A Corny Idea

By Byron King

Did you know that corn is a type of food? If you do, then you may have keener insight than some people who write headlines at The New York Times. I mention this because of the rather curious headline above a Jan. 5, 2007 article in the business section of the Times: "Rise in Ethanol Raises Concerns about Corn as a Food."

Huh? OK, let me see if I follow the logic. The background issue is that the world needs to find substitutes for its depleting supplies of oil and natural gas. We know that. We also know that ethanol is one of those potential oil substitutes. People have been running vehicles on ethanol for well over a century. And we know that a lot of corn is presently being diverted to manufacture ethanol. Even so, doesn't corn remain a food first and a fuel second?

The Old Gray Lady framed the food-versus-fuel issue in the first paragraph of the story:
"Renewing concerns about whether there will be enough corn to support the demand for both fuel and food, a new study has found that ethanol plants could use as much as half of America's corn crop next year."
What? The U.S. will use half its corn crop next year to manufacture ethanol? This raises a kernel of concern with me.

As I am sure you all understand, corn that is used to manufacture ethanol will not be available for other things, like eating. Nor will this ethanol-destined corn be used to feed other animals, or turned into other foodstuffs, let alone exported to raise foreign exchange for the U.S. And of course, the price of corn will rise.
So corn-based food, and products derived from corn, will become more expensive. And I know, so you don't have to remind me, that farmers will respond to the price signals and grow more corn. But I hope you also realize that the farmers will do this by using more tractor fuel, fertilizer, pesticide, herbicide, and myriad of other substances derived from oil and natural gas. There is no free lunch...or free corn.

The U.S. currently has 116 ethanol plants in production. But new plants are sprouting up across the United States. According to a recent study by the environmental group Earth Policy Institute, 79 ethanol plants are currently under construction in the U.S. When completed, by 2008, these new plants will more than double the annual U.S. ethanol production capacity, to 11 billion gallons. In addition, there are at least 200 more ethanol plants in the planning stages in the U.S.

The forecast annual U.S. production of 11 billion gallons of ethanol translates into about 262 million barrels. Sounds like a lot of fuel, until you adjust for the energy density of ethanol, which is far lower, only 59.5%, than an equivalent barrel of gasoline. The standard, accepted measurement of energy density for ethanol is 26.8 megajoules per kilogram. This clearly compares unfavorably with the energy density of gasoline at 45 megajoules per kilogram.

In other words, 262 million barrels of ethanol will yield 60% less energy when burned than an equivalent volume of gasoline. We won't go into a long discussion of that just now. Nor will we get into the energy return on energy investment (EROEI) of ethanol, which is about break-even at best. No, we won't go there. Let's take a look at some telling comparisons...

262 million barrels of ethanol per year translates into about 718,000 barrels per day. (Divide by 365 days in the year.) In terms of volume, this is the energy equivalent of replacing about two supertankers full of imported oil every day. OK, not bad, and this looks like a lot of fuel if you are standing next to one of the two supertankers, but it is a drop in the bucket of U.S. national aggregate demand for liquid fuel – less than 3.5% of U.S. daily oil consumption of about 21 million barrels.

Another way to look at it is that each ethanol plant, on average producing 3,680 barrels of product, will yield the ethanol equivalent of what is commonly considered to be a small onshore oil field. But consider the EROEI of ethanol for a moment. On an ongoing basis, the oil field is producing oil with only the "energy input" of the pumps that lift the oil out of the ground. Even today, with oil drilling occurring in remote locales, in deep waters, and with wells that penetrate to great depth, the EROEI for the world oil industry is estimated to be between 25- to-1 and 30-to-1.

By contrast, the ethanol plant requires far more energy to operate, on an ongoing basis, than does the oil field. The EROEI for corn-based ethanol, produced in the U.S., has been estimated at anywhere between .8-to-1, or below the break-even point, and the slightly energy-positive 2- or 3-to-1, depending on who is doing the calculating. Even if you grant the high number, it is clear that producing ethanol from corn provides about only one-tenth the EROEI of current oil drilling (3 for ethanol, versus 30 for oil drilling).

