Updated Corn Ethanol Economics
Posted by Robert Rapier on June 25, 2008 - 10:00am
| Executive Summary: The current cost to produce a gallon of ethanol is approximately $3/gal. The current price of ethanol is $2.86/gal, which explains why ethanol producers are shutting down. If corn and natural gas prices remain high, I think ethanol has to rise to something like $3.40-$3.60/gal to make it worthwhile to ethanol producers. So, if I was a commmodities investor, I would probably go long ethanol right now. The only risk factors I can see - given that there is a mandated (and rising) demand for ethanol - is if corn or natural gas prices collapse. The other remote possibility is that that mandate is repealed, but I don't see that happening. |
This is an update to a post I originally made back in February 2008: Corn Ethanol Economics. While this is approximate, I think I captured most of the major economic considerations. In fact, one of the comments I received following the first essay was: "I work in an ethanol plant. Those numbers are pretty accurate, but the price we get for ethanol has been going up lately. Our margins have been poor lately, but are improving. But you did capture the important economic factors that have hurt us lately."
Since then, natural gas, corn, and ethanol prices have all risen. So what do the economics look like today? The following is my previous analysis, with updated numbers.
I found multiple references for all of the numbers I am going to use, but I will only reference a single source. According to Ethanol Reshapes the Corn Market, one 56-pound bushel of corn will yield up to 2.7 gallons of ethanol and 17.4 pounds of distiller’s dried grains with solubles (DDGS).
The price of corn for July delivery as of this writing is $7.24/bushel, so each gallon of ethanol contains $7.24/2.7, or $2.68 of corn per gallon of ethanol. However, the DDGS can be sold, so a credit is applied for that. The current price of DDGS as of this writing is $175/ton, which is $0.0875/lb. Given that a bushel of corn yields 17.4 pounds of DDGS, there is then a $1.52 credit, which spread over 2.7 gallons is equal to $0.56 gallon. This reduces our cost per gallon to $2.68 minus $0.56, or $2.12 for just the corn input. (Note that there is sometimes a credit for carbon dioxide sales, but it is very small relative to the other costs and credits).
I still have to consider utilities (natural gas is a major cost), labor, enzyme and yeast costs, and depreciation. I have a spreadsheet from an actual ethanol plant, but there isn't much in the public domain that I could find on this. The closest thing to a source on these is the spreadsheet in the presentation Fossil Fuels and Ethanol Plant Economics (for a standard dry mill process). If you look at Page 16 of the presentation, you can see that all of the miscellaneous costs together total approximately as much as the corn inputs. If you take the spreadsheet on Page 24 and change the natural gas price to the current price of $13.20/MMBTU, you get an overall energy cost of $0.51/gal of ethanol. (You can play around with the original spreadsheet that is in the PDF here). The sum of enzymes, yeast, and other chemicals comes out to be $0.14/gal, and labor, maintenance, and various miscellaneous expenses add another $0.23/gal.
On depreciation, I have several sources for capital costs that are pretty consistent. In the EIA's Energy Outlook 2006, capital costs per daily barrel of corn ethanol ranged from $20,000 to $30,000, depending on the size of the plant. This breaks down to between $1.30 and $1.95 per gallon of installed capacity. This is also consistent with A Guide for Evaluating the Requirements of Ethanol Plants, which states "Current capital cost per annual gallon of installed capacity for an ethanol plant ranges from $1.25 to $2.00." So let's be conservative and say that we want to build a big plant, so the capital costs are on the low end at $1.30/gallon. Depreciate that over 15 years and this portion amounts to about $0.08 per gallon (but is captured above already).
However, for biomass to liquids facilities - which would include the biomass gasification to ethanol that some are calling cellulosic ethanol - the capital costs in the EIA's Energy Outlook 2006 are listed at around 5 times that of a conventional corn ethanol plant. Thus, the capital depreciation portion is going to be around $0.40 per gallon of ethanol. (On the other hand, the feed costs should be much lower).
Summary
Times are tough for ethanol producers. This is what the economics roughly look like at $7.24 per bushel of corn and $13.20/MMBTU of natural gas. To produce 1 gallon of ethanol requires:
- $2.68 of corn
- $0.51 of energy
- $0.14 of enzymes, yeast, etc.
- $0.23 of labor, maintenance, and various miscellaneous expenses
There is a DDGS credit per gallon of ethanol of $0.56. Thus, the total cost to produce a gallon of ethanol today is $2.68 + $0.51 + $0.14 + $0.23 - $0.56, or exactly $3/gallon of ethanol. For reference, the July contract for ethanol in the Midwest closed yesterday at $2.86. And $3/gallon is merely cost of production. It doesn't take into account any return on investment.
Also note that due to the lower energy content, this production cost is equivalent to a $4.48 per gallon production cost for gasoline ($3/0.67) - and that this production cost is a moving target: As long as the ethanol mandates are driving up the price of corn and increasing the demand for and cost of natural gas, corn ethanol producers must chase their tails in a vicious circle.
Producers are going to be hard-pressed to ever match the 2006 windfall that was given to them when the MTBE phaseout drove ethanol prices sky-high. But my conclusion is - since ethanol is mandated - some marginal producers will shut down and prices will rise. If everything else remained constant, I think ethanol would have to rise to something like $3.40-$3.60/gal to make it worthwhile to ethanol producers. So, if I was a commmodities investor, I would probably go long ethanol right now.
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Wow!
They're screwed. Somebody (I guess that could be me) should write about how & why the natural gas price has accompanied the oil price rise.
And don't fret, cellulosic ethanol will be much cheaper! :-)
If its bad now for ethanol producers what if oil prices fall again like they did in late 2006 (hey its an election year it could happen) then they will be well and truly f***ed.
A welcome post!!! Here are some more nails in the coffin for corn ethanol. A review of studies by the National Resources Defense Council and Argonne National Laboratory regarding the net energy gain from the production of corn ethanol, reveals that some studies indicate some net gain and one study indicates a net loss of energy.
None of these studies, however, considers all of the energy inputs in all of the processes required to produce ethanol (mining and transport of ores, parts, equipment, heating of factories, all employees’ transportation and salaries (oil consumed in spending salaries and dividends), and maintenance, etc.), nor do the studies consider the opportunity costs of not using corn for food (sales). And ethanol cannot be transported by the existing pipeline network that covers the U.S., and transport by trains and trucks is very expensive and consumes much energy as well.
The ERoEI for ethanol is therefore negative. There cannot be any precise data produced on this as there are too many confounded energy input variables. The cost of ethanol is higher than the cost of oil (and it has less energy per gallon) because it uses more energy than it provides. This price differential is how we can assess all of the energy inputs for producing corn ethanol. Chris Shaw is right when he says that energy is the one true currency, it always was and always will be.
http://www.onlineopinion.com.au/view.asp?article=3837&page=3
Here is some supporting stuff.
http://answers.yahoo.com/question/index?qid=20070522080205AAEOqEK
http://www.theoildrum.com/node/3591
Gasoline, corn and nat gas prices all rise and suddenly ethanol is not profitable - what a surprise!!! (this is the definition of low net energy gain technology - law of receding horizons.)
I disagree with Robert that ethanol is necessarily a buy. Many of the ethanol producers will continue to produce ethanol even at a 20 cent loss because it is cheaper than competely shutting down. Clearly some producers will shut down, but not enough for me to want to buy ethanol. Yet. (actually, out of principle, I would never buy corn ethanol futures (though in Wisconsin, I have little choice but to buy the actual product).
