"It makes no sense to tax ethanol coming in from friendly countries like Brazil when we do not tax oil imported from countries like Saudi Arabia…"
Or how about:
…Brazil’s experience shows that to successfully copy its example, the U.S. may have to make political choices that U.S. politicians have ducked in the past, including raising gasoline taxes, ending government support for crucial agricultural products such as sugar and corn, and opening protected agricultural markets.
Both are from "How Brazil Broke its Oil Habit," The Wall Street Journal, 6 February 2006, p.A9.
Good morning. I am talking from Brasil, I think WSJ
article reflects the major opinion here in Brasil, for which much of my fellow nationals are proud.
I have a somewaht dissedent view. I agree that alcohol migt be a sensible choice when oil is over 50 dollars per barrel.
But Brasil obliges that all gasoline marketed inside Brasil have to blend 25% of alcohol, in volume. This 25% is not related to international oil prices. And I believe there is a rarely talked about cost in maintenance expenses borne by vehicles owners here in Brasil.
In summary, if alcohol was so good, I think it would not be
necessary to make it compulsory for all vehicles , speacilly
when oil prices are so high.
Like your blog very much.
I think ethanol subsidies need to be cut for two reasons. The first is the obvious distortion to the farm and energy markets. The second I think strikes at their real purpose and long term impact:
Ethanol (and hydrogen filling station) subsidies create a pleasant fantasy of a low cost transportation future.
The man on the street thinks the government is working to keep gas prices low. He thinks those future technologies the President outlined in the State of the Union speech are serious attempts to get there.
If we are going to have a free-ish market future in transporation (and I think we are) then we should at least be honest with the population about what that means. It is up to them to figure out what prices will prevail, and what their response will be.
(it boggles my mind that people think a free market in ethanol will be low at the same time a free market in oil is high. supply and demand means ethanol will chase gasoline higher)
Well, the Saudi angle strikes at the market/non-market fantasy as well. Remember when prices go up, the President needs to meet with the Saudis and get “promises” about production. This is another veneer on our market system. It allows the consumer to think prices are being managed.
I’ve talked before in various blogs about what I see as a perceived social contract on gas prices. It isn’t that I think there should be such a social contract … it’s that I think it is out there.
And the SOTU and all its follow-on discussions dance around that contract.
Jack, are you saying that I am misinformed or using a canard? I am directly addressing the sentence Tyler quoted, which implies that Brazil is in some sense more friendly than Saudi Arabia and that this sense is relevant to our trade policies. I think my point is quite on the mark if we are assessing the merits of that sentence. And yes, I agree that it is a canard, which weakens the original sentence, and which is exactly why the sentence grates on me so much.
My larger point really is that economic policies including trade should be based on rationality rather than on rhetorical tropes about who our “friends” or “enemies” are, regardless of whether Japan or China or Saudi Arabia is the rhetorical enemy-du-jour. And yes, the Wall Street Journal knows better.
DK, No intention to call you anything. My apologies if it appeared that way. I agree with your points.
asiequana, Yes, I am aware that the US GDP is the same portion of global production as oil consumption – 25%. But there is no requirement that these two be linked. I am sure that a global comparision would should that some countries use a much lower portion of oil (ie. Japan) and that in general economically developed countries use a lower percentage of global oil than their portion of global production.
In any case, my claim is not that the US should not be using a lot of oil. Instead, I said that US policies encourage a higher level of use than needed and that the impacts of this are negative. One of the reasons that I included the 25% figure was to illustrate the impact of US consumption of global oil markets, although I did not develop this point. If the US were to reduce consumption by 10%, this would knock the bottom out of global prices and the impact of transfer of funds to dangerous parties.
Why does everyone worry about using energy to produce ethanol? If it takes 100 Joules of coal energy to produce 90 Joules of liquid fuel, that is a net GAIN, because you can use ethanol in a car, and you can’t with coal (or nuclear, wind, solar…).
The problem is if you are burning oil to get the energy you use. That is just stupid, and can only happen if the government is involved.
And the comments about sugar cane being hard to grow are just wrong. For centuries it was maintained that cutting cane was too hot and hard for europeans, so dark skinned slaves were needed. But as soon as slaves were unavailable (for example, in Australia) european men, paid by the tonne, proved perfectly capable of doing the work. These days of course it is all done by machines and the question is irrelevant.
