Will ethanol E85 catch on in the US? Will we Live Green and Go Yellow?

gagrice · June 2006

It's that sort of reduction in demand during the seventies that helped to break the OPEC cartel.

That is very true. It is also the catch22 in this whole ethanol business. You make ethanol to cut back on OPEC oil. OPEC cuts the price to maintain their income levels. Ethanol is now impractical with cheap oil. Starts the same old cycle. The ones that lose are those that invested time and money into producing ethanol. It also happened with shale oil at the same time 20 years ago. The worst part is companies like ADM have conned US into footing the ethanol bill this time. They make a killing while the fire is hot. We are left with the mess and our dollars in the pockets of the Mega Ag company executives. Some here would argue that is better than in Exxon executive pockets. Is it?

snakeweasel · June 2006

That's not a bad guess, you may very well be right.

Its just a guess and on the high side as I used production levels just above what I have read is the maximum reasonable level of ethanol production in the foreseeable future.

Using the best estimates for reasonable production and allowing for a slight yearly increase in demand I see less than 20% E85 penetration and would barely reduce our current levels of use.

socala4 · June 2006

Ethanol is now impractical with cheap oil.

But the key difference between today and the 1970's is that the overall pool of demanders hadn't changed -- it was dominated by the US and other western countries, and as demand declined within those countries, OPEC began to turn on itself.

Today, the increased price of oil is not coming from the actions of a cartel restricting supplies, but from rapidly increasing demand from emerging market economies such as China. Supplies are being pumped out about as quickly as is possible, it's the demand drivers that are creating the pricing pressures.

In other words, the days of $10 oil are probably long gone. The odds of having prices that are high enough to support alternative energy are much greater than they were in the past. If alt fuels can produced for a price similar or below of some of the lesser oil sources, such as shale, then it stands a good chance of going the distance. But yes, if oil prices collapse for some reason, then all these alt fuels will be dead.

markcincinnati · June 2006

Like Crazy Miranda, who lives on propaganda, I will report the following paraphrase:

Ethanol will be subject to the same vicissitudes that effect gas -- and when gas (for purposes of "from now on" I will agree that gas and E10 are essentially the same) prices are effected:

o Ethanol prices will also increase (or decrease.)

Furthermore. . . .

Ethanol, to overcome the impact of the removal of the $.51 incentive will have to drop in cost about a $1.00 per gallon (and sometimes more).

Ethanol, if produced from food (other than soybeans, if and then only used for biodiesel) will cause the cost of food to rise, even if ethanol per se is artificially price contained.

Bio-mass is a possible approach -- yet little effort is being made to develop bio-mass production facilities, even though it is at least not unreasonable to think that a corn based plant could be used to produce ethanol from switch grass and other bio-mass.

We have the technology and the resources to extract real gooey oil from the US at what appears to be a cost that is about 1/2 of the cost of today's bbl of crude (i.e., $35).

All of these approaches take time -- possibly decades.

Real normal regular gasoline or real normal regular diesel are the only near term products -- from ONLY an economic standpoint -- that can reduce both greenhouse gas and our dependence upon Middle eastern oil.

Other future technologies are, of course, possible, probable and promising.

We should not stop the work to develop supplies of Ethanol despite the apparent contradictions we know of today.

We should, indeed, probably not stop the work to develop alternatives of all kinds.

Based on TODAY's circumstances and the years it will take virtually anything we discover or develop to "come on line," exploitation of better and better ICE's and other compression based technologies are prudent, pragmatic and possible (where would we be without alliteration?)

Everything else is NOT without merit.

Everything else with respect to ethanol will bankrupt and starve us even if we could ramp up the production to anything approaching the quantities required to make a dent in our use of "ferrrin'" oil.

Hybrids, despite their recent fuel economy set backs (for a variety of reasons), too, should not be set back on the shelf of "nice ideas" -- develop develop develop new, better, different approaches must continue.

The hot news technically and supply wise, has to be new and better ICE's and diesels; and, generations worth of oil waiting to be sucked up and turned into gasoline that we already have at our disposal -- both legally and technologically.

I would say we have an obligation to all of these approaches. The buzz about ethanol, I fear is too much like the promise of a perpetual motion machine -- that damn friction always seems to get in the way.

socala4 · June 2006

Ethanol, if produced from food (other than soybeans, if and then only used for biodiesel) will cause the cost of food to rise, even if ethanol per se is artificially price contained.

Not necessarily. Food supplies are more than adequate, and commodity products tend to be cheap.

Most of the price of the goods that we buy at the retail level is not generated by the commodity components, but by all of the processes in between -- farmers even lose money on products sold by retailers at a profit.

If anything, the main risk to food prices comes from increased shipping costs that are created by rising fuel prices. (Those price increases affect everyone in the business, so they will eventually trickle up to the consumer.) So if introducing large quantities of biofuels can reduce the cost of fuel, food prices might actually decline relative to what they would have been, rather than increase.

markcincinnati · June 2006

If I would so stipulate that your comments about food supplies being "more than adequate" are thus, this does not address the other issues brought up.

Ethanol, TODAY, is simply difficult to make in adequate quantities, difficult to transport and a 68% solution.

When I was in school, 64% was an "F" -- making Ethanol a "D-" solution. My mom will not put E85 into her car (if she had one) and have it only go about 7 miles for a given quantity when gasoline will go 10 on the same amount.

Well maybe if the price of Ethanol dropped at least 32% -- wait, wait, I think Hell maybe freezing over -- naaaa, false alarm. :surprise:

In an era where we look for value, Ethanol -- and its costs and MPG's present at best a weak argument to the consumer.

