The Ethanol Bubble Pops in Iowa

[hypermiler01]

The Ethanol Bubble Pops in Iowa - WSJ.com

By MAX SCHULZ
APRIL 18, 2009
Dyersville, Iowa

In September, ethanol giant VeraSun Energy opened a refinery on the outskirts of this eastern Iowa community. Among the largest biofuels facilities in the country, the Dyersville plant could process 39 million bushels of corn and produce 110 million gallons of ethanol annually. VeraSun boasted the plant could run 24 hours a day, seven days a week to meet the demand for home-grown energy.

But the only thing happening 24-7 at the Dyersville plant these days is nothing at all. Its doors are shut and corn deliveries are turned away. Touring the facility recently, I saw dozens of rail cars sitting idle. They've been there through the long, bleak winter. Two months after Dyersville opened, VeraSun filed for bankruptcy, closing many of its 14 plants and laying off hundreds of employees. VeraSun lost $476 million in the third quarter last year.

A town of 4,000, Dyersville is best known as the location of the 1989 film "Field of Dreams." In the film, a voice urges Kevin Costner to create a baseball diamond in a cornfield and the ghosts of baseball past emerge from the ether to play ball. Audiences suspended disbelief as they were charmed by a story that blurred the lines between fantasy and reality.

That's pretty much the story of ethanol. Consumers were asked to suspend disbelief as policy makers blurred the lines between economic reality and a business model built on fantasies of a better environment and energy independence through ethanol. Notwithstanding federal subsidies and mandates that force-feed the biofuel to the driving public, ethanol is proving to be a bust.

In the fourth quarter of 2008, Aventine Renewable Energy, a large ethanol producer, lost $37 million despite selling a company record 278 million gallons of the biofuel. Last week it filed for bankruptcy. California's Pacific Ethanol lost $146 million last year and has defaulted on $250 million in loans. It recently told regulators that it will likely run out of cash by April 30.

How could this be? The federal government gives ethanol producers a generous 51-cent-a-gallon tax credit and mandates that a massive amount of their fuel be blended into the nation's gasoline supplies. And those mandates increase every year. This year the mandate is 11 billion gallons and is on its way to 36 billion gallons in 2022.

To meet this political demand, VeraSun, Pacific Ethanol, Aventine Renewable Energy and others rushed to build ethanol mills. The industry produced just four billion gallons of ethanol in 2005, so it had to add a lot of capacity in a short period of time.

Three years ago, ethanol producers made $2.30 per gallon. But with the global economic slowdown, along with a glut of ethanol on the market, by the end of 2008 ethanol producers were making a mere 25 cents per gallon. That drop forced Dyersville and other facilities to be shuttered. The industry cut more than 20% of its capacity in a few months last year.

What's more, as ethanol producers sucked in a vast amount of corn, prices of milk, eggs and other foods soared. The price of corn shot up, as did the price of products from animals -- chickens and cows -- that eat feed corn.

Texas Gov. Rick Perry reacted by standing with the cattlemen in his state to ask the Environmental Protection Agency last year to suspend part of the ethanol mandates (which it has the power to do under the 2007 energy bill). The EPA turned him down flat. The Consumer Price Index later revealed that retail food prices in 2008 were up 10% over 2006. In Mexico, rising prices led to riots over the cost of tortillas in 2007. The United Nations Food and Agricultural Organization and other international organizations issued reports last year criticizing biofuels for a spike in food prices.

Ethanol is also bad for the environment. Science magazine published an article last year by Timothy Searchinger of Princeton University, among others, that concluded that biofuels cause deforestation, which speeds climate change. The National Oceanographic and Atmospheric Administration noted in July 2007 that the ethanol boom rapidly increased the amount of fertilizer polluting the Mississippi River. And this week, University of Minnesota researchers Yi-Wen Chiu, Sangwon Suh and Brian Walseth released a study showing that in California -- a state with a water shortage -- it can take more than 1,000 gallons of water to make one gallon of ethanol. They warned that "energy security is being secured at the expense of water security."