I’ve tried looking for infomation on ethanol now and then and it’s a very frustrating experience. But none the less, here are some things about ethanol I’ve discovered that appear to be true:
1. One liter of ethanol has 68% the energy of a liter of gasoline, meaning that unless people are decieved or compelled they will probably want to pay less for ethanol blends than standard gasoline.
2. Ethanol is added to all or most blends of modern gasoline in very small amounts as an anti knock agent.
3. No country burns large amounts of ethanol in cars without government intervention.
4. Despite Australia’s huge agricultural sector, including vast amounts of sugar cane production, and a much higher tax on gasoline than in the United States, no one seems to want to produce ethanol for fuel without government subsidies.
5. In general people and companies don’t think energy in vs. energy out ratios are important, they think money is important.
6. My head hurts when people talk about “cellulistic” ethanol.
Thanks Michael Vasser for your really succinct and helpful answer!
Patrick, a 90% efficiency for converting coal to liquid fuel would be miraculous. But that won’t save corn ethanol — especially in that case, it will be cheaper to put your super liquid fuel directly in cars rather than putting it in tractors to harvest corn to make ethanol for cars. As you said, that “can only happen if the government is involved.”
Ronald, great points. But Re #5, real people do care about energy balances, for simple and monetary reasons. First, saying a technology has a bad energy balance is a way of proving that it is unprofitable across all possible market conditions in the short run. For example, there are (extreme) shifts in the oil supply and energy demand curves which could make solar energy a cost effective substitute for oil (in power plants if not in cars). If corn ethanol has a negative energy balance, then even infinite shifts in those curves would not make unsubsidized corn ethanol profitable.
Second, energy balances may affect whether a technology has any hope of becoming profitable in the future. If the energy cost of moving the corn to the silo is too high, then no amount of government investment will ever make corn ethanol cost effective, short of genetically engineering the corn to walk itself to the ethanol plant.
Let’s note exactly what’s at stake here — the point of the original article is that the U.S. might want to consider applying the Brazilian government’s strategy of promoting an ethanol transition. I think that would be a bad economic policy, but I’d like to know whether it would be the equivalent of spending tax dollars on a perpetual motion machine, or whether (like hot fusion and mars missions) it is something that could theoretically be possible if the government doesn’t screw it up as badly as it usually screws things up.
Jack,
Yes Japan is a more efficent user of oil. But it is only because they have a more concentrated population, more than 10 times as concentrated. Hence transportation costs are lower. Japan also generates more of it’s electricity from nuclear power than we do.
If the US is 25% of world GDP and consumes 25% of the oil then we are average in terms of efficiency. So US energy policy doesn’t appear to distort consumption in the US vs. ROW.
The discussions about energy output of ethanol vs. input gas is mind numbing. However, reducing trade barriers is pretty simple. Why not just drop trade barriers for Brazillian ethanol as originally suggested?
If the Brazillians cannot make money on it, then they will eventually do something different. But if they are making ethanol at $1.00 per gallon, and we are paying $2.50 at the pump for gasoline, then why not let the market work its magic?
JBP
Alternatively, if one actually wants to know the wholesale cost of fuel ethanol it is posted live here
http://www.ethanolmarket.com/fuelethanol.html
It is between $2.30 to $2.50 per gallon, which is not $3.00 per gallon. It tends to approach a cost of a equivalent gallon of gasoline, when adjusted for fuel value and tax breaks.
JBP
I did some more sums, this time on Brazilian ethanol vs. Australian petrol. The product cost of one litre of gasoline in Australia, before any taxes or distribution costs, is roughly 44 U.S. cents. One litre of Brazilian ethanol costs roughly 36.5 cents, but has less energy. The ethanol energy equivalent of one litre of gasoline costs about 53 cents, which is roughly 20% more. And although ethanol will be more expensive to transport and distribute because of its bulk, when you consider the environmental benefits of Brazilian ethanol that’s not such a bad deal.
These guys have it at 11 pence per liter.
http://www.dft.gov.uk/stellent/groups/dft_roads/documents/page/dft_roads_024054-06.hcsp
Or about 16 cents per liter, if am reading this right.
JBP
Very good,
This is truly interesting. So there is a competitive market developing for oil vs. cane ethanol, perhaps holding down the price of oil, as ethanol is substituted.
Makes me wonder why we still have sugar tariffs in the USA instead of using that sugar to make ethanol.
JBP
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