I disagree with Robert that ethanol is necessarily a buy. Many of the ethanol producers will continue to produce ethanol even at a 20 cent loss because it is cheaper than competely shutting down.
Nate, some are shutting down, yet the mandate marches on. I think prices have to rise. Ethanol producers may continue to lose money, but ethanol itself should rise unless 1). Energy prices collapse; 2). Corn prices collapse; 3). The mandate is repealed.
I don't strongly disagree with you - just pointed out that a good deal of production will stay online despite a loss. And at some finite price for ethanol the gas stations won't want it because customers will choose regular gasoline (if they can choose that is).
This whole thing is disheartening. You and I (and many others) have been writing for several years now how this is a spent bullet when we need dry powder in energy policy. Yet we never made a dent. If something as clearcut as this can't be rejected, what hope do we have on the tougher decisions?
Here's a basic economics lesson for ethanol producers.
Profit - When the inputs are worth less than the outputs (Hint: this is what you're trying to achieve).
Loss - When the output are worth less than the inputs. (Hint: this should be avoided)
Moral of the story: Don't take expensive stuff (corn,oil and gas), expend a lot of effort and produce less expensive stuff (ethanol).
It's just not good business!
"The ERoEI for ethanol is therefore negative." - is INCORRECT.
Ethanol can be made in many different ways from many different feedstocks. Ethanol derived from sugar cane for example, is very much energy positive and no, not even a correction to, 'corn ethanol is therefore negative' will work because a) corn ethanol is energy positive and b) not all corn ethanol is made via the same production process.
Pimentel and Patzek's study produced a net negative energy gain for corn ethanol because they counted the energy used to make the buildings(-) that housed the tractors(-) in which the farmers sat eating sandwiches(-). Pure lunacy.
Robert is right when he says, go long on ethanol.
I've pointed out many times at TOD, that what ethanol does very well, is reduce our exposure to petroleum inputs. As such, the USDOE (under NREL) has mapped out an integrated biorefinery construct that will see 1st generation ethanol production paths (fermentation) combined with cellulosic and thermo-chemical platforms.
This is the future of renewable liquid fuel production.
Studies purporting to prove sugar ethanol's energy gain were commissioned by the Brazilian government and are intended to support a slave-labor employment scheme. The sugar lands were drained from the Panatel, Brazil's great freshwater swamp, the last, now that we've drained the Everglades (in part for sugar production).
You are wrong regarding P&P. Their study did not include buildings or sandwiches, only the concrete and steel fermenters etc. contained within.
Cellulosic ethanol has an even lousier energy return than sugar systems, contrary to promises for biogengineering and rumen-bug chemistries. These don't exist except in prospecti and investor schemes.
Just a few statements to help balance out the argument...
On EROEI and petroleum inputs...
"A recent research paper produced in "Science" by Berkley scientists noted that ethanol was not only a net energy winner, but that it required very low petroleum inputs compared to gasoline -- about 30 times less. What is most interesting about the Berkley study is that cellulosic ethanol was directly competitive with petroleum itself -- producing 10 times more energy than the amount invested into it. What was ironic was that the Berkley study confirmed Pimentel's earlier analysis that it takes more energy to produce gasoline than gasoline itself contains. So while ethanol is a net energy winner by 30% for corn to 1000% for cellulose, the fuel that sits in your car sucks up some just to be synthesized."
On ethanol as a driver for high food prices...
"The US uses a staggering 30% of its corn for ethanol synthesis. Looking at this figure is intimidating and without understanding the process of modern ethanol synthesis from corn, it is easy to see why many would come to the conclusion that we are using far too much of our food as fuel. In truth, though, the process of ethanol synthesis is a bit more complex.
In processing ethanol, the starch part of the corn is removed and used for manufacturing ethanol. The other part, a high protein remainder, is removed and used as distillers grains in cattle feed. In this way, 30% of the corn and 90% of its protein is saved for use in feed for livestock. When it is taken into account that the kind of corn used for ethanol isn't even the type used for human consumption, it becomes a lot more difficult to implicate ethanol as the sole cause of rising food costs.
In a study by the US Department of Agriculture, use of corn in ethanol production accounted for barely 2% of the total rise in food costs over the past few years. The primary cause, by contrast, was the rising cost of oil which is used for transportation, fertilizer, and harvesting."
Ethanol's effect on fuel prices...
"Currently, according to Department of Energy figures, the US produces 570,000 barrels per day of ethanol. This volume of liquids displaces more than 6 percent of US daily oil imports. To put the volume of ethanol produced in the US in perspective, it would take approximately fifteen years of drilling in ANWR to produce a comparable volume of oil. Since we are importing less oil because of ethanol, it has a positive affect on the price of gasoline. A recent study estimated that without ethanol, gasoline prices at the pump would be 54 cents higher for every gallon. With average pump prices for regular at $4.03 per gallon, without ethanol you'd end up paying $4.57. Not only is this money saved by consumers within the US, it is also money that remains inside the US economy, generating wealth here rather than going to sovereign wealth funds overseas. In total, the 570,000 barrels per day of domestic ethanol displaces about 30 billion dollars in oil imports every year, while helping the US move closer to energy independence."
On ethanol's impact on water resources...
"Though the process of ethanol distillation involves water, most industrial processes do. For example, a cheeseburger consumes 1 gallon of water in the process of its production. According to a US Department of Agriculture study, ethanol takes between 3 and 5 gallons of water to produce one gallon of ethanol. And while this may seem like a lot of water, the process of producing gasoline is estimated to take between 4 and 7 gallons of water. In the end, ethanol is less of a strain on water resources than the fuel it competes with."
On new biofuels technology related to ethanol...
"The major focus of the ethanol industry at this point in time is diversifying and improving its feedstock base. The industry is looking to produce ethanol from cellulose and, to this end, is constructing a number of manufacturing facilities around the country. Furthermore, the industry is continuing to improve the types of corn used for ethanol production in order to yield both more energy and more grain for feeding livestock. Another initiative includes the use of more efficient crops like sorghum which produces a sugary liquid that is easier to refine."
What a gem. I learn so much on this site everyday!!
The "Science" article mentioned the net EROEI negative of gasoline due to the fact that ethanol is a direct competitor for that fuel. Ethanol is a net gain because it derives a portion of its energy from the sun.
Ethanol is a net gain because it derives a portion of its energy from the sun.
Where do you think oil got its energy from? Magic pixie dust?
Ah, Robert, but the problem is an oil shortage, after all, isn't it? Without replacements, where are we?
And I wasn't comparing ethanol in this case to oil, but to gasoline -- an oil product. Though some here would like to claim that ethanol is a petroleum product which, at 30 times less petroleum inputs than gasoline, it clearly is not.
As for magic pixie dust, if you can show me where to buy some on the commodities and futures market, I'd be happy to speculate :)
Ah, Robert, but the problem is an oil shortage, after all, isn't it? Without replacements, where are we?
That is a completely different question.
Though some here would like to claim that ethanol is a petroleum product which, at 30 times less petroleum inputs than gasoline, it clearly is not.
It is a fossil fuel product, as the inputs are mainly natural gas for the process and coal for electricity. Some diesel and oil for fuel, pesticides, etc. And the processing of ethanol consumes a lot more fossil fuels than the processing of oil. This makes sense if you think about it. One is in a pool underground. You stick in a bit straw and suck out a water insoluble liquid, which you then process. For ethanol, you expend a lot of energy producing the corn, and then you produce a water soluble product that takes a lot of energy to get the water out.
