Why are Oil Prices So High?

Why are oil prices so high? This is the question being asked with increasing frequency in many countries around the world. Some would have you believe that the blame should be placed on "greedy oil companies", "Arabs", "speculators" or "OPEC".

While speculation is happening with investors and hedge funds looking to commodities for returns that are not being seen in the stock or property markets, there are underlying fundamental reasons which mean prices are likely to stay high.

Last November the International Energy Agency released its annual World Energy Outlook report. Traditionally the agency has projected energy supply based on projected demand.

The agency has projected that India and China will lead the increase in energy demand making 45% of total growth. Oil imports for these two countries combined will grow to 19.1m barrels a day by 2030 compared to 5.4m barrels a day in 2006.

Demand for oil will grow to 116m barrels a day by 2030, an increase of 37% on 2006 oil usage. In this report back in November the International Energy Agency warned the price of a barrel of oil could rise to $159 by 2030 due to high growth in demand. This estimate now looks very conservative.

The reality is there have been some fundamental changes.

Before if the United States went into recession, this would lower demand for oil and prices fell. Now with China, India and other rapidly developing nations demanding ever increasing quantities of oil a recession in America is unlikely to lead to falling oil prices like it did in the past. Were per capita oil use in China and India to reach the same level as in the United States, this would fully deplete the world's remaining proven oil reserves in just 15 years and prospective resources, in 26 years.

The other fundamental change is that there is little excess production capacity. While Saudi Arabia would like the world to think it could increase production if it deemed it "beneficial" to the stability of the market, this is just an illusion of control. The reality of the OPEC cartel is that while sticking to production quotas may have benefited the group as a whole, individual countries have always "cheated" consistently and repeatedly exceeded their production quotas. In the past this has lead to significant downward pressure on prices.

This time the signs are that the world is at or near its maximum oil production capacity. Does this mean Peak Oil has arrived? In my opinion - not yet.

New production will continue to come online in the coming years which is likely to raise worldwide maximum oil production. So we haven't reached peak production... yet.

What we may be experiencing is what Robert Rapier calls Peak Oil Lite, with the early effects of Peak Oil arriving. Demand is rising faster than supply. In its July 2007 report the International Energy Agency predicts OPEC spare capacity will decline to minimal levels by 2012. The lack of spare capacity means, that price volatility increases with price spikes occurring in the event of supply disruption.

So what we are likely to experience prior to Peak Oil is Peak Export. According to Eugene Linden in BusinessWeek when it comes to oil our biggest concern should be the amount of "global oil available for export".

According to the Export Land Model developed by Jeffrey Brown - exports decline faster than production declines, the rate at which exports decline accelerates over time and only a small percentage of a producing country's production is exported following peak production.



According to a report in last week's Wall Street Journal, fresh information from the US Department of Energy shows the quantity of petroleum products shipped by the top exporting countries in 2007 fell 2.5% last, while prices increased 57%.

Net exports from major producers Mexico, Norway and Venezuela have fallen in every year since 2005.

With the rise in prices individual producing countries in OPEC had every incentive to "cheat" and yet exports fell. The influx of wealth into the Middle East has led to a boom in domestic demand. It seems that Middle Easterners aspire to the same gas guzzlers and energy rich lifestyles as Americans. Soaring profits from high-price crude have fuelled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. In 2007 the output of the region's six largest oil exporters - Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar - fell by 544,000 barrels a day. During the same period domestic demand increased by 318,000 barrels a day, leading to a decrease in net exports of 862,000 barrels a day.




A recent report from CIBC World Markets also indicates that as much as 40% of Saudi Arabia's expected production increases will be offset by rising internal demand by 2010, and Iranian exports will decline by more than 50% for similar reasons.

Indonesia recently withdrew from OPEC as it has gone from being a net exporter of oil, to a net importer of oil.

The Wall Street Journal report comments that the fall in oil exports "defies traditional market logic." Perhaps that should be blind faith that OPEC nations can turn on the taps if prices rise "too high". It seems even oil traders are unsure what is driving prices as according to one market analyst quoted by BBC News "we really don't know what the fundamentals are doing at any point in time." Much of the information on fundamental factors in the oil market is not public or freely available.

In simple terms demand is outstripping supply and prices are rising. This is how the market is supposed to work.

