The Wall Street Journal
Wednesday 28 November 2007
Claims for environment, energy use draw fire; fighting on the farm.
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In the span of one growing season, ethanol has gone from panacea to pariah in the eyes of some. The critics, which include industries hurt when the price of corn rises, blame ethanol for pushing up food prices, question its environmental bona fides and dispute how much it really helps reduce the need for oil.
A recent study by the Organization for Economic Cooperation and Development concluded that biofuels "offer a cure [for oil dependence] that is worse than the disease." A National Academy of Sciences study said corn-based ethanol could strain water supplies. The American Lung Association expressed concern about a form of air pollution from burning ethanol in gasoline. Political cartoonists have taken to skewering the fuel for raising the price of food to the world's poor.
Last month, an outside expert advising the United Nations on the "right to food" labeled the use of food crops to make biofuels "a crime against humanity," although the U.N. Food and Agriculture Organization later disowned the remark as "regrettable."
The fortunes of many U.S. farmers, farm towns and ethanol companies are tied to corn-based ethanol, of which America is the largest producer. Ethanol is also a cornerstone of President Bush's push to reduce dependence on foreign oil. But the once-booming business has gone in the dumps, with profits squeezed, plans for new plants shelved in certain cases, and stock prices hovering near 52-week lows.
Now the fuel's lobby is pleading with Congress to drastically boost the amount of ethanol that oil refiners must blend into gasoline. But formidable opponents such as the livestock, packaged-food and oil industries also have lawmakers' ears. What once looked like a slam-dunk could now languish in pending energy legislation that might not pass for weeks, if ever.
The U.S. gives oil refiners an excise-tax credit of 51 cents for every gallon of ethanol they blend into gasoline. And even though it's the oil industry that gets this subsidy, the industry dislikes being forced to use a nonpetroleum product. The U.S. ethanol industry is further protected by a 54-cent tariff on every gallon of imported ethanol.
Ethanol prices peaked at about $5 a gallon in some markets in June 2006, according to Oil Price Information Service. The price soon began to slide as the limited market for gasoline containing 10% ethanol grew saturated. New plants kept coming online, increasing supply and dropping prices further. Today, the oil refiners that purchase ethanol to blend in need pay only about $1.85 a gallon for it.
The low ethanol prices help some oil refiners. "I'd pay a hell of a lot more for ethanol than I am right now.... I'm getting a windfall because it's priced so much less than its value to me," Lynn Westfall, chief economist for refiner Tesoro Corp., told investors recently. The ethanol tax credit will bring refiners an estimated $3.5 billion this year. Some oil companies use ethanol to stretch gasoline supplies or meet state requirements to make gasoline burn more cleanly. Ethanol that's voluntarily blended into gasoline reached a high this month, according to the Energy Information Administration.
The low prices reflect soaring output. Global ethanol production has grown to a projected 13.4 billion gallons this year, from 10.9 billion gallons in 2006, according to the International Energy Agency. The U.S. production is more than half of that total, or about seven billion gallons this year, up 80% in two years. It equals less than 4% of U.S. gasoline consumption.
Analysts expect U.S. production capacity to keep growing, encouraged both by high oil prices and by the hope that Congress will stiffen the mandate for refiners to use ethanol. Some observers regard the profit squeeze as part of an ordinary industry shakeout that will ultimately leave the best producers in a position to thrive. As ethanol prices were pushed lower and corn prices stayed high, ethanol profit margins dropped from $2.30 per gallon last year to less than 25 cents a gallon.
Turning Up the Heat
This year, even as the production glut was driving down ethanol's price, critics and opposing lobbyists were turning up the heat. Environmentalists complained about increased use of water and fertilizer to grow corn for ethanol, and said even ethanol from other plants such as switchgrass could be problematic because it could mean turning protected land to crop use. Suddenly, environmentalists, energy experts, economists and foreign countries were challenging the warm-and-fuzzy selling points on which ethanol rose to prominence.
"Our love affair with ethanol has finally ended because we've taken off the makeup and realized that, lo and behold, it's actually a fuel," with environmental and various other drawbacks, says Kevin Book, an analyst at Friedman, Billings, Ramsey Group Inc.