Ethanol, today, is the antithesis of value.

Ethanol promises to deliver us the ability to mitigate our indulgence, yet it seems, thus far, to deliver only gluttony.

Perhaps we'll all find some information here:

Hey, are we really on TV? Cool!

manley · June 2006

Before we start talking about large scale production lower the price of ethonal we have to first look at the problems that ethonal faces.

There is a point of use problem. There is a reason that E85 is easy to find in Iowa and its real hard to find in Arazona. Unlike gasoline ethonal cannot currently be sent through the pipelines. Transportation is one of the bestest problems with ethonal. It has to be truck(Big rigs usually get 5 to 6 MPG of deisel)

Ethonal also has the problem of being energy negative. Meaning it take more engery to make it than you can get back out. We need really cheap energy in order to make the ethonal cheap. Oh and if we are trying to reduce polution the source of that energy has to be CLEAN. Since the majority of our electricty and industrial heat comes from coal we are just shifting the polution from one source to another.

For some reason we have it in our heads that we have to make ethonal from Corn. Go yellow. Ethoanl can be made from a great deal of stuff that can be grown almost anywhere. Stuff that can be grown much easier than corn.

These are just some of the problems that face ethonal. In order for ethonal to be price competitivly we are going to have to change the way we do alot of stuff in this contry. In the words of green peace "the nuclear option is the only option". We also have to convence local power companies that congeneration of transporstaion fuel is a good thing. Waste heat from the nuclear reactor could be used to run the stills for the ethonal and biodiesel plants. The sulfer Iodine process could be used to make hydrogen also from the waste heat from the nuclear power plant. The hydrogen is used to fuel cars as well as make more fertizer (amonia) for the crops. Waste mangament utilities could start using garbage to make methane to heat home and power local fleets. Basically a complete rework of how our engery is produced. The econmy of scale on a grand scale so to speak. Our home grown energy companies are going to have to step up and start handeling all our energy needs, not must electricty, if we are ever going to kick not just foriegn oil, but fossel fuel period. This would also distribute the production points all over the country and ideally the raw matierals can be produced locally. This will elimiate the 3 problems that I mentioned above. this will also mean a huge investment on the part of energy producers with out a guarntee of success.

manley · June 2006

Why do you want the Japanese to develop this technology.

This is the same reason we are in the shape we are in. Americans have become lazy. We need to stop waiting on the japanese to do stuff for us and start doing it ourselves. If its not military we look to europe of asia for all of our solutions.

socala4 · June 2006

When I was in school, 64% was an "F" -- making Ethanol a "D-" solution. My mom will not put E85 into her car (if she had one) and have it only go about 7 miles for a given quantity when gasoline will go 10 on the same amount.

Again, that's arbitrary benchmarking. Since when did fuel economy generated by gasoline become the gold standard for evaluating the usefulness of a fuel?

I'll restate that from the consumer's standpoint, that won't matter if the fuel stops are infrequent enough to be reasonable, if the fuel costs are low enough to either wash or provide an advantage, and if distribution is wide enough to make it a usable choice.

The question becomes whether ethanol supplies will become so plentiful that they can be generated at a lower cost than is possible today. I'd like to see some research on the benefits or lack thereof that scale economies can provide to this industry. Perhaps the subsidies can be cut off once the production infrastructure is in place.

And again, perhaps the answer will ultimately come from distributing it regionally, rather than nationally, which would still help to alleviate demand for gasoline. Perhaps the folks in the Midwest could fuel up on ethanol, while the Northeastern types could use more gas. We'll see what happens.

snakeweasel · June 2006

Again, that's arbitrary benchmarking. Since when did fuel economy generated by gasoline become the gold standard for evaluating the usefulness of a fuel?

Its not arbitrary. In case you haven't noticed practically every car out there runs on Gasoline. Hence when we are evaluating a fuel to replace gasoline it has to be benchmarked against the fuel it is replacing (gasoline). Unless we do there is no way to tell if it is useful to make the switch.

The question becomes whether ethanol supplies will become so plentiful that they can be generated at a lower cost than is possible today.

The question should be can we produce enough at a reasonable price to make the switch. I really don't see that in the future.

markcincinnati · June 2006

How, please elaborate, is this benchmark existing or coming about seemingly at random or by chance or as a capricious and unreasonable act of will -- aka, arbitrary?

The adoption of a "fuel" that is apparently carefully marketed to suggest it is fungible (with gasoline, in this case) when it contains but 68% of the "quantity" of energy/distance and our "calling them on it" is not random and it is not an unreasonable act.

Gasoline -- even in Europe still powers 70% of the vehicles and here in the US it powers even more.

Perhaps the subsidies can be cut off once the production infrastructure is in place? That is the idea isn't it?

Then, based on where we stand today, we would have a fuel that would be priced similarly to gasoline yet still provides a serious reduction in miles per gallon.

Your suggestion that the distribution system may prove to be more efficient (lower cost?) were it to be regionalized is certainly worth discussing further, though.

I actually got a response from my Congresswoman today -- I followed up by sending the Rand study her way.

Bluetec diesels, apparently, satisfy all 50 states and the version 5 engines must even further reduce the dirtiness of these engines (yet another 50% over version 4.)

Let's see if we can actually create an oil glut (which according to the Rand study, Shell has -- in 2005 -- taken several key steps to that end), which ought to lower gas prices and make Ethanol's economic argument -- already quite weak -- downright anemic.

Affordable, plentiful and clean fuel -- is what the customer wants.

Same as it ever was. Same as it ever was.