For all the pain ethanol has caused, it displaced a mere 3% of our oil usage last year. Even if we plowed under all other crops and dedicated the country's 300 million acres of cropland to ethanol, James Jordan and James Powell of the Polytechnic University of New York estimate we would displace just 15% of our oil demand with biofuels.

But President Barack Obama, an ethanol fan, is leaving current policy in place and has set $6 billion aside in his stimulus package for federal loan guarantees for companies developing innovative energy technologies, including biofuels. It's part of his push to create "green jobs." Archer Daniels Midland and oil refiner Valero are already scavenging the husks of shuttered ethanol plants, looking for facilities on the cheap. One such facility may be the plant in Dyersville, which is for sale. Before we're through, we'll likely see another ethanol bubble.

[rmay635703]

No offense but I say, told yah so.

The ethanol industry should have followed a much different methodology across the board which should have included slow growth strategies and cheaper methods of production, like using summer heat to eliminate fossil fuel consumption.

Ah well optimists be damned I guess.

[Allch Chcar]

The WSJ has always hated ethanol. This just proves it. The effect of corn prices on feed is smaller than fuel prices, and if you haven't forgotten the recent fuel price surge then you should understand there was a delay before food prices shot up and it didn't have to do with the price of corn. That 10% increase was mostly due to fuel rising 200%. All of the food commodities shot up when speculators bet corn, wheat, rice(there was a shutter of rice shipments from Vietnam), and a few others. Farmers were still operating on contracts and didn't sell their crops that high.

Ethanol plants are shuttering because the price of oil dropped too low for them to break even. The 51 cent tax credit per gallon also affect oil companies. And it takes $3 a gallon for most plants to break even, maybe a little less with subsidies.

The deforestation accusation is an attack on farming as a whole. As is the effects on the runoff from farming. If they were using better techniques then we'd have less of a problem with this stuff. And California's water problems are caused by crowding in cities and using freshwater from other sources instead of building desalination plants and passing the bill onto the consumers.

Field of Dreams? Sounds more like a Dream of fields of more oil. Remember this, businessmen favor oil. It's farmers and regional businesses that depend on corn production. Ethanol doesn't need to control the whole fuel supply, it just needs to be big enough to afford R & D into more efficient technologies. Ethanol is still 5% more efficient in a gasoline tuned vehicle and it does reduce emissions by 20% over it's lifetime. It's your choice if you choke.

[Matt Herring]

A similar grab and crash scenario is playing out in my hometown back in Pennsylvania. Rich, untapped farmland has been leased by natural gas drilling companies from private individuals to siphon the land (we're talking in the hundreds and hundreds of contracts). While the scenario has made alot of mostly low-income families alot of money quickly it also is presenting alot of environmental concerns. But, in these times, big energy companies are able to flash the money and get what they want.

[rmay635703]

Originally Posted by Allch Chcar

Ethanol plants are shuttering because the price of oil dropped too low for them to break even. The 51 cent tax credit per gallon also affect oil companies. And it takes $3 a gallon for most plants to break even, maybe a little less with subsidies.

The deforestation accusation is an attack on farming as a whole. As is the effects on the runoff from farming. If they were using better techniques then we'd have less of a problem with this stuff. And California's water problems are caused by crowding in cities and using freshwater from other sources instead of building desalination plants and passing the bill onto the consumers.

Field of Dreams? Sounds more like a Dream of fields of more oil. Remember this, businessmen favor oil. It's farmers and regional businesses that depend on corn production. Ethanol doesn't need to control the whole fuel supply, it just needs to be big enough to afford R & D into more efficient technologies.

Its odd to me that ethanol is going out of business when gas is just above $2 a gallon, the local ethanol plants out in Utica WI were up and running when gas was under $1.50 a gallon (which we thought was robbery at that time) and were selling E85 for around $1.00 a gallon I find it odd that if they could make it through that period 2004 onward that they would go out of business now?

