More Discussion About Ethanol

For those of you who have broadband, Google Video has a presentation by Vinod Khosla, a successful venture capitalist, about ethanol.  He suggests (Powerpoint, 7.3 MB) that ethanol is competitive with oil at $35 - $40/bbl and that cellulosic ethanol made from switchgrass has many desirable features.  He goes on to say that switchgrass adds nutrients to the soil.  In order to catalyze the uptake in use of ethanol, Khosla proposes a set of government initiatives, such as mandating that E85 (85% ethanol, 15% gasoline) pumps be offered at certain gas stations.

One of the dispiriting aspects of Khosla's talk is that he relies on the government to do the spadework on ethanol rather than entrepreneurs and the market.  For instance, in addition to the E85 pump mandates mentioned above, he wants to collect $35 million to promote a California ballot initiative that would tax gasoline to the tune of $380 million a year.  For another, he proposes taxing oil when it falls below $40/bbl, such that OPEC can't lower its prices to run ethanol out of business.  I think Khosla's instincts are poor in this regard.  Politics is fickle.  The money would be better spent on more durable gains, such as researching new technologies that make ethanol a more favorable economic proposition.  As people become invested in ethanol, the politics will follow.  Besides, for my tastes, we already have too much economic coercion going on in our society.

A couple of months ago, I had a discussion with my mom and dad, where they argued that using ethanol would mean essentially burning our topsoil, no matter that the ethanol feedstock was switchgrass rather than corn.  However, Khosla says that switchgrass enriches the soil, even though he doesn't present any backup.  I always have been sympathetic to my mom and dad's view with regard to ethanol from corn, but I would like to see some facts on how the soil is impacted by growth of switchgrass on a mass scale.

In any event, Khosla also mentions an aspect of ethanol that surprised me:  It takes only $40 per vehicle to convert a gasoline-only vehicle to a Flex-Fuel Vehicle (FFV) that can burn E85 or regular gasoline.  The car companies probably can justify this expense on positive PR grounds alone.

Comments

[Jeanne Schmelzer]

Farmers have always known since the depression era, when topsoil was depleted and blew away with the prairie winds, that rotation was good for the soil. Soy beans (any legume as well as Alfalfa) fixes nitrogen into the soil so that the following year corn is planted. Corn takes a lot of nitrogen to grow and so it takes advantage of the fixed bean/alfalfa etc. previous year nitrogen. Corn should only be planted in that plot for no longer than 3 years otherwise the corn isn't nourished well. After corn is taken off then wheat is planted. Along with the wheat is hay (alfalfa or timothy and clover) which germinates slowly in the wheat to present itself after the wheat is harvested for the grain and the straw. Hay is made the following year or two and the cycle starts all over again.

However in this day and age with artificial fertilizers, the soil is forced to produce on its single crop in many instances. The tilth of the soil without the hay's fiber becomes hardened. More and bigger equipment is needed to stir up the soil so it's not compacted. So it is aerated. Each year the topsoil becomes less and less and then we have a problem.

On the other hand, oil is there in the earth for the taking and plenty of it. We would leave the soil for food. However, the market forces will do what they generally do. They aren't going to get a survey together to find out what the majority think. And maybe it doesn't matter. Decisions tend to have their own force.

[Dominic Schmelzer]

The ethanol and bio-diesel discussion will certainly not be ebbing in the near future. Not only because the price of oil is once again reaching new historic hights (remind you of the late '70s?): http://isht.comdirect.de/html/detail/main.html?hist=1y&sSym=SCZ6.NYM&DEBUG=0&bFirstTime=1&ind0=VOLUME&overview_hist=10d&sCat=FUT&sPageType=extended&sTab=chart&type=candle

It also looks like we are now in the process of tipping past the historically highest point of oil production in humanity's history. "Guess what else happened in mid-February? Total net US imports started falling. The following numbers are weekly,.. The week ending 2/10/06 showed average daily net oil imports of 13,396,000 bpd. Seven of the subsequent weeks have shown declines. The most current weekly data show 11,634,000 bpd. This is a decline of 13.2%. (The same period last year showed about a 3.7% decline.)"
Thanks to the friends at The Oil Drum: http://www.theoildrum.com/story/2006/4/17/11120/4955 (s. comments to this story. An update to the story is here: http://www.theoildrum.com/story/2006/4/18/2149/32950 ) If we really are now past peak, world oil production will fall at a guesstimate of about 4% per year while US imports will probably fall even faster (which is, of course, a different discussion).

Back to ethanol.

What bugs me about presentations like Khosla's is naming a price at which a certain technology is competitive: "...that ethanol is competitive with oil at $35 - $40/bbl". The problem with this is that such prices are nowhere near to being absolutes. Meaning: if oil costs $30/bbl, then ethanol is competitive at $35. But if oil is at $80, ethanol no longer costs $35 to produce, but probably more like $80.

This is the same phenomenon with other technologies like Nat. Gas Liquids (NGL) or Coal to Liquids (CTL) or tar sands production (Canada) or what have you.

Do I have any way of backing up this claim? Not directly, and I am sure that there are good arguments against it. But let me give you an example of price development from the last couple years:

Ethanol is also produced from sugar in Brazil. I think about 50% of their liquid fuel needs are covered with ethanol. (Yes, it can be done, at least on their scale.) If my claims from above are correct, the price of production (energy + raw material + production instalations) will correspondingly rise. Let's test this hypothesis with recent history.

As I first claimed that the price of oil was going to go through the roof to you guys in September 2003 (Price was ca. $28/bbl, remember?) as a result of peaking production (and chart-technical signals on the market), I might as well have said that all resources are about to go through the roof. But I didn't believe it myself...

Since then, price of oil has risen 2.5 times.
Coal has doubled.
Sugar has more than doubled.
Uranium has quadrupled.
Copper has risen 3.5 times, just to name a few. (If you would like links, please let me know.)

At the moment, the energy being put into turning mash into ethanol is usually natural gas, but two plants in the US are being errected which use coal. Like I said, these costs are increasing even before a great deal of the resources are being used for transformation into ethanol, which will put a preasure on prices in itself through increased demand. And y'all know what nat. gas prices have been doing the last years. Coal should follow, with a lag, of course, perhaps a couple of years. Corn? Switchgrass? Their prices will also rise with a lag. Sugar prices, for instance, took til last fall to begin to rise. And I'm sure there are those who would argue that this rise has nothing to do with ethanol or rising oil prices.

One rebuttle to this argument was: "If you look at prices during the last oil crisis, they move in tandem with oil at first but then stop doing so as the price elasticity of oil increases. I doubt that food will be ten times as expensive when oil is ten times as expensive. Driving a car, on the other hand, will be." Now, I can't disprove this argument right now. But I'll bet you that the price to produce ethanol/bio-diesel will, over the long run, correlate closely to the price of oil, no matter which technology is used for it.

As to the discussion of soil depletion, I'll leave that for another day. Have to get back to work...

[Dominic Schmelzer]

And now, a bit of graphic support for my point about price flexibility:
http://www.neo.state.ne.us/statshtml/66.html
Basically, as gasoline prices go up, so do ethanol prices. It looks like they are beginning to converge. (The past does not garentee future performance!)

BTW, should have told me that the presentation on Ethanol is 100 pages! Ok, much of it was repeated...