Against all the criticism and lobbying, "we're David in this fight," says Bob Dinneen, the ethanol industry's top lobbyist. Mr. Dinneen says the industry has been made a scapegoat for food price increases that are due to many factors, including higher oil prices and growing overseas demand for grain. He also faults the lack of a mature U.S. distribution network that would make it easier for consumers to get ethanol. His group, called the Renewable Fuels Association, and the National Corn Growers Association have formed a coalition to "unify the voices" in the ethanol community, he says.
Back in early 2005, President Bush gave ethanol a boost in his State of the Union speech by calling for "strong funding" of renewable energy. Energy legislation that summer required oil companies to blend a total of 7.5 billion gallons of "renewable" fuels into the nation's fuel supply by 2012. The legislation also effectively extinguished ethanol's chief competitor as a clean-burning additive, methyl tertiary-butyl ether, which had groundwater-pollution issues. The bill anointed ethanol as the default additive and instantly created demand nearly double what was produced that year.
"That was when the floodgates started coming open," says attorney Dan Rogers of the Atlanta law firm King & Spalding LLP, which arranges financing for ethanol plants. Hedge funds, private-equity investors and East Coast bankers started pouring money into ethanol. Producers such as VeraSun Energy Corp. and Pacific Ethanol Inc. went public. Mr. Dinneen, the lobbyist, hopscotched the country attending ribbon-cuttings at new plants that popped up in corn-growing states.
Local farmers who'd invested soon were cashing handsome dividend checks, even as new demand pushed up the price of corn. After languishing roughly in the $2-a-bushel range for three decades, corn jumped to above $4 early in 2007. So far this year, it's averaging $3.35.
In the past, livestock farmers supported ethanol because it was good for the overall farm economy. But now they began to complain that the higher corn price cut sharply into their profits. A meat-producer trade group called the American Meat Institute took a stand against federal support for biofuels last December, joined soon after by the National Turkey Federation and the National Cattlemen's Beef Association.
The farm fissure widened when livestock, meat and poultry groups started coordinating their lobbying with the oil industry, in discussions helped along by former Texas Congressman Charles Stenholm, who now lobbies for both industries.
Packaged-food companies, too, began pushing back, as one after another blamed biofuels' effect on grain costs for hurting earnings. In June, Dean Foods Co., H.J. Heinz Co., Kellogg Co., Nestle USA, PepsiCo Inc. and Coca-Cola Co. sent a letter to senators saying that requiring greater use of ethanol would affect their "ability to produce competitively available, affordable food."
Ethanol's opponents also began to highlight reasons why ethanol might not be such a boon to the environment, citing some recent research studies.
Strain on Water Supplies
One by the National Research Council said additional ethanol production could strain water supplies and impair water quality. A spring 2007 report by the Environmental Protection Agency said that "ozone levels generally increase with increased ethanol use."
A study coauthored by Nobel-prize-winning chemist Paul Crutzen said corn ethanol might exacerbate climate change as the added fertilizer used to grow corn raised emissions of a very potent greenhouse gas called nitrous oxide. The ethanol industry replies to that one with an Energy Department study concluding that use of ethanol reduces greenhouse-gas emissions by 18% to 28% on a per-gallon basis, provided that coal isn't used to run ethanol plants.
Opponents of ethanol also have hammered on an Agriculture Department projection that by 2010, less than 8% of the U.S. gasoline supply will come from corn-based ethanol - and 30% of the corn crop will be used to make it. That suggests to some that the tradeoff between food and fuel is unbalanced.
At the same time, some foreign countries have been increasingly questioning ethanol. Mexico blamed it in part for contributing to rising prices of corn-based tortillas. China barred new biofuel plants from using corn, and Malaysia trimmed its biofuels production mandates. Cuban President Fidel Castro has called using food crops for fuel a "sinister idea." President Hugo Chávez of Venezuela ordered troops to secure his oil-producing nation's grain supplies, saying corn was to be used for food, not fuel.
The government of Quebec, which has offered loan guarantees for corn ethanol plants, recently decided not to initiate any new ones. Instead it will turn its attention to so-called cellulosic ethanol, which would be made from switchgrass, wood chips or other plant matter. It concluded that "the environmental costs of corn ethanol are higher than expected," says a spokesman for the province's minister of natural resources.