Most of my relatives are farmers and they are NOT remotely environmentally conscious, I think the bad apples who just dump more chemicals to grow corn 40 years in a row on a plot need to be made aware of how their actions affect the industry and the quality of the food and environment.

Originally Posted by Matt Herring

A similar grab and crash scenario is playing out in my hometown back in Pennsylvania. While the scenario has made alot of mostly low-income families alot of money quickly it also is presenting alot of environmental concerns. But, in these times, big energy companies are able to flash the money and get what they want.

A think that was the idea, people that are poor and not able to maintain their lifestyle are much easier to control, this whole morgage crisis is a scam, you can't tell me the banks didn't understand what happens when the mortgages balloon beyond the income level of the people who own the house?

[shovel]

The thing I find amazing is how many people have an outright hatred of ethanol...

I use it all the time, it kicks ass, and I think it would be both economically and functionally successful if people would embrace it as a bridge away from petroleum rather than just being negative about it all the time. Has anyone considered that maybe ethanol has been struggling to gain economic viability because few stations sell it, few everyday, non-"ecomodder" consumers currently driving flex fuel vehicles know even what that means (let alone where to buy E85), and half the people who do know what it means have a vicious, unexplainable bias against it?

Reminds me of all the conservative pro-lifers against universal health care. "save the fetus and then let it die once it's breathing"... "save me from dwindling petroleum resources and environmental pollution but I'm going to fight the most realistic bridge toward progress we have"

[rmay635703]

I and many here have no bias against ethanol itself, in fact when e85 was over $1 a gallon cheaper I was burning e85 in a non-e85 car.

It is the method and what the ethanol is being made from presently that most of us have bias against.

If ethanol was made the OLD low energy way where the plant didn't have to waste tons of fossil fuel to make the beer then waste more to distil it we would be all for it.

The sad part is corn is not grown in an low energy way (at least not by anyone but amish) Just 70 years ago corn was still picked BY HAND. In a country where it is grown and harvested by hand corn based ethanol would make sense. Even today if we would use old slow acting ROOM temperature methods of making the beer without heating we would be ahead of how we are doing it.

Also corn is NOT the best or even a good source for alcohol, tons of potatoes rot every year and the alcohol yield from potatoes is many factors better than corn but since there is no lobby potatoes just rot.

The changes that NEED to be made for ethanol to be viable.

1. Only produce at ambient temp, in other words either where it is warm or use different enzymes. Never heat the slosh to make ethanol faster.

2. Use the sun and low pressure methods of separating ethanol from water. Steam distillation to over 99.9% is very very wastefull, this ties into #4

3. Create ethanol from ANY food or non-food source that is NOT usuable for food or is surplus, do not use repurposed food specifically. No more corn only BS, use whatever is the most economical and FEASABLE which corn is neither.

4. Burn PURE ethanol WITHOUT ANY GASOLINE! Many of the problems both with cost, purity and corosion with e85 are solved when ethanol is left separate from gasoline. Ethanol can have a LOT of water in it and burn fine without corosion/phase separation issues so long as there is NO GASOLINE MIXED IN.

5. Develop motors that are DESIGNED TO RUN ETHANOL as primary fuel, gasoline motors even when retuned are not perfect for burning ethanol as is, several have made significant changes resulting in my better potential FE from pure ethanol even when compared to gasoline due to a few of its better qualities that go unused in a gas/alchol hybred motor. Racers know what to do but for some reason our car companies won't go that far.

Even with all of the above, ethanol is only part of the solution but at least if the above were followed it would be a REAL part of the solution, as it is now, it is not viable, just very wastefull like most industries in this country.

Cheers
Ryan

Originally Posted by shovel

The thing I find amazing is how many people have an outright hatred of ethanol...

I use it all the time, it kicks ass, and I think it would be both economically and functionally successful if people would embrace it as a bridge away from petroleum rather than just being negative about it all the time. Has anyone considered that maybe ethanol has been struggling to gain economic viability because few stations sell it, few everyday, non-"ecomodder" consumers currently driving flex fuel vehicles know even what that means (let alone where to buy E85), and half the people who do know what it means have a vicious, unexplainable bias against it?

