Drought, food, and fuel

Aug. 20, 2012
Drought in the US shines harsh light on the lunacy of converting food into vehicle fuel. According to the US Department of Agriculture, the corn yield this year will drop to its lowest level since 1995.

Drought in the US shines harsh light on the lunacy of converting food into vehicle fuel. According to the US Department of Agriculture, the corn yield this year will drop to its lowest level since 1995. With 40% of the corn crop now used for the production of fuel ethanol, the federal requirement for which rises yearly, corn prices are leaping in the US and around the world. Because rising corn prices levitate the costs of feeding livestock, meat prices are rising, too.

From inside and outside the US, calls have sounded for a waiver of the grain-ethanol mandate, which reached 13.2 billion gal this year en route to a peak of 15 billion gal in 2015. One such call comes from the top food official at the United Nations, another from the president of the American Meat Institute. The appeals correctly identify a large part of the problem. But the solution they propose grounds itself in the same naivety that tricked America into thinking it can meet its energy needs with waves of grain cultivated by subsidies and mandates.

Diverting corn

To meaningfully damp food prices, corn now used to produce fuel ethanol would have to be diverted to food. This won’t happen. If it did, economic pain would shift from food to gasoline, the price of which would zoom.

Ethanol now represents about one tenth of the US gasoline pool. If a waiver of the mandate did chase corn out of ethanol and into food, the volume loss would rock the gasoline market. Ethanol from inventories would absorb some of the shock—but hardly all or even most of it. Any consequent easing of food prices thus would come at the expense of sharply higher fuel costs.

Couldn’t refiners just compensate for ethanol losses by raising the output of gasoline made from crude oil? Not quickly enough to prevent a price spurt.

About 60% of finished motor gasoline is conventional fuel containing ethanol and thus receiving a 1 psi rvp waiver on volatility standards. Unless an exception were granted, removal of ethanol would void the waiver. To meet the newly toughened volatility limit, refiners shedding ethanol would have to pull light hydrocarbons from gasoline streams. Supply thus would take another blow.

Compensating for octane losses would further cut supply. With two octane boosters, ethanol and butane, in diminished use, refiners able to do so would increase alkylation, an important route to octane that shrinks material volumes. Partial offsets would be available. On balance, however, a waiver of the ethanol mandate that actually removed enough ethanol from vehicle fuel to lower corn prices would cut fuel supply overall and raise gasoline prices, perhaps painfully. In actual practice, refiners, unless ordered otherwise, probably would keep blending ethanol despite suspension of the mandate to avoid disrupting their operations and gasoline supply. Either way, ethanol producers, already squeezed by high corn prices, would be crushed.

As long as drought persists, all options are bad. This unhappy circumstance was inevitable. By acts of Congress, the US hitched its fuel market to the vicissitudes of weather-sensitive agriculture and committed a large and growing share of its food supply to the production of fuel. For some reason, many otherwise sensible nations duplicated the mistake. Did everyone think the token displacement of devilish petroleum by angelic alcohol meant there’d never be another disappointing harvest?

Hungry people

Because of widespread official failure to ask simple questions, hungry people at the economic margin now can’t afford food. They need help. Waiving the ethanol mandate won’t provide it. And a cruel irony in all this is the diminished relief available from governments with financial predicaments exacerbated by ill-considered energy subsidies.

In fact, waiving the ethanol mandate will never redress this historic and tragic foolishness. A program motivated too much by the politics of agriculture has done too much damage and shouldn’t be waived. It should crushed into pieces and sown in furrows of salt.