In recent months, U.S. lawmakers appear to have become more receptive to the anti-ethanol arguments. "People never thought they would have to make a trade between energy security and food security," says Jesse Sevcik, a lobbyist for the ethanol-opposing American Meat Institute.
The ethanol industry, accustomed to getting its way in Washington, hadn't faced such opposition before. It may not have helped that Mr. Dinneen, in a close echo of former Vice President Spiro Agnew's famous line, for months brushed off his foes as "nattering nabobs of negativity."
Mr. Dinneen says arguments about ethanol driving up food costs are overblown, in part because corn farmers will produce so much grain that corn prices will ease. But even though U.S. farmers this year planted their biggest crop since World War II, prices have stayed well above $3 a bushel, thanks to rising demand in developing countries and poor weather in some grain-growing nations. The price is expected to stay well above $3 next year as farmers shift some land from corn to two other crops whose prices have risen sharply, wheat and soybeans.
Bigger Plants
New and bigger ethanol plants, spurred by money from investors far from the Corn Belt, have contributed to production capacity that's expected to approach 12 billion gallons next year. But annual U.S. demand stands at just under 7 billion gallons.
So it's easy to see why the industry supports the Senate version of pending energy legislation, which includes a requirement that gasoline blenders use 36 billion gallons of renewable fuels by 2022. Up to 15 billion gallons of this would come from corn-based ethanol. The rest would come from cellulosic ethanol - an industry that now barely exists - or other fuels. A similar bill passed in the House has no such provision.
Mr. Dinneen, who has been lobbying on ethanol so long he's known as the "reverend of renewable fuels," says he's "reasonably confident" Congress will raise the ethanol mandate. He says he's talking with the military, labor groups, Southern black churches and others about how ethanol can help them. "We've got to build the biggest, baddest coalition we can."
Ethanol a Sticking Point in Energy Bill
By Richard Simon
The Los Angeles Times
Wednesday 28 November 2007
Some Democrats extol corn as a source; others want the fuel made with nonfood materials easier on the environment.
Washington - With oil prices in record territory, presidential candidates stumping for votes in corn-centric Iowa, and congressional Democrats anxious to pass an energy bill to cut the nation's dependence on Mideast oil, this should be the right moment for ethanol.
But a plan to dramatically increase ethanol production has become a major sticking point in congressional negotiations to complete work on the bill. And it has created a challenge for House Speaker Nancy Pelosi, whose Democratic caucus has split over the issue.
Pro-ethanol Democrats and farm groups want the bill to require a nearly fivefold increase by 2022 in the amount of home-grown alternative fuels that must be blended into gasoline. They say the mandate would reduce U.S. dependence on foreign oil and help America's farmers.
Democrats on the other side, joined by environmental and food-industry groups, think the mandate could raise the price of corn used for food; harm the environment by using more land to produce biofuels; and gouge taxpayers by expanding ethanol subsidies.
Because of the provision's popularity among farm-state lawmakers from both parties, it is seen as the glue holding together an energy bill that is expected to include the first significant increase in vehicle fuel-economy rules in decades.
And it might be enough to coax a signature from President Bush, who has made reducing reliance on foreign energy sources a priority.
"All along, energy-bill watchers have believed that the renewable-fuel standard was going to carry the entire bill," said Bill Wicker, a spokesman for Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.). "It's just very popular."
The sense of political urgency for Pelosi to work out a compromise has risen along with prices at the pump.
"How she marries these various interests is really a challenge," said Sierra Club lobbyist Melinda Pierce. "The Democratic Party pie gets sliced differently every time, but it's the leader's job to figure out how to put it all together." House Democratic leaders want to vote on the bill next week, as soon as Congress returns from its recess.
Ethanol has been hotly debated since 1978, when Congress approved a tax break for the fuel. It has long been a key topic on the presidential campaign trail through the Corn Belt - especially in Iowa, which is first in the nation in ethanol production and in voting on presidential nominees.
In 2005, when it drafted the last energy bill, Congress decided to require that 7.5 billion gallons of ethanol be added annually to U.S. gasoline supplies by 2012, an amount expected to be reached soon. California uses about a billion gallons of ethanol.
