Blending ethanol with gasoline permits refiners to produce greater quantities of lower octane fuel at reduced cost. Use of ethanol as an additive increases octane, reduces tailpipe pollution and increases the volume of available fuel.
But overall, increased use of ethanol would boost greenhouse gas emissions because of the additional fossil fuel needed to produce it, Taylor says, citing a report by the Massachusetts Institute of Technology.
“Expanding corn production would require greater energy inputs,” Taylor says. “New cropland would have to be harnessed and it would almost certainly be less productive than the land now in use. That means more fertilizer, irrigation – more energy and, on average, more greenhouse gas emissions.”
Bush’s proposal counts on increased research and production of ethanol made from cellulose such as wood chips, switch grass and other non-corn feedstock. That’s where the future lies because current corn-based ethanol production can’t meet the increased demand called for by Bush’s proposal.
The basic question: Will users pay through subsidies and mandates or will private investment flow into the sector? If cellulose ethanol has merit, venture capitalists will bring it to market. Heavy subsidies suggest a lack of merit.
Another analyst dismissed much of Bush’s speech as routine political twaddle.
“I think most of any president’s State of the Union address – Bush, Clinton, Reagan, Carter, Ford, whoever – tends to be the stuff of pipe dreams,” says Tom Kloza, an analyst at the Oil Price Information Service. “But there’s bipartisan support for renewable fuels. If there’s ever an ethanol glut, producers won’t be demonized for cutting back but refiners taking the same action would evoke thoughts of John D. Rockefeller and (fictional TV character) J.R. Ewing.”
Kloza expects gasoline prices to increase 30 to 40 cents and crude oil to rise to the mid-60s in the next 45 to 90 days.
Saudi Arabia didn’t cut production when the price of a barell of crude oil fell below $50 a barrel because worldwide demand remains strong and significant new supplies of non-OPEC oil won’t be available for about two years, he says.
Ethanol is heavily subsidized and the industry exists as we know it today because state and federal governments mandate its use.
“We view the industry as commodity-based and dependent on high oil prices, or alternatively, on government policy in low oil price environments,” Elif Acar, an analyst at Standard & Poor’s, said in a research report. “Margins are subject to commodity price volatility and have been very thin or negative in the past.”