Setting The Story Straight

To my surprise, this morning I found myself cited by the Wall Street Journal as a strong advocate of subsidies for food-based ethanol, and as a recipient of "federal dole" who ought to "take a vow of embarrassed silence." While I appreciate the Journal's foray into fiction writing (and I'd love to discuss my status on the dole with my accountant, who recently filed my taxes), I would like to clarify a few of the facts and offer a more rounded view of biofuels and ethanol in general.

A few facts:

I have not advocated subsidies for food-based ethanol. In fact, I strongly believe any nascent technology that cannot exist without subsidies beyond an introductory period will not gain market penetration, and is not worth supporting. I have consistently argued that food-based ethanol cannot scale beyond roughly 15 billion gallons or so in the US, and that making a material impact on replacing oil requires cellulosic or other advanced biofuels. The corn ethanol subsidies that exist today were part of the 2005 Energy Bill, a time when I had no contacts with Washington.

Moreover, I look forward to the WSJ's complaints about oil's subsidy bonanza, from tax breaks for drilling, loopholes that allow royalty-free offshore oil leases, manufacturing tax breaks, as well as roughly $7 billion in subsidies in the wake of the Katrina disaster. At a recent WSJ Conference, 75 percent of its erudite audience "voted" (rightly) that oil was more highly subsidized than ethanol.

It is clear that corn ethanol has served as a stepping stone for cellulosic ethanol and other biofuels, mitigating risk and establishing a market. As a venture capitalist, I would not have invested in cellulosic without corn ethanol's partial alleviation of the risks of creating a market, creating distribution terminals, E85 pumps and starting our flex-fuel fleet. Cellulosic ethanol uses non-food feedstocks with significant green house gas emission reductions, and the first commercial-scale plant is being built today in Soperton, Georgia. Many other non-food-based biofuels companies will be in the market in the next five years. Should we not look past our noses to the larger issues of dependence on oil?

While corn prices certainly have some impact on biofuels, their impact is constantly overstated by sources like the WSJ. In fact, they would do well to see what the USDA has actually said on the subject. Yesterday, USDA Chief Economist Joe Glauber noted: "On the international level, the President's Council of Economic Advisors estimates that only 3 percent of the more than 40 percent increase we have seen in world food prices this year is due to the increased demand on corn for ethanol."[i] As the USDA noted previously: "Given that foods using corn as an ingredient make up less than a third of retail food spending, overall retail food prices would rise less than 1 percentage point per year above the normal rate of food price inflation when corn prices increase by 50 percent.[ii]" Have the editors at the WSJ not been reading the press since they cited the USDA as evidence against me in their op ed? I do believe the UN officials they cite are misinformed and have not done a full food and fuel cost analysis.

I know the American Petroleum Institute (API) has previously engaged in campaigns against corn ethanol, but the current campaign is run by the Grocery Manufacturer's Association. In fact, based on presentations at the recent WSJ conference, the API and I have similar views on next generation non-food-based fuels, though our assessments of timing may differ. We do have shared investments with oil companies.

What is responsible for the bulk of the food price increase? Principally soaring energy costs, increasing demand and droughts in certain countries amongst others. The WSJ fails to note the impact of higher energy prices on food prices: A 2007 study by John Urbanchuk at LECG suggests that increases in petroleum prices have 2-3x the impact than increases in corn prices have on the food Consumer Price Index (CPI) alone. [iii]

Furthermore, ethanol has played a significant role in reducing costs for consumers elsewhere. Merrill Lynch has estimated that oil prices may be up to 15% higher than current levels if not for ethanol. What impact might the withdrawal of biofuels and higher oil prices have on food prices? As noted in a press release issued by the USDA yesterday: "According to the International Energy Agency, the biofuels production that has been available to the United States and European markets over the last three years has cut the consumption of crude oil by one million barrels a day. At today's prices, that's a savings of more than $120 million per day."[iv]

In the recent Farm Bill discussions, I have consistently advocated for higher cellulosic biofuel mandates over subsidies. Mandates reduce the ability of any specific party to manipulate or hinder the market by limiting access to biofuels. With regards to these mandates, I have proposed an adjustable Renewable Fuel Standard (RFS) that can go up or down every year, depending on the availability of cellulosic fuels at a fair market price like $2.50 per gallon (more than a dollar below today's gasoline prices). Such a "price capped cellulosic RFS" approach protects consumers by offering them an effective ceiling, while offering investors and producers assurance that all cellulosic fuels that are produced at these reasonable prices will be mandated.