But now the consumer may actually give a damn about cleanliness, whereas historically it appears the customer was mostly willing to give lip service to that attribute.

Here in SW Ohio, we are forced to use E10 -- which today for us is over $3.00 per gallon ($3.18 this afternoon.) Diesel (dirty diesel probably) is $2.89.

E10 comes it at 97% of the power and mileage of E0, yet costs NO LESS.

Roll up your arm and bend over, as the old joke goes.

Ethanol may become viable as E85.

Current evidence does not support this notion, unfortunately. :confuse:

albert6 · June 2006

A better rating might be dollars/mile or %some_typical_income/mile.

As incomes aren't changing instantaneously, the dollars/mile is a good short-term measure.

The exception might be for long distances. where filling stations were too far apart to be attained with a single fuel tank. Then mpg is a vital informative.

markcincinnati · July 2006

Here is a scenario with respect to per mile costs for both gasoline (E0/E10) and ethanol (E85):

It'll cost HOW MUCH per mile?

The current thinking pertaining to diesels is that they will go 20 - 40% further in a similarly priced and performing car (similar to the gasoline powered version.)

The comparison between an oil based fuel (diesel, in this case) and a corn based fuel (E85, today, i.e.) is skewed even more in favor of the oil based fuel. The example from the "klik" above figured a tank of gasoline vs a tank of E85 in an FFV and arrived at the numbers:

Gasoline Miles Per Tankful=600
E85 Fuel Miles Per Tankful=408

Diesel would be an MPT of =720

The cost for the tankfuls of gasoline and E85 based on where we are today were about $2.00 difference for a twenty gallon tank (assuming E85 was $.10 more per gallon.)

Today, (in Ohio, Kentucky, Indiana, West Virginia) diesel is ~ $.29 per gallon less expensive than gasoline and $.39 less than E85, which would translate to about $6 or $8 less per tankful.

Diesel fuel MPT=720 @$2.89/gal
Gasoline MPT=600 @$3.18/gal
Ethanol MPT=408 @$3.28/gal

The performance in top speed and acceleration is about the same between these different fuels in the vehicles noted above -- diesel accelerates slightly quicker than gasoline and E85 "probably" will accelerate slightly quicker than gasoline.

Assuming the cost of the car was ~ the same (within $1,000 of each other) -- would you go for the E85 FFV vehicle and use E85 in it?

TODAY, I cannot even with my best and most altruistic hat on, my best Sociological Imagination (Mills) that is, imagine people in the US going green because it will cost so much MORE green.

I could be wrong. It just seems counter intuitive to believe that Americans (and not limited to just Americans) would pay that much more for so much less, regardless of their desire to stop sending money to the Middle East.

gagrice · July 2006

imagine people in the US going green because it will cost so much MORE green.

Well Americans do buy hybrids with little hope of regaining the premium paid.

I can see it now. You have the green hybrid group all keeping track of their mileage online. There is the VW TDI Club with their 800 mile group. Next will be the E85 site. With a 300 mile per tank list. The catch being if they can find an E85 station on a trip 300 miles from home. Mighty doubtful.

Martha, "DO I have to give back the Green hat with the ear of Corn stickin' out the top, if we fill with Regular ole gas?"

snakeweasel · July 2006

A better rating might be dollars/mile or %some_typical_income/mile.

But it still comes down to comparing it to gasoline since that is the defacto fuel for all cars today. Sure we could use dollars to miles, and I have on this forum. But since we are talking about replacing gas that dollar per mile cost has to be benchmarked against the dollar per mile cost for gas. You are talking about ways to measure economy the benchmark is still gasoline.

The exception might be for long distances. where filling stations were too far apart to be attained with a single fuel tank.

IIRC the longest distance between any two gas stations in North America is about 245 miles on the Dalton Highway in Alaska. Since any car can do that in one tank of E85 I don't see that being an issue.

snakeweasel · July 2006

Well Americans do buy hybrids with little hope of regaining the premium paid.

Yeah the roads are clogged with hybrids, can't swing a cat without hitting one. :P

gagrice · July 2006

IIRC the longest distance between any two gas stations in North America is about 245 miles on the Dalton Highway in Alaska.

Good picture. You know I worked 25 years at the end of the Dalton Highway and never drove further than 40 miles South to go fishing.

I do think a few will get sucked into the hype and rationalize that by using E85 they are doing something for America. Same as the person that buys a Hybrid. It does defy conventional wisdom and logic.

snakeweasel · July 2006

I think that picture is at cold foot driving up to deadhorse. When I was stationed up there we discussed taking a trip up the road but back then you needed a permit to go on it.

I do think a few will get sucked into the hype and rationalize that by using E85 they are doing something for America.

Yeah a few will buy into the hype. But I don't think as many will that have done the hybrid route. With a hybrid people see you have one, with a FFV who knows what your running.

gagrice · July 2006

with a FFV who knows what your running

That is exactly right. You may have a corn cob in your tailpipe but you are probably spewing gas fumes. Outside of the government agencies I don't see much future for E85. I think one person has posted here that they are using it. Will they when it costs as much or more than regular unleaded?

Looks like a real bargain in Kansas City. This is copied from the E85 website.

From: Ted
E85 Price: 3.499
Station Name: Presto Conoco, Bannister/Holmes
Station City: Kansas City
Unleaded Price: 2.799
Date: Friday, June 30, 2006

Here's a real deal in SC on E85:

From: Chuck
E85 Price: 3.65
Station Name: Tims Petroleum
Station City: Columbia,SC
Unleaded Price: 2.61
Date: Wednesday, June 28, 2006

socala4 · July 2006

But it still comes down to comparing it to gasoline since that is the defacto fuel for all cars today.

