divide on climate change and environmental considerations in general. [For more on what "North-South" means, click here.]

Thats a big topic right there, one I’m not going to go into too much except to say that I’m often frustrated by the patronizing message of Northern environmentalists towards the South. I ascribe to the idea that it is MUCH more important for the South to be able to develop as cheaply as it can — in the long term that is the only way to resolve global environmental problems. For the record, I also don’t think coal is all-evil, and fighting coal plants is detrimental to development and to finding technological solutions to cleaning coal up.

Oh no, I’m slipping into a whole other post. I promise to write more on that topic, but for today, lets stick to Biofuels.

Biofuels solution?

I’m writing a short paper currently on biodiesel in Argentina. Its been a great opportunity to get a little more in-depth into the whole biofuels controversy. I say controversy on purpose. There is a lot of misconceptions and confusion and vitriol from all sides of the debate.

When I started off writing about this I didn’t have a very positive outlook on biodiesel/biofuels. But first let me give you a little run down of what both those things are.

Biofuel is the generic term for any fuel made from plant — so ethanol is a biofuel and so is fuel from soybean. The difference is one of sugar vs fat. Ethanol, made from corn, sugar beets, sugar cane and a few other plants I’ve either never read about or don’t know exists is basically starch. So if you put in your car, your car is running on carbohydrates (I always knew they where good for something!). Oil from soybean, rapeseed, sunflower and my personal favourite Jatropha is basically fat. You can blend both starch based fuel or oil based fuel with regular diesel to get biodiesel.

Countries like Brazil and Argentina have been running on biodiesel for years, and its only recently with the current volatility in fossil fuel prices, the fear of a ‘peak’ and Bush’s ‘energy independence agenda’ that there has been a push for biodiesel to be used globally.

That said, the biodiesel/fuel concept has been prevalent for a long time, every time there has been a hiccup in the geo-politics of oil it re-enters the agenda. To me, this time around, it seems pretty serious. Even the most hard-bitten Texan oil man knows that an alternative needs to be found. Interestingly, biodiesel is probably the most fossil fuel alternative we have.

Already available in a lot of countries are blends of biofuels with diesel. These are classified by the percentage of the blend, so B5 fuel means 5% biofuel and 95% diesel and so on and so forth. A regular diesel car can run on this without a lot, in some cases no, adjustments to the engine. B100 is an option as well.

So that said, what do I really think about this biodiesel stuff? On an agricultural front I find it pretty worrying. Soybean, Corn and other fuel plants are incredibly damaging to the environment especially when dealt with as a purely commercial monoculture. Large-scale farms run often by corporations really only care about the bottom line and the short-term. If the world is serious about biofuels then it needs to make sure that the agricultural system in place gets a long-term view overhaul, because the current rate of planting and harvesting is simply not sustainable — and thats not an environmentalist point either. If the land is exhausted of its nutrients, micro nutrients and polluted with excessive nitrogen and Ph from fertilizers then yields will only fall, and thus revenue. (side note: soy can be harvested up to 3 times a year)

Secondly, are biofuels that much better for the environment? That’s an interesting argument. Burning biodiesel releases more NOx (Nitrogen Oxide). That’s the nasty stuff makers of diesel cars have been trying for years to reduce in their emissions. There is less CO2, and some argue that the growing of crops absorbs even more CO2 but that too can be countered. Energy inputs, i.e. Thomas Homer-Dixon’s energy return on investment (EROI), for many fuel crops is low. Technology can improve that, but with that comes a cost in pollution. Its all said a difficult balance to find. Not to mention that much soy cultivation in South America is at the expense of natural forests. I’m sure soy growth takes up a lot of CO2, but I doubt that it absorbs as much as a rain forest. (0bviously that isn’t confirmed by any study I’ve had a chance to read)

A lot can also be said about turning a developing country into an energy provider. Thomas Friedman put it well in his article I blogged about last week: More fuel = less democracy. This might not be the case in the States where the democratic institutions are pretty solid, but what about a country like Argentina? Unarguably their democracy is functioning, but it wasn’t so long ago that they had a major economic break-down, or for that matter a military dictatorship.

Now you ask, what is my position? Clearly, I’m not persuaded. I didn’t even start talking about the social costs. There are better alternatives available. But more specifically, I think biofuels are a feasible option but not the way the system is currently set up. Countries should become self-sufficient. For example, Switzerland should not shift its fuel demands from Saudi Arabia to Brazil in a continuation of our current fuel model. Rather they should look into how to build domestic and regional energy networks. That would solve economic, environmental, and geo-political problems rather than perpetuate old ones.