Other fossil fuel prices tend to follow oil. IEA's latest World Energy Outlook forecasts coal is set to rocket in demand, increasing by 73% from 2005 to 2030. This means coal's share in global energy demand will rise from 3% to 28%. It is predicted by 2015 America will go from being a net coal exporter to a net coal importer. Coal is the most carbon intensive way of generating electricity and this report predicts that rather than becoming a smaller part of the energy mix, coal is predicted to play a much bigger role.

With a presidential election this year in the United States and gas prices at record levels, oil and energy in general is set to be a key issue. There is the opportunity to have a serious debate about energy - a fundamental part of our lives which has been taken for granted for far too long. However the responses from the presidential candidates so far have not been encouraging.

In 2002 McCain declared that ethanol is a "giveaway to special interests in corn-growing states as the expense of the rest of the country." In 2003 he put out a press release saying "Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality." He went on to describe it as "highway robbery." Hillary Clinton signed a letter saying that there is "no sound public policy reason for mandating the use of ethanol".

McCain, Clinton and Obama all seem to have drunk the ethanol Kool Aid and seen the bright white light that has converted them to E85. In 2008 none of these presidential candidates seems to have anything negative to say about ethanol.

In 2006 Barack Obama along with four Republican and one Democrat senator introduced the Coal-To-Liquid Fuel Promotion Act.

There have also been accusations made against "Big Oil", "OPEC" (including by British Prime Minister Gordon Brown) and suggestions that a "gas tax holiday" or "windfall tax" would fix everything. It's always easier to find a scapegoat.

One bandaid being suggested from some quarters, is to open up drilling in the United States in areas which are currently off limit. This would give access to 19 billion barrels of oil enough to meet US needs for approximately two-and-a-half-years or world demand for just over 7 months at current rates of consumption.

To quote the head of the International Energy Agency:
"All countries must take vigorous, immediate and collective action to curb runaway energy demand.

The next ten years will be crucial for all countries... We need to act now to bring about a radical shift in investment in favor of cleaner, more efficient and more secure energy technologies."

Further Reading:
The Ethanol Scam in "Gusher of Lies"

You can read more on what the energy policies of McCain, Clinton and Obama should be in this Open Letter to the Next President.

Brief Analysis of Climate Change Report

Here’s my brief analysis of and comments on the recent IPCC working group report on Mitigation of Climate Change released from Bangkok, Thailand as it relates to alternative energy.

Energy Efficient & Net Zero Energy Buildings

Energy efficiency and renewable energy are rightly held to be a key ways to reduce carbon emissions. Buildings, both residential and commercial, are a significant emitter of greenhouse gasses.

Solar hot water heating can be used to provide up to 70% of annual hot water needs for homes, it can also be used in commercial buildings that require significant hot water such as gyms and nursing homes.

Geothermal (ground source heat pumps) is a lesser known source of alternative energy which can be used to both heat and cool buildings in a highly efficient way and is suited both to residential and commercial buildings. It can also be used to provide hot water. As bore holes and/or trenches need to be dug for geothermal to be installed, it is particularly suited to new builds.

Electricity can be provided from renewable sources via the grid (e.g. wind power) or off-grid it can be generated using for example solar photovoltaic panels (PV).

The use of insulation, natural light & shade, low energy lighting, motion detection lighting etc. can further reduce energy usage.

As noted in the report appropriate building codes can minimise carbon emissions from buildings.

Alternative Energy = Energy Security

The report notes that nations seeking energy security (security of supply) can help achieve it using alternative energy. Nations lacking their own fossil fuels resources should be concerned with the negative impact reliance on fossil fuels can have on their economies. By increasing utilisation of alternative energy resources, nations can increase their energy security.

Transport Policy & Fossil Fuels Subsidies

I was disappointed by the report’s lack of vision on transport. It correctly notes that past increases in efficiency in internal combustion engine (ICE) design have been used to increase power rather than fuel efficiency meaning vehicle carbon emissions have continued to climb. This trend has even continued into hybrid vehicles with performance being favoured over fuel economy (e.g. Lexus hybrid cars). Mention was made of making increased use of biofuels, which can actually significantly increase carbon emissions (see this post on Palm Oil Biodiesel). The glaring emission, is the need for a fundamental shift from the internal combustion engine to electric vehicles. I got the impression the report in trying to build consensus was avoiding treading on any toes. Perhaps that’s why it recommended only reducing rather than eliminating the subsidisation of fossil fuels.