So you completely ignore Berkley scientists who analyzed petroleum imputs and found it to be 30 times less for ethanol than gasoline? If gasoline is the direct product in question, why not compare ethanol to gasoline and not oil? Ethanol can't be used as oil is used. But ethanol can be used to replace one oil product -- ie gasoline.
In any case, as I said before, in the case of ethanol a large portion of the energy imputs come from the sun.
Those scientists conflated conversion efficiency with harvesting efficiency (EROI). And they used narrow boundaries. Robert (and others) have explained this about this at least 20 times on this site.
The focus on the Liebigs input du jour is the problem. Water, food, soil, natural gas, coal, etc. and other limiting inputs are ignored.
So you completely ignore Berkley scientists who analyzed petroleum imputs and found it to be 30 times less for ethanol than gasoline?
Appeals to authority don't impress me. Or can I merely appeal to Pimentel's analysis in response?
As I said above, the major input into ethanol is natural gas. Natural gas is not petroleum, but it is a fossil fuel. I clearly addressed that, and ignored nothing.
If gasoline is the direct product in question, why not compare ethanol to gasoline and not oil?
Because when you process oil you get other products like diesel and jet fuel. It is easy to compare energy/water/etc. usage per barrel of oil, but more difficult to allocate per gallon of gasoline - since various crudes and refinery configurations will produce differing amounts of gasoline. And didn't you just write that ethanol "displaces more than 6 percent of US daily oil imports"?
In any case, as I said before, in the case of ethanol a large portion of the energy imputs come from the sun.
That's also where gasoline gets the vast majority of its inputs. Gasoline is ancient sunshine, with some processing. The energy you spend in processing the gasoline will yield about 10 times what you consumed.
"That is a completely different question."
Not at all. It is the crux of the matter.
If you deconstruct the EBAMM model used in the Berkeley report (freely downloadable from their website), you'll actually find that it calculates an EROEI of cellulosic ethanol of 0.78, not 10. The magic they used to get their reported return was to credit the entire amount of biomass energy used in the processing stage back to the ethanol. (A side fallacy in this model was the assumption that there was enough lignin to run all processes in the plant and to export electricity--this is also in error.) Biomass energy is energy, so claiming an energy return above unity for cellulosic ethanol is simply wrong.
Ah, so Berkley is not a reputable source now? And somehow counting food calories consumed by workers in the negative side is valid, while counting process inputs on the positive side is not?
UC Berkeley has many good scientists. I work with a number of them.
Inputs (whether food calories or biomass used for combustion) are all in the numerator as inputs. I don't understand your distinction. The problem I mentioned is that the input energy used and recorded in the numerator is then zeroed out in the denominator by crediting the output with all the energy used in its production. If it were natural gas consumed to produce ethanol, would you credit the energy content of the natural gas to the output? If you don't zero out the biomass energy consumption (which you shouldn't since biomass energy is still energy, just like natural gas is energy), then you get the 0.78 EROI. It's actually quite logical given how inefficient the whole process is.
Just a few statements to help balance out the argument...
OK, but will you defend them?
A recent research paper produced in "Science" by Berkley scientists noted that ethanol was not only a net energy winner, but that it required very low petroleum inputs compared to gasoline -- about 30 times less
That's because they counted the petroleum itself as an input, even though the output is gasoline. It's kind of like saying "gasoline requires very low corn inputs compared to ethanol."
In a study by the US Department of Agriculture, use of corn in ethanol production accounted for barely 2% of the total rise in food costs over the past few years. The primary cause, by contrast, was the rising cost of oil which is used for transportation, fertilizer, and harvesting."
That's funny, because if the EROEI is good for ethanol, you would expect corn to be more insulated from rising fuel prices. Then again, if the fossil fuel inputs are high, you would expect rising fossil fuel prices to lead to rising corn prices. Which is it? Good EROEI, and food versus fuel is driving corn prices, or bad EROEI, and fossil fuel prices are driving corn prices? (The truth is that it is a bit of both).
Currently, according to Department of Energy figures, the US produces 570,000 barrels per day of ethanol. This volume of liquids displaces more than 6 percent of US daily oil imports.
Ignores the fact that ethanol has a much lower energy density than a barrel of oil, and treats them as the same. In fact, the energy density in a barrel of oil is quite a bit higher than the density for gasoline. A barrel of oil has double the energy density of ethanol, so your quoted statement his horse hockey. Further, does not take into account the fossil fuels it took to make the ethanol.
According to a US Department of Agriculture study, ethanol takes between 3 and 5 gallons of water to produce one gallon of ethanol. And while this may seem like a lot of water, the process of producing gasoline is estimated to take between 4 and 7 gallons of water.
Try 0.52 gallons of water per gallon of crude oil processed:
http://i-r-squared.blogspot.com/2007/03/water-usage-in-oil-refinery.html
Those numbers come from publicly available refinery statistics from the refinery I used to work at. So that's not just a guess. That's a number that I know.
"That's because they counted the petroleum itself as an input, even though the output is gasoline. It's kind of like saying "gasoline requires very low corn inputs compared to ethanol.""
If you're looking to reduce overall petroleum inputs, it's absolutely valid. And of course petroleum imputs to gasoline would be high -- as gasoline is a petroleum product. But ethanol is not, and therefore, does not rely so much on petroleum. Isn't that the goal? Reduced reliance on petroleum. Well, perhaps not for those in the oil industry but it should be very important for the rest of us, especially if we look for solutions to oil supply problems.
"That's funny, because if the EROEI is good for ethanol, you would expect corn to be more insulated from rising fuel prices. Then again, if the fossil fuel inputs are high, you would expect rising fossil fuel prices to lead to rising corn prices. Which is it? Good EROEI, and food versus fuel is driving corn prices, or bad EROEI, and fossil fuel prices are driving corn prices? (The truth is that it is a bit of both)."
Well ethanol is getting hit, like everyone else, by rising transportation costs and energy costs across the board. With such a high portion of all transport dominated by oil, it tends to skew the assessment. What should be noted is the positive impact ethanol has on the price of oil -- approximately 56 cents lower at the gas pump. So such a small portion of ethanol has a pretty broad impact. In any case, the rising cost of corn, of which floods currently have had a major impact, is the primary pressure on ethanol at the moment.
"Ignores the fact that ethanol has a much lower energy density than a barrel of oil, and treats them as the same. In fact, the energy density in a barrel of oil is quite a bit higher than the density for gasoline. A barrel of oil has double the energy density of ethanol, so your quoted statement his horse hockey. Further, does not take into account the fossil fuels it took to make the ethanol."
And you ignore the fact that certain blends of ethanol, as an oxygenate, actually increases fuel efficiency by a given amount.
For my part, I do not resort to personal attacks. I have quoted figures produced by legitimate agencies. Meanwhile, you resort to character assassination. I would expect little less from someone with such a personal stake in the failure of ethanol as a fuel.
"Try 0.52 gallons of water per gallon of crude oil processed."
