February 16, 2007 -- By Myra P. Saefong, MarketWatch
Ethanol as an alternative energy source is a flawed concept -- at least when corn is used to produce it.
And the consequences of using corn to create ethanol are far-ranging - they even impact consumers and the price they pay for meat.
So is it worth it? It depends who you ask.
"There have been numerous studies completed regarding the energy efficiency of ethanol vs. its production," said John Eichberger, vice president of government relations for the National Association of Convenience Stores.
"These range from a positive net energy return in excess of 30% to a negative net energy return of more than 30%," he said. "Researchers on both sides of the issue argue that the other research is significantly flawed."
Even so, policymakers insist that ethanol is a "positive replacement product for crude-oil based fuels and have proceeded down a path to subsidize and mandate its use," said Eichberger, whose trade organization represents the convenience and petroleum-retailing industry.
There's no doubt that renewable fuels are a good idea, said Darin Newsom, a senior analyst at Omaha, Nebraska-based DTN. "That means putting more research into more efficient ways" of making them.
That said, "corn is a short-term end to the means."
Invest energy to get energy
"Some of the warts associated with ethanol production are [real] -- it does use a lot of water, electricity and natural gas," said Newsom.
So "the problem with corn-based ethanol is that, at best, you don't get more energy out of it than it costs to grow and make it," said Sean Brodrick, a contributing editor at MoneyandMarkets.com.
"At worst, you lose energy."
A math and science lesson is in order.
An easy-to-read measure of whether ethanol's economically viable can be derived from taking a look at its "energy return on energy invested," or EROI, according to Brodrick.
"It is at the crux of why corn-based ethanol is a boondoggle," he said.
EROI can be expressed as "net energy," he explains. The EROI for corn-based ethanol is 1.2:1, so the net energy is 0.2, he said.
That means you put in 1 British thermal unit to get 1.2 BTUs from it, he said.
"At EROI of 1.2 to 1, the 3.9 billion gallons that the U.S. produced in 2005 required 3.29 billion gallons of BTU energy input, resulting in a 'net energy' of 610 million gallons," he said.
And that's being generous, he said. "There are some computations that show corn-based ethanol has a net energy of zero. Others show it as a net energy loser."
So it all depends on how you look at it.
A "break even" with the cost of production would be largely based on the cost of crude oil and the cost of corn, said Rick Kment, an analyst at DTN.
For example, if crude-oil prices are at $70 to $100 per barrel, very high corn prices can be paid and ethanol can still economically work in the system, he said.
But with $30 crude and $4 corn, "it becomes unprofitable," he said.
At current price levels, DTN estimates a net profit -- after depreciation and all other factors -- to be near 5 cents per gallon of ethanol produced, he said.
That's down from a 50-cent per gallon net profit at the first of the year, and down from $2.50 a gallon in June 2006, Kment said.
March crude-oil futures closed Thursday at $57.99 a barrel on the New York Mercantile Exchange, while March corn futures were trading around a 10-year high above $4 a bushel on the Chicago Board of Trade. And March ethanol stood at $2.08 a gallon on the CBOT.
'Dead argument'
Still, there are many more experts who say there's really no question as to whether corn-based ethanol puts out more than it uses up.
"The argument over the energy balance of ethanol is really a dead argument," said Matt Hartwig, a spokesman for the Renewable Fuels Association, the national trade group for the ethanol industry. "Study after study has proven them [the critics] to be flat out wrong," he said.
Hartwig called attention to the Web site for the biomass conversion research laboratory at Michigan State University.
A Feb. 5 note on the site prepared by Bruce Dale, professor of chemical engineering at the university, said the net energy analysis is "simple and has great intuitive appeal," with net energy defined as ethanol's heating value minus the fossil energy inputs required to produce the ethanol.
But "it is also dead wrong and dangerously misleading."
Tadeusz Patzek, professor of civil & environmental engineering at the University of California at Berkeley, said in a report last year that the "energy cost of producing and refining carbon fuels in real time, e.g., corn and ethanol, is high relative to that of fossil fuels deposited and concentrated over geological time."
"We do not value energy per se, but rather the services or 'qualities' that the energy provides," argued Dale.
"We need to carefully choose our metric of comparison," he said.
One gallon of ethanol contains 84,000 BTUs, which is about 2/3 that of gasoline, according to Neil Koehler, chief executive of Pacific Ethanol Inc.
"Since ethanol burns more completely (and cleanly) than gasoline, this lower energy density can be completely offset by increased efficiency," he said.
It's eating at corn
But ethanol's impact on the corn market has been "dramatic," said DTN's Newsom.
"If ethanol demand increases to projected levels, corn supplies will be incredibly low at the end of the 2006-2007 marketing year in August 2007," he said.
The U.S. produced an estimated 4.9 billion gallons of ethanol last year and used more than 5.5 billion, according to the Renewable Fuel Association's Hartwig. Ethanol is blended in more than 46% of the nation's gasoline, he said.
"It would seem that the corn market is poised for a long-term rally in price," said Newsom. He predicts that the high of $5.54 a bushel from 1996 seems like a "reasonable price target."
Meanwhile, limitation in the corn market itself should be considered.
"Corn-based ethanol will be of limited supply," said Charles Perry, chairman of energy-consulting firm Perry Management. The U.S has a limited amount of productive land so we "can spare only a limited amount of our corn crop for ethanol."
At the same time, this corn use for ethanol has been "hampering feeding, with some talk in the livestock industry of herd reduction due to higher feed costs," said Newsom.
"Our food prices will go through the roof -- $4-$5 corn makes for very expensive beef, pork and chicken," said Bernie Feshbach, president of investment firm Feshbach & Sons.
Also, "the use of corn makes ethanol a regional (Midwest) issue as the U.S. lacks the infrastructure to move the product around to meet demand," said Newsom.
But the logistics involved with ethanol production could be irrelevant.
"More attention needs to be paid to the personal economics of ethanol since many consumers are more concerned with cost, than with how a fuel is derived," said Geoff Sundstrom, a spokesman for motorist group AAA.
The industry will get a chance to discuss all of these things soon. The Renewable Fuels Association's 12th annual National Ethanol Conference is next week from Feb. 19-21 in Tucson, Ariz.
The group's Web site says registration for the conference is closed because it's reached its capacity. Interested parties are being placed on a waiting list.
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