Research and Development + Technology Transfer

India and China will soon be at the top of the list of carbon emitting nations. The report wrongly suggests that because many new power stations are being built in developing nations, they will be using new energy efficient designs and technologies. While new power stations may be more efficient than those built decades ago, for cost reasons less efficient technology is usually used (for more details see this post on Clean Coal). The report notes there have been low levels of investment in research and development. Investment is needed now and much more should be done to aid the transfer of the most energy efficient technologies between nations.

IPCC working group report on Mitigation of Climate Change (pdf link)

Seeing Red: Palm Oil Biodiesel

In the enthusiasm for renewable energy and taking care of our environment, it is easy to assume that making fuel from plants (biofuel) must be by definition "green" and renewable. However when it comes to energy issues, easy assumptions can be dangerous assumptions. In previous years some politicians and advocates in Europe have made these assumptions without sufficient thought and research and secured government subsidies for companies importing palm oil from South East Asia to make biodiesel for transport and for use in electricity generation.

The demand for palm oil in Europe has soared in the last two decades, first for use in food and cosmetics, and more recently for fuel. This cheap oil can be used for a variety of purposes, including as an ingredient about 10 percent of supermarket products, from chocolate to toothpaste.

Promoted by hundreds of millions of dollars in national subsidies, the Netherlands quickly became the leading importer of palm oil in Europe, taking in 1.7 million tons in 2006, nearly double the previous year.



Now it is increasingly difficult to ignore the mounting body of scientific evidence that palm oil plantations in Indonesia and Malaysia, rather than preserving the environment are in fact actively destroying it. By subsidising biofuels, European governments have artificially raised demand for palm oil in Europe, and accelerated the destruction of huge areas of rainforest in South East Asia. Palm oil plantations are often expanded by draining and burning peatland, releasing enormous amounts of carbon dioxide into the atmosphere. As a result Indonesia has become the world's third largest emitter of carbon dioxide, ranked after the United States and China, according to a study released in December by researchers from Wetlands International and Delft Hydraulics, both based in the Netherlands.

The 2003 European Union Biofuels Directive, which required all member states aim to have 5.75 percent of transportation run on biofuel in 2010, is now under review. In the Netherlands, the data from Indonesia has prompted the government to suspend palm oil subsidies.

In Europe a small amount of rapeseed and sunflower oil is used to make diesel fuel, however increasingly plant oils are being imported from the tropics, since there is simply not enough plant matter or land for biofuel production at home. So while the billions of dollars in European subsidies appear to have reduced carbon emissions in European countries by importing biofuels, this has been achieved by exporting them and increasing their impact many times by the permanent destruction of rainforest and peatland in South East Asia.

For anyone familiar with how the ethanol industry works in the United States, they will be unsurprised to learn that the palm oil industry was promoted long before there was adequate research. Biofuel Watch, an environment group in Britain, now says that "biofuels should not automatically be classed as renewable energy." It supports a stop on subsidies until more research can determine if various biofuels in different regions are produced in a nonpolluting manner. The group also suggests that all emissions arising from the production of a biofuel be counted as emissions in the country where the fuel is actually used, providing a clearer accounting of environmental costs.


BEFORE: rainforest on the Indonesian part of the island of Borneo

Friends of the Earth estimates that 87 percent of the deforestation in Malaysia from 1985 to 2000 was caused by new palm oil plantations. In Indonesia, the amount of land devoted to palm oil has increased 118 percent in the last eight years.


AFTER: a palm oil plantation

Peat is an organic sponge composed of 90 percent water that stores huge amounts of carbon, which when it is drained emits huges amounts of carbon into the atmosphere.

Even worse peatland is often burned to clear ground for plantations. The Dutch study estimated that the draining of peatland in Indonesia releases 660 million tons of carbon a year into the atmosphere and that fires contributed 1.5 billion tons annually.