Here is another comparison. 718,000 barrels of ethanol per day is somewhat less than the amount of oil that the U.S. produces daily from its vast array of humble, old stripper oil wells, about 900,000 barrels per day. According to the U.S. Department of Energy, the U.S. has 393,000 oil stripper wells in service. And there are about 260,000 natural gas stripper wells in service. These wells are typically operated by small, independent companies and pull product out of older fields that are long past their peaks.

The definition of a stripper well applies to oil wells delivering no more than 10 barrels per day and gas wells delivering no more than 60,000 cubic feet per day. Clearly, therefore, the stripper well industry is not in any way capable of supplying the U.S. with anything approaching its cumulative daily energy demand for liquid fuel. And the corn-based ethanol industry is still quite a bit smaller than the stripper well industry.
Lastly, wrap your brain around this comparison: The amount of grain that is required to fill a 25-gallon tank with ethanol, one time, could otherwise feed one person for a year. So will the U.S. really wind up converting one of its largest food crops into a massive fuel crop? The answer is no.

According to the statistics, as published in The New York Times, no less, ethanol production from existing plants and plants under construction is on track to consume about half of the U.S. corn crop. In some localities of the U.S. Midwest, almost all corn is already under agreement to be sold for ethanol production, essentially leaving no corn for other local farming needs. This will certainly cause a ripple effect throughout many farming communities, all the way to the shelves of the grocery stores. And according to Cornell researcher David Pimental, if the entire U.S. grain crop were converted to ethanol, it would still only satisfy about 15% of U.S. automotive fuel needs.

The take-away point here is that the full-court press now ongoing in the U.S. to build plants and manufacture ethanol from agricultural corn will not provide any sort of long-term energy salvation for the nation. Rather, it will destabilize the nation's food supply and disrupt traditional export patterns, all for the sake of converting fossil-fuel based inputs into ethanol. From a national security standpoint, therefore, large-scale ethanol production from corn will not make the nation more secure in any measurable way. We would still need to important billions of barrels of crude oil to produce our billions of barrels of ethanol. In fact, based on current technologies, we would consume about 5 to 8 billion gallons of oil equivalent (boe) to produce the 11 billions gallons of ethanol we expect to produce by 2009. I would hardly call that "energy independence."

Maybe there is a better idea out there for making ethanol from cellulose waste products. And it is not as if a diversity of energy resources is ever a bad idea. So some production of ethanol from corn makes sense. But sometimes, just because something is a good idea, it does not necessarily follow that more of it is a better idea. It is the same thing with corn-based ethanol. Pro-ethanol agricultural, industrial, transportation, and tax policies will not provide the country with anything like the volumes of motor fuel that it needs to run the existing transportation grid. And manufacturing ethanol from corn will dramatically disrupt the U.S. food supply. Eventually, the nation will reap what it sows.

A Corny Idea, Part II By Byron W. King

Is ethanol a good investment?

For a corn farmer, yes. For an ethanol producer, maybe. For a national energy policy, probably not. For a long-term investor, unlikely.

Let's dig a little deeper...

Most investors have at least a basic understanding of the concept of Return on Investment (ROI). ROI is the ratio of how much money an investor gains or loses on an investment, relative to the amount of money invested. That is, you buy a stock for $100 per share, and sell it later for $110 per share, for a profit of $10 a share. In this example, the $100 you used to buy the stock is the "investment" and the $10 profit is the "return." So $10 is your "return on investment." ROI is an extremely valuable tool for calculating the degree of investment profitability. Ideally, you want to deploy your investment funds to the most profitable efforts, and certainly avoid the money-losing propositions.

A similar concept operates in the world of energy production. That is, the concept of Energy Return on Energy Investment (EROEI) is the ratio between the amounts of energy you expend to obtain a resource, compared with the amount of energy you receive from that resource.

Although the academic study of EROEI is, for the most part, of relatively recent vintage, EROEI is a fundamental sort of concept. EROEI has deep roots in the iron laws of thermodynamics, and the immutable realities of geology and biology. But despite its solid scientific basics, EROEI tends to be rather an alien concept to most policymakers, economists...and investors.

