Friday, August 28, 2009

Going Green Goes Bust: Ethanol Businesses In Crisis

Back in late 2007, I wrote this post concerning Congress and energy policy. In that piece, I quoted an article which read, in part,

In its efforts to set the U.S. on the road toward energy independence, Congress may be constructing a detour.The House and Senate have passed separate energy bills and are now working on combining the two into final legislation that could come up for a vote by the end of the year.Both bills are designed to lessen American reliance on foreign oil, in part by mandating far greater use of corn-based ethanol and so-called cellulosic ethanol, which is made from biomass like grasses and wood chips. The Senate bill also calls for higher fuel-economy standards.Here's the catch: Anything that creates uncertainty about demand for gasoline over the long term means less incentive for refiners in the U.S. to expand their capacity. And that means greater reliance on gasoline imports in the near term, at least until ethanol becomes a mainstream fuel. And that, of course, is the opposite of energy independence."

It was thus with some amusement that I read an article in yesterday's Wall Street Journal entitled, "Turmoil in Biofuels Threatens Green Energy Revolution."

Without going into massive detail, the piece notes that several factors have recently coincided to derail the holy grail of replacing oil with ethanol-based fuels for transportation.

Specifically, oil's price decline to the neighborhood of $70/barrel, and a global recession, have completely changed the assumptions initially governing the US government's alternative energy subsidies.

Thus, many of the once-touted green energy initiatives are going bankrupt. Ethanol isn't being produced in the quantities imagined only two years ago.

One of the howlers is that the sanctimonious Silicon Valley mogul, Vinod Khosla, unwittingly backed a scam in which Cello Energy of Alabama produced fuel from conventional petroleum sources and claimed it was green-based. A rather damning passage in the Journal's piece states,

"This year, Khosla representatives took samples of diesel produced at the new Cello plant and sent them off for testing. The results showed no evidence of plant-based fuel: Carbon in the diesel was at least 50,000 years old, marking it as traditional fossil fuel. The EPA wasn't told about the test, and continued to rely on Mr. Boykin's original claims when it asserted in the Federal Register in May that Cello could produce 70% of the cellulosis fuel targets set by Congress that are due to take effect next year."

One other rather comic effect of the biofuel producers' sudden financial woes is the looming prospect of a government bailout of this new sector. Because the current administration made alternative energy such a showcase issue, it may be politically necessary for this third major bailout. It's ironic, of course, because it was thanks to government mandates and subsidies that anyone took this form of energy production seriously in the first place.

I love economics in part because it can't be fooled. Governments can subsidize and legislate to distort returns and costs. But even such actions have costs, and these, too, have to be borne by voters. Eventually, horrendously expensive, wasteful government programs become apparent.

Some, like the dairy and sugar industries' shameful subsidies, continue because the costs/consumer are so small, while the benefits/producer are so large.

But in the case of alternative energy, there are huge new investments and uncertain scaling up of new energy production technologies. And, of course, as the Journal article notes, we still have the distressing fact that if all current US vegetable and animal fat output were used to produce ethanol, it would provide only 7% of diesel fuel used in the country.

The economics are simply against long-term usage of large amounts of vegetable-based energy. It's not as powerful per unit of volume as petroleum, and never will be. You could more easily and efficiently liquefy coal than you can convert foodstuffs into transportation fuel.

Perhaps in this recent era of federal bailouts and massive deficits, the green energy sector will be one too many sectors to save. Especially as it may not be well-enough established to have the political clout on its own to sway federal legislators.

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