I agree that comparisons to gas are to be expected, but MPG is not the only benchmark.

If MPG was the main driver, we'd all be driving diesels, which clearly we aren't and probably won't do. Obviously there are other motivations and considerations, and consumers will often make these decisions based upon a "good enough" standard of some sort. If E85 was cheaper or perceived as being "better" in some other way, that would generate sales.

gagrice · July 2006

we'd all be driving diesels, which clearly we aren't and probably won't

We were headed that direction in the last gas crisis of the late 1970s & 1980s. Every major car maker had diesel cars for sale. They were noisy, smelly and slow. That is where your perception and most of America's perception of diesel comes from.

If E85 was cheaper or perceived as being "better" in some other way, that would generate sales.

Perception by the uninformed is that E85 is going to save us from the evil oil empire. E85 burns cleaner granted. At what cost in pollution to grow and produce? You read 10 studies and none agree on how much fossil fuel it takes to make ethanol. More than likely with having to truck it across the country to the coasts it takes more fossil fuel to produce ethanol than you get out.

socala4 · July 2006

"we'd all be driving diesels, which clearly we aren't and probably won't"...We were headed that direction in the last gas crisis of the late 1970s & 1980s.

I'd like to see some hard data about that. I don't know what penetration diesel may have had during the seventies, but based upon what I remember from the time, I seriously doubt that diesel comprised even 10% of the light vehicle market in the US.

You read 10 studies and none agree on how much fossil fuel it takes to make ethanol.

Yet you always go with the worst case scenario. Why not look at the range of data, and consider the merits and flaws of each of them? There's no need to grind an ax, pro or con, about any of this stuff.

gagrice · July 2006

There's no need to grind an ax, pro or con

There most certainly is a reason. It is my tax money and I assume your tax money that is subsidizing this boondoggle called ethanol from corn. Or to make it sound good to the masses "Live Green and Go Yellow". I have no problem with ethanol if it is left to a free market to grow the corn and produce the ethanol. It is the subsidies and the tax breaks that I am upset about. I am not behind subsidies for biodiesel either. If it cannot make it on its own merit it must not be viable.

gagrice · July 2006

Not a lot of info on the subject. I did read somewhere that in the 1980s the MB 300D and 300SD comprised 80% of their US sales.

In 1975, only Mercedes-Benz, Peugeot and Opel sold diesel cars in the United States. GM got into the diesel market in 1977 and sold one million of them from 1977 to 1981 as buyers looked for a hedge against rising fuel prices.

snakeweasel · July 2006

I agree that comparisons to gas are to be expected, but MPG is not the only benchmark.

I don't think anyone is using MPG as the only benchmark. Most people are basically using the cost per mile. Of course many people would accept 20 MPG on a $1 a gallon fuel than get 35 on a $3 a gallon fuel. But thats not the case with E85 is it?

gagrice · July 2006

Cost per mile is the most important factor. The best mileage car you can buy that is flex fuel is the 2006 Chevy Monte Carlo. On E85 it gets a combined 19 MPG. For comparison the slightly larger midsized 2006 Camry gets combined 28 MPG. So if you are looking for a car based on economy you would not even consider a FFV. If you happen to live in MN or SD where E85 is more heavily subsidized than other states you may get E85 as much as 80 cents per gallon cheaper. Based on E85 @ $1.99 vs $2.79 for unleaded regular the cost per mile is as follows.

Chevy Monte Carlo = $.1047 per mile
Toyota Camry = $.099 per mile

Does not look bad for E85 at 80 cents per gallon cheaper. That was the best case scenario. Most of the time E85 is within a few cents of gas.

socala4 · July 2006

Of course many people would accept 20 MPG on a $1 a gallon fuel than get 35 on a $3 a gallon fuel. But thats not the case with E85 is it?

But again, we cannot look at today's pump price differential, and presume that this margin will remain constant.

Let's review what has happened as of late. Before the E10 mandate, E85 was relatively cheap because there was minimal demand (fuel had minimal distribution, and most vehicles don't run on it). It has recently leaped in price because of new regulations that have imposed increased demand for ethanol before the supply sources were in place.

The economic implications of this are clear: because ethanol cannot currently be produced fast enough to meet the demand, its price has gone up. However, if the basic laws of economics apply here, then we could expect that ethanol prices will fall when production levels have increased.

The follow-up question is whether the cost of ethanol production will decline going forward. If there are going to be cost reductions, I see two basic possible sources for savings: (a) scale economies and (b) cheaper biomasses. To the extent that there is a benefit from (a), the production capacity isn't yet there but will be soon enough. As for (b), increased capacity might create inducement for developing an alternative biomasses. (Presumably, any company that can generate an alternative that will lead to large cost savings for the producers will be amply rewarded.)

Bottom line is that we can't use today's pump prices as the main determinant of what could happen in the future. The current price of ethanol is clearly not in equilibrium, so I wouldn't forecast future events based upon a temporary disparity.

markcincinnati · July 2006

The disparity is probably temporary. Also, probably, we can find erudite and creditable authors who will say ethanol will rise in cost (relative both to where it is today and in synch with "gas") and those who say it will fall.

Similarly, there are emerging into the mainstream, articles suggesting a possible "oil glut" (even if it is only a steep decline in per bbl costs and NOT really an endless supply.)

If all of the points of view (with their explanations intact) that supported E85 actually costing less than petroleum based fuel were to be proven accurate, none of them (that I can find) suggest price decreases for E85 that WITHOUT subsidy or even WITH the continuation of a $.51 "hidden tax" will make E85 cost less than using gasoline.