Kuala Lumpur, Malaysia
the haze has covered much of SE Asia for extended periods of time since 1997

The total is equivalent to 8 percent of all global emissions caused annually by burning fossil fuels, the researchers said. "These emissions generated by peat drainage in Indonesia were not counted before," according to a Wetlands spokesperson. "It was a totally ignored problem."

While for the moment the widescale destruction of rainforests in South East Asia continues, hopefully the palm oil story will serve as a cautionary tale which will lead to much better informed policymaking and behaviour. Politicians must resist the urge to rush to legislate and subsidise in order to bask in the glow of being seen to be "doing something" while a number of so-called green companies profit from taxpayer subsidised destruction. Energy policy must make sense from a scientific (i.e. it should be energy positive), economic and environmental viewpoint. However the continued promotion of ethanol and coal-to-liquids calls for continued skepticism.

Is Ethanol / E85 Fuel the Solution?

I've recently received a number of emails calling for me to Kick the Oil Habit by supporting E85 which is a liquid fuel made up of 85% ethanol and 15% regular gasoline. Having previously had my doubts about ethanol I emailed fellow blogger the Engineer Poet seeking his opinion. A large part of this resulting post is based directly on his reply and as such the credit belongs to him.

So is E85 fuel the answer to America's (and the world's) addiction to oil?

E85 fuel is not the solution. It is not even a part of the solution, it is a part of the problem. Here's why, in a nutshell:

All US vehicles can burn 10% ethanol (E10), but the US does not even produce half as much ethanol as universal E10 would require. We make about 5 billion gallons of ethanol, but use 140 billion gallons of gas.

E85 and "flex fuel" is a loophole for the automakers to sell guzzlers without having to pay CAFE penalties. It makes the problem worse. Ending the loophole probably means ending E85, because there is no other reason for it to exist.

Since the best estimate is that every gallon-equivalent of ethanol takes about 4/5 of a gallon-equivalent of other fossil fuel to make it, each gallon of E85 really represents about 0.6 gallons-equivalent of various fossil fuels. Since most flex-fuel vehicles get roughly 2/3 the mileage on E85 as they do on gasoline, they burn about 90% as much fossil energy even at their best.

Even if we can use "cellulosic ethanol" to reduce the inputs of fossil-derived fertilizer and whatnot, we can't make enough no matter what we do. The efficiency of the average gasoline-powered vehicle is about 15%, and we just can't grow enough inputs to make up for throwing 85% of our produced energy away. The most efficient use of biomass is in local combined heat and power plants, not as a feedstock for ethanol.

Low corn prices and high oil prices, and a government subsidy of 51 cents per gallon have fuelled unprecedented growth of the ethanol industry. In the case of the U.S. ethanol industry, fossil fueled trucks ship the fuel halfway across the country from the population sparse corn belt to population and car dense states like California and Texas. Science magazine found only a 13% reduction in CO2 emissions for bioethanol over gasoline (and only 11% for E85 fuel). U.S. government federal records show a single ADM corn processing plant in Clinton, Iowa generated nearly 20,000 tons of pollutants including sulfur dioxide, nitrogen oxides, and volatile organic compounds in 2004. The EPA considers an ethanol plant as a "major source" of pollution if it produces more than 100 tons of any one pollutant per year. From an emissions standpoint it is far preferable to drive a fuel efficient gasoline car than a low efficiency flex fuel vehicle running on E85.

E85 fuel is not a solution. It is a distraction, like hydrogen vehicles. Further, every E85 vehicle is also a gasoline-compatible vehicle. It will maintain demand for petroleum as long as it is on the road. If you want to end oil addiction you have to get rid of the things which use it.

E85 ethanol fuel may make a small contribution now, but it is a dead end. If we want to really be free of fossil fuels (including imported oil), we have to re-think things as completely as changing from riding horses to driving motor cars.

Ethanol has already created an addiction of its own. The farmers and agribusiness interests which got into it found it hugely profitable, and they have big investments in its continuation. Even if you developed a better way of using corn today, you'd still have a lot of money lobbying to use it for ethanol, and even force it to be used for ethanol.



This is already a race between technologies which can make us independent of fossil fuel, and technologies which get subsidy money. In that race, the subsidy seems to win every time. At least 43 percent of Archer Daniels Midland's annual profits are from products heavily subsidized or protected by the American government. For every $1 of profit earned by ADM's ethanol operation (the largest in the U.S.), it costs taxpayers $30. If you subsidize a technology which can only replace half our gasoline (and none of our diesel, jet fuel, or anything else), you're probably going to be stuck with it.

