Subsidizing Ethanol Guzzles Consumers' Gas and Money

There are better ways to cut dependence on Mideast oil

Mark J. Perry

March 30, 2006
 

It has been more than 30 years since President Richard Nixon established a long-range goal of achieving energy independence, and yet oil imports keep increasing. As a result, many environmentalists and politicians are now suggesting that it is time for the United States to speed the deployment of ethanol and other biofuels as a "cheap" alternative to gasoline.

Sen. Richard Lugar, R-Ind., chairman of the Senate Foreign Relations Committee, is co-sponsoring a bill to scale back U.S. oil consumption by 50 percent within 25 years.

And Lugar and other lawmakers have introduced legislation to boost federal loan guarantees for the wider use of E-85, a blend of 15 percent gasoline and 85 percent ethanol, and also require filling stations to sell this product.

But mandating and subsidizing the use of ethanol clearly doesn't make economic sense because the costs of producing ethanol are greater than the benefits.

Biofuel subsidy frenzy

Ethanol production is now about 4.3 billion gallons a year, but is expected to climb to 6 billion gallons by 2007. At the national level, Congress further mandated last year that ethanol production grow to 7.5 billion gallons by 2012.

In Michigan, there are almost a dozen bills being considered in Lansing that would provide tax breaks and grants for producers, sellers and users of ethanol and biofuels.

Still, subsidizing the fuel is wasteful.

Consider how ethanol is made. Corn is grown, harvested and then winds up at an ethanol plant. There the corn is ground up, mixed with water and then fermented. Finally, a mixture that is only about 8 percent ethanol must be distilled again and again until it eventually becomes almost pure ethanol.

Unfortunately, growing and harvesting the corn, and heating and reheating the fermented corn to produce ethanol require a vast amount of energy. Ironically, most of this energy to produce ethanol comes from fossil fuels.

Ethanol guzzles gas

If you account for all the steps to produce ethanol -- oil to run tractors, natural gas to heat the fermented corn, and fuel to transport the ethanol by truck or railroad to refineries -- it takes 29 percent more fossil fuel energy to make ethanol from corn than the fuel produced, according to a recent study at Cornell University and the University of California-Berkeley.

Ethanol fails miserably in a simple cost-benefit test of energy efficiency, because there is actually a net energy loss in ethanol production from seed to fuel.

Without the enormous government subsidies for the production of ethanol, the corn-based fuel could not survive in the free market.

The current federal subsidy is 54 cents per gallon of ethanol, which is an estimated 30 to 45 percent of its production cost. And 14 states, mainly in the Midwest Corn Belt, provide their own subsidies for ethanol production in addition to the federal subsidy.

All of this adds up to billions of tax dollars annually that go to corn farmers and ethanol producers to artificially prop up a product that fails the market test. Therefore, it's hard to see how Michigan taxpayers would gain from jumping on the ethanol bandwagon.

Fuel raises energy costs

Further, the inevitable economic consequences of capping the use of oil in favor of ethanol would increase energy costs in other ways. Most importantly, because ethanol's fuel performance is so much worse than gasoline, there is a significant decline in fuel performance, adding to fuel costs for motorists who might be forced to use increased amounts of ethanol.

Before members of the Michigan Legislature or the U.S. Congress vote on bills to promote the increased use of ethanol in place of oil, they should ask themselves whether the hoped-for benefits justify the significant cost to the nation's economy. The answer should be a clear no.

If the goal is to reduce dependence on Middle East oil, there are better, more effective ways to accomplish this outcome than switching to costly ethanol as a substitute for fossil fuels. A more sensible energy policy for our country would include diversifying our petroleum sources so that individual oil-producing countries cannot pose a threat to our energy security.

Mark J. Perry is a professor of finance and economics at the University of Michigan-Flint. Mail letters to The Detroit News, Editorial Page, 615 W. Lafayette, Detroit, MI 48226, or fax them to (313) 222-6417 or e-mail them to letters@detnews.com.