Well according to government studies, gasoline takes between 4 to 7 gallons of water. I didn't post figures on crude oil directly because I wasn't comparing ethanol with crude oil. That said, I've seen conservative figures on oil (from the National Renewable Energies Labratory) ranging from about 90 gallons per barrel for that process alone (or 2.5 gallons of water per gallon of crude).
http://www.drivingethanol.org/ethanol_facts/water.aspx
Wow, Robert, you link your own article from your own blog. That's independent validation for you...
If you're looking to reduce overall petroleum inputs, it's absolutely valid.
But it isn't EROEI. It's one thing to say "We need to reduce oil consumption." It is something quite different to say "It is more energy efficient to produce ethanol than gasoline." The second statement is simply false, yet that is the implication (if not blatantly stated).
What should be noted is the positive impact ethanol has on the price of oil -- approximately 56 cents lower at the gas pump.
So you expect that demand won't respond to price? As oil prices have risen, gasoline demand has softened. That has had a big impact on the ability of gasoline prices to keep pace. But ethanol likes to take all that credit.
And you ignore the fact that certain blends of ethanol, as an oxygenate, actually increases fuel efficiency by a given amount.
Show me any large, independent study that shows this. And you might notify the DOE, who still shows a substantial mileage hit from ethanol:
http://www.fueleconomy.gov/
For my part, I do not resort to personal attacks. I have quoted figures produced by legitimate agencies. Meanwhile, you resort to character assassination.
What character assassination? You mean like the one you did here:
I would expect little less from someone with such a personal stake in the failure of ethanol as a fuel.
But I have to ask - and this is a legitimate question and not character assassination - are you stupid? Why on earth do you think I want ethanol to fail as a fuel? I am personally heavily involved in a cellulosic ethanol project. The backers of that project would be quite amused by your suggestion. What I dislike is misinformation, and you have been posting misinformation.
Wow, Robert, you link your own article from your own blog. That's independent validation for you...
And I gave links and sources in the article, which you conveniently omit. Can you not read? Do you think the utility bills have been falsified? Do you think I am just making it up; that I don't know the water usage in my own refinery? But what else should I expect from someone who falsely complains about character assassination, and then turns around and actually assassinates my character?
Nice work RM - I should read through some of your earlier posts.
The PIR or petroleum input ratio of liquid fuels (let alone all post-peak initiatives) has been at the center of my argument for years.
You encapsulated the ethanol debate to a T.
The one caveat I would add, however, is what U.S. ethanol has truly replaced or displaced rather, as outlined in an excellent contribution by our resident actuary here: http://www.theoildrum.com/node/2423
I'm not saying that ethanol is limited to that amount by any means but as a proponent of the fuel, Gail's observation was rather sobering.
Perhaps you should read the P&P study newland. Furthermore... you've been here long enough to have seen the excellent posts we've done on Brazilian cane->etoh production as well. I would recommend refreshing yourself with de Sousa's work.
Here's how ethanol is done properly:
Louisiana's governor Bobby Jindal has signed into law the Advanced Biofuel Industry Development Initiative, the most comprehensive and far-reaching state legislation in the United States, enacted to develop a statewide advanced biofuel industry. Louisiana is the first state to enact alternative transportation fuel legislation that includes a variable blending pump pilot program and a hydrous ethanol pilot program. The initiative will also give an efficiency boost to the ethanol industry in the state by supporting high yielding non-corn crops.
The legislature found that the proper development of an advanced biofuel industry in Louisiana requires implementation of the following comprehensive “field-to-pump” strategy (as developed by Renergie, Inc., which utilizes high yielding, water-efficient sweet sorghum).
Yep. Pimentel is always cited by those who dislike ethanol because it is the most pessimistic study available. As you stated above, it includes such ridiculous things like how much calories workers consume in the form of food as part of the 'net energy' equation.
and I bet they wouldn't do that for gasoline.
Oh Pimentel probably would have. He was the ultimate bean counter when it came to EROEI.
Robert is right to go long on ethanol. The EROEI argument is irrelevant as I have pointed out many, many times. The EROEI for fossil fuel electricity is and has been about .5 for over a hundred years during the rapid expansion of its use.
The EROEI of imported oil from the point of view of the oil importing country has got to be minus one. Yet oil imports continue to rise as the imported oil is paid for with economic gain coming from the oil consumption. This is a tough row to hoe though since there are competitors like Germany, Japan as well as many low wage countries playing that game.
It is better to maximize our own resources by converting corn to ethanol rather than wasting corn energy feeding it to animals or exporting it. Americans are not the world's champion exporters and we will end up as losers if we go that route.
Corn at $7 is still very undervalued for its energy content which I estimate to be in the area of $11-12 now.
True gas and ethanol are running in circles as the price of oil rises. But what else would you expect? Those plants closing down are smaller, more inefficient opperations. New plants are being cancelled of course. What else would you expect in this market environment? Crop failures are not a good basis for making policy decisions. Should we abandon gas if there is a war that makes crude oil prices rise? I don't think so.
Many ethanol plants are not the publicly traded companies that get Wall Street headlines. Many are private or co-ops owned by farmers who can absorb a lot of red ink especially if they are receiving a bonanza in the form of high corn prices.
Holding oil, corn or ethanol prices down will only make matters worse, since the required decreases in energy use in areas like airlines, recreational travel and the military will not be made.
Food prices must rise so that energy resources for food are guaranteed. There is no problem buying corn for food use now.
The problem is going to be in buying it for animal feed and for export. These uses have to make way for ethanol since ethanol will be able to out bid them as its price rises along with gasoline.
No, not really. Guess what: Buildings cost money to build, the sandwiches cost money to make. They cost money because it took energy. It took energy to grow and chop the trees to make the barn. It took energy to grow the wheat to make the sandwiches. It all goes into the cost of producing the corn that goes into making the ethanol. Say what, let's drop the fight over whose methodology is right and let the economics speak for themselves. If ethanol becomes profitable for a sustained period of time (I mean for several years and without artificial support from subsidies/mandates etc etc) then you're right and P & P can eat humble pie. If the converse, then they're right and you're wrong. Simple.
Not so simple-that Iraq invasion wasn't free and it wasn't done to secure corn supplies.
"No, not really. Guess what: Buildings cost money to build, the sandwiches cost money to make. They cost money because it took energy."
how do they calculate it though? a building could last 30 years or more. some building will last longer than others. some workers eat more sandwiches. some buildings cost more to heat that others. what if in 5 years commutes are drastically lower? what if the workers live at the plat 5 days out of the week?
Life Cycle Assessment (LCA) has a set of rules and protocols that standardize these type of comparisons.
Let me know when ethanol proponents get to count the money/energy utilized in the exploration/extraction/expedition/protection process of getting MENA oil to U.S. shores.
Corn ethanol is an energy sink, and that is what the price tag say.
Transformation has value; you can burn corn in a pellet stove, but you can't put it into the tank of an existing vehicle.
Taking a step back from the endless debate on EROI we are still going to need police, fire, ambulance, and delivery services after we convert to electrified rail. If we succeed in freeing the corn crop from fossil fuel inputs ethanol, for all its warts, is usable in our current vehicles with minor modifications. If we simply stop the (foolish IMHO) plan to quintuple ethanol production and focus on making what we've got ultra-efficient then we'll have a win, such as are available in these uncertain times.
Gosh, ethanol not profitable? Who'd a thunk?
You mean that a physical process that produces less energy than it takes to make it earns too little money?
Next thing you'll tell me is that perpetual motion machines are fantasy!
These dream killers better quit it!
