The Economics Of Gasohol

********** Gasohol, a vehicle fuel currently produced by mixing corn ethanol with gasoline, is alleged to have important ecological and economic advantages: This fuel is supposed to reduce our extraction of nonrenewable energy, to be highly price competitive with gasoline, and to reduce pollution. I argue below that none of these claims holds up to inspection. Most commercially made ethanol now comes from corn and the most commonly available gasohol contains 10% corn ethanol (designated E10); much higher mixtures are also made for use in fuel-flexible vehicles. (1) Between 2000 and 2007, the average annual growth rate of U.S. ethanol production was about 23% and in 2006, the United Sates overtook Brazil to become the world's largest ethanol producer. In 2007, U.S. corn ethanol production was about 6.5 billion gallons and, by the end of that year, production capacity reached roughly 7.2 billion gallons, with an additional 6.2 billion gallons of capacity under construction (Renewable Fuels Association, 2008). (2) If this investment is completed, total production capacity would quickly reach about 90% of the 2015 goal of 15 billion gallons of corn ethanol production set in the 2007 Energy Independence and Security Act. Serious U.S. governmental attention to ethanol as a fuel began after the 1973 oil shock as various federal agencies began to search for solutions to the multiple problems arising from dependency on oil, particularly from foreign sources. Underlying the rapid increase in production and capacity of ethanol in recent years were rising petroleum prices plus massive U.S. government subsidies and other supports for the ethanol industry. It seems important to step away from this feverish activity and assess the value of current U.S. governmental policies toward gasohol. The answer to this policy issue depends on the answers to four questions: Does the production of this ethanol actually save nonrenewable energy? What is the real cost of the corn ethanol in gasohol? Would the use of gasohol as a fuel significantly reduce gasoline consumption and petroleum imports? And what other significant impacts does the use of gasohol have on the economy and environment? I examine each of these questions and conclude that current U.S. governmental policies meet few reasonable tests of economic rationality. I. CORN ETHANOL: ITS ENERGY OUTPUT AND THE NONRENEWABLE ENERGY USED IN MAKING IT A. Estimates for the Last Stages of Production of Corn Ethanol The long-term rising gasoline prices since the early 1970s have prompted a number of analysts to estimate the energy required to obtain a gallon of ethanol from corn (maize) to determine whether production of gasohol saves on nonrenewable energy. We would expect the results to vary across time because of technological advances, but as Table 1 shows, estimates even in recent years can vary significantly from each other. Unfortunately, the documentation of the estimation methods in many of these studies is too scanty to determine the source of the differences, but it should be clear that little consensus has been achieved, and I must make my own calculations. Although new technologies appear to hold considerable promise, I do not consider them in this discussion because their costs, when produced on a large scale, are quite uncertain. (3) TABLE 1 Previous Estimates of Energy Inputs to Produce 1 Gallon (3.785 L) of Ethanol from Corn Total Energy Coproduct Net Production Inputs BTU Credits BTU Inputs BTU Ho (1989) 98,996 11,550 87,447 Marland and Turhollow (1990) 73,934 8,127 65,807 Pimentel (1991) 144,114 23,649 120,464 Keeney and DeLuca (1992) 100,312 8,885 91,427 Shapouri, Duffield, and 82,824 15,056 67,768 Graboski (1995) Lorenz and Morris (1995) 81,090 27,579 53,511 Wang, Saricks, and Santini 75,292 16,444 58,848 (1999) Agriculture and Agri-Food 75,292 15,460 59,832 Canada (1999) Pimentel (2001) 144,163 23,649 120,514 Shapouri, Duffield, and Wang 77,228 14,372 62,856 (2002) Hill et al. …