A hobbyist wrote an article about his home-built plug-in hybrid electric vehicle (PHEV). He published this article in Mother Earth News... in 1978.

We don't need any new technology. We could be building these cars today. Heck, we could have been building them in 1995 (when the CARB ZEV mandate came in)... or maybe even 1985. They would have been crude, but they would have gotten the job done. We can do far better today, of course.

People finally got fed up and started building their own PHEV's out of Toyota Priuses. It's time to quit the excuses, both making them and accepting them.

CAFE regulations utterly failed to contain U.S. motor-fuel consumption. This is not opinion, this is historical fact. Now the E85 fuel campagin wants to do the same thing again, but "reduce" consumption with E85 instead of directly cutting gallons-per-mile. You'll get the same result as before - if driving doesn't cost more, people will continue to drive as much or more.

There are roughly 200 million light-duty vehicles in the USA. One recent news item says that there will be all of 6 million flex-fuel vehicles by 2007. That's a whole 3%.

The average flex-fuel vehicle is a guzzling truck (because they get the biggest CAFE preference from it). If those trucks get 13 MPG on E85, and they drive the national average of 13,000 miles/year, those 6 million vehicles would consume 5.1 billion gallons of ethanol. That's roughly the same as the total production capacity of the nation.

The E85 fuel campaign is currently sponsoring a road trip to highlight the usage of E85, but also the difficulty of driving a car solely on E85 due to its lack of availability.


the electric Tesla Roadster - 250 mile range, one cent a mile, 0-60 in 4 seconds, 130 mph top speed - photo from Autoblog Green

However, had this trip been made in a Tesla Roadster or tZero from AC Propulsion, it could have instead highlighted how EASY it is to get electricity wherever you are... even if you never stop at a filling station! Using non-toxic lithium-ion batteries they have a 250 mile range, charging overnight from an electric outlet.

E85 fuel is a distraction, a diversion, a red herring. Just as the switch to "hydrogen economy" (remember that?) was before it. Both require huge investment, new infrastructure and will not lead to a post-oil economy. The hydrogen economy was promoted principally by both automakers and oil companies as a stalling strategy to avoid having to change the way they currently do business. Oil companies were also aware in the unlikely event that the hydrogen economy did take off (with huge taxpayer subsidies) that they would be supplying hydrogen produced from natural gas which they were already profitting from. The automakers sat around lamenting the fact they couldn’t start to build cars as there are hardly any hydrogen filling stations and the energy companies would not open commercial hydrogen filling stations as there is no demand for them. While appearing to want to do something, both the automakers and energy companies continued for a few more years with business as usual.


The Nissan Armada promoted on the E85 fuel site - with no fuel economy figures indicated

The campaign for E85 fuel is somewhat similar. The automakers are eager to produce flex fuel vehicles which require a relatively cheap modification to the highly profitable gas guzzling SUVs they already produce. By backing E85 fuel they can continue to produce the highly inefficient vehicles while appearing to be green (as seen in GM's Live Green Go Yellow campaign). Car and Driver magazine estimates the CAFE loophole could have saved GM more than $200 million in fines in 2005 alone.

As GM admits the consumer can choose “to operate on gasoline or on a blend of 85% ethanol and 15% gasoline. So, you can choose the fuel that's best for you. That's good to know, because E85 fuel is not yet widely available.” In other words in the vast majority of cases your new flex fuel vehicle will still be running on regular gas. Charter members of the National Ethanol Vehicle Coalition (NEVC), which promotes E85 fuel, when it was set up in June 2000 include GM, DaimlerChrsyler, and Ford.

Meanwhile E85 fuel is also been promoted by organisations such as the National Corn Growers Association, as well as regional and state corn growers organisations, associated agribusinesses and biofuel companies. All of which have a commercial interest in promoting E85 fuel. According to the Center for Responsive Politics, a clearinghouse on political donations, the agribusiness sector has funneled more than $190 million into federal election campaigns since the 2000 election cycle. In the NEVC’s bylaws its purpose is described as to "ensure that as decisions regarding the future of America’s use of alternative forms of transportation fuels are being made, ethanol has a role in the nation’s alternative transportation fuel market and support the expanded use of ethanol" and to "advance legislative proposals" to this effect. This seems to be regardless of whether ethanol/ E85 fuel is the best or is even a good solution to our energy challenges.