Nice update RR
Has anyone done a sensitivity analysis, assuming US cattle herd stays the same (100 million beef and 10 million dairy, roughly), if ethanol scales to the mandate, how soon do we reach the maximum DDS that cows can effectively eat (meaning that the output credit gradually declines for DDS, reducing the energy return)?
Perhaps ethanol won't scale to mandates or, at least, the current mandates.
Good update.
Can you clarify some things:
On the short term, as competition becomes scarcer, producer prices will rise for ethanol.
IF crude oil and feedstock were not to rise in price, THEN some of the companies might break even in due time (if gasoline price keeps high).
However, as this is unlikely to happen, many producers will keep on bleeding money, right?
It's interesting to note that EIA is forecasting still a rise in production and capacity
Source: EIA, 5/2008
IPPC WG3 is forecasting a lowering of production costs (to 2030!)
Source: Toyota R&D @ IPCC Outreach Meeting in Beijing, WG3, 5/2007
Investment bankers are expecting grain based ethanol production to double in just a few years
source: Goldman Sachs, 3/2008
Is the planning and financial world really this removed from the data on the ground or am I reading your comments wrong?
Please note that I'm not refuting anything, just asking.
Is the planning and financial world really this removed from the data on the ground or am I reading your comments wrong?
I think they are just assuming that things will play out according to the mandates. And if they do, you ain't seen nothing yet with respect to how this can distort markets.
Remember, we have to put 9 billion gallons of ethanol in the gasoline supply this year. That goes up to 10.5 billion gallons in 2010, and rises to 15 billion gallons by 2015. Unless the mandate is repealed, ethanol production will continue to rise, although some producers will go broke.
Robert,
You are not all that far away for Lester Brown's analysis http://www.earth-policy.org/Updates/2008/Update69.htm
but there is some difference. Do you think this is mainly in the change in the natural gas price?
What do you know of the fate of the 62 distilleries under construction in January?
Thanks,
Chris
Do you think this is mainly in the change in the natural gas price?
The main difference is that there is no stated price given for ethanol. I think they made some assumptions about price relative to gasoline that hasn't held up.
What do you know of the fate of the 62 distilleries under construction in January?
Some are definitely on hold, but I don't know exactly how many.
Robert,
Thanks. That makes more sense. The mandate could raise the price I suppose so that $10/bushel corn could still be in the cards.
Chris
Based on the way Congress is vilifying speculators as the root cause of our energy woes, and in symbiosis with the passing of comedian George Carlin, I half expect Congress to increase the subsidies given to corn ethanol producers, so as to alleviate their short term pain....;-)
ROFLMAO
You have GOT to be kidding.
Spiking corn prices 'prove' low EROEI?
20% of the Iowa corn crop has been wiped out due to what..low EROEI?
Spiking oil prices 'prove' low EROEI?
Spiking coal prices 'prove' low EROEI?
EROEI is such a wonderful concept.
It can explain EVERYTHING.
Although I believe RR is a touch high with his costs, I'm not going to quibble over it since it's, probably, not all that germane to the question at hand.
That question is: Do you want to bet on corn prices going up from here? ?
Then there's the question,
'Do you want BOTH your food supplies AND a key motorfuel to be decimated and cast into further 'percieved' competition by the same weather events?
It certainly cannot explain everything. (I am submitting a paper next week to Energy Policy titled "The Limitations of EROI as an Energy Policy Statistic" and will post a summary here).
But an energy technology like corn ethanol that has low net energy makes it easy to predict the lack of profitability from ANY hiccup in input costs. Alternatively, high EROI systems have much more room for error and would still be profitable (in energy or dollar terms) if their input costs doubled or tripled.
Another paper I am working on is 'The Sharpe Ratio of Corn Ethanol', showing that we need to divide the 'mean' expected return by standard deviation in order to accurately judge an energy technologies value to society - biomass crops, especially monocultures, have very large dispersions of annual yields vs trendline - if we have 20% of our fuel supply based on an annual crop, the expected volatility must be accounted for, just as it is in financial portfolios.
This is interesting to ponder. It is basically the same problem (on a different timescale) as using wind for electricity instead of ff
Nate,
The way we usually handle volitility in grain harvests is to maintain a carryover stock of around 120 days (at the end of 2007 we were at 54 days). This moderates prices and maintains food security. So, the cost of supply volitility is built in through the storage facilities we maintain.
Chafwakale suggests that this is the same problem as for wind or solar although at different timescales. In my opinion, by the time we need to maintain storage for those, we'll have it basically for free as a result of electrification of transportaion, but there might be a similar approach to performing the calculation.
What I think would be really illuminating would be to look at the volitility of fossil fuel supply over the entire period of their use. One can not buffer the reduced availability of fossil fuels by storing them, so that volitility should have a stronger effect.
At present, we have wandered away from sound food security policy and so price volitility in grains may provide a sigma for your calculation that will help. But, returning to sanity may bias sigma down and you'll need to apportion the cost of storing grain between food and fuel in some way or another.
Chris
what if you can't maintain sufficient carryover stocks (e.g. at end of this year)?
That is a little like Pharaoh ignoring Joseph's interpretation of his dream. You get a bunch of skinny cows and closed feedlots and ranchers losing their spreads I guess. If that does not turn food security policy back around, then worse to come I guess. Cutting forests and water mining to try to replenish the stocks will have mainly destructive consequences I think.
You should get a good glance at what kind of volitility to include in you calculation.
Chris
http://www.reddit.com/info/6oxr3/comments/
http://www.reddit.com/info/6ox49/comments/
Jeff Broin stated, last week, that some of their plants (they own 23, I think it is) are making a few cents; some are losing a few cents.
Also, Verasun has announced that two of their new 100 mby plants' openings will be pushed back due to tight economics. These two anecdotes lead me to think that, at $2.85, they're right on the edge.
Nate, the RFS is for 10% from Corn, right? Where does the 20% come from?
the other 10% is for 'advanced' biofuels, which will also come from crops or crop waste products - things dependent on weather, climate, etc...
I've been lurking for a few weeks and I'm ready to get my feet wet - but not on ethanol. I just don't believe we should be distilling our food supply so we can keep Hummers on the road. I'd rather see the US plunk down a few wells off the coast of Marin County before subsidizing more corn to make ethanol.
Something else in the news related to ethanol is the bowing out of US Sugar in Florida, with the state paying $1.7B for 300 sq. mi. of Everglade swamp land (former sugar cane farmland). Executives with US Sugar claimed they cannot compete with imports (even considering the high tariffs) and decided to close the business over a six year period. If sugar is such a great feed source for ethanol production, why didn't US Sugar hold out or find financing for someone wanting to bet on ethanol?
Even if sugar cane is not the choice biofeed for ethanol production, surely something like switch grass could be grown in Fla. With the long growing season and water supply, it seems like someone could make a go of it. I'm just not able to connect the dots in this case.
There's also a six year time frame to "phase out" sugar production in order for residents of Clewiston to find alternative means of employment. Expensive gasoline may change things a bit.
Corn , Wheat, and Sugar ... all reaching highs
http://www.cnbc.com/id/15839171/site/14081545/
I hate EROEI for corn ethanol because if the EROEI goes to 7:1 based on some new process I still don't like it. I am against it mostly on principle. corn should be used to either feed humans or cattle. even if corn is grown that wouldn't be feed to us humans it still is displacing some corn that would be grown for us humans.
if an ethanol plant is powered entirely by solar or wind EROEI is basically infinite because the sun and the wind are renewable and infinite. the only real energy expended(we're talking at the ethanol plant) is the time it takes to pay back the energy it took build the turbine or build the solar panels. that's a much different calculation of EROEI than if the plant uses nat gas or oil to produce power to produce ethanol. even if solar or wind and some other breakthrough could make ethanol feasible there is always the opportunity cost of not using wind and solar power that the plant uses to make something else that may be more sustainable.
