While President Bush and other advocates of biofuels have often called for ethanol to be made from alternative feedstocks such as switchgrass–a plant native to the U.S. prairie states, where it grows widely–the required technology is, according to most estimates, at least four to five years from commercial viability. Meanwhile, advanced biological techniques for creating novel organisms that produce other biofuels, such as hydrocarbons, are still in the lab. So far, researchers are making quantities that wouldn’t even fill the tank of a large SUV.
The economic woes and market limitations of corn ethanol are a painful reminder of the immense difficulties facing developers of new biofuels. “The bottom line is that you’re going to have to make fuel cheap,” says Frances Arnold, a professor of chemical engineering and biochemistry at Caltech. “We can all make a little bit of something. But you have got to make a lot of it, and you have got to make it cheaply. The problem is so huge that your technology has to scale up and do it at a price that is competitive. Everyone is going to be competing on price alone.”
There may be no better place to get a realistic appraisal of biofuels than the Department of Applied Economics at the University of Minnesota. The large campus housing the department and the rest of the university’s school of agriculture lies on a low hill in a quiet St. Paul neighborhood. Acres of fields where experiments are conducted spread out from the edge of the university. Nearby are the grounds of the Minnesota State Fair, a 12-day event that draws more than a million and a half visitors at the end of the summer.
The state is the fourth-largest producer of corn in the U.S., and much of its economy, even its culture, is intimately tied to the crop. The run-up of corn prices has been a boon for Minnesota’s rural agricultural communities. And the governor and other state politicians have strongly pushed the use of ethanol as a transportation fuel. Still, you won’t find much cheerleading for corn ethanol in the plain brick building that houses the department.
In his orderly office with its neat stacks of technical papers and farm reports, Vernon Eidman, an emeritus professor of agricultural economics, combines the authority of a scholar with the sternness of a Midwestern banker. “We could see this coming,” he says, describing the current market plight of the ethanol producers. “It’s not like [producers] didn’t know it was coming. At least, they should have known it.” In 2006 they “made profits like they never had before,” Eidman says. “And that’s a major factor that led to this tremendous buildup.”
The numbers speak for themselves. Eidman’s calculations show what it costs, given varying prices of corn, for a new, moderate-size facility to produce ethanol. At $4.00 a bushel of corn, ethanol production costs $1.70 a gallon; to gain a 12 percent return on equity, the producers need to sell ethanol at $1.83 a gallon. Then Eidman shows his figures for the prices that petroleum companies are paying when they buy ethanol to blend with their gasoline: this December, prices were about $1.90 a gallon, and bids for 2008 range between $1.75 and a $1.80 a gallon. In other words, the profit margins for ethanol producers are extremely tight. To make matters worse, Eidman says, production capacity, which was around 5.4 billion gallons at the beginning of 2007, is expected to reach 12.5 billion gallons by 2010.
- Boom or Bust? (PDF: Charts and graphs of the economics of biofuels)
- See images of high-protein grains and the production of hydrocarbons.
- University of Minnesota researchers explore the future of biofuels.
- C. Ford Runge explains the problems of corn ethanol.
- Venture capitalist Vinod Khosla details the market potential of alternative energies.
While swelling ethanol production has led to worries about oversupply, the other side of the market equation is actually a cause for greater concern: the future demand for ethanol fuel is by no means certain. In a few parts of the country, particularly in the corn-belt states, drivers can buy fuel that’s 85 percent ethanol. But for the most part, petroleum companies use ethanol at a concentration of 10 percent, to increase the oxygen content of their gasoline. Not only is such a market limited, but the 10-percent-ethanol blend delivers slightly reduced gas mileage, potentially damping consumer appetite for the fuel.