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[cdn-nucl-l] WSJ, The Ethanol Bubble Pops in Iowa
Interesting article ...
Wall Street Journal
April 18, 2009
The Ethanol Bubble Pops in Iowa
More evidence the fuel makes little economic sense.
By MAX SCHULZ
In September, ethanol giant VeraSun Energy opened a refinery on the
outskirts of this eastern Iowa community. Among the largest biofuels
facilities in the country, the Dyersville plant could process 39 million
bushels of corn and produce 110 million gallons of ethanol annually. VeraSun
boasted the plant could run 24 hours a day, seven days a week to meet the
demand for home-grown energy.
But the only thing happening 24-7 at the Dyersville plant these days is
nothing at all. Its doors are shut and corn deliveries are turned away.
Touring the facility recently, I saw dozens of rail cars sitting idle.
They've been there through the long, bleak winter. Two months after
Dyersville opened, VeraSun filed for bankruptcy, closing many of its 14
plants and laying off hundreds of employees. VeraSun lost $476 million in
the third quarter last year.
A town of 4,000, Dyersville is best known as the location of the 1989 film
"Field of Dreams." In the film, a voice urges Kevin Costner to create a
baseball diamond in a cornfield and the ghosts of baseball past emerge from
the ether to play ball. Audiences suspended disbelief as they were charmed
by a story that blurred the lines between fantasy and reality.
That's pretty much the story of ethanol. Consumers were asked to suspend
disbelief as policy makers blurred the lines between economic reality and a
business model built on fantasies of a better environment and energy
independence through ethanol. Notwithstanding federal subsidies and mandates
that force-feed the biofuel to the driving public, ethanol is proving to be
In the fourth quarter of 2008, Aventine Renewable Energy, a large ethanol
producer, lost $37 million despite selling a company record 278 million
gallons of the biofuel. Last week it filed for bankruptcy. California's
Pacific Ethanol lost $146 million last year and has defaulted on $250
million in loans. It recently told regulators that it will likely run out of
cash by April 30.
How could this be? The federal government gives ethanol producers a generous
51-cent-a-gallon tax credit and mandates that a massive amount of their fuel
be blended into the nation's gasoline supplies. And those mandates increase
every year. This year the mandate is 11 billion gallons and is on its way to
36 billion gallons in 2022.
To meet this political demand, VeraSun, Pacific Ethanol, Aventine Renewable
Energy and others rushed to build ethanol mills. The industry produced just
four billion gallons of ethanol in 2005, so it had to add a lot of capacity
in a short period of time.
Three years ago, ethanol producers made $2.30 per gallon. But with the
global economic slowdown, along with a glut of ethanol on the market, by the
end of 2008 ethanol producers were making a mere 25 cents per gallon. That
drop forced Dyersville and other facilities to be shuttered. The industry
cut more than 20% of its capacity in a few months last year.
What's more, as ethanol producers sucked in a vast amount of corn, prices of
milk, eggs and other foods soared. The price of corn shot up, as did the
price of products from animals -- chickens and cows -- that eat feed corn.
Texas Gov. Rick Perry reacted by standing with the cattlemen in his state to
ask the Environmental Protection Agency last year to suspend part of the
ethanol mandates (which it has the power to do under the 2007 energy bill).
The EPA turned him down flat. The Consumer Price Index later revealed that
retail food prices in 2008 were up 10% over 2006. In Mexico, rising prices
led to riots over the cost of tortillas in 2007. The United Nations Food and
Agricultural Organization and other international organizations issued
reports last year criticizing biofuels for a spike in food prices.
Ethanol is also bad for the environment. Science magazine published an
article last year by Timothy Searchinger of Princeton University, among
others, that concluded that biofuels cause deforestation, which speeds
climate change. The National Oceanographic and Atmospheric Administration
noted in July 2007 that the ethanol boom rapidly increased the amount of
fertilizer polluting the Mississippi River. And this week, University of
Minnesota researchers Yi-Wen Chiu, Sangwon Suh and Brian Walseth released a
study showing that in California -- a state with a water shortage -- it can
take more than 1,000 gallons of water to make one gallon of ethanol. They
warned that "energy security is being secured at the expense of water
For all the pain ethanol has caused, it displaced a mere 3% of our oil usage
last year. Even if we plowed under all other crops and dedicated the
country's 300 million acres of cropland to ethanol, James Jordan and James
Powell of the Polytechnic University of New York estimate we would displace
just 15% of our oil demand with biofuels.
But President Barack Obama, an ethanol fan, is leaving current policy in
place and has set $6 billion aside in his stimulus package for federal loan
guarantees for companies developing innovative energy technologies,
including biofuels. It's part of his push to create "green jobs." Archer
Daniels Midland and oil refiner Valero are already scavenging the husks of
shuttered ethanol plants, looking for facilities on the cheap. One such
facility may be the plant in Dyersville, which is for sale. Before we're
through, we'll likely see another ethanol bubble.
Mr. Schulz is a senior fellow at the Manhattan Institute.