So, it's okay to grow corn to feed to cattle to produce T-Bone Steaks for "Rich" People; but, it's Not Okay to grow corn if you're going to convert part of it for affordable transportation fuel for "Poor" people. Is That about it?
Is it alright to grow barley, and rice for beer? I mean, we could have raised wheat on that land and given it to the needy in Africa, right?
What about Grapes for Wine?
Potatoes for Vodka?
kdolliso,
you've made a very valid point --- there is something artefactual about the argumentum ad Africa in applying it only to biofuels. If the core principle of our ethics were to 'bring hope and prosperity to Gwondanaland' then we would not only have to forsake the cultivation of biofuel crops but also forsake the cultivation of anything other than staple foods (as you point out).
My own view is that Africa is the ultimate basket case and that its only utility is to give us a bad conscience, which isn't really a bad thing, since it might at least inhibit us from indulging in the worst of our consumer frivolities. Still, one can live quite well with a bad conscience. With a bit of practice it is relatively easy to bear the suffering of others, especially when there is absolutely nothing one can do that will not make things worse, other perhaps than promoting birth control.
Using corn to produce biofuel is a bad thing because it doesn't work, on purely economic terms. It makes us worse off as well as them. If biofuel production did turn out to be an economic success (imagine some huge genetically modified science-fiction pumpkins each containing four gallons of pure gasoline that will grow almost anywhere -- just park your SUV on the side of the road, gather a few pumpkins, and squirt their content right into your petrol tank) I reckon the 'starving children' argument would fizzle out pretty quickly. And thanks again for providing food for thought.
kdolliso,
you've made a very valid point ---
After How Many Months? imagine that.
Carolus, once I can move them away from the visceral food/fuel hypocrisy I've got'tem.
Gasoline is $4.00 +/gal, and we're shipping $1.3 Billion Overseas for Oil EVERY DAY. This against my suggestion that we simply plant more corn, and use some of our Own Natural Gas (understanding, of course, that we're moving Away from nat gas toward biomass - syrup, lignin, corn stover, etc.)
It becomes a no-brainer after awhile. :)
kdollisco,
I've been watching the most fanatical of the anti-biofuels crowd--economist Jeffrey Sacks and Lester Brown of the Earth Policy whatnut..
These guys are totally adamant that US biofuels, especially ethanol, are starving the Third World to death.
The funny thing is these same NGOs don't want the US to send ANY grain to Africa, etc. they want us to send cash so they can give the poor stipends to buy the food from their local farmers instead.(You KNOW this is a total NGO scam, i.e. we give NGO who split it with say Mugave..how much 'trickles down?)
So who needs our food?
Huge nouveau-riche Third World middle class(hundreds of millions of consumers) which has taken a liking for protein.
A bushel of corn can produce either 2.7 gallons of ethanol OR 5.6 ponds of beef.
Previously a Chindian ate one tenth the amount of protein that an American does. That is changing fast.
That, not straving Africans, is the face of high corn prices.
"Conclusions
1. Rising demand for grain in China, stemming from an increase in meat consumption, is
overwhelmingly the cause of supply and demand imbalances in corn production.
2. Given that the US population has grown 15 percent in the past 13 years, the 82 percent
increase in US corn production left plenty for people, plenty for livestock, and plenty for
ethanol.
3. Chinese meat consumption is still 45 percent less than the average consumption in the
US. An additional 277 million tonnes of grain would be needed to support China at
parity with the US. That would take 68 million acres to grow.
4. If the Chinese people had consumed the same amount of meat, per person, in 2007 as
in 1995, there would have been enough grain left over to support 927 million hungry
people with enough grain for an entire year,” said Lane.
5. The growth rate for grain in China is so intense that, even if the US ethanol industry
were completely shut down tomorrow, increased Chinese demand would soak up the
excess grain by 2011."
http://www.biofuelsdigest.com/MeatvsFuel.pdf
The USDA economists puts the contribution of biofuels to be 2-3% of the total food inflation.
A bushel of corn can produce either 2.7 gallons of ethanol OR 5.6 ponds of beef.
5.6 ponds would hold a lot of beef. :-)
Majorian,
Thanks for the hard data and for the link to Biofuels Digest.
Amazing how you can read a hundred articles in the press about the ethics of biofuel production without coming across a single piece of genuine quantitative information. The same secondary or tertiary sources with each pundit virtually plagiarizing the other.
I have put your comment and citation in my 'stuff I read that taught me something new and didn't just repeat some old totally redundant crap I've come across one hundred times before' subdirectory. :)
yes.
You might consider challenging him on the suggestion that this Transp fuel would even be affordable.
Kdolliso, do you have some mechanism whereby only poor people are able to get their hands on the cheap fuel, and only rich people buy meat?
Minor quibbles (I, too, abhor the damage being done to our watersheds and food prices by production of corn for ethanol, and these have nothing to do with its EROEI. Is is also too small a contribution to our energy "needs" as presently defined to include Hummers.):
Corn is useful for feed to chickens and pigs even more than for cattle (Beef is more nutritious, though the cattle grow more slowly, when they are grass fed.)
Even if an ethanol plant were powered by wind/solar, there's still a lot of fossil fuel used to create the fertilize, plant and harvest and dry the corn.
RR, are you sure that $0.23 for labor, maintenance, misc. shouldn't be $0.023?
You can open the spreadsheet for yourself and have a look. It was $0.2264, and that was before oil prices skyrocketed. It is certainly higher than that now.
I went to page 16 of This Spreadsheet, and it looks like about 2 to 3%.
Think about it; a 100 million gpy ethanol plant will employ about 55 people, at an average salary of $40,000.00 would be $2.2 Million, or $0.022/gal. What am I missing?
What am I missing?
The fact that this wasn't just for salaries.
The "maintenance," and "Misc" bars were shorter than the labor bar. Robert, $23 Million/yr for labor, maint., and misc for a 100 mgpy ethanol plant just doesn't make sense.
So they were. But, there were a number of categories in the spreadsheet that added up to the final number:
Depreciation
Maintenance & Repairs
Interest Expense
Labor
Management & Quality Control
Real Estate Taxes
Licenses, Fees& Insurance
Miscellaneous Expenses
You had said earlier that you weren't going to quibble over pennies, but here you are quibbling over 23 cents that should probably be quite a bit higher than that. (Don't forget, salary is only about half the cost of an employee). Further, this was done for an average-sized ethanol plant, but it was done before the oil price escalated. It was also done by a pro-ethanol person.
Okay, I didn't realize that you were putting other named categories into the category named "misc."
Carry on. :)
Your analysis generally looks quite believable to me, but in one area it is not accurate for quite a few plants. You are using what appears to be the Board of Trade futures price for corn. Many Ethanol plants pay well under this price for corn. The Chicago price is for delivery at a specific location which I believe is south of Chicago somewhere on the Illinois River (I haven't checked this recently). Price varies locally quite a bit and a one dollar per bushel variation shaves about 37 cents off the price of ethanol. Failing to account for basis would be similar to doing refinery economics for a refinery in Billings using the price of WTI delivered to Cushing Oklahoma.