At the heart of this year's dispute on Capitol Hill is the Senate bill's renewable fuel standard, which would mandate 36 billion gallons of alternative fuels by 2022 - up to 15 billion from corn-based ethanol. After 2016, an increasing portion would have to be advanced biofuels, including cellulosic ethanol produced from plant materials, such as switch grass and wood chips, thought to be easier on the environment than corn-based ethanol.
The House version of the bill includes no such mandate. Instead, it offers tax incentives to promote research on cellulosic ethanol. A Pelosi spokesman said the San Francisco Democrat wanted an expansion of the renewable fuel standard that would include "a significant boost to the cellulosic ethanol industry."
Rep. Henry A. Waxman of Beverly Hills is one of the many Democrats critical of the proposed standard. "It certainly would enrich the corn lobby, but it doesn't offer the country the sustainable energy future that we need," he said. "Congress just gave the corn-based ethanol industry everything it wanted two years ago."
But Matt Hartwig of the Renewable Fuels Assn., a Washington-based trade group, says what is at stake is energy security. "This isn't about giving the ethanol industry or any other energy industry what it wants. It is about making a choice as to our nation's energy future," he said.
The fight has scrambled the usual alliances. The National Cattlemen's Beef Assn. and the National Corn Growers Assn., allies in the recent fight to win House approval of a trade agreement with Peru, are on opposite sides of the battle over ethanol. Republicans are divided on the issue too, with some lawmakers from oil-producing states opposing the mandate, and others from corn-growing states supporting it.
Environmental groups, which support alternative fuels, want to ensure that stepped-up production does not damage the environment. They worry about more pollution from fertilizers and pesticides, and the conversion of grasslands and wildlife habitats to farmland.
"We are strong proponents of biofuels," said Jim Presswood, an energy expert at the Natural Resources Defense Council. "We think they're a critical piece of solving global warming and reducing oil dependence. We just want to make sure they're done right."
Forty-six Democrats, including several Californians, recently wrote congressional leaders to express similar concerns: "Rapid expansion of ethanol made from corn and other food crops has also created new unforeseeable challenges, including rising food prices, rising animal feed prices, heightened competition for water, water pollution, and the loss of grasslands and other valuable wildlife habitats."
The Senate measure included a requirement that the process used to create any new biofuel emit 20% less greenhouse gas than the production of gasoline, but environmentalists say the measure might not account for all of the potential environmental effects.
Rainforest Action Network, Friends of the Earth and other environmental groups recently wrote the House speaker urging her to reject the fuel mandate. The groups asserted that the measure could lead to the clearing of Indonesian rain forests for palm oil plantations.
Democrats have also written to congressional leaders to say the country would benefit far more from biofuels made from nonfood sources. That would do more, they said, to reduce greenhouse gas emissions without reducing the availability - or increasing the price - of corn used for animal feed.
About 24% of the nation's corn is expected to go to ethanol production this year, up from 13% in 2004, before Congress enacted the ethanol mandate.
Even though corn production has increased, corn prices have shot up. A bushel sold for about $3.50 last week, up from about $2 two years ago.
Food industry groups recently wrote lawmakers to complain that diverting corn from food to fuel "strains the supply for the commodity and increases prices for all users."
"The only winner of the renewable fuel standard has been corn farmers," said Scott Faber, vice president of federal affairs for the Grocery Manufacturers Assn. "Clearly, the losers have been moms who are having to pay more for the price of milk, meat and other basic staples at the supermarket."
Ethanol proponents, who say critics have exaggerated the problems, contend that the ethanol mandate's effect on food prices would be negligible, perhaps no more than 0.2%. "We see a greater effect than that from a hard freeze in California," the National Corn Growers Assn. and other proponents recently wrote in a letter to lawmakers.
Lawmakers who support a mandate for increased production of domestically produced alternative fuel also emphasize a need to wean the U.S. from imports. "Sure, there are environmental considerations, but there are also national security considerations," said Wicker, Sen. Bingaman's spokesman. "A lot of people who are supporting renewable fuels are doing it partly because they want to displace oil imported from parts of the world where they hate us."
Jon Doggett, vice president of public policy for the National Corn Growers Assn., said corn growers would be stepping up efforts to win passage of the renewable fuel standard as lawmakers visited their districts during the two-week Thanksgiving recess.
"Gas is over $3," he said, "and there's a lot of constituents who are going to want to know what they're going to do about it."
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