Ethanol is so five years ago. 2011 is the year of electric cars and shale gas. Or is it? Considering the following:

1. Since 2004, U.S. ethanol consumption has grown four-fold, while gasoline consumption has been flat.
2. Driven to cut the national deficit, politicians are increasingly advocating for the reduction or elimination of government supports for ethanol. Two such House bills were introduced earlier this month.
3. The Obama Administration supports both the ethanol mandate and increased fuel economy. Since ethanol delivers fewer miles per gallon than gasoline, this will lead to an inevitable clash between the Administration’s energy and economic priorities.
4. “High energy prices contribute to high food prices by making food production more expensive and encourages more people to use grains like corn to make ethanol, which also drives up corn prices” (Slate).

So even though ethanol isn’t the sexiest energy story of 2011, it’s incredibly relevant to the politics of energy, food and global trade. Read past the break for the full story and join the Green Light Distrikt Facebook group for updates on new events, blog posts and more.

In part I, I’ll walk you through five things you should know about ethanol politics in order to decide where you stand. In part II, which will be published in early November, I’ll discuss five things about ethanol economics and what the means for America’s energy future.

1.   What is ethanol?

Ethanol, which is the same alcohol found in your happy hour lager or Friday night Merlot, can be produced from a variety of crops but is primarily made from corn (U.S.) and sugarcane (Brazil). Ethanol is intended to do prevent engine knock, reduce smog and displace gasoline. It’s ability to displace gas at the pump is hampered by its low energy density: you need 1.5 gallons of ethanol to replace 1 gallon of gasoline. Also, ethanol is hygroscopic, which is a snotty way of saying that it mixes with water so it can’t be shipped through oil pipelines, making it more expensive to ship.

2.   What is the history of ethanol?

While ethanol has been in use since before the Civil War (or the War of Northern Agression, depending on your roots), its first use as a transportation fuel was in the Ford Model T, which had a flex fuel engine that could run on ethanol, gasoline, or a mixture of the two. It’s use increased during the world wars dur to limited crude oil supply, but demand plummeted immediately afterwards. During the Carter Administration, government increased its support for ethanol production, but cheap oil during the Reagon years put more than half of the ethanol producers out of business because they couldn’t compete. The 1990′s introduced ethanol as as oxygenate alternate to the chemical MBTE, which was beginning to be banned due to concerns that it was contaminating groundwater.

But ethanol wasn’t in the public consciousness until President Bush, a former oil executive, famously stated in his 2006 State of the Union address that “the U.S. is addicted to oil.” This statement, largely motivated by concerns over reliance on Middle East oil, was even more remarkable given Texas’s usual animosity towards government support for oil alternatives (consider Governor Perry’s position on ethanol). The President championed the Renewable Fuel Standard that has grown ethanol from a 1.6 billion gallon industry in 2000 to a 15 billion gallon industry in 2015.

3.   How does the U.S. government support ethanol production?

The U.S. government supports ethanol production through a variety of energy and agricultural subsidies, tariffs and regulations. Here are the main ones:

• The tax credit: Refiners get a $0.45/gallon tax credit for blending ethanol into motor fuel. Originally the tax credit was $0.54/gallon to match the tariff. Congress is expected to let the tax credit expire in 2012.
• The tariff: Refiners that import ethanol, typically sugar ethanol from Brazil, pay a $0.54/gallon tariff. The tariff currently has a limited impact, with Brazil currently importing ethanol from the U.S. The tariff could threaten U.S. corn ethanol production if the tariff is repealed and sugar ethanol producers are able to establish a market and distribution channels. Congress is expected to let the tariff expire in 2012.
• The insurance: Crop insurance protects corn growers against the loss of their crops as a result of natural disasters or the loss of revenue due to decreased commodities prices. It’s a way for growers to hedge against risks that they can’t control.
• The payments: Growers also receive cash payments to ensure that they are making a profit and continue to grow corn, which maintains supply levels and pushes prices down. Most growers I talked with anticipate that payments will end and insurance will be restructured as part of the 2012 Farm Bill.
• The low carbon fuel standard: California passed a law requiring a reduction in the greenhouse gas emissions of transportation fuel. Since producing a gallon of sugar ethanol has significantly lower greenhouse gas emissions than producing a gallon of corn ethanol, the standard incentives use of Brazilian ethanol. There is no short-term risk to the standard being repealed.
• The mandate: Arguably the most significant government support, and the one I’ll focus on for the remainder of our time. The Renewable Fuel Standard requires 15 billion gallons of ethanol be blended into motor fuel by 2015. States determine how the ethanol is blended, from E10 (10% ethanol) in the majority of fuel to E85 (70-85% ethanol) for cars with special engines.