[Allch Chcar]

Hey! I'm still subscribed to this thread.

The biggest argument against Ethanol is still ignorance. It was a better quality fuel than petroleum as far back as the early 1900's. It wasn't cheaper, hence why it became unpopular but now we have higher compression engines and ECUs. Alcohol was stopped cold with Prohibition until WWII. After the war it became nonexistent in the US until the 70's. It has always been an alternative to petroleum based fuels. It is more efficient that gasoline and on par with diesel on a purely thermodynamic efficiency scale. Alcohols are inherently less energy dense per gallon due to a high oxygen content, but this makes the fuel safer for higher compression operation. It's not uncommon to hear or read about a rant on using food for fuel when infact ethanol does not compete with human consumption. It's actually a very ignorant argument. Sweet Corn is used for human consumption and takes only 10-20% of the total corn production in the US. The majority of Corn is feed corn either for livestock or use in ethanol or squirrel corn. For livestock it's used to add cheap fat to the animals, not a big deal there.

Make no mistake there are subsidies for ethanol production but the bulk of which are merely to support gasohol mixing. E85 is selling on it's own merits now. And pure ethanol is competitive at $2 a gallon or so in a state-of-the-art plant. If you had pure ethanol vehicles the cost per mile would be almost the same as gasoline.

The truth is that ethanol is only cost-effective(compared to gasoline) in small quantities, as a portion of the current feed corn production. Ethanol could replace or displace gasoline completely but the cost would be much higher. The one good point to petroleum based products is always their cheapness. That's something that is hard to beat. But ethanol is a renewable source and with good practices and techniques better in every way than petroleum.

I disagree with your Pro-Life vs Universal healthcare point on moral grounds either one should not be forced upon. But ethanol is the most realistic bridge towards greatly reducing oil consumption. Add in; hybrid electric powertrains, cellulosic ethanol, market competition and it could displace petroleum. The one major negative I've found is health reports of formalhydride from alcohol emissions. But everything I've read suggests it comes from mixing with gasoline. E100(99%pure ethanol) can be used in the future but you either need to preheat the engine to 100 degrees or pig rich the fuel:air mixture on startup.

[meanjoe75fan]

My understanding is that the reason the Model T ran on gasoline, not ethanol was politics: while Prohibiton wasn't enacted until 1919, the movent was afoot in 1903, and "fuel ethanol" proponents were seen as aligned with the "wets." Unwilling to forsake the "drys" as customers, Henry Ford went with petroleum.

While I don't believe in the wisdom of "growing" a primary source of fuel, I think using it as an oxygenate is a heckuva lot better than MTBE. I also don't buy the Pimental argument about "energy-negative," because no-one other than Prof. Pimental has come to that conclusion.

[Allch Chcar]

Unfortunately I can't claim to know much about the prohibition era or years before World War I. I don't even know the year Prohibition was enacted without looking it up. I can say with certainty it was the price of petroleum that won out. Prohibition and the prior movement certainly didn't help.

There does need to be a good study comparing using solar/wind to charge electric cars vs using ethanol grown from more efficient plants. Corn is at it's peak production per acre and while it can get better there's more room for other crops to be even better. Corn is thirsty and requires lots of nutrients. Soybeans for biodiesel isn't even reasonable because the production per acreage is 1/3 of Corn. Any other acceptable crops for biodiesel are grown from tropical plants. Some people are holding out for cellulosic but it's going to be expensive to keep using corn the production per acre will just be higher.

Growing a fuel makes as much sense as collecting it does. With collecting sun or wind you're limiting by materials, expenses, and land. There's no difference from building all that and growing it because you're looking at similar cost and expenses. Whereas if you stick with electrical generation there's the whole battery electric vehicle side that needs more development. There will still be some demand for liquid fuels even after petroleum production stops. Even if it's just racing or certain forms of transport.