Making Fuel, Not Tortilla Chips

Global thirst for fossil fuels is driving gasoline prices in the USA to record highs, triggering an unforeseen boom in the renewable energy sector. Corn farmers, politicians and investors all see ethanol as the tank fuel of the future.

By Peter Hossli

There is one commercial currently dominating US TV. A group of attractive young men and women are standing in the middle of billowing corn fields. “What if we could reduce our dependence on oil?”, asks a brash redhead. A striking brunette knows the answer. “With E85, the green fuel.” E85 is the term for a blend of 85 percent ethanol and 15 percent gasoline. General Motors is running the ad for its flex cars, novel automobiles that can drive on lead-free gasoline and ethanol. GM plans to turn out 400,000 flex cars in 2006, almost twice the number produced in 2005. Ford and Chrysler are also promoting engines that run on biomass-based alcohol fuels.

As Expensive as in the 1970s

Not since the oil crisis in the 1970s have US motorists been paying so much for gasoline as now, spending an average three dollars per gallon (3.78 liters), and in some places as much as five dollars. Two years ago drivers were paying just under two dollars for a gallon of gasoline, regarded as steep at the time. US car owners are accustomed to prices in the vicinity of USD 1.20. Last year’s Hurricane Katrina pushed the price up temporarily. Another factor is low refinery capacity – not one single new gasoline plant has been built in the USA over the last thirty years. However, at over 70 dollars a barrel, oil is the main reason it is getting more expensive to fill up a car in the United States. A year ago, a barrel of oil was selling at just 50 dollars. India, China and other emerging economies are pushing up demand. Developing new oil fields is a costly business. The war in Iraq and the Iranian diplomatic crisis are also unsettling the markets.

The Parties Are United on Ethanol

US politicians are increasingly pushing “home-grown” energy. Ethanol – generally distilled from corn in the USA – is viewed as a logical substitute. This would help to reduce “America’s addiction for oil” claimed US President George W. Bush in this year’s State of the Union address. Last year he approved a mandate to double annual ethanol consumption from the current four to almost eight million gallons by 2012. Analysts are expecting to see an increase in the mandatory quota even sooner, especially with Democrats and Republicans united in their support for yellow corn fuel. According to US Department of Energy projections, by 2030 one third of all vehicles on US roads could be driving on ethanol. Individual US cities such as Wilmington in Delaware have switched to using ethanol in all public sector vehicles.

Private Investors Drive Expansion

A gallon of ethanol today costs USD 2.60, making it cheaper than gasoline. With production costs at between USD 1.00 and 1.20, this still leaves a profit. Margins of this scale have unleashed a veritable gold rush in Iowa, Indiana, Minnesota and other states in America’s Corn Belt. Almost 100 new ethanol refineries have been built over the past five years, and another 33 are under construction, with investment costs ranging from 50 to 125 million dollars. This expansion drive is being largely funded with the savings of small private investors who choose to sideline Wall Street. A case in point is corn farmer Darrell Hack, one of 650 investors who five years ago put their money in a refinery in Primghar, Iowa. Three years ago he received a cash dividend of 20 percent of the original investment, and last year’s payout was an impressive 80 percent. Hack has also seen a rise in price and demand for the corn he grows.

Ethanol Smells Like Business

The more traditional investors have also started to prick up their ears. The few ethanol producers with an exchange listing are experiencing a boom, along with biotech firms which develop enzymes that speed up the fermentation process. A number of private firms are preparing for IPOs. Microsoft founder Bill Gates has also jumped on the ethanol bandwagon, buying a one-quarter stake in Pacific Ethanol for 84 million dollars. The California-based ethanol producer and marketer is currently building five refineries. Legendary Silicon Valley venture capitalist Vinod Khosla is moving out of high tech and into renewable energy. Khosla, erstwhile promoter of Google and America Online, now believes that ethanol could replace gasoline in the USA and many other countries.

Experts Divided

This view is not shared by Professor David Pimentel of Cornell University. He decries the ethanol boom as madness, bemoaning the fact that a small number of people are making a fast buck out of a venture with no future. He claims that ethanol exhibits poor environmental compatibility and has a negative energy balance. According to Pimentel, converting corn to ethanol requires 29 percent more fossil energy than the fuel produced. Energy analysts are already warning of an “ethanol bubble.” They are not the only ones clouding the vision of energy independence. The UK “Economist” quotes a senior Saudi oil official as saying “If biofuels start to take off we will drop the price of oil.” Saudi Arabia is able to lift a barrel of oil out of the ground for less than a dollar. No corn farmer can match that.