A Tale of Three Additives (Part II)

Once again, in 2005, the field of fuel additives in the United States opened up to new candidates. And just as quickly, to all appearances, it snapped shut tight again. Abandoning MTBE, refiners — at long last — stampeded to its main rival, ethanol, and there was a rush of publicity, investment and refinery-building.

It would seem that Henry Ford’s original fuel, ethanol — the “populist” additive that could be produced by any average Joe — still standing after rivals fell, finally had its day.

This would seem to be a thing to celebrate, and indeed it was celebrated loudly in many quarters. Most notably it was celebrated by the corn lobby, whose members now stood to reap the windfall so long enjoyed by fossil fuel producers.

President Bush pledged that the United States would produce 35 billion gallons of ethanol annually by 2017 (displacing 15% of the nation’s gasoline consumption), and 60 billion gallons by 2030. And the U.S. Congress piled on subsidies as well, totaling $7 billion annually, according to the OECD.

But others aren’t so impressed with the new leading additive. Studies of the energy inputs needed to produce corn-based ethanol suggest that it yields little net energy on balance, if any at all — and is not a meaningful step toward energy independence.

The U.S. National Academy of Sciences says that expanding corn production and ethanol refineries in the United States will exacerbate local and regional water shortages and lead to increased erosion, sedimentation and nitrogen fertilizer runoff. And it would further endanger marine life, for example, in the expanding oxygen-depleted “dead zone” in the Gulf of Mexico.

A report released by OECD raises concerns that expanded global ethanol production will put pressure on biodiversity if new land is cleared for ethanol crops (including sugarcane in the tropics), and will accelerate the rise in global crop prices if current cropland is converted.

But only a small fraction of corn in consumed directly, of course. If the price of corn rises, it will be felt by consumers mostly in the price of beef and other meats, since half of the current corn crop goes to animal feed.

And it would be felt in the price of processed foods, which depend heavily on high-fructose corn syrup. Already, rising fuel and grain prices are pinching food budgets. Among the poor, this threatens a crisis of malnutrition. Among middle-income consumers, ironically, these trends might produce health benefits if people reduce their consumption of meat and processed foods in favor of locally grown produce.

By late 2007, it already seemed as if the ethanol bubble had burst. The price of ethanol plummeted 57% from its June 2006 high. Orders for new ethanol plants were being canceled, and analysts were predicting a wave of closures and consolidation.

Is the end of the era of ethanol already at hand — so soon after it inherited the mantle from MTBE?

The current slump is clearly not the end of ethanol. Analysts blame the crisis primarily on a distribution bottleneck (in particular, inadequate infrastructure for getting the ethanol from the heartland to the coasts), made more financially precarious by rising corn prices.

Long-term demand in the United States for ethanol seems secure, and it is possible to see the slump as merely growing pains for an important emerging industry.

On the other hand, the slump can also be blamed in large part on herd mentality — financial analysts pegging corn ethanol as “the next big thing,” and financial markets wildly overvaluing it in the stampede away from MTBE.

In fact, although ethanol may be here to stay, now that the hype has died down it seems likely that ethanol will never achieve the dominant status of lead and MTBE.

It is clear that ethanol is no silver bullet that can solve all of the U.S. transportation energy needs, and that relying on it exclusively would be environmentally disastrous. And at the same time, there have never been so many fuel options in development, quite possibly, since the birth of the industry.

The grandfather of all hybrid cars may have been Henry Ford’s Model A, which had a dashboard knob that allowed the engine to switch between gasoline and alcohol.

Today, U.S. drivers have gas/electric hybrids on the road in significant numbers, and many other options in various stages of development and commercialization, ranging from pure ethanol and E85 (a mixture of 85% ethanol and 15% gasoline) to hydrogen, plug-in electric, biodiesel and synthetic gasolines produced by microbes.

Americans are also seeing more creative solutions to their nation’s transportation problems as well, as rent-by-hour cars become more popular, and cities reinvest in public transportation and rethink community planning.

What lessons can be drawn from this survey? First, U.S. regulators have clearly gotten more sophisticated since the days when they allowed lead to be used in gasoline with virtually no oversight.

And at the same time, with the regulatory landscape so much more complex today, it is both increasingly difficult and increasingly urgent for policy-makers to consider the unintended repercussions of their decisions. We should never forget the key lesson of MTBE — what is good for air quality may be bad for water quality.

Ethanol presents challenges even more subtle and more complex, as we weigh climate change, environmental degradation and food prices with effects of ethanol use at the pump and in the tailpipe.

But the lessons to be learned here are not just for regulators. There is a lesson for industry leaders, entrepreneurs — and consumers as well. It is too easy with a copycat, bandwagon mentality for one option to be quickly selected out of a field, and to become the norm.

The winning option is not necessarily chosen on its merits. It could just be the favorite of one or two influential players — DuPont and GM chose leaded gasoline for the nation and the world and later the U.S. auto and oil industries chose MTBE.

EPA was quite sophisticated when it enacted the Clean Air Act Amendments. It did not require a one-size-fits-all solution for the nation, but targeted the areas of the country with air quality problems and presented a whole menu of options that could be used to meet the new standards in those areas, of which MTBE was only one.

The fact that MTBE became so quickly and overwhelmingly the norm can be attributed at least in part to a lack of imagination on the part of industry, and a lack of interest on the part of the American public.

Over the past few years, we have seen a similar tendency for the U.S. fuels industry to come to a quick consensus around ethanol. But in this case, we have seen it backfire.

There are always powerful forces that encourage an industry to settle quickly on one option, be it a gasoline additive, a fuel, or other technology. Look at the herd mentality another way. It makes good sense to have a standardized transportation infrastructure, and no one wants to be the company that invests in a fuel or a technology that becomes obsolete.

But rival technologies can coexist — look at Apple and the PC, or even the four types of fuel sold at many filling stations today (three grades of gasoline, plus diesel).

No one emerging fuel is currently capable of filling all our transportation needs, and we should not be in a rush to narrow the field while so many are in their infancy, any more than overanxious pundits should attempt to project the winner of November’s election so early in the race.

When emerging fuels reach maturity, maybe it won’t be necessary to pick a single winner at all. Maybe in ten years filling stations will be offering biologically synthesized gasoline, switchgrass E85, biodiesel and hydrogen, or a similarly diverse range of options.

Having a plurality of fuel options means consumers will need to become better educated about fuels and more savvy about the vehicles they buy and drive.

But it also makes the transportation sector more robust — less vulnerable to risks from any quarter, and better able to adapt to changing global economic and environmental conditions.

Ethanol will have a leading role to play, and although it won’t be king, as lead and MTBE were, its tenure may be happier and longer in the end.

Editor’s Note: This is Part II of a two-part series. Read Part I here.