Dave's Energy

Wednesday, April 26, 2006

Ethanol and the Energy Balance question

Ethanol and the energy balance question; is the flaw in David Pimentel's method?

The more research I do into the actual full-cycle cost of producing ethanol, the more I realize that there are simpler ways of looking at the energy-balance question. That is, I have read many quality analyses that include the costs all the way back through the corn production (see the Feb 13, 2006 blog entry below). These include the cost of fertilizers and fuels that are hydrocarbon based and some argue that when all the energy is taken into account, that ethanol is either 1) a net negative energy suck, or 2) extremely inefficient compared to other alternatives.

However, the analysis of the cost of the inputs to the ethanol process do not need to go back this far, back beyond the first-order costs of the inputs. We can stick to just the first-order costs as long as we can know and analyze their true, unsubsidized value -- that value which allows for a market-based return on capital.

Let me illustrate by example: If you are looking at the cost of making a shoe, your cost analysis may consider the cost of leather purchased in an open market at arm's length. You don't go back and assess the cost of feeding the cow, tanning the hides, etc. This is because the cost of the leather that is sold to the shoe manufacturer is PRESUMABLY being sold at a value that recaptures all the upstream costs plus a return on capital for the leather manufacturer. If the shoe manufacturer can take the leather and increase it's value by adding labor and capital and create a product which the market will purchase at a price that provides profit, then it all works. This is an obvious statement in a capitalistic system, but is important to note when we consider all the ways in which the government makes this analysis less-than-transparent in the case of ethanol.

So, to my point: the ethanol energy balance debate can be put aside if we ignore subsidies for corn in the U.S. as well as any tariff impact that keeps out or increases the delivered cost of otherwise lower-cost imports. We can use this unsubsidized corn value (including a profit margin) as the valid input for analyzing ethanol's economic viability.

This allows us to concentrate on analyzing the opportunity for efficiency gains in the ethanol production process itself without getting bogged down in the upstream issues of whether we are capturing all the hydrocarbon costs of producing corn (or sugar). That said, we have to understand that the price of those inputs will fluctuate with fuel costs, but that analysis is fairly easy and can be the subject of a sensitivity analysis. It will then inherently take the true full-cycle energy-use balance into account.

Of course this ignores one still-valid point, that an all-ethanol world (no such thing) doesn't stop us from needing some amount of hydrocarbons produced either domestically or from abroad in order to grow the crop that makes the ethanol. But think of it this way: if we ran all our cars on ethanol, it would be true that CARS would no longer be the primary users of hydrocarbons like crude oil. Now it would be the CORN industry that was using all the oil. It would then be up to that industry to find ways to reduce their input costs or their "addiction to oil".

Where would that buck stop?

-Dave

1 Comments:

  • Let's not forget that it's really difficult to start a 100% ethanol internal combustion engine in the freezing cold, hence the need of a little gasoline in the mix. As much as we try to run away from fossil fuels, we aren't quite there yet.

    By Blogger Grant Fox, at 12:02 PM  

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