Monday, July 23, 2012

Ethics of ethanol amid US drought:

            About seven years ago, as it was starting to sink in that conventional petroleum production has reached stagnation, while we continue to rely on an expanding supply of transport fuels, the movement of peak oil, trying to bring awareness of this impending challenge for humanity and its well being, all the sudden gained the attention of the mainstream.  Books like “Twilight in the Desert” by Mathew Simmons became bestsellers.  Governments and corporations re-adjusted their view of the world to reflect this reality.  There were still many however who said all along that it was nonsense to worry so much about it (peak oil), because through a combination of increasing efficiency as well as new extractive technologies and sources of energy coming online as a result of the higher prices triggered by the end of cheap sources of petroleum, will bring alternative sources of transport energy online.  Faith in the market is what these people were banking on.

Note:  Data sourced from the EIA[i].  It shows the growing gap between conventional and unconventional sources of oil.  Of note should be the plateau that developed since 2005 in conventional crude, while there is only a temporary plateau in the total liquids supply, followed by another leg up, which can be attributed to the effect of the market in response to the stagnation in crude oil.

            The magic of the market is strong indeed.  Seven years after conventional crude oil production worldwide stagnated; we are yet to witness the economic collapse that the peak oil community predicted would happen.  Things are certainly not all rosy.  I believe that the world economy will never be the same again as a result of the event of conventional crude production stagnation.  It nevertheless seems that the opponents of the market underestimated its power. 

            The market is not all powerful of course.  It cannot be the solution to everything. Dealing with global climate change for instance has to be a policy solution, because it is not within the competence of the market.  The market can deal with its effects, but cannot work to prevent it.  Markets need price signals to react, and there is no natural price signal to prevent climate change and other environmental problems.  In the case of resource scarcity, it becomes a classical case of product substitution, triggered by price signals.  So, for instance, if the price of coal becomes much higher than it would be to use natural gas for power generation, the market will substitute, or complement in the case of rising demand.

            A similar situation happened to some extent with conventional oil.  After production stagnated, ethanol, unconventional oil, and natural gas complemented the use of conventional oil in order to accommodate rising demand.  The higher price also led to an increase in conventional sources that became exploitable, which might even have the effect of pushing conventional crude on a higher production plateau.

The argument of the market worshipers goes that if and when conventional oil will go from the current stagnation to eventual decline, unconventional sources will complement and substitute to allow us to continue on our merry way.  I should point out however that if we are to compare the finite nature of our planet with the finite nature of moves available to a player in a chess game, the market in effect is taking us through a losing game of chess, where every move is one of these resource substitutions, that sometimes come with a cost, not unlike the often necessary sacrifice of a piece or strategic position, in order to prolong the chess game.  With every sacrifice or compromise to avoid complete disaster or check mate, the chances of winning become less.

            A case in point is the complement of oil with ethanol.  This is something we should be paying particular attention to, given the continuing drought in the US, where corn ethanol has become a significant component of liquid fuel production.  132 billion kilograms of corn was used in 2011 to produce over 12 billion gallons of ethanol according to EIA data[ii].  A kilogram of corn contains about 1000 calories, which means that about 250 million people could have been fed by allocating the corn or the land used to grow corn during the entire year of 2011 to feeding those people.  There are currently about a billion people suffering severe malnourishment on the planet.

            It is increasingly clear that this current year will see a reduction in the corn crop in the US, and there is little hope of making up for the caloric loss from other sources.  The USDA estimated last week that about 12% of the corn harvest for this year will be lost due to current drought conditions.  The drought is continuing as of this week in most of the affected areas, so it could even get worse.

            Now the inevitable question arises:  Will the loss of the corn supply be soaked up by a decline in ethanol production, or will we expect people to go on less food?  The market response as well as policy that mandates ethanol to be blended in gasoline, suggests that the latter will be the case.  The loss, by the way can be as high as 2.9 billion bushels (73.7 billion kilograms) compared to the initial USDA estimate for this year’s US crop.

            If the loss of the corn crop will be soaked up by the ethanol industry, ethanol production in the US will drop by half.  That is equivalent to .5 mb/d, or about .6% of the world’s liquid fuel production.  With demand for transport fuels still growing despite the sluggish economy, as well as the tensions with Iran, this amount of liquid fuels is actually highly relevant.

If the loss is soaked up by people, the loss is equivalent to about 125 million people’s caloric needs for a year.  We should not forget also that corn is not the only crop affected, and there is also a drought in parts of Europe, including in Russia, where wheat production will most likely be down about 10% from a year ago.  There are also increasing worries of bad news coming out of Ukraine on grain yields.  To put things into perspective, the world grain council data shows that the shortage of grains in the 2010/11 period, which led to the food crisis that sparked the revolutions in the Middle East, was about 34 million tons.  The shortages of grains for this season, if we are to add up the expected losses from only the US and Russia, could add up to a shortfall that is more than twice as large at least (up to 90 million tons according to latest reports)[iii].

            It is hard to predict how the market for food will cause this to play out, but one thing that can be certain is that with the withdrawal of such a large quantity of caloric input from the global food supply, millions will actually starve to death somewhere, because after all, the solution of the market is demand destruction.  It is true that some of the loss will be soaked up by a possible decline in meat consumption, and a reduction in waste as a result of the higher price of food, but still, it is undeniable that demand destruction through starvation will be a part of the market solution.


            At this point, there is little that can be done to prevent the coming food price spike.  Ethanol plants will continue their production.  We will continue eating meat in accordance with our ability to pa for it.  Food waste at the retail level will continue.  Food waste at the personal level can be helped, and I urge everyone who reads this, to become more conscious of the need to manage their fridge and kitchen in a manner that will not lead to food being thrown away.

            There is nothing we can do about the current weather.  Climate change may be real, but it will take decades for any action on our part to be noticed.  We should start doing something about it now, so a few decades from now; we will not be faced with even worse conditions.  My suggestion for the best approach to encouraging global sustainability through standardizing global trade tariffs and tailor the tariffs in a way that will encourage sustainability is perhaps by far the best way forward.  I certainly did not come across any viable alternative proposal thus far, aside from idealistic calls to voluntary action, which never, ever yielded tangible results, even when an entire region was mobilized into action as was the case of Europe in the last few decades.

            Some say that every crisis is an opportunity to change and fix things.  There is little doubt now that there is an impending food crisis on the horizon.  I hope that the best thing that can come out of it is a realization that we need to take global sustainability very seriously now, and we need a solution.  A global mechanism that helps promote sustainability through conditioning tariff levels on the ability to produce with as little of an environmental footprint as possible, is the only way we can slowly move away from our current path of increasing human and environmental tragedy.


[ii]A bushel of corn yields about 2.3 gallons of ethanol.  A bushel is equal to 25.4 kilograms.
EIA data:

International Grains Council report on July 2, estimating a 9 million ton shortfall in supply compared with demand.

Russia grain production after the July, 2 report by the International grains council, which added over 10 million tons more to the shortfall.

USDA reduction of US corn crop estimate after July, 2 report by the International Grains Council, which could add as much as another 70 million tons to the shortfall..

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