I have read a report that suggests that it MAY be possible, if we figure out a way to produce enough E85 to cut the price of a gallon of E85 to "about" a dollar less than regular petrol based gas, IF we continue the $.51 subsidy.

These viewpoints assume no oil glut and also assume that somehow the factors that effect gasoline's prices will somehow be suspended with respect to ethanol.

OK, leap of faith hat chin strap in place:

If gasoline would "settle" at about $3.25 per gallon and if E85 could somehow be made to be $2.25 per gallon (with the subsidy in place), what would be the motivation to use ethanol?

A tankful of gas (20 gallons) would cost a bit more than $60 and in a fuel efficient V6 engined car (an FFV) it could be capable of going about 600 miles.

A tankful of E85 in the same vehicle would cost a bit more than $40 and in the V6 FFV would go about 400+ miles.

If you tracked the cost to go 1,200 miles the cost would be the same but you would have had to stop twice for gas and three times for E85.

If the subsidy went away, IF the cost of E85 could actually be driven down another $.51 (to about $1.75 per gallon), the miles per tankful would NOT change but the cost per tankful would drop about $10.00.

So, then at $60 per tankful and a cost of $120 to go 1,200 miles (with two stops to refuel) vs $30 per tankful and a cost of $90 to go 1,200 miles (with three stops) there WOULD be some motivation to "fill 'er up" with E85.

No model from any camp of any repute (and I exclude "us" here on Edumnds since we are mostly writing with only the benefit of published (and summarized) reports) suggests any kind of price divergence -- with or without the end of the subsidy -- that could support such a scenario.

Many reports, however, suggest that other approaches appear to have more merit:

a) "breakthrough" internal combustion engine improvements -- possible; "incremental but evolutionary" internal combustion engine improvements -- not only possible but actually happening (at the retail level) about every other year;

b) improvements in hybrids -- notably marrying electric motors with diesel engines;

c) diesel adoption, on a relatively rapid (percentage wise) pace over decades;

d) renewable fuel manufacturing technology improvements and engines that are optimized to use ONLY ethanol based or bio-something based fuels (i.e., not FFV's which seem to offer the worst of both worlds and what many of us here rail on against;)

e) advanced technologies (some known, some dreamed of and some neither known nor dreamed of yet.)

Perhaps we "shouldn't" use today's pump prices as the main determinant of what could happen in the future.

But we do, we are and for the near to mid term, I am convinced, we will.

The prices posted several blogs back tell today's stories -- and I'll so stipulate things will change one way or the other "the next day."

"E" faces challenges that, with history as our guide, we cannot legislate away. Remember prohibition?

The somewhat confusing and contradictory thing I find (this is not an argument, it's contradiction) is that there are those who are willing to forecast diesel's future based on that technology as it was "then." I.E., a technology that has been proven by time to be "temporary" (e.g., dirty, smelly, noisy, sluggish diesel "Olds and Cadillacs from 20+ years ago.")

I wouldn't bet on diesel's failure based on a forecast using the old diesel anymore than I would jump to base ethanol's future on what may be proven to be today's temporary disparity. :surprise:

snakeweasel · July 2006

But again, we cannot look at today's pump price differential, and presume that this margin will remain constant.

But we can't presume the margin will change by any great amount either. We have to follow historical trends unless we see something that will say differently. I cannot see the price of ethanol coming down anytime soon save for wasting more taxpayers hard earned money.

However, if the basic laws of economics apply here, then we could expect that ethanol prices will fall when production levels have increased.

Two issues with this. First the capacity to produce that much ethanol does not exist and would have to be created which means the price will not go down soon. Secondly Ethanol is made from something else. Increasing the amount of ethanol being produced means using that raw material (mostly corn right now) that means the demand curve for that raw material will shift and the price will increase. As the cost of the raw material increases so will the price of ethanol.

If there are going to be cost reductions, I see two basic possible sources for savings: (a) scale economies and (b) cheaper biomasses.

Scales of economy only reduce the cost of a product significantly when increasing productions from a low level. There is something called diminishing rate of return. Increasing production 10% would mean a per piece reduction in cost of X, increasing by another 10% only reduces the price per piece by X-Y.

Biomass will not produce enough ethanol to make a significant dent, It might reduce the cost somewhat but not enough to make it viable against gas.

Bottom line is that we can't use today's pump prices as the main determinant of what could happen in the future.

Again without anything in the future that will significantly reduce cost we have to follow todays pump price. I seriously doubt that within the next 10 years you will see much difference between the two.

socala4 · July 2006

We have to follow historical trends unless we see something that will say differently.

Political issues aside, the biofuels issue will be driven by a change in historical trends, so we can't look just at the history without noting how the situation has changed.

Except during the seventies OPEC cartel crisis, oil has been a fairly cheap fuel for much of the 20th century, which did not make ethanol price competitive. Now that the fundamentals of demand are changing, the prices are increasing.

[T]he capacity to produce that much ethanol does not exist and would have to be created which means the price will not go down soon.

It is reasonable to expect that increased production capacity will lower prices, as the supply catches up with a level of demand that spiked by a large amount due to regulatory changes.

You are correct that it doesn't exist at this moment, but capacity is being built and planned, so this is a matter of time. All infrastructure takes time and money to build, so we can't consider the potential or lack thereof until we consider the supply side of the equation.

As the cost of the raw material increases so will the price of ethanol.

As I pointed out above, that may or may not prove to be true. The final retail price of commodities is largely driven by processing and transport costs, not by the commodity prices themselves, and the increased cost of the crop may be more than offset by a reduction in potential transport costs created by the ability to reduce petroleum consumption.