My calculations, available her show that it is conceivable that not one additional acre of land may be needed to replace our gasoline under certain circumstances, but even in more conservative scenarios, the amount of land needed is small. Further insurance to ensure that green house gas reductions from biofuels are significant can come from giving incentives (the carrot) to developing countries to reduce deforestation and providing a stick of banning biofuel (and maybe all agricultural exports) from countries that don't meet deforestation reduction targets.

While I am certainly an advocate of biofuels, it is vital that we understand that biofuels themselves have differences - we can do them poorly, or we can do them right. We cannot discuss drugs without differentiating between cocaine and aspirin. Criticism of biofuels is certainly fair game (such as palm oil based biodiesel from Indonesia's rainforest, which actually hurts the environment more than it helps it), but there is an obligation to stick to the facts. Unfortunately, today's editorial failed to meet even this basic threshold.

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[i] http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2008/05/0130.xml

[ii] http://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htm

[iii] http://www.ethanolrfa.org/objects/documents/1157/food_price_analysis_-_urbanchuk.pdf

[iv] http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2008/05/0130.xml

Comments

[Decipherer]

Thank you, Vinod, and for your advocacy of biofuels as a solution to the world's energy crisis.

I would make a couple of modest suggestions, however, as I have made to you since we first met in St. Louis in October 2006, as to how this problem should be addressed in the face of doubled crude oil prices since then and the run-up in all commodity prices.

Lazy commenters fail to understand corn STARCH-based ethanol production. This corn is grown anyway for animal feed, export, and other purposes. Only a portion of that corn (~20%) NOT FOR HUMAN CONSUMPTION, the starch portion of that corn is used to make ethanol, leaving a high-protein, high-value co-product used to feed livestock, hogs, and poultry.

So, how is it that API and its new best friend Grocery Manufacturers get away with their latest anti-ethanol slander? How is it that you are just now waking up to the fact that API has tried to kill the nascent ethanol industry for over 30 years any way they could? Why have their attacks have increased just at the time oil prices explode AND the Farm Bill is debated in the Congress?

Coincidence? Hardly.

We must take the gloves off and take on those who want to keep us as deep into the oil barrel. It is also time for a campaign -- www.25x25.org -- to expand biofuels sustainably AND open new markets for biofuels, beyond traditional markets.

[Ethanol]

The Bureau of Labor Statistics (BLS) monitors average retail food prices of more than 120 common items. The data is carefully controlled and based on surveys of hundreds of retail outlets from a variety of U.S. markets, small towns and large cities in all regions of the country. The sample includes dozens of items that include corn as a direct or indirect production input.

While these numbers exist from a year to two out...they do illustrate the impacts and can be compared to today's pricing....you be the judge.


No. 2 Yellow Corn, Cash (bu.)

Jan. 2006: $1.98
Mar: 2007: $3:76

Grocery Bill Comparison for Selected Items

ITEM QTY JAN. 06 PRICE MAR. 07 PRICE
Milk 1 gal. $3.20 $3.07
American Cheese 1 lb. $3.94 $3.77
Butter � lb. $1.57 $1.49
Eggs 1 dz. $1.45 $1.63
Ground beef 1 lbs. $2.74 $2.81
Cola, non-diet 2 ltrs. $1.13 $1.22
TOTAL 䦋㌌㏒�좈�"�琰茞�"㵂�" $54.63 $55.80

Increase from Jan. 2006 to March. 2007 is 2.1%
Average Yearly Food Inflation is 2.9%


The cost of food has not kept pace with the cost of health care or housing or a variety of other goods and services. We also need to keep focused on the major benefits of ethanol production. It reduces reliance on foreign oil, cleans the air and provides economic stimulus for our country.

Dr. Jeffrey B. Zeiger
www.fieldstofuel.org

[Decipherer]

This is illustrative, but is a bit out of date. The large run-up in these commodity prices, along with oil, metals, etc., has come through the advent of market speculation during roughly the last year.

I would like to see what these numbers look like through March 2008, not just March 2007.

In that regard, the chairman of the Council of Economic Advisors testified before a Congressional committee last week that the effect of corn STARCH-based ethanol on food prices is only about 1.2%, which is almost a rounding error in terms of the recent spike in food prices in the U.S. and globally.

The point here is that the effect of the corn STARCH-based ethanol industry on food prices and availability is very small, and certainly far smaller than API and the Grocery Manufacturers would have you believe.

This API/Grocery Manufacturer "Food to Fuel" anti-ethanol campaign, frankly, is at its core a big lie -- at least as big a lie as "beyond petroleum!"

[mamacat]

The author is complaining about a lack of rigorous vetting before publishing by people at the WSJ.
Is this not the same WSJ taken over by Murdoch? Is there any reason to think that anything taken over by this man, from "Fox News" to the WSJ, will bare the imprimatur of Mr. Murdoch's political agenda, to the detriment of the truth?