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Wall Street Slams the Ethanol Hoax

On Saturday, The Wall Street Journal editorial board opined that, "'Be like Brazil' have never been words to live by except perhaps in soccer or samba. But suddenly Americans are being told we should imitate Brazil in its expensive devotion to driving cars that run on ethanol. VeraSun Energy, the second-largest U.S. ethanol producer, was the talk of Wall Street this week with its IPO. Wal-Mart wants to install pumps to cater to cars that run on a largely ethanol blend. Even Rudy Giuliani was plumping for the stuff this week, a sign that an Iowa campaign stop may be in his future.

"We'd say the world had gone mad, except that this is a fairly typical case study in how political meddling distorts energy markets. Weary of high gas prices, drivers can be forgiven for desiring a 'miracle' fuel that is allegedly cheap and clean. But the corn farmers, ethanol producers, politicians and environmentalists who have promoted the new ethanol mania have no excuse for peddling misinformation."

The Journal editorial board also stated that, "U.S. taxpayers today pay twice for ethanol: once in crop subsidies to corn farmers and again in a 51-cent subsidy for every gallon of ethanol. Without such a subsidy, ethanol simply wouldn't be cost competitive with gasoline. Then last year, Congress went further and passed a new ethanol mandate, requiring drivers to use at least 7.5 billion gallons annually by 2012.

"The immediate consequence of this new mandate was higher gasoline prices this spring, since the ethanol industry was ill-equipped to meet the new demand. Ethanol must also be carried by truck or rail, rather than through pipelines, and it requires special blending facilities. All this has both raised prices and created gas shortages around the country. But rather than blame their new mandate for the higher prices, the Members of Congress blamed, of course, Big Oil.

"Ah, but what about the other alleged virtues of ethanol? One favorite is that every gallon of ethanol will supplant a gallon of gasoline imported from tyrannical Mideast oil regimes. Thus, a la Brazil, ethanol can help the U.S. achieve the miracle of 'energy independence.'

"Sorry. The most widely cited research on this subject comes from Cornell's David Pimental and Berkeley's Ted Patzek. They've found that it takes more than a gallon of fossil fuel to make one gallon of ethanol -- 29% more. That's because it takes enormous amounts of fossil-fuel energy to grow corn (using fertilizer and irrigation), to transport the crops and then to turn that corn into ethanol. The Saudis ought to love the stuff."

Interestingly, an Associated Press article from yesterday stated that, "With the market for corn-based ethanol booming, lawmakers from sugar-producing states such as Minnesota and Florida are hoping that beet and cane growers can soon jump onto the renewable fuel bandwagon.

"They cite the model of Brazil, which produces ethanol made from sugar cane.

"But critics, pointing out that sugar is much cheaper in Brazil than in the U.S., question whether the economics of sugar-based ethanol would work in this country.

"The U.S. Department of Agriculture is expected to issue a long-awaited study around July 1 on the viability of converting sugar into ethanol.

"Keith Collins, the USDA's chief economist, said that the soaring demand for ethanol and Brazil's successful track record make it worth discussing sugar-based ethanol here."

A separate A.P. story, which was posted at DTN on Friday, reported that, "VeraSun Energy Corp.'s debut on Wall Street showed investors' early excitement about ethanol, but some analysts say the burgeoning industry faces risks of oversupply, volatile commodity prices and a dependence on government subsidies.

"The 97 ethanol plants in the U.S. are producing about 4.5 billion gallons (17.1 billion liters) of the corn-based fuel per year, according to the Renewable Fuels Association , and another 33 plants under construction would boost annual capacity to 6.4 billion gallons (24.3 billion liters) within a few years.

"The clean-burning, high-octane fuel, has risen from obscurity in recent years because it's viewed as a way to help the U.S. cut its dependence on foreign energy sources. But Daniel Welt, a Standard & Poor's credit analyst in New York, said the industry's quick expansion likely will push capacity beyond base demand by 2008."