ETHANOL'S BRIGHT FUTURE
by Mark Ingebretson, Contributing Editor
The 2002 Ford Explorer FFV due out late this year looks like the companyís standard four-wheel drive. You can order it with options like a leather-wrapped steering wheel and a 6-disc CD player. But under the hood thereís an important difference. The engine can run on either gasoline or nearly pure ethanol or a combination of the two. True enough, finding a filling station thatíll sell you a tank of nearly pure ethanol might be tough in the next few years. Nevertheless, experts see Fordís Explorer and other so-called flexible-fuel vehicles like it as further signs of ethanolís bright future.
"Thereís a lot of momentum occurring in favor of renewable fuels, highlighted by ethanol," says Larry Cunningham, senior vice president of corporate affairs at Archer Daniels Midland (ADM), Decatur, Ill., a leading ethanol producer. A surge in ethanol use would mean good news to corn growers. Ethanol currently consumes about six percent of the U.S. corn crop. Production could reach a record two billion gallons this year. Analysts say that should boost corn prices anywhere from 15 to 30 cents per bushel. The Renewable Fuels Association predicts ethanol use will rise to 3.5 billion gallons by the start of 2004. Corn prices should rise in tandem.
Cunningham and others can cite a laundry list of reasons why theyíre bullish about ethanol. Topping that list, of course: Recent energy price spikes have renewed interest in alternative fuels. At the same time, Washingtonís support for ethanol appears unwavering. And it may even be growing. Recall the California governmentís attempts to bar ethanol from pumps in that state, citing what state officials there claimed would be heightened costs to consumers. The Bush Administration soundly quashed the bid. California has since taken its case to the courts. But if the Bush decision holds, it would boost ethanol use by 25 percent over the next two years.
Meanwhile, Congress is considering several bills mandating increased usage of ethanol and other renewable fuels that could raise consumption by as much as ten-fold, which still leaves plenty of room for growth. Currently ethanol is an ingredient in only 15 percent of the fuel consumed in America. Contrast that with Brazil, the worldís leading ethanol producer, where 40 percent of the cars run on ethanol.
NEW PRODUCTION FACILITIES
Little wonder, established ethanol producers and newcomers are rushing to boost refining capacity. The Renewable Fuels Association estimates that 34 of the nationís 62 ethanol plants are scheduled to undergo some form of expansion. Eight new plants are also in the works. ADM, with four giant facilities located in Illinois and Iowa, recently boosted its refining capacity by 100 million gallons. The company now accounts for roughly half of all ethanol production. The closest competitor, Williams Bio-Energy, produces 345 million gallons each year.
Yet the industry remains highly fragmented. Trevor Guthmiller, executive director of the American Coalition for Ethanol, says farmersí co-ops, looking to vertically integrate, are building refineries as well. And Guthmiller sees no reason why these smaller plants canít compete with well-capitalized producers like ADM. "The co-opsí plants are newer," he says, "so they take advantage of the latest technology." Another plus: Theyíre located right at the doorsteps of corn-producers.
That said, ethanol plants cost plenty. A large-scale refinery capable of processing 100,000 bushels a day - enough to yield about 250,000 gallons daily - would carry a $350 million price tag.
A LONG HISTORY
Using ethanol in lieu of gasoline is actually an old idea. Henry Ford planned to run his Model T on ethanol until increasing supplies of gasoline proved a cheaper alternative. Ethanol first appeared at the pump in significant amounts during the 1970s, as policy makers sought ways to stretch U.S. fuel supplies during the Arab oil embargo. In the mid í80s ethanol found yet another use. Gas was plentiful again. But concerns over pollution were growing. Thanks to its chemical make-up, ethanol proved an environmentally friendly replacement for toxins such as lead and benzene.
Hereís how: Ethanol molecules contain 35 percent oxygen. And itís that oxygen that causes fuel to burn more completely, increasing efficiency, while creating fewer pollutants. Ethanolís leading competitor as a pollution-fighting fuel additive is a compound called MBTE (methyl tertiary butyl ether), which many believe causes groundwater contamination. And several states, including California, have moved to ban it.
Ethanol, by contrast, wonít threaten water supplies. In fact, itís nothing more than plain old alcohol. Producers must add five percent gasoline to the end product in order to make it undrinkable and avoid federal and state alcoholic beverage taxes.
Because ethanolís nothing more than alcohol, refineries are in reality high-tech stills. And the refining process is pretty simple. Using one process called dry milling, corn first gets ground into meal. Then itís mixed with water to become a mash. The mash turns into "beer" after about two days. Next it passes through a still. The end result is 200-proof alcohol. Any solid waste left over can be converted into animal feed, while the CO2 that results from fermentation is used to carbonate soft drinks. A variation on this refining process called wet milling also yields by-products such as cornstarch and corn syrup.
Ethanol does have its detractors. Among them are a few consumers. Thatís because back in the í80s the additive caused damage to some rubberized components in carsí fuel systems. Manufacturers have since modified their fuel systems. And today all major auto brands are certified to run on mixtures containing at least 10 percent ethanol. Still, consumers have long memories. Guthmiller at the American Council for Ethanol concedes that, "in the Midwest, weíre pretty familiar with ethanol. But thatís not true in other parts of the country."
Others oppose ethanol, claiming the industry wouldnít exist without federal subsidies. Indeed, tax breaks currently amount to about 5.3 cents per gallon at the pump, and theyíve totaled some $10 billion since first enacted in 1979. Prudential Securities reports that ethanol subsidies have boosted ADMís profits by $1 billion over the years.
Ethanol producers counter that the oil industry has received subsidies totaling some $130 billion over the past 30 years. Monte Shaw, communications director at the Renewable Fuels Association says that amount doesnít even include the $50-billion-per-year cost of maintaining military forces in the Middle East, where their chief role is protecting U.S. oil supplies.