The same calculation could be done for the price of ethanol though I suspect it would often trend in the opposite direction. Also at least some ethanol plants get a higher price for their ethanol by using direct retail sale of E85.
Some ethanol plants should be economical even in the current environment. Also my understanding is that crack spreads in refineries are low compared to historical numbers and if this comes into line it should increase ethanol prices.
This is a good point, as I know the basis in north-central WI, is 50 cents lower than CBOT. But I wonder if the same basis differential holds for ethanol contracts? I am looking into the contract details. (Its possible only hedgers/producers are allowed to trade them...)
You are using what appears to be the Board of Trade futures price for corn.
But I also used local prices for ethanol and DDGS. So it should all be pretty relative.
Some ethanol plants should be economical even in the current environment.
There may be some that are marginally economically right now, but they are in about the same shape as oil refiners. And as the more marginal producers shut down, price has to rise.
Iowa production cost for corn is around $2.50 per bushel. So, it seems that from a pure cost perspective corn ethanol can work out quite nicely. The question is: do you prefer to eat chicken or have ethanol in your tank.
http://www.extension.iastate.edu/agdm/crops/xls/a1-85cornprofitability.xls
Why not both? We've got plenty of corn. I bought a five pound chicken at Kroger last week. It was $5.00. A dollar a pound. It made dinner for a family of four; and, we had leftovers.
It takes two pounds of corn to get a pound of chicken. By the way, Tyson has more labor cost than corn cost in a packaged chicken. Labor is right at 50% of their costs, I believe.
"It takes 2 pounds of corn to produce 1 pound of chicken".
Filling up your tank with 13 gallons of ethanol will consume 13/2.7 = 4.8 bushels of corn times 56lb/bu = 269 lb of corn. 269lb corn -> 134.5lb of chicken / 5 = 27 chickens.
Did you fill up with ethanol today? You just consumed the dinner of your family for a month... congratulations.
Eh, not ezzackly;
Disregarding the fact that I would have had 1.5 bushels of chicken feed (distillers grains) left after producing the ethanol, I would have had to pay the grocer $135.00 for the chickens, and I could have purchased 13 gallons of ethanol in some places for about $3.00/gal, or $39.00.
Now, it's true I could have fed those chickens in my backyard; but, then I would have had to pay the $500.00 fine for keeping farm animals in the City. Oh well.
You are shooting yourself in the foot: the 27 chickens cost 4 times as much as the ethanol, which means it makes much more sense from a producer perspective to feed chicken. From societal perspective it is also a much better deal - we obviously value the food much more since we are ready to pay 4 times the amount for the food than for the fuel. Chicken is obviously much more valuable.
Distiller grains somewhat improve ethanol standing but I'm not sure by how much.
Look at it this way. I've gotta drive, and I've gotta eat. Gasoline is $4.00/gal, and ethanol is $3.00/gal. If I use 13 gallons of ethanol I have $13.00 left over to buy two chickens, and a some dinner rolls. Maybe even a cold bud light. :)
In 1953, a single figher plane cost a half-million bushels of wheat - Eisenhower
LevinK - take a guess as to how much wheat a single F-22 costs?
Even with the latest run-up in wheat prices I would guess about 10 times that much. Comparing via fighter planes is plain deceiving though - a fighter plane in 1953 was orders of magnitude simpler and easier to produce machine than a F-22 today. Wheat on the other hand was produced in the same way in 1953 and now and didn't require billions of money spent on R&D or government pork.
Try going through median wages, but please add subsidies to the price since this is still money we end up paying.
Wheat cultivation has changed substantially since 1953 and it depended on the occupation of Japan in some sense so perhaps on the largest government project ever undertaken. http://en.wikipedia.org/wiki/Norin_10_wheat
Chris
Clearly, under present economic conditions, corn ethanol production shuts down overnight if the subsidies and mandates go away. But I am wondering how the economics of corn ethanol would be affected if subsidies for corn itself were to be reduced. It seems that would also weaken corn ethanol's position; is that right?
As I understand it... corn subsidies in the U.S. disappear once $4.00/bushel is reached, let alone $7/8.
I called my futures broker today. Apparently not just anyone can buy ethanol futures - there is an approval process. I am being sent a packet of forms (strange - I've had account there for over 10 years) but as of now an average speculator cannot just 'go long' ethanol futures.
Apparently not just anyone can buy ethanol futures - there is an approval process.
Interesting. Did he know what the requirements are for being approved?
see below
It is abundantly obvious from this discussion that the only good use for corn ethanol is for making cheap moonshine :)
People always want to believe in the easy answers. Fire up the still Cleetus!
moonshine is for drinking and corn ethanol EROEI is for fighting over!
Referenced over at the Stranded Wind Initiative's web site ... very nicely done.
http://strandedwind.org/node/197
It sure is good to be a farmer. All you limp wristed ethanol flamers only have one choice: Starve or pay up. The EROEI of your emo-trash science is zero. You will eat expensive pop corn while watching Africans starve on TV. Cry more pls.
There is a serious g
Sorry for the last broken msg.
There is a serious global shortage of food grains. Some African countries are even facing famine conditions.
This being the case, it is sad that U.S purely for commercial and economic reasons, is converting valuable food grain as corn into Mthanol for auto fuel.
U.S as a super power has a global obligation to supply the corn to needy nations .
I was rather amused to read that some 'experts' cricise India for stopping export of rice, while closing their eyes on Ethanol production from corn in U.S.
U.S. corn doesn't feed people - it feeds animals. U.S. corn exports aren't destined for people either but for animals in the OECD.
Remember that <30% of the starch value and 90% of the protein value of the corn utilized for ethanol production (which isn't fit for human consumption) goes back to the animal feed food-chain.
There's enough grains on this planet TODAY, to feed an additional 8 billion people. However, we choose to feed those grains to animals instead. WE CHOOSE THIS.
OUR choices, coupled with destructive, neo-liberal trade practices, first-world protectionism and the continued blight of despotic AND democratic rulers who prefer to buy guns instead of butter, is why people starve.
Yes, it's all true, and then animals and the people who eat tasty animals (PETA) generate a lot of gases, which wastes energy and causes horrific oders, not to mention global warming from methane gas, said to be 10x worse than CO2, and smellier too. Yes, I know, the smell is actually from hydrogen sulfide, not from methane. And then, the tasty animals end up as human waste in solid and liquid form (it is actually fertilizer, but since we call it waste, we must dump it somewhere) gets flushed down the toilet, which goes to a sewage treatment plant before being flushed into rivers and streams, where water is drawn for populations downstream or on the lake. Someday soon, there won't be enough power for the sewage treatment plants, and some of us who are dying will wonder......how did we manage to poison ourselves with our own waste, when we could have just as easily used human fertilizer to make tasty vegetables.
From Odum, AMBIO (1973)
Odum appears to lack understanding of the quantum mechanical conversion of sunlight. It is actually extraordinarily low entropy. If he understood this, he would reorder his list. He seems to be attemptng this a little by equating information with high quality energy. However, the chemical energy used by the human brain to think and that used by a horse to pull are the same and have the same quality. The connections between entropy and information are trickier than this.