Biomass will not produce enough ethanol to make a significant dent

That is what I would agree seems to be the most likely stumbling block. If we ultimately can only reduce oil consumption by a few percentage points, then it will have proven to be a rather costly waste.

That's why I'd be inclined to increase the likelihood of success by plowing in significant resources to expedite the R&D effort. The current biomasses of choice (corn-based ethanol and soy-based biodiesel) are fairly inefficient, and alternatives need to be developed that make production rampups more scalable. We are early stages here for all of these things, and there is not much incentive at this stage for the free market to push it along on its own.

markcincinnati · July 2006

Do any of us believe the assertions that diesel engined cars purchased in %'s similar to the EU's would NOT reduce our oil consumption by 1.4 million bbls per day?

Do any of us believe this (1.4MM bbl) is an insignificant dent if these numbers are "real calculations" rather than fuzzy, "hopeful-guess" statements made by our own government?

The tax incentives are in place NOW, to stimulate the continued and increased sales of fuel efficient vehicles (diesels, too, are included in the group with tax incentives.) My personal wishes for incentives are no longer up for discussion -- the incentives are now the law of the land. I say let's consider availing ourselves of them if we're in the market.

Of course, what still galls me is that FFV vehicles actually seem to increase CAFE numbers when they do no such thing. Then it galls me even more to see virtually no "widespread" (or, perhaps, better said "mainstream") advertisements or news stories that explain the sharp decrease in MPG's one "enjoys" when using E85.

It is not even an open secret -- for few seem to want to look into the consequences (or one consequence, economic) of using an FFV with gasoline vs E85.

The thing missing in action -- and soon to be rectified -- is a variety of vehicles to buy that are FFV's (also missing are diesels -- but Audis, BMW's, Honda's Mercedes and VW's will be a good start.)

Both of these MIA's should be addressed by the end of the decade -- but since everything has a lead time of 2 years at least, it would seem that it will be possible to actually buy a car you would enjoy driving (financially and performance wise) that uses a clean compression based power plant sooner than you can buy an FFV and keep it economically filled up with ethanol.

Bluetech and version 5 diesels can be here over the next MY or two without too much trouble.

An oil glut could make them unpopular -- but that would seem to be the case with FFV's too.

Much as I want an oil glut and the price decrease that is suggested will accompany it, I'm not holding by breath.

socala4 · July 2006

Do any of us believe the assertions that diesel engined cars purchased in %'s similar to the EU's would NOT reduce our oil consumption by 1.4 million bbls per day?

I'm not sure about this, actually. Diesel made from oil is being made from oil (yes, I'm stating the obvious), so the argument seems to be that using diesel simply allows us to get more out of a given barrel of oil because we are using that barrel to provide us with both gasoline and diesel, rather than just gasoline.

But let's remember that it's not as if that diesel is being thrown away, it's being used by somebody, somewhere on the planet. Perhaps Americans may not be the one using that specific quantity of diesel, but that doesn't mean that the diesel never enters the supply chain.

I may be misunderstanding it, but this argument strikes me as more of a national diversification argument, not one that reduces our global dependence on oil. It's an argument which may hold true when we look at just one group of users (in this case, Americans), but not when we view the global picture.

If all things were held equal except that we started shifting toward diesel, rather than gasoline, I would expect that this would simply free up more gasoline for someone else to burn, while reducing their available diesel supplies. That might specifically help the US, but it wouldn't necessarily solve the big-picture political problem of our dependency on these dictatorships to fuel the entire world, and what that does to create resource constraints and competition among the rest of us.

snakeweasel · July 2006

It is reasonable to expect that increased production capacity will lower prices, as the supply catches up with a level of demand that spiked by a large amount due to regulatory changes.

That is unless the increased production drives up the cost of the raw material by bidding up that product. Increasing production can reduce the price, or it can be the same or it could increase costs. It all depends on things other that making supply meet demand.

I just don't see increasing production of ethanol getting high enough without forcing a bidding war on the raw materials to make it to make a real difference.

gagrice · July 2006

Something that has not been hashed out here is an obvious problem of converting to non-sugar sources for ethanol. It is an entirely different process involved making ethanol from a biomass such as wheat straw, wood chips or switchgrass. Iogen has the only working plant to do just that. They have not gotten funding to build a 350 Million plant in Idaho. Will we ever build those plants? From all I have read current corn stills are not usable for other types of ethanol production. Will anyone want to spend millions and probably billions to ramp up this use of other materials to make ethanol. It is not in the interest of companies like ADM. They want to make all the ethanol they can from corn. Would you invest big bucks in a venture that could be worthless if oil prices drop as they will. It is not too far off. Nobody would believe when I said gas would get below $2.50 per gallon by fall. It has hit $2.12 in KY already. OPEC is not going to let some upstart companies squeeze their money supply.

socala4 · July 2006

I just don't see increasing production of ethanol getting high enough without forcing a bidding war on the raw materials to make it to make a real difference.

That may be, it's a fair guess. (Which is one of my points -- at this juncture, all of us are speculating, and none of us really know what will happen.) Personally, I don't see the likelihood of a commodity pricing problem -- individual ag producers have virtually no power to set prices -- but I do question the ability for the fuel itself to become so abundant that it will do much to impact the price of oil.

gagrice · July 2006

but I do question the ability for the fuel itself to become so abundant that it will do much to impact the price of oil.