The best way to keep it straight in your mind is to focus on the point that anything that requires or consumes more energy to obtain than it yields is not a practical energy resource over the long haul. At the most fundamental stage, when the EROEI of something becomes equal to or less than 1, that energy source becomes what is called an "energy sink." It can no longer realistically be used as a primary source of energy because it consumes more energy than it yields.

For example, think about the energy that it takes to drill an oil well. It requires energy to manufacture the steel pipe and drill bits. It takes energy to construct and run a drilling rig. It takes energy to run the pumps that lift the oil from the well. And when you compare the energy value of the oil that comes out of the well, with the energy input to make the well, you can arrive at a general value for the EROEI for oil drilling.

Many decades ago when most oil was found and extracted from near-surface, onshore fields, the EROEI for oil production was about 100-to-1. That is, for every unit of energy that went into an oil well, you pulled 100 units of energy out. This very favorable ratio is one reason why oil was so downright cheap for so many decades. Even today, with oil drilling occurring in remote locales and in deep waters, the EROEI for the world oil industry is estimated to be between 25- to-1 and 30-to-1. As the world's depleting oil reserves become trickier to locate and develop, oil's EROEI will certainly continue to fall. Ominously, for frontier exploration over the past decade, EROEI has been estimated as low as 8-to-1. But guess what? 8-to-1 is still about three times higher than the most flattering estimates of ethanol's EROEI.

Chemically speaking, ethanol is a form of alcohol based on the ethane molecule, containing two carbon atoms. As opposed to methanol, commonly known as wood alcohol, ethanol is the kind of alcohol that you can drink (but not to excess, please.) Ethanol has a relatively high energy density, although it only has about 60% of the energy density of standard gasoline. Still, you can burn ethanol in a properly modified automobile engine, up to and including NASCAR racers. And ethanol can be handled, transported and distributed relatively safely, without the need for expensive and heavy cryogenic or high-pressure systems, which are required for gaseous fuels like methane gas, propane or butane.

And ethanol, say some promoters, is a "renewable fuel." This usually assumes that the ethanol is produced from fermented biomass such as corn in the U.S., or sugar cane in Brazil. But upon closer inspection, "renewable" seems like a gross misnomer. The EROEI for corn-based ethanol, produced in the U.S., has been estimated at anywhere between .8-to-1, or below the break-even point, and the slightly energy-positive 2- or 3-to-1, depending upon who is doing the calculating. Even if you concede the highest ratio, it is clear that producing ethanol from corn provides about only one-tenth the EROEI of current oil drilling (3-to-1 for ethanol, versus 30-to-1 for oil drilling). And the higher EROEI estimates for ethanol tend to discount the need to use oil- and natural gas-based inputs for corn farming, such as for tractor fuel, fertilizer, transportation and process heat for manufacturing the ethanol.

You need more than just fresh air and sunshine to grow corn. And if conventional, fossil fuel-intensive U.S. agriculture is the basis for growing corn, then what currently passes for "renewable energy" production is really more of an "energy trade." In particular, oil and natural gas are used in great quantity to grow and harvest corn, which is then converted to ethanol. So at the end of the process we are merely trading one form of non-renewable fossil fuel for the illusion of another, so-called renewable kind of fuel. The claimed environmental and long-term sustainability advantage of corn-based ethanol in the U.S. is simply not going to be realized because, viewed as a system, the net result is a negative fuel balance.

Brazilian ethanol, on the other hand, is estimated to have a rather respectable EROEI of 7- or 8-to-1, and even up to 15-to1. This is because Brazil produces ethanol from high-yielding sugar cane, in a tropical climate, using an agricultural system that is far less dependent on fossil fuel inputs than is the case in the U.S. Brazil has been developing its ethanol industry for over 30 years, and the EROI has improved over time, as Brazilian agronomists and technical personnel have gained knowledge in the field.

The bottom line is that corn-based ethanol does not "save" all that much oil or natural gas, and may well be a one-for-one trade in terms of net energy produced. The U.S. is not gaining anything by focusing on the manufacture of corn-based ethanol. By throwing resources into corn-based ethanol, the U.S. will not supplant its dependence on foreign oil, nor produce a truly viable, large-scale alternative to gasoline consumption.

Investor beware.