Peak ethanol - and that's a good thing

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 reclaimfreedom@gmail.com

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READER COMMENTS

Trugger
28/06/2012 3:54:02 AM

David Leyonhjelm obviously has not kept abreast of the R & D scene here in Australia regarding cellulosic ethanol. There have been massive gains in the energy budget to produce ethanol from cellulose in the form of bagasse. Techniques for converting cellulose to a fermentable form has been trialed and is being seamlessly incorporated into the system at a northern sugar mill. It is now commercially ready and will not have to rely on bagasse alone. The system will be able to handle all sorts of farm waste such as corn and wheat trash. All of this has been done without big grants of govt cash.
Trugger
28/06/2012 4:08:19 AM

David might also like to know about field trials of bio-fuel plants which can be grown in arid areas of the tropics under way now. These plants will produce both petrol and diesel fuel with a bagasse type residue and a heavy oil which can be converted to plastics or lubricants. The energy budget for producing these fuels is much lower than that of ethanol and biodiesel. In fact, if the cost of oil exploration and drilling is taken into account, it will be only marginally more costly than petroleum fuel to make. It seems Davids pontificating article is short on research and a bit one-eyed.
grumpy
28/06/2012 5:58:19 AM

This guy, (Leyonhjelm) is an oxygen thief who would have us all behave like lemmings. Satified to tear down solutions to the inevitable decline of mineral oil. In rural and regional Australia we are exposed to significant hardship in oil decline. More strings to the bow the better.
JayDinSouth
28/06/2012 6:39:41 AM

I haven't research any of this, however what you are saying Trugger IMO totally support the article: bio-fuel is more expense. Your 2nd post points to what I assume is more efficient production / use, however even under that scenario states "it will be only marginally more costly than petroleum fuel to make". Marginally more costly = still more costly.
David Leyonhjelm
28/06/2012 7:50:44 AM

I am generally aware of those things Trugger. There are quite a few other projects of a similar nature. What I haven't heard is how any of them will survive without taxpayers paying to prop them up. I'll be the first to congratulate one that doesn't require corporate welfare.
John Newton
29/06/2012 6:12:31 AM

David - how would the fossil fuel industry survive without the taxpayer propping it up - coal subsidies are a fact kept successfully out of the news.
dunart
29/06/2012 7:51:50 AM

so why does the business have to take on a govt responsibility and prop up wages? If they did not have this impost, no govt funds would be needed. when are the economists of the Australian world going to realise the propping of the labour market is what’s destroying business. This policy is a govt responsibility, not a world market income receiver.
Biofool
29/06/2012 11:49:24 AM

Trugger, if there really is a commercially viable cellulosic ethanol plant in Australia that is profitable without massive hand-outs or other forms of support, you best let the world know the details. If it is, then it is unique and billionaires will be beating a path to their door.
Trugger
29/06/2012 7:03:57 PM

David, the arid area biofuel project, a family funded project that has started on the Western Downs is currently looking for trial sites in the Gulf Country and areas west of Longreach for further trials. Trial extractions of the plants are showing that as much as 10 barrels of oil can be extracted per acre. I repeat, there is no govt funding in any way. Nth Johnston mill has had some small seed R&D funding admittedly from govt, but their efforts are about to be rewarded by going commercial very soon. Ethanol may not be a total replacement for petrol, but it reduces our reliance on imports.
Trugger
29/06/2012 7:16:16 PM

JayDinSouth, When I said that the arid area biofuel project was marginally more expensive than petroleum, there is no need to jump to such a conclusion. It has been calculated that the price of crude oil could drop to $80 per barrel, and it would still be profitable to market the petrol and diesel in direct competition with the oil companies. This is a crop that the major part of the R&D is refining the culture practices of the plant for the best returns for the farmer. It will still be five years or more before it is ready for full commercialization as the provenance trials are completed.
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Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

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