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A Texas Oil and Gas Attorney Looks at Ethanol-Part One

When discussing the issues involved in national energy and environmental policy, the subject of alternative energy frequently comes up. As a Texas oil and gas attorney, I follow these discussions with great interest. The outcomes of our decisions about alternative energy sources will eventually effect anyone even tangentially connected with the oil and gas industry in this country. That’s why a balanced evaluation of the proposed alternatives to fossil fuels is so important. In this first of several blogs about alternative energy, we’ll be looking at one of the most widely used today-ethanol.

Ethanol, or grain alcohol, has been around as a fuel for well over a century. Henry Ford’s first vehicle, the Quadricycle, was designed to run on pure ethanol; later, his Model-T could run on pure ethanol, gasoline, or a mixture of both. In fact, Ford continued to be an advocate for ethanol as a motor fuel well into the 1920s, long after cheap and plentiful gasoline became the fuel of choice. The low price of gasoline until the 1970s dampened the further use of ethanol (save for a brief time during World War II). This changed with the gasoline price shocks of the 1970s. Interest in ethanol revived, spurred by government subsidies targeting the development of synthetic fuels. When gasoline prices plummeted in the 1980s, research into the commercial production of synthetic fuels stopped to a great extent. Interest in ethanol, however, remained.

The interest in ethanol, at least through the 1990s and early 2000s, was not as a replacement for gasoline but as a fuel additive for environmental reasons. The Clean Air Act of 1990 and the Alternative Motor Fuels Acts mandated the use of oxygenates to reduce carbon emissions from automobiles. The two most widely used oxygenates were MTBE (methyl tert-butyl ether) and ethanol. By the early 2000s, however, the EPA mandated the phasing out of MTBEs because of fears of groundwater contamination. Today, ethanol is the most widely used gasoline additive, with most areas requiring a blend of 10% ethanol and 90% gasoline.

1278475_corn_on_stalks.jpg With the rising price of gasoline worldwide, along with fears of man-made climate change, the possibility of ethanol partially-or fully-replacing fossil fuels for motor vehicles has gained great currency. From 2007 to 2008, ethanol’s share in global gasoline-type fuel used increased from 3.7% to 5.4%; in 2009 world production reached 19.5 billion gallons. The world leaders in ethanol production are Brazil and the United States, with a combined 80% share. (See Executive Summary: “Assessing Biofuels” UNEP 2009). Ethanol can be produced from a wide variety of grains and other feedstock such as corn (the predominate source in the United States) and sugar cane (the predominate source in Brazil), along with sugar beets, sorghum, switchgrass, wheat, cotton, and even the waste left over from harvesting (referred to as cellulose waste). While the production of ethanol from these other sources is in the research stage, commercial production of ethanol in the United States from corn is commonplace.

Production of corn ethanol in the United States is driven by statutory mandate and government subsidies. Oil refineries are required by law to use ethanol to blend with gasoline to reduce carbon emissions. The problem is that ethanol is very expensive to produce; according to a 2005 Department of Agriculture study, a gallon of ethanol costs an average of $2.53 to produce; by contrast, a gallon of gasoline takes only an average of $1.95 to produce. As of 2007, ethanol subsidies amounted to 42% to 55% of ethanol’s wholesale market price. This means that the real cost of producing a gallon of ethanol is almost $4.00 per gallon. Without the subsidies, ethanol would not be economically viable to produce as a fuel, much less to use as a fuel additive.

In spite of the costs involved, the advocates of corn-based ethanol continually tout its benefits to the economy and the environment. Ethanol, they say, reduces toxic emissions and the growth of greenhouse gases in the atmosphere, leads to American energy independence from imported foreign oil, aids farmers and rural communities by increasing demand for their crops, and is responsible for the creation of thousands of new jobs in communities all across the nation.

Are these benefits real? Are they worth the cost? And, finally, what are the real costs of ethanol production? I’ll look at these in my next blog.

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