Meanwhile, ethanolís opponents look to scientific studies to bolster their case. One 1999 study by the National Academy of Sciences, for instance, claimed that ethanol as an additive fails to significantly reduce pollution, and may even play a role in fostering smog. More vexing, perhaps, have been a series of studies by David Pimentel. The Cornell University professor claims an acre yielding 7,110 pounds of corn would produce 328 gallons of ethanol. But it would require 140 gallons of fuel simply to plant and harvest that single acre. Then youíd still need to factor in the energy costs of refining the ethanol and transporting it to filling stations. The end result, says Pimentel: Ethanol production consumes 70 percent more energy than it produces. And that, he says, amounts to poor use of U.S. agricultural lands.
Pimentelís critics dismiss these results. Shaw at the RFA points to a 1995 USDA study, updated in í96, which found that ethanol production yielded 36 percent more energy than the amount needed to produce it. Moreover, he says, Pimentelís findings ignore the livestock feed and other byproducts that result from ethanol production.
HIGH ON THE HILL
Ethanolís strongest supporters can be found in Washington, in the White House and on both sides of the aisles in Congress. With the votes of farm states crucial to both parties, no one is likely to meddle with ethanol subsidies anytime soon. President Bush has indicated a willingness to extend subsidies past the 2007 expiration date. At press time, nine bills favoring ethanol production were winding their way through the House and Senate.
Ethanol backers have pinned their hopes on one Senate bill, The Renewable Fuels for Energy Security Act of 2001. Originally sponsored by Nebraska Republican Senator Chuck Hagel, it now has the support of Iowa Democratic Senator Tom Harkin, who chairs the Senate Agriculture, Nutrition and Forestry Committee, plus three other Midwestern Senators from both parties. The bill would require that renewable fuels make up two percent of all gasoline sold by the year 2008. That amount would increase to five percent by 2016. "Thereís talk that the bill will be considered in conjunction with the farm bill," says Cunningham at ADM. "So it could happen yet this year."
THE ETHANOL ECONOMY
If passed, the Energy Security Act would boost ethanol output 10-fold over the next 15 years. Other renewables would likewise benefit. Even so, ethanol should maintain its commanding lead over rivals. Take hydrogen-powered fuel cell vehicles, for example. General Motors estimates the cost of producing a fuel cell engine at $15,000. Thatís three times the price tag for a conventional engine and transmission. Moreover, it turns out that fueling up a hydrogen-powered car is anything but simple. The fuel must be dispensed at a frigid temperature and it can be volatile. Currently, only 10 service stations worldwide dispense hydrogen to motor vehicles, according to the World Watch Institute.
In the future, pumps can be readily modified to dispense varying mixtures of ethanol and gasoline for use by flexible fuel vehicles like Fordís 2002 Explorer FFV. "The ethanol and gasoline will be mixed right at the pump," predicts Guthmiller.
Also, ethanolís use will not be limited to cars. Researchers at the Department of Energyís National Renewable Energy Laboratory and elsewhere are studying ways to add ethanol to small engines and aircraft engines. And it may replace pure hydrogen as the fuel of choice in fuel cell powered vehicles. No one can predict how soon Americans will be shopping for ethanol-powered lawn mowers or jet skis. "In the end it depends on a lot of things," says Guthmiller, "including the price of corn and the price of oil." Still, the millions pouring into new ethanol refineries represent a huge bet that ethanol will fill an ever-growing role. "These people donít spend millions of dollars unless theyíre fairly certain they can make a profit," says Guthmiller. AM
Mark Ingebretsen writes on technology, business and finance from his home in Iowa. His most recent book on the history of the Nasdaq stock market will be published in March 2002.
BIODIESEL THE OTHER RENEWABLE FUEL
What ethanol has done for corn prices, another renewable fuel called biodiesel could do for soybeans. Biodiesel can be made from soybean oil left over from the production of livestock feed. Other vegetable oils and animal fats as well as ethanol can serve as the raw materials, too. But biodieselís proponents seem especially bullish about soy oils. The chief reason: surpluses that have grown by 33 percent since 1990.
"We just need to figure out a way to use up all of those soybeans," Victor Bohuslavsky, executive director of the Nebraska Soybean Board, told the Omaha World Herald.
Biodiesel may be just the ticket. Productionís grown from a scant 500,000 gallons nationwide in 1999 to 5 million gallons last year. Analysts predict 2001 production could reach 25 million gallons. Officials at Ag Processing, a farmer-owned co-op based in Omaha thatís the nationís largest supplier of the fuel, say their own production should grow tenfold this year.
True, these increases hardly amount to a drop when compared to Americaís total energy needs. But they can have a significant impact at the local level. Nebraska filling station owner Albert Hurt started blending two-percent soybean oil into his diesel tanks a couple of years ago, the Omaha World Herald reports. Resulting sales at his three stations now consume 28,000 bushels of soybeans, annually. Thatís equal to two percent of total yearly soybean production in Custer County, Nebraska.
The USDA has helped bolster biodiesel production by dolling out $300 million in incentives this year. The money is earmarked for energy companies that purchase crops to make fuel. Local communities have helped spur demand, too. This spring, for example, Cedar Rapids, Iowa, officials announced their cityís 65 buses would begin running on an 80/20-diesel/soy oil mix. Whatís more, throughout the farm belt soybean growers have put pressure on local filling stations to carry the fuel. While in California and Nevada stations offer biodiesel made from recycled cooking oils.
If growth continues, USDA analysts predict biodiesel could boost soybean prices by three cents per bushel by 2010. And if the government requires that soy oils be added to all diesel fuels, the resulting price rise could hit 13 cents per bushel by decadeís end. AM