Local Production for Local Needs
I currently live in Hawaii, and one thing I hope to help facilitate is for Hawaii to become more sustainable in food and energy. We have the natural resources here to be largely sustainable, but we depend on outside sources for around 90% of our food and energy. Currently, fuel and power in Hawaii are provided by Southeast Asia and from as far away as the Middle East.
Of course we do this for the same reason many countries are dependent on imports for their food and energy: That is cheaper than the alternative of self-sufficiency. But from the perspective of risk, regions with such high dependence on others for their basic needs can quickly find themselves in an uncomfortable position. The U.S. first found out the implications of dependence during the OPEC oil embargo of 1973. Today, the level of dependence in the U.S. is much higher than in 1973, so those risks continue to hang over our heads.
This is why I advocate — to the greatest practical extent — local production and usage of food and energy. As long as production can be done in a relatively efficient and economic manner, there are many potential benefits to communities that produce their own food/energy: Supply disruption risks can be managed, fossil fuel consumption from transporting food and fuel are reduced, and local jobs are created. Further, countries that are self-sufficient in food and energy can’t be held hostage by other countries withholding these things (which has often resulted in war).
In fact, this is a major factor generally given for broad adoption of renewable energy standards (with climate change concerns another major factor). To the extent that renewable energy is truly making a region more self-sufficient, I am highly in favor of incentives and programs to accomplish this goal.
A More Sustainable Midwest
One reason I have often spoken out against ethanol subsidies is that I didn’t see regions actually becoming more self-sufficient as a result. What I saw was a delusion of self-sufficiency. Yes, more ethanol was being produced, but the oil dependence of those producing communities continued to be very high (in some cases growing even as ethanol production soared).
Take the Midwest of the U.S. as an example. The United States is divided into five Petroleum Administration for Defense Districts (PADDs). These districts were created during World War II, and the Energy Information Administration (EIA) currently collects and reports statistics for the different PADDs. PADD 2 is essentially the Midwestern states. The states in PADD 2 are Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Wisconsin. (See this PADD map for a full breakdown of all five districts).
PADD 2 is responsible for approximately 95% of all ethanol production in the United States (production is actually more concentrated than that, as some PADD 2 states produce little or no ethanol). Ethanol production in PADD 2 has grown from 1.6 billion gallons in 2000 to 3.9 billion gallons in 2005 to almost 12.5 billion gallons in 2010. The region has clearly been successful in rapidly boosting ethanol production.
Despite this success, demand for conventional gasoline has remained strong. In 2000, demand for conventional gasoline in PADD 2 was 2.1 million barrels per day (bpd). Demand increased slightly by 2004-2005 to 2.2 million bpd before declining to the present demand value of 2.14 million bpd. (Source). In other words, even though ethanol production soared in the Midwest by some 700%, demand for conventional gasoline in the Midwest remains within 5% of the all time high set in 2004. (True gasoline demand is somewhat higher, because I am not considering the gasoline contained in approximately 400,000 bbl/day of reformulated gasoline).
Why Export When You Don’t Produce Enough to Sustain Yourself?
With a present conventional gasoline demand of over 2.1 million barrels per day against ethanol production of 0.8 million barrels per day, it is puzzling that an ethanol pipeline is being discussed. If gasoline demand in the Midwest was converted to demand for E85, every drop of ethanol produced in the Midwest could be consumed in the Midwest instead of using fossil fuels to transport it across the country.
Consider the following thought experiment. Let’s suppose that instead of 2.1 million barrels per day of gasoline, we could convert that demand to E85. Given a fuel efficiency penalty of 25%, it would require 2.1/0.75 = 2.8 million barrels per day of E85 to replace conventional gasoline in the Midwest. That breaks down to 2.4 million bpd of ethanol blended with 0.4 million bpd of gasoline (an 80% reduction in gasoline consumption). To put that into perspective, 2.4 million bpd of ethanol would be an annual demand of 37 billion gallons of ethanol versus the current 12.5 billion produced in the Midwest. Or, to put it another way, if E85 could only reach 34% market penetration in the Midwest, all ethanol produced in the Midwest could be used locally in the Midwest and oil imports could be backed out of the region.
But instead of a strategy in which we try to consume ethanol locally, we are trying to supply a little bit of ethanol all over the country, inefficiently transporting it from the Midwest to coastal states. At the same time, oil imports continue to flow into the Midwest. While most oil imports into the Midwest come from Canada, oil from Venezuela and the Middle East also makes its way into Midwestern gasoline. My view is that instead of exporting ethanol from the Midwest to New York (or even out of the country) we should make sure that E85 dominates the local markets and backs out Venezuelan crude, rendering hollow Chavez’s threats to cut off our crude supplies.
I was asked on a recent radio program about my thoughts on the proposed $4 billion pipeline to transport ethanol to the Northeast states. Because of the arguments I have laid out here, I said that I did not favor that. I think it would make far more sense to push the Midwest — also where much of the country’s food is grown — much further along the path to energy independence.
In fact, a Department of Energy study on the pipeline suggested that it may not even be economically viable:
The study’s findings indicate that the ethanol pipeline would need to carry 4.1 billion gallons of corn-based ethanol annually to be feasible without major financial incentives.
That volume is nearly 50 percent higher than the volume for the pipeline being proposed by Poet, the world’s largest producer of ethanol, and Tulsa, Okla.-based Magellan Midstream Partners LP.
Poet and Magellan had been courting support in Congress to amend an alternative energy loan guarantee program that would back up 80 percent of the debt the companies plan to spend installing the ethanol pipeline.
I simply fail to see the logic of spending those kinds of dollars — including taxpayer dollars — to send ethanol outside a region that is still heavily dependent upon gasoline. A mere 10% penetration of E85 into the Midwestern gasoline market would consume even the 4.1 billion gallons mentioned above.
The report further notes:
But according to the DOE report, moving ethanol through the pipeline would cost shippers 28 cents per gallon at projected demand levels, well over the 19 cents per gallon average rate for the rail and barge transportation currently used.
So why not save that 19 (or 28) cents per gallon added costs from shipping it out of the Midwest and make E85 the fuel of choice there? If that strategy were successfully executed, there would be no need for ethanol pipelines or mandates for E15 or E20. The Midwest alone could consume three times the ethanol they currently produce, backing out oil imports into the region and eliminating the fossil fuel consumption from currently shipping ethanol around the country.
It would be far more efficient (i.e., fossil fuel savings and greenhouse gas reductions) to maximize local usage before trying to build an export market. Imagine that Hawaii followed the same model: Develop an alternative energy industry that ships the product to California, while continuing to import crude from Saudi for local needs. I think we would agree that this would be silly, and yet that is what is happening right now with ethanol in the Midwest.