Auto Manifesto

May 7, 2008

The Midas Touch – Not Always Good

This is not about the muffler repair chain. This is about the value of commodities when demand increases, specifically it is about ethanol and corn. Corn is at about an all-time high closing at $6.13/bushel today on the Chicago Board of Trade.

Let me illustrate why corn to ethanol is not a scalable solution. The USDA estimates 86 million acres of corn will be planted in 2008. For conversation’s sake, let’s just make it an even 100 million acres.

My back-of-the-envelope calculations (using these conversion factors) show that if all the corn the US produced was turned into Ethanol for automobile use, we’d end up with 27.24 billion gallons of ethanol. Now think of what that would do to food prices and political stability around the world. Nothing good. Not to mention the water and energy that goes into producing ethanol.

Ok, but continuing down this path where does that leave us? Wikipedia shows 34.6 MJ/L for gasoline and 20 MJ/L for ethanol. That means 1 gallon of ethanol contains about 70% of the energy of a gallon of gasoline. So the 27.24 billion gallons of ethanol would equate to about 19 billion gallons of gasoline.

How much gasoline does the US use each year? The EIA figure for 2006 was 388.6 million gallons per day, or almost 142 billion gallons per year. That means if we used all the corn (and then some) grown in 2008 and turned it into ethanol, we can expect it to replace about 13.5% of the gasoline used.

You’ve seen the headlines of food shortages and price increases in many parts of the world. Certainly there are a variety of factors causing this. But on more than one occasion corn-based fuel has been cited as a concern. Right now the amount of corn used for fuel is miniscule, and already we’re seeing price issues.

Irrational markets driven not only by demand but also by projections and fear are putting a huge risk premium on the price of many commodities.

Whenever demand for something increases or potentially increases, the price will increase and in some cases skyrocket. Corn is no exception. There is simply too much demand for, and fear over it.

Corn does not seem to be a scalable solution to our energy problems. In fact, there don’t seem to be many possibilities that offer a scalable silver bullet. The heart of the problem is that the world currently consumes too much energy in proportion to what is able to economically produce, which in turn will cause price increases in the production of every energy source there is.

Go here for more about recent corn price activity:
http://biz.yahoo.com/ap/080403/corn_at_6.html

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