PEAK ethanol has arrived. As an alternative to petroleum based fuel, ethanol has fallen off its pedestal. After 15 years of growth, consumption in the US is starting to decline and production plants are closing down.
The industry invested heavily in new capacity based on assumptions that fuel consumption would continue to rise and ethanol’s share would increase, underpinned by laws requiring a certain proportion of ethanol to be blended into petrol. But petrol consumption is not increasing and, with ethanol in the US now accounting for almost 10 per cent of petrol supplies, the legal mandates have almost been reached.
Meanwhile, the ethanol industry's once powerful political support has weakened. Congress last year eliminated about $6 billion in annual subsidies, and critics are pushing for cuts in the 15 billion-gallon-a-year mandate. The industry’s plan to increase the mandate to 15pc appears doomed.
The ethanol industry consumes about 40pc of corn produced in the US, up from around 14pc in 2005, and has contributed to a big rise in corn prices. But with corn production up and the change in ethanol’s fortunes, the reverse is now occurring. The price of corn is back to where it was two years ago. Wheat and barley, which are partial competitors, have gone the same way.
Peak ethanol has also arrived in Australia. A campaign led by petrol retailers forced the NSW government to back down on its plan to replace normal unleaded fuel with E10, although the 6pc ethanol mandate was retained. With the focus now on gas, there is little prospect it will rise again.
Ethanol’s course has mirrored the economy, both in the US and here. With prosperity, all sorts of indulgences can be accommodated. When times are tough, it’s back to basics.
The idea that fuel could be grown at home rather than imported from unfriendly foreign countries appealed to a lot of people. Lining the pockets of Muammar Gaddafi or Hugo Chavez was never going to win against that. Green groups also argued that ethanol was renewable and produced fewer greenhouse gas emissions, while the farm sector pointed to opportunities for “struggling farmers” to benefit from increased demand for their crops.
There were some who disagreed. The developing world pointed to the impact of higher food prices on global hunger, with a UN official describing biofuels as a “crime against humanity”. The industry responded by promising to shift to cellulosic feedstock based on non-food crops grown on marginal land.
The elephant in the room was always the fact that it is a lot more expensive to grow and produce ethanol than it is to extract and refine petroleum, and cellulosic ethanol is even more expensive. The only way ethanol can compete with petrol is with government support. That has been forthcoming in the form of subsidies, tax advantages and protection through mandated blending.
There is a cost to this. Subsidies are a direct hit to the budget; tax advantages leave the government with less revenue; and blending mandates impose extra costs on the fuel industry. Ultimately the cost is borne by consumers, contributing to lower economic growth. And that lowers tax revenue as well.
Governments are beginning to reduce their support not because of sudden concerns about starving people or the feeling that industries ought to stand on their own feet. Rather, they can no longer afford to splash money around. They are under enormous pressure to bring spending into line with revenue. If funding for the ethanol industry is maintained, there will be less available for schools, hospitals, roads and bridges.
This situation will persist for quite a few years. The US and EU budget problems are too big to be solved quickly, and neither has yet made a serious start anyway. Australia’s debt is lower, but not insignificant. Unless there is a big breakthrough in production costs, ethanol has no future as a major fuel.
The case for greater energy self-sufficiency may have some merit, but ethanol is not the way to achieve it. Australia has vast quantities of coal and natural gas (both conventional and unconventional), plus potential for additional hydro power. On the other hand, it does not have limitless land on which to grow food. Nor does it have enough taxpayers to fund uncompetitive dreams. It is good that ethanol’s best days are over.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at email@example.com