Fueling Big Ethanol's machine

Ethanol producers are today’s alchemists. They take gasoline, convert it to an inferior product, then sell that product for more than the cost of the gasoline.

Chuck Angier, the author of The Futility of Ethanol essay, checked in with some comments on my previous post. If you haven’t already, take a moment to read his comments. I appreciate Chuck’s attention and his feedback on my thoughts.

Like Chuck, I was also troubled by the 6% return in ethanol production, but I got there from a different direction. A 1.06 energy ratio means that you need to use 16.7 gallons of ethanol to produce 17.7 gallons of the product, a net gain of one gallon of ethanol. This can be justified from an energy perspective, but it doesn’t make any sense from a business standpoint. There is too much risk and too large of an investment for that small return.

Likewise, you would have to grow 16.7 acres of corn, for a net gain of ethanol equal to the yield from only one acre. That is geographically unsustainable, even for today’s ethanol production levels of less than 5% of U.S. gasoline consumption.

For these reasons I was convinced that the 1.06 energy ratio was wrong. The answer finally came to me, the energy ratio was correct, but I assumed the wrong fuel in my analysis of ethanol production.

The ethanol producers are smart enough to avoid using ethanol in their processes. They use good ol’ gas, natural gas and petroleum based fertilizers. This improves both the sustainability and economics of producing ethanol.

Sustainability. Use of gasoline reduces the inputs needed to produce one gallon of ethanol from 16.7 gallons of ethanol to 11.0 gallons of gasoline. This is due to the higher energy content of gasoline (i.e., ethanol’s 1.52 GGE).

This also makes the agriculture of ethanol more sustainable because the 16.7 to 1 acreage use is avoided. They just pump the required raw materials from the ground, instead of growing them. But that’s another blog.

Economics. Wholesale pricing for motor fuels is inverted. Ethanol at times costs more than gasoline on a volume basis despite its inferior energy density. This is really astounding considering ethanol has only 66% the energy of an equal volume of gasoline. So when converting corn to ethanol, producers choose gas. It can be cheaper and provides more energy per volume.

Assuming equal pricing by volume, the math works out like this

$1.00 gas x 1.52 GGE x 1.06 energy ratio = $1.61 ethanol to sell

Throw in government subsidies and excise tax avoidance and there is no longer any mystery as to why people are lining up to build ethanol facilities.

Isn’t that ironic? For ethanol production to be economically viable and agriculturally sustainable, it is dependent on fossil fuels. Ethanol producers will not and cannot use their own product in production.

I will re-look at some of the number crunching performed in Chuck’s essay based on the above assumptions in a later follow-up post.

Note: If my logic or math is hosed up in this analysis don't be shy about correcting me.