4.   Who are the players?

There are a number of players involved in the ethanol debate, and what makes it so interesting is that the lines aren’t the typical partisan lines but a more complex mix of federal politics, local economics and individual values.

• Politicians: Mixed. Oklahoma and Texas are decidedly pro-oil and anti-ethanol. Corn growing states are pro-ethanol because ethanol production boosts grower profits. Others decide based on typical party lines, such as Tea Party Republican’s anti-ethanol stance because government supports increase the federal deficit. The other major factor is that Iowa, an overwhelmingly pro-ethanol state, is an Presidential primary state, generally driving both Democrats and Republicans to voice pro-ethanol views during their campaigns (Commentary).
• Farmers: Mixed. Grain farmers, who profit from high corn prices, support the mandate. Livestock farmers, both meat and dairy, oppose the mandate because high corn prices lead to higher feed prices for their livestock.
• Environmentalists: Mixed. Conflicting research about ethanol’s environmental impact means it really comes down to how you prioritize environmental issues. Corn-based ethanol can reduce greenhouse gas emissions 7-22% over gasoline, but it also increases air pollution (IEA, Science, National Geographic).
• Energy security hawks: Mixed, though leaning anti-ethanol. The anti-ethanol leanings are due to the fact that “processing all the corn in the country would displace about 3.5% of our gasoline,” a small amount compared to the impact that simple efficiency measures such as optimally inflating tires (>20%) could have (USDA).
• Poverty and food security activists: Anti-ethanol. “Inflation in food prices can inflict severe damage on the poor, who already spend a large chunk of their income on food than the well-off” (Slate).

I think this spokesperson for the Senate Energy and Natural Resources Committee said it best: “The issue is complicated, and it’s wise for folks to catch their breath and get better educated on the complexities before charging ahead with changes.”

5.   So, will the ethanol mandate be changed or repealed?

The short answer is that, after speaking with more than a dozen ethanol experts and corn growers, I don’t believe there is risk to the mandate anytime soon. How is this possible given that the major players in the ethanol debate are at best mixed, and at worst forcefully anti-ethanol?

Ethanol’s complex politics, in particular its role in the Presidential primaries, support my belief. As J.P. Morgan analysts note, “We believe politicians would be loath to increase energy dependence on an unstable Middle East, particularly in an election year. In addition, given economic volatility and high domestic unemployment, politicians should be hesitant to vote for a bill that jeopardized U.S. jobs.” Another reason that the mandate will stay intact is that even without other government supports, ethanol production could remain profitable as they are in fact today (I’ll discuss this further in part II). Even if for policymakers changed or repealed the mandate, this really wouldn’t impact demand for U.S. corn ethanol because mandates coming online in more than 50 countries including the EU, China and India in the next decade will significantly increase ethanol demand (Biofuels Digest).

So is ethanol the sexy energy story of 2011? No, it’s one of the central energy stories of the 21st century.

Share your thoughts and questions below and stay tuned for part II on the economics of ethanol.

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About Aaron Desatnik

Aaron is a research analyst at Iridian Asset Management, an equity management firm in the New York City area. Part of his work is to investigate mid- and large-cap energy efficiency and renewable energy companies to evaluate their investment potential. Previously Aaron was the Director of Marketing at the Sustainable Performance Institute in Boston, MA. He is also active in the community and has organized campaigns to increase awareness about the benefits of purchasing local food in the Greater Boston Jewish community as well as to develop a growth strategy for the transportation advocacy group LivableStreets Alliance. Ping Aaron if you want to talk about strategy, investing, energy or cycling. hello@aarondesatnik.com @aarondesatnik www.aarondesatnik.com

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