Return to feature: The Battle Between Food and Fuel

ethanolgold.jpg Credit: Rasmus Lystrup

Industry is transforming American corn into ethanol at an increasingly feverish pace.

“Recently it’s been a gold rush mentality,” said Dan Basse, president of AgResource, an agricultural economics firm in Chicago. “There’s really never been a structural change in the landscape of demand like this before.”

Biofuels—a category that includes a wide range of fuels made by exploiting the energy stored by plants—first received serious consideration in the U.S. in the 1970s, when an oil crisis prompted officials to look for fuel sources beyond petroleum. To encourage production, the federal government offered subsidies for ethanol, which is made by fermenting the carbohydrates in crops, such as corn or sugarcane.

“That subsidy permitted the industry to survive and grow,” said Wallace Tyner, an agricultural economist at Purdue University. “But today, because oil prices are so high, ethanol is viable without the subsidy. Ethanol prices have gone through the roof. Today it’s a very profitable industry.”

Ethanol, which is usually mixed into gasoline, currently makes up 1 to 2 percent of the nation’s supply of transportation fuel. Despite its relatively minimal displacement of fossil fuels, ethanol already consumes a substantial amount of the U.S. corn crop—nearly 13 percent in 2005—making ethanol production the third largest market for the nation’s corn, behind livestock feed and exports, a Renewable Fuels Association report said.

The price of oil has been advancing much faster than the price of grains being used to make biofuel. Ten years ago, a barrel of crude oil bought 4.5 bushels of corn. Today, it buys 34. The higher oil prices soar relative to crop prices, the more economic sense it makes to turn those crops into fuel.

The market’s enthusiasm for the fuel is evident in the rapid pace at which energy companies are constructing new ethanol refineries. In January 2005, there were 81 ethanol distilleries in the U.S. A year later, there were 95, with 31 more under construction.

Originally published August 29, 2006

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