I don't think the actual production of ethanol will have any real affect on our purchasing of oil. It is still very possible that it takes more oil to make ethanol than you get back. So it is a win for OPEC. They just have a history of dropping prices with the least little drop in oil movement. As some of the countries having internal problems come up to normal production levels. They will probably be over producing the demand, and the price will come down.

markcincinnati · July 2006

Shell Oil has, in limited quantities thus far, cooked quite a few batches of USA Shale to create oil that is (June 9, 2005 data from the Rand Corporation) doable at the equivalent of $20/bbl.

They are NOT being subsidized (or at least they were not last year at this time) to do this in the same way ethanol is being subsidized ($.51 per gallon.)

Were they to build the infrastructure to actually do this on a large scale and produce gasoline and simultaneously reduce our dependency on Middle Eastern oil, there would probably be little more than a "thanks for playing" mention on the evening news (after the initial cheap oil hit the market and we got back to the lower prices we were enjoying a few short years ago.)

Were there to be tax credits, rebates, subsidies, subventing and subterfuge for all I care, Shell seems to think that we could use ONLY American crude for 100 years and not import another drop. Conversely, Rand says, "well, the more practical way to use this oil is to increase our use of our own natural resources to 25% of our demand, which would essentially give us the ability to use our oil for about another 400 years" [sic] (but at THAT level.)

The theory continues and perhaps even foreshadows a possible oil glut (theory since it has only been put into small use, rather than big, full - scale pedal to the metal production that Shell (and others) probably would do were they given half the economic incentive to do that ADM (et al) presumably has been given.)

The data suggests that once we got fully into cooking our shale to create our own crude, the overall cost of a bbl of oil would drop from today's $72+ per bbl by perhaps $15 to $30+ less. The cooked oil, to underscore, from June, 2005, was able to be made viable at a rate about $20/bbl (Rand Report link in previous blogs.)

Factor in start up costs and other infrastructure build up costs and throw in a couple of 500 million dollar retirement packages and perhaps the cost of a bbl of our own goo would be $40.

Keep in mind the KNOWN reserves we have identified from this one source are triple the reserves of Saudi Arabia.

It will take years (more than 10) to do much of anything that will slow down our need for dino fuel. Why not "encourage" Shell and others to see what a little help from their friends might do toward answering the question "what's cookin' underground in Colorado?"

This, in response to my Congresswoman who claims she'd rather send our money to Iowa than Iran. I don't want to send our money either place. Well, in some free market way, it almost would seem that folks will involuntarily send their money to Iowa (so they have to be "mandated" to do so), yet they [we] have proven time and again to be quite eager to send our money to the middle east, Mexico, Canada, South America and so on.

My Congresswoman's email to me detailed all the ramp up (and $ encouragement) we are providing companies to build CORN refineries. From what I have read, if we build corn into ethanol refineries they are not "automatically" able to use other biomass for the same purpose.

Further, if what is being written about the impact upon our ability to export corn (as in sharply reduce or eliminate it altogether) -- and how much of our farmland we would have to devote to the production of food crops that will be instead turned into ethanol (71%) if we choose this route -- is true, won't there be global consequences?

Is it really "OK" with the rest of the world to no longer get any (or at least a lot less) corn from us?

The economic and practical evidence continues to mount, seemingly against, this course of action.

We have the resources and we have the technology to extract a lot of "time" from the oil we have right here, right now.

It seems like much of what we discuss, argue, debate and contradict here is mainly about buying time without bankrupting ourselves.

Shell must feel like a screaming voice in the wilderness from what I can gather. Meanwhile, King Corn, not Big oil (this time) dips into the public pocket for help.

Don't cry for me Argentina -- whatever.

gagrice · July 2006

This, in response to my Congresswoman who claims she'd rather send our money to Iowa than Iran.

Sounds like your Congress woman needs to do some homework. Last I heard we are not getting any of that crap oil that Iran is selling. In fact that is a part of all the saber rattling. They have very high sulfur crude that is not much in demand around the world. I think they have some of the same ideas about taking over Saudi oil as Saddam had in 1990.

Shale oil is an interesting prospect for sure. I think the natives of the area are nervous. I would look for the same kind of resistance to shale oil as we are seeing off the coast of Florida. CA & ANWR. As has been shown we can have all the reserves in the World and still not get to it. Lots of obstacles to producing oil.

Our Congress talk a good story about energy independence. Too bad their actions do not accomplish anything to achieve that goal.

markcincinnati · July 2006

The impact on jobs, the economy and National Security (but three of the + impacts) alone have, according to Rand, made the oil shale states willing to raise their hands, and yell "pick me, pick me!"

Send your tax-donations to King Corn, P.O. 3.14, Black Hole, USA, Planet Earth.

Sheeesh. :surprise:

Have a piece of pi on me.

gagrice · July 2006

oil shale states willing to raise their hands, and yell "pick me, pick me!"

I would think they would want the business. I know in Alaska it has been an uphill battle keeping the Left Coasters nose's out of the state's oil business. They like using lots of oil. They think it grows on trees and you just reach out and pick it, nice and pretty like. I do believe that ANWR will come on line in due time. It is a great reserve and very easy to get at in a sound environmental fashion. The capacity of the oil pipeline is such that it would not be possible to transport it for a few more years. They are keeping the flow at about 1 million barrels per day. I think there are some sections that need to be replaced. They don't want another incident like BP had last winter. It is amazing how oil can wear out a big thick pipe. At least 90 miles have been replaced of the original pipe installed in the 1970s.

scott1256 · July 2006

E85 isn't close to being competitive with regular unleaded right now.

If E85 becomes competitive (about 2/3 the price of regular unleaded) there is still the annoyance of stopping more often for fuel.