Edit: I saw that an anonymous coward rated this down. A photon arriving from the Sun leaves the Earth as 20 photons, a large increase in entropy. When the energy of a photon from the Sun is directly converted quantum mechanically to electricity, the conversion to the 20 photons is delayed until that energy is used. Odum seems to have thought of sunlight as diffuse but we know that we have the collecting area available to power all our energy use in the roofs of existing structures with achivable quantum efficiency. So, it hardly seems as though that matters. Then, the only consistent aspect of his energy quality assesment is a desire for lower entropy sources. Thus, it would seem that he would put sunlight at the highest level of quality were he to understand the physics better.
Chris
Another great analysis Robert.
As for the "go long ethanol" advice, it really made me think but I'm still not clear on a few items:
1. I guessing that most/many ethanol producers hedge themselves on the near futures market. Therefore it is hard for me to imagine that the corn and ethanol futures prices are very far off base in the immediate future at current prices. If it were truly impossible to produce ethanol profitably at the current corn price, I'm not sure who would be selling "cheap" ethanol contracts for July and August 2008. Perhaps a few foolish speculators, but I doubt it since ethanol is a thin market probably dominated by specialists. That's not to say I disagree with Robert's cost analysis, I'm just thinking perhaps most of the ethanol producers must have long term corn contracts at well below spot price to insure current profitability.
On the other hand, the far future price of ethanol is forced to track oil's backwardation while corn is in forwardation. If ethanol is close to unprofitable at the current prices, then just wait until summer 2009. The correct trade today would have been to buy July 2009 ethanol at 2.79 (vs 2.855 near month) and sell an equal amount of July 2009 corn at 793 (vs 730 near month).
2. My only other serious offhand concern with this trade is that I was under the impression there is some type of trade restriction which makes Brazilian ethanol cost more on the US market than it should. Does anyone have any info on this or am I imagining it? If that is the case then the restriction could be lifted/modified at any time (especially now) leading to a disastrous trade.
Overall though it does seem offhand to be a logical trade recommendation especially when done in the 2009 vs 2008 contracts. Anyone else see something I'm missing?
As for the greater issue of ethanol policy, I often think that the clearest way to analyze EROI may be to look at the profitability of a process. If you need subsidies, ultimately you are putting in more dollars/value than you are getting out. These dollars are directly convertible to fossil fuel if you choose to do so. Therefore you start out with more fuel than you end up with. It is a lot simpler to analyze this way rather than trying to track back the infinite fuel inputs for every aspect of a complex process. That's not to say that we shouldn't subsidize experimental processes IMO, but the ethanol madness has gone way beyond that point.
I'm just thinking perhaps most of the ethanol producers must have long term corn contracts at well below spot price to insure current profitability.
Yes, but many are on the record as saying they aren't making money, and some are definitely shutting down. My analysis merely helps to understand why that is. The fact that some are shutting down while the mandate is increasing leads me to believe prices have to rise.
Heres why this doesn't happen. The ethanol contracts are extremely illiquid. The front month contract has a 2.86 bid and offer at 2.99 with just 10 contracts at each. My futures brokerage won't allow people to trade them other than 1 or 2 lots, due to a big loss they took with someone who built a position and couldnt get out. Thats on the CBOT - symbol EHQ8. On the NYMEX, the volume is even less. E.g. there really is no active futures market in ethanol. At least yet. So its only arbitragers and a few producers that arrange trades. Ethanol trade totally dominated by cash exchange.
Although it is an illiquid/shallow market, you can still probably make the trade without too much slippage. Contracts are being traded daily in ethanol for most months out to summer 2009. When your broker quotes you a big gap like the 2.86 bid / 2.99 offer, just ask him what was the last sale price today. He will tell you something like "one contract sold an hour ago for 2.92". Then ask your broker to make a bid either a little above or below the last sale price depending on whether the market is rising or falling. You will get picked up at your bid price most days as long as one more contract is sold by day's end. As you note, it takes away much of the profitability if you simply buy/sell at the offer/bid price in a shallow market like ethanol.
As for the issue of higher margin requirements from your broker, that is normal for an illiquid market, but serves to protect you just as much as your brokerage. (If you are ever anywhere near your broker's margin requirements you are probably taking on way too much leverage IMO).
My real concern with simply buying ethanol is that you are basically betting on the price of corn with a bit of an advantage per Robert's analysis. There is no guarantee that corn won't crash next month giving a big loss. Therefore IMO the trade should be modified per my earlier post unless you were planning to go long corn anyway.
As an aside - food bill pressure generated by whatever consortium of circumstances has led to this being a national Tv + printed news item today in the UK:
Not good.
http://www.mailonsunday.co.uk/news/article-1029198/Desperate-families-be...
A local company aspires to become the Henry Hub of ethanol:
http://www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20080626/BUS...
A large reason the cost of ethanol has climbed so much this year is due to the major flooding that's been going on, preventing the harvest of crops. We should see more competitive prices next year.
http://dumpitinthepump.com/
Hi Robert,
This is great stuff, what is the source (s) for:
"The current cost to produce a gallon of ethanol is approximately $3/gal. The current price of ethanol is $2.86/gal"
I web searched but could not find it (:
Cliff
The $3 is derived from the post. The $2.86 was linked to near the end of the post.
OK, I see that, and I agree with you have done, and I will add to the costs. The real cost is more than $3 dollars per gallon when you consider ALL of the energy inputs required to produce and deliver corn ethanol:
1) All of the processes required to produce ethanol (mining and transport of ores to make aluminum/steel for the processing ethanol processing plants, parts, equipment, heating of factories that make the equipment, portions of all employees’ transportation and salaries/dividends who worked on whatever parts, equipment (oil consumed when employees and stock holders spend salaries and dividends [money/dividents are tickets to use energy]), and maintenance, etc.) There are thousand of parts that were manufactured in factories and transported internationally etc. It is not possible to calculate all of this accurately, because there are too many confounded costs. For example, a ship transporting parts from China was constructed for other purposes and is carrying many other products, but we must count everything.
2) Ethanol cannot be transported by the existing pipeline network that covers the U.S., and transport by trains and trucks uses diesel, which must be counted.
3) Opportunity costs of not using the land to produce corn for food for corn sales. One opportunity cost is people starving in poorer countries.
It is difficult to calculate all of the above confounded energy costs precisely, but they exist (for example, if the workers on the trains carrying bauxite ore did not get to work by using gasoline, the ore would not be transported). The cost differential between the higher cost of ethanol in comparison to the price of equal energy in gasoline or diesel is a rough approximation of the differential energy inputs that are too confounded to calculate.
It's pretty sad how many people support ethanol mandates despite this rather clear evidence. Even when you use more conservative numbers, it still looks pretty awful.
The government has basically mandated higher food prices AND higher heating bills for natural gas users. Along with more pesticide runoff and all the other goodies that go with increased corn production.
And people still think it's hyperbole when I say that the government has declared warfare on the people. They want to rob and loot middle class, and kill the poor. And no matter what area you research you'll keep coming across this same story if you actually look.
To have Americans understand the concept behind sugar cane ethanol after they have had the negative experience with the corn ethanol, is sometimes to ask too much. Not only do they not have enough land to plant enough sugar cane, but "they've already invested millions on the corn ethanol industry".
Why not lower/abolish the tariffs on imported ethanol and ease the pain? Because those with high investments on the corn ethanol distilleries would suffer, and Washington can't have 30 investors unhappy with their investments. Instead have the whole population pay the price of sustaining the corn ethanol industry.