As the Engineer Poet points out in this post, burning fuel for transportation is very inefficient way of using energy. Whether you are fed up with the current use of petroleum for transportation for environmental, political or financial reasons E85 fuel is simply not the answer. What we need is a step change, as represented by moving from using gas burning vehicles to electric vehicles.

To encourage this, I urge you to sign this online plug in hybrid campaign asking automakers to produce plug-in hybrid electric vehicles (PHEVs).

Autoblog Green's exclusive interview with Tesla Motors' chairman

Tesla Roadster Video

Archer Daniels Midland (ADM) - the Largest U.S. Ethanol Producer

Vinod Khosla Debunked

Car and Driver Magazine on the Promise of Energy Independence through Ethanol

USA Today on the Ethanol Debate

Cutting Down Borneo's Rainforests to Make BioFuels

Mixed Signals & Federal Funding for Alternative Energy Research

There have definitely been some mixed signals on alternative energy research recently. At the same time President Bush's State of the Union address called for a 22 percent increase in federal spending to develop alternative energies, dozens of staffers and contractors for the National Renewable Energy Laboratory in Golden, Colorado, were being laid off.

The disconnect was a political embarrassment for the president, so federal officials restored the laboratory's funding, rehiring the workers who had been laid off just in time for President Bush’s scheduled speech at the NREL.

In his speech the President acknowledged the confusion, “I recognize that there has been some interesting mixed signals when it comes to funding," President Bush said.

This comes at a time when a new national public opinion survey demonstrates overwhelming public support in the United States for government policies and investments that will support development of alternative energy sources. The survey of 1,000 registered voters was conducted by Public Opinion Strategies of Alexandria, VA, for the Energy Future Coalition. The survey’s findings included:

According to the survery there is nearly unanimous support for a national goal of having 25% of the United States domestic energy needs met by alternative energy by the year 2025. Ninety-eight percent of voters see this goal as important for the country, and three out of four (74%) feel that it is "very important." Ninety percent of voters believe this goal is achievable.

Similar majorities support government action to encourage greater use of renewable energy. Eighty-eight percent of voters favor financial incentives, and 92% support minimum government standards for the use of renewable energy by the private sector.

Nearly all voters (98%) say the costs, such as the cost of research and development and the cost of building new renewable energy production facilities, would be worth it to get the United States to the 25% by 2025 goal.

Voters consider energy to be an important issue facing the country, rating it similarly with health care, terrorism and national security, and education, and ahead of taxes and the war in Iraq. Half (50%) of voters believe America is headed for an energy crisis in the future, and 35% believe the country already is facing a crisis.

So just how much is the United States government spending on alternative energy research? After the 22% increase the budget will stand at $771 million. This amounts to less than one percent of the $55,000 million the federal government spends annually on research, nearly half of which is devoted to healthcare.

It’s time for action.

Source for figures on federal funding for alternative energy research

President Bush's speech at the National Renewable Energy Laboratory

America's Energy Future

Alternative Fuel: Ethanol Fuel Production Subsidies

I was recently taken to task by a reader for not giving more coverage to ethanol fuel (alcohol). I replied that I am yet to be convinced that ethanol is either energy positive or economically viable. I then forwarded her reply to the Engineer Poet who continued the correspondence resulting in a post entitled "the money-grubbing mendacity of the ethanol lobby" with accompanying calculations. In reply the original emailer sent me a press release from the "grassroots voice of the U.S. ethanol industry".

The Slate recently ran an article entitled "the ethanol subsidy is worse than you can imagine".

In it Robert Bryce reports that for the last generation, ethanol has been America's fuel of the future. But there has never been more hype about it than there is today. Green-energy analysts like Amory Lovins, environmental groups like the Natural Resources Defense Council, neoconservatives like James Woolsey, and farm groups like the American Coalition for Ethanol are all touting the biofuel.