Eliminating the subsidy of $0.51/gallon might make E85 competitive. Brazil and other nations would be quick to send ethanol here.

gagrice · July 2006

Eliminating the subsidy of $0.51/gallon might make E85 competitive. Brazil and other nations would be quick to send ethanol here.

That is just the latest subsidy. Corn has an additional subsidy. The real kicker is the Tariff of 54 cents per gallon on Brazilian ethanol. That was put on long ago to protect the less productive ethanol producers in this country. Brazil is selling us about 20 million gallons a year. They are competitive even with the more than a $1.50 disadvantage tacked on by our wise leaders. If the subsidies and tariffs are removed our ethanol industry would die a quick death. Every Caribbean Island would be growing corn and making ethanol.

captain2 · July 2006

didn't exactly say I wanted the Japanese to develop anything - only that in most likelyhood if an 'efficient' E85 specific engine would be developed this is where it would come from. It has to do with having the money for the R&D, and the fact that the 'US' mfgrs. have consistently shown the inability to produce anything innovative (but gas hog V8s) over the last 50 years or so. And that was before we became 'lazy'.
The Europeans have been doing a good job with diesels - if E85 is going to get anywhere something has to be done to increase engine efficiencies, something that the GMs of the world have never been able to do. The FFV V8s that GM is pushing is nothing but a means to dodge some CAFE requirements and at 10-12 real mpg (on E85) - obviously not any kind of answer. The 'Japanese' 3, on the other hand, develop and produce some of the best smaller displacement engines (4 and 6 cylinder) available. Since a very large portion of their production is now in the US, and the US market is the bulk of sales; there should be some REASON for them to take a serious look at it - under the assumption that the E85 becomes available.

scott1256 · July 2006

Fuel efficiency of vehicles burning E85 is limited by the properties of the fuel.

Gallon for gallon, ethanol only has about 67% as much energy as gasoline.

Most vehicles using E85 only get about 72-75% of the mileage they achieve running on regular unleaded.

How would engine design overcome this basic property of ethanol?

albert6 · July 2006

OK, I may not have it entirely clear, but a few years ago 'the other white meat' was going to be a great thing for a number of farmers. Lots of farmers went to raise a lot of pigs. So many that the spot market for pigs dropped the price below the cost to raise them. It was tough on the farmers who got to choose whether to ship to market and lose even more money on transportation or shoot the pigs and bury them on the spot to cut their losses.

The peculiar thing was the price for pork in grocery stores did not drop. Beef prices stayed high due to limited supply and the grocery stores saw no need to undermine them with lower pork prices.

I see the same with Ethanol. Even if it was free to produce, until it is the majority fuel it won't be priced much lower than gasoline, either on a per-gallon basis or on a per-btu basis. What would the point be of doing so? One can't pull a market that does not exist.

scott1256 · July 2006

congress has given US ethanol plants a $1.50 per gallon subsidy/tarriff protection (see Gagrice's post #1503).

If this was removed E85 would be lots cheaper than regular unleaded even adjusted for energy content.

Brazil could export very large quantities of ethanol if the playing field was level. Other countries would also quickly develop ethanol capacity.

gagrice · July 2006

Without the subsidies farmers would not grow as much corn. ADM and Verasun would not build ethanol plants. The whole ethanol scam is to beef up the midwest in time for elections. after the fall it could all go away. That 54 cent tariff should never have been implemented.

Hollman W. Jenkins words it - The U.S. imposes a 54-cent-a-gallon tariff on Brazilian ethanol, to discourage competition with domestic ethanol, which receives a 54-cent subsidy from taxpayers. This should lay bare the fraud that whats going here has anything to do with energy security. It has only to do with the agricultural lobby masquerading its interests behind foolish and misleading rhetoric about energy security.

Our government in deja vue action:

1980 - The Energy Security Act offered insured loans for small ethanol producers (less than 1 million gallons per year), up to $1 million in loan guarantees per project that could cover up to 90 percent of construction costs on an ethanol plant, price guarantees for biomass energy projects, and purchase agreements for biomass energy used by federal agencies.
1980 - Congress placed an import fee (tariff) on foreign-produced ethanol. Previously, foreign producers, such as Brazil, were able to ship less expensive ethanol into the United States.

gagrice · July 2006

Here is one of the arguments used, to try and convince the Congress and President, not to lift the ethanol tariff on Brazil.

Renewable fuels are produced only in countries where programs have been created to assist in their production. Thus, any reduction in the U.S. secondary tariff on ethanol would result in U.S. taxpayers further subsidizing imported ethanol beyond the subsidies that are already be given in the country of production. Since imported ethanol receives the 51 cent per gallon tax credit, if the U.S. tariff on ethanol is removed or dips below 51 cents, then U.S. taxpayers would be effectively subsidizing imported ethanol. The subsidy would be equal to the difference between the tax credit and the amount of any reduced tariff.

jim314 · July 2006

The heat of combustion of ethanol is lower than that of a typical hydrocarbon, but ethanol has a higher octane rating than most hydrocarbons. So E85 could have a higher octane rating than regular gasoline. If the engine controls can adjust spark and valve timing depending on the amount of ethanol in the fuel, then the engine would convert more of the free energy of combustion into output power. See link http://en.wikipedia.org/wiki/Octane_rating

jim314 · July 2006

See http://en.wikipedia.org/wiki/Gasoline

Ethanol is added to gasoline both to act as an oxygenate (to reduce pollution) and as an octane booster (to reduce knocking).

Will ethanol E85 catch on in the US? Will we Live Green and Go Yellow?

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