Memo to Jean Schmidt and the Rest of Congress: On Economics, Ethanol Is a Loser
Strangely, the most visible and consistent issue position taken by Congresswoman Jean Schmidt in the runup to the Special Election on August 2 was her support for expanding the use of corn-based ethanol (scroll to “A Responsible Energy Policy” at the link) and, by inference though never specifically stated, higher spending on subsidies for its production.
Based on what follows, this position is not wise, and the effort to commercialize ethanol with heavy government subsidies is not a good idea.
According to the October 31 Forbes “Side Lines” piece written by Editor William Baldwin (link requires subscription), the idea is a loser on an erroneous BTU to BTU comparison done by a couple of scientists, and is still a loser after the errors are corrected to take market economics into account:
(First,) David Pimentel of Cornell and Tad W. Patzek of Berkeley reported, just in time for Congress to enshrine this atrocity in the energy bill, that corn-based ethanol consumes more energy than it yields.
Too soon to rejoice. Now comes along Peter Huber, my favorite envirocolumnist, to say that comparing energy inputs to energy outputs is an accounting error. One BTU is not the same as another. It makes all the difference in the world where your energy is and what chemical form it takes. So, it’s okay to burn two units of natural gas in Qatar to make one appear in Texas, or to put 5 BTUs of coal into a power plant and have only 2 BTUs of electricity come out the other end. Quality matters as much as quantity.
Now, the professors did a very careful analysis, considering fossil fuels only and converting these into oil equivalents. And they peeked in places that maybe the ADM (Archer Daniels Midland) lobbyists overlooked, such as the energy used to manufacture farm machinery, or the energy burned up indirectly in the form of farm labor. If the farmer heats his swimming pool with propane, you are, arguably, consuming that propane when you buy a gasoline-ethanol blend. But the profs, for simplicity, violated the Huberian accounting constraints. They lumped assorted BTUs together.
How, then, to do energy accounting, if BTUs are not interchangeable? Huber has an ingenious method (also requires subscription), borrowed from Adam Smith: Follow the money. If you make money converting one form of energy to another, then convert, irrespective of BTU calculations. If you lose money, you are doing something bad to the Earth’s thermodynamics.
So, what are the economics of converting fertilizer and tractor fuel into automobile fuel? Not good. The professors noted in their paper that taxpayers were financing this conversion with $3 billion a year of ethanol subsidies–this was before Congress mandated a doubling in the use of ethanol for fuel–and are also suffering higher beef and milk prices as a side effect. The three experts agree on something: Gasohol is a loser.
This should never have been a big element of the Schmidt Campaign in the first place, and it should get the quiet burial it deserves.
A related blogpost on the topic is here.
