Starved For Energy

INVESTOR'S BUSINESS DAILY
Posted 8/23/2006

Energy: Despite huge subsidies and tax breaks, the only thing ethanol seems to be accomplishing is eating up the corn supply. Consider that one tankful of ethanol could feed one person for a year.

If there were an example of the law of unintended consequences, it would be ethanol, a fuel aimed at making us energy independent by relying on a homegrown resource — corn.

A year ago Indiana Gov. Mitch Daniels decided his corn-rich state would make ethanol use widespread. He designated the town of Reynolds, population 550, "BioTown USA." Reynolds was to be a showcase, the first town to run entirely on renewable energy.

But the law of supply and demand got in the way. The question quickly arose: Do you install ethanol pumps at $50,000 a pop when there are few cars to line up at them or do you try to sell vehicles that use ethanol when there's no place to fill up?

There are 6.5 million flex-fuel vehicles in use nationwide, less than 2.5% of all vehicles. Only 750 of 167,000 stations nationwide offer E85, a mix of 85% ethanol and 15% gasoline. The nearest ethanol pump for Reynolds residents is 30 miles away.

Then there are the laws of economics. Station owners such as John Harris, who owned the town's only gas station, found it would have cost him $500,000 to $750,000 to alter his station to include E85 ethanol and biodiesel pumps.

Considering that even at $3 a gallon, gasoline yields only a 1% to 2% profit margin for station owners; that's a huge investment. A lot of them depend on convenience store sales to stay in business. As Harris put it, "That's a lot of candy bars."

Ethanol was touted as a cheap alternative to gasoline, but receives a huge subsidy per gallon. It now trades at 50 cents a gallon more than gasoline in futures markets. As corn prices rise with demand, something will have to give.

Some problems are less obvious, such as hunger. Yes, hunger. As noted by Lester Brown, president of the Earth Policy Institute, the grain required to fill a 25-gallon SUV tank with ethanol could feed one person for a year. But even if the entire U.S. grain harvest were made into ethanol, we'd satisfy just a sixth of U.S. energy needs.

In Iowa, site of the first step for presidential wannabes, 25 ethanol plants are operating, four are being built and 26 are planned. Iowa State University economist Bob Wisner says once built, they'll consume the state's entire harvest. In South Dakota, ethanol plants already consume half that state's crop.

Prices for sugar, corn and wheat are up sharply this year, thanks largely to soaring ethanol use. The Agriculture Department reports that world grain consumption will rise 20 million tons this year. Of that, 14 million tons will go into American gas tanks.

Grocery stores and gas stations now compete for the same resource as do stomachs and gas tanks.