I raised the topic of ethanol subsidies in class last Wednesday and most of the class responded with very strong opinions about ethanol. In the news media today, ethanol is generally crucified because of the "food vs fuel" debate. However, the issue of food vs fuel is not so simple. Here's some food for thought about the role of ethanol in world food markets:
I invite you to examine the prices of various commodities grown as food crops around the globe: maize, barley, rice. While news rages with complaints about rising corn prices, you will notice that corn is not the only crop going up in cost. Indeed, everything is going up. So is the price of oil (notice the extremely close correlations in the price of food and oil overtime)-- which believe it or not, drives the price of virtually everything. Consider a $3.60 box of corn flakes. It is comprised of merely ten cents of corn. The rest of the cost is made up of producer mark up and the $1.20 of energy that goes into producing that corn flake from raw corn. The price of oil drives the price of food products-- not the cost of the raw good, which is virtually negligible. Even in the poorest countries in Africa, cassava root (one of the most important staple crops in the country) must be cooked before eaten, lest the consumer die from a cyanide produced in the stomach by eating raw cassava. To cook cassava, one needs energy-- in today's world, that means oil.
The next concern raised in the food vs fuel debate is the idea of direct land use change. First of all, I've yet to see a comprehensive, widely accepted study that confirms this theory at all. But aside from that, let's look at the theory behind it. When corn prices go up, farmers want to grow nothing but corn because they want to grow the crop that will make them the most money. This results in a shortage of other crops, making them more scarce, and driving the price of those crops up, as well. Just by this logic, one would assume that the market balances out at this point; those farmers that had turned to the more profitable corn industry could then turn back to their original crops and make just as much money producing a more scarce crop.
But, even if that logic doesn't satisfy you, here's a kicker: consider rice, which is grown in paddies that are not competitive with land for corn in any way. The price of rice is up from four years ago, just as the price of corn and barley and just about every other crop in the world is. Rice isn't competitive with corn: according to the indirect land use change model, rice farmers would switch to growing corn because it is more profitable, causing the rise in the price of rice. However, due to the nature of the actual crop, this argument is invalid. Rice is the world's largest food staple, and it is by nature unaffected by ethanol markets.
If you consider the correlation between the price of oil and the price of food that I mentioned earlier, ethanol theoretically decreases the price of food, rather than increasing it. Ethanol breaks dependence on oil by providing a more domestic, sustainable alternative. This, in turn, affects the correlation we previously mentioned, ultimately reducing the cost of processing and cooking food.
My final point: food vs. fuel comes from concerns about rising prices for corn. This is a western, rich man's issue. Indeed, 50% of the world consists of subsistence farmers-- the farmers who worry not about high food prices, but low food prices that leave them poorer than ever. Only if the price of corn or rice or barley or what have you drops do they have a concern. The issue of high corn prices, which is commonly raised on behalf of the parts of the world that can't afford food, is actually benefiting the world's poorest.
The world produces more calories per capita today than it did in 1960. Why is there more hunger than ever? I'd venture to say that it has little to do with ethanol. It has to do with a distribution problem for food around the globe.
For further reading, here are a few related articles, including one about the most recent study regarding food vs fuel:
Myths about ethanol
Food vs Fuel thoughts
Food vs Fuel study
3 comments:
A major argument is that ethanol will help us fight dependency on foreign oil. However, ethanol takes more energy to be formed than it contains. The results from a 2005 study from professors at Cornell and Berkeley show that:
"In terms of energy output compared with energy input for ethanol production, the study found that:
corn requires 29 percent more fossil energy than the fuel produced;
switch grass requires 45 percent more fossil energy than the fuel produced; and
wood biomass requires 57 percent more fossil energy than the fuel produced.
In terms of energy output compared with the energy input for biodiesel production, the study found that:
soybean plants requires 27 percent more fossil energy than the fuel produced, and
sunflower plants requires 118 percent more fossil energy than the fuel produced."
Source:
http://www.news.cornell.edu/stories/july05/ethanol.toocostly.ssl.html
Professor Patzek then studied all the inputs again for growing and preparing the corn and ethanol distribution and so forth, and "All told, he believes that the cumulative energy consumed in corn farming and ethanol production is six times greater than what the end product provides your car engine in terms of power."
Source:
http://www.sciencedaily.com/releases/2005/03/050329132436.htm
Another source with a graphic illustration of this: http://articles.sfgate.com/2005-06-27/news/17378861_1_ethanol-production-fossil-energy-fossil-fuel
In another article from the Harvard International Review, the author wrote that, "if all US corn were to be converted into ethanol, it would provide the nation with only 4 percent of total oil consumption." Also, "To fill the fuel tank of a SUV vehicle with corn ethanol requires a total of 660 pounds of corn or food. This is enough corn to feed two people in a developing country for an entire year. Furthermore, to produce corn ethanol, 46 percent more fossil energy is required to produce a liter of ethanol than than is yielded. Oil therefore must be imported to produce ethanol."
Soruce:
http://hir.harvard.edu/agriculture/corn-ethanol-as-energy
Point about ethanol being an inefficient source of fuel is accurate, however, i want to go at this from another angle. This policy is not only bad for the global rich (West) but for most people. It does hurt the "rich man," the CBO reported in 2009 that, the increased use of ethanol was responsible for 10 to 15 percent of the increase in food prices and that alone costed
it costed US families between $5.5 billion and $8.8 billion in higher grocery bills in 2007.
(http://online.wsj.com/article/SB124389966385274413.html)
However, the higher food prices also hurt the third world, because many of the countries in the third world are net food importers. This means that higher food costs cause inflation and harm the economies of many countries. This is exacerbated by the fact that poor countries spend more on food (food accounts for 10% of the CPI of Europe/US but generally over 50% of the CPI for poor countries) (source is economist article below). For example according to the economist (http://www.economist.com/node/10250420) overall, enormous numbers of the poor—both urban and landless labourers—are net buyers of food, not net sellers. They have already been hard hit...According to IFPRI, the expansion of ethanol and other biofuels could reduce calorie intake by another 4-8% in Africa and 2-5% in Asia by 2020. For some countries, such as Afghanistan and Nigeria, which are only just above subsistence levels, such a fall in living standards could be catastrophic. Also as Nobel laurate in economics, Gary Becker, points out, if food prices rise by one-third, they will reduce living standards in rich countries by about 3%, but in very poor ones by over 20%.
On the economic impact, the problem i have with the original analysis logic about rising prices is that this is caused by a market distortion, and the new equilibrium will have more corn and less of other grains produced. The reason is that the US mandated that (though the E10 blending requirement) that the US will use more ethanol, the market will in fact double from 2009 to 2020 due to government policy. This causes a permanent increase in demand, creating a new equilibrium where the production possibilities curve is shifted so that more corn is produced and less other stuff. While a new equilibrium emerges, price levels are higher.
It also needs to be pointed out that corn based ethanol is not better than oil economically. While (do to subsidies) ethanol appears to cost less than regular gas, when the inefficiency of corn ethanol is taken into account. It takes 1.53 gallons of corn ethanol to get the same impact as a normal gallon of gas. (http://zfacts.com/p/436.html)
To take a practical example today at fuelgaugereport.com, the average price of gas in the US is 3.295 and the cost of a 85 percent ethanol blend is $3.054, however that rises to $4.019 when fuel efficiency is taken into account.
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