Making ethanol, they claim, will help America achieve the elusive goal of "energy security" while helping farmers, reducing oil imports, and stimulating the American economy. But the ethanol boosters are ignoring some unpleasant facts: Ethanol won't significantly reduce our oil imports; adding more ethanol to our gas tanks adds further complexity to our motor-fuel supply chain, which will lead to further price hikes at the pump; and, most important (and most astonishing), it may take more energy to produce a gallon of ethanol than it actually contains.

The greens, hawks, and farmers helped convince the Senate to add an ethanol provision to the energy bill—now awaiting action by a House-Senate conference committee—that would require refiners to more than double their use of ethanol to 8 billion gallons per year by 2012. The provision is the latest installment of the ethanol subsidy, a handout that has cost American taxpayers billions of dollars during the last three decades, with little to show for it. It also shovels yet more federal cash on the single most subsidized crop in America, corn. Between 1995 and 2003, federal corn subsidies totaled $37.3 billion. That's more than twice the amount spent on wheat subsidies, three times the amount spent on soybeans, and 70 times the amount spent on tobacco.



The stickiest question about ethanol is this: Does making alcohol from grain or plant waste really create any new energy?

The answer, of course, depends upon whom you ask. The ethanol lobby claims there's a 30 percent net gain in BTUs from ethanol made from corn. Other boosters, including Woolsey, claim there are huge energy gains (as much as 700 percent) to be had by making ethanol from grass.

But the ethanol critics have shown that the industry calculations are bogus. David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley, co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains.

The two scientists calculated all the fuel inputs for ethanol production—from the diesel fuel for the tractor planting the corn, to the fertilizer put in the field, to the energy needed at the processing plant—and found that ethanol is a net energy-loser. According to their calculations, ethanol contains about 76,000 BTUs per gallon, but producing that ethanol from corn takes about 98,000 BTUs. For comparison, a gallon of gasoline contains about 116,000 BTUs per gallon. But making that gallon of gas—from drilling the well, to transportation, through refining—requires around 22,000 BTUs.

In addition to their findings on corn, they determined that making ethanol from switch grass requires 50 percent more fossil energy than the ethanol yields, wood biomass 57 percent more, and sunflowers 118 percent more. The best yield comes from soybeans, but they, too, are a net loser, requiring 27 percent more fossil energy than the biodiesel fuel produced. In other words, more ethanol production will increase America's total energy consumption, not decrease it. (Pimentel has not taken money from the oil or refining industries. Patzek runs the UC Oil Consortium, which does research on oil and is funded by oil companies. His ethanol research is not funded by the oil or refining industries.)

Ethanol poses other serious difficulties for our energy economy. First, 8 billion gallons of ethanol will do almost nothing to reduce our oil imports. Eight billion gallons may sound like a lot, until you realize that America burned more than 134 billion gallons of gasoline last year. By 2012, those 8 billion gallons might reduce America's overall oil consumption by 0.5 percent. Way back in 1997, the General Accounting Office concluded that "ethanol's potential for substituting for petroleum is so small that it is unlikely to significantly affect overall energy security." That's still true today.

Adding more ethanol will also increase the complexity of America's refining infrastructure, which is already straining to meet demand, thus raising pump prices. Ethanol must be blended with gasoline. But ethanol absorbs water. Gasoline doesn't. Therefore, ethanol cannot be shipped by regular petroleum pipelines. Instead, it must be segregated from other motor fuels and shipped by truck, rail car, or barge. Those shipping methods are far more expensive than pipelines.

There's a final point to be raised about ethanol: It contains only about two-thirds as much energy as gasoline. Thus, when it gets blended with regular gasoline, it lowers the heat content of the fuel. So, while a gallon of ethanol-blended gas may cost the same as regular gasoline, it won't take you as far.

My latest post (July 2006) on ethanol and flex fuel vehicles can be found here:
Ethanol E85 Fuel

To support a real solution to our transportation energy challenges I encourage you to sign this online plug in hybrid campaign urging automakers to produce plug-in hybrid electric vehicles (PHEVs).

If you have comments I suggest the debate continues here.

Full Slate Article

American Coalition for Ethanol Press Release

Star Phoenix article criticising Pimental and Patzek's research

Rocky Moutain News' Coverage of the National Corn Growers Association Opinion

The Ohio Farm Bureau Federation's Coverage