Bio-fuels. Is Ethanol the answer to America’s fossil fuel petroleum energy crisis?

Essay 2007 8 Pages

Business economics - Economic Policy



Is Ethanol the answer to America’s fossil fuel petroleum energy crisis?

The United States is in the midst of an energy crisis. The U.S. imports the majority of its fossil fuel petroleum products from overseas. The Department of Energy estimates that by 2010 the U.S. will import 75% of its required transportation fuels (Lauder, 2001). These petroleum-based fuels are not a limitless resource. At this time based on 2005 consumption rates of petroleum products, “the world has 41 years of proven reserves” (Dimotakis, Grober and Lewis, p. 5). Experts state that petroleum based exploration, discoveries and drilling will reach their peak by 2050. Increased awareness of the limits and over dependence on petroleum-based fossil fuels has led to a re-emergence of alternative fuels. The U.S. government has implemented an alternative energy initiative as part of their overall energy policy since the early 1970’s. This new policy came because of the 1973 oil embargo. These alternative energy initiatives have focused primarily on bio-fuel sources. The two leading bio-fuel alternatives to the current petroleum-based fuels are bio-diesel and ethanol. “Driven by environmental, economic, and energy security concerns, the availability of ethanol (E85) is growing nationally” (U.S. Department of Energy, 2006). This evaluation judges if ethanol is the most promising bio-fuel to reduce the United States dependency on fossil fuels economically, practically, technically, and environmentally.

Ethanol is economically promising for several reasons. Production of ethanol or grain alcohol, which currently comes from corn and other agricultural crops, helps the agricultural rural economies (Morris and Hill, 2006). Since ethanol production comes from several agricultural products and is a bio-fuel, it will be a more economical alternative to current gasoline. As oil and gasoline prices continue to rise the financial benefits of ethanol increase. The increased use of ethanol will decrease the dependence on petroleum products of which the majority is imported. Economic impacts will be felt throughout the economy. Farmers, ethanol producers, distributors, business owners, and consumers who use transportation fuels will benefit from increased ethanol usage. Fleet services of niche markets in business and metropolitan cities can see an economic impact. These niche markets include bus fleets, taxis, airport ground fleets, airport luggage carts and national park vehicles. This type of machinery does not see many miles but instead brief stop and go routes. The owners of these vehicles can see a reduction in their overall fuel cost by using ethanol versus gasoline.

However, there are economic obstacles for ethanol to overcome. Since 90% of ethanol comes from corn grain, the price of ethanol can fluctuate erratically based on the price of corn. As a result, the federal government is heavily subsidizing corn growers and ethanol producers by granting tax breaks, exemptions and incentives (Yacobucci, 2007). Since the majority of corn ethanol is grown and produced in the Midwestern U.S., it does not have an extensive delivery infrastructure at this time. The cost to grow, produce and transport ethanol without government subsidies is more expensive than conventional gasoline. Ethanol will become just as economical as gasoline when it is produced and distributed correctly. Until the infrastructure of production and distribution of ethanol moves beyond the Midwestern U.S., its usage and consumption will not justify the financial investment made into its development as an alternative fuel. Although, if oil prices increase above $50 a barrel, ethanol can be competitive as long as corn prices do not increase (Lerner, 2007). Compared to oil prices currently at the $70 a barrel and gasoline prices at the average of $3 a gallon nationwide, ethanol is around $2.25 a gallon (Lerner, 2007).

Corn ethanol is also under scrutiny because of its food versus fuel capability. Since corn and grain are the primary source of ethanol currently and the primary animal feed in the U.S. and increase in corn prices would mean an increase in meat prices. Similarly, the U.S. is the world’s leading producer and exporter of corn. If corn and grain production is channeled away from food production towards fuel production there will be a backlash as seen by Mexican riots in January 2007 “following a nearly 30% price increase for tortillas, the country’s dietary staple (Yacobucci, 2007, p. 6). To counter this, research and development has uncovered other sources of ethanol to reduce the strain on corn growers to increase yields at the expense of other necessary agricultural food crops.

Since the majority of the United States transportation fuel is imported from overseas, the cost of maintaining the security and defense of the production and delivery infrastructure has grown increasingly expensive. Unrest in the oil producing countries has placed an increased economic burden on the U.S. economy by maintaining a high-level of strategic oil reserves and maintaining an adequate military force to be deployed if necessary to the affected region. In addition, oil prices increase daily with more news of further unrest around the oil producing regions. In this regard the Department of Defense according to Dimotakis, Grober, and Lewis (2006) states that “the need to reduce fuel costs, as well as providing a prudent hedge against a foggy future, especially in the Middle East and South America, argue for a reduction in fuel use, in general” (p. v). The department of defense is evaluating the possibility of moving to an alternative fuel ethanol fuel for their light vehicles. Overall, ethanol can assist the economy by reducing the amount of money spent on imported oil from foreign countries, defending the infrastructure of supply routes, and the cost to everyday consumers in the U.S.



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Title: Bio-fuels. Is Ethanol the answer to America’s fossil fuel petroleum energy crisis?