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An even better sentence
"It makes no sense to tax ethanol coming in from friendly countries like Brazil when we do not tax oil imported from countries like Saudi Arabia..."
Or how about:
...Brazil's experience shows that to successfully copy its example, the U.S. may have to make political choices that U.S. politicians have ducked in the past, including raising gasoline taxes, ending government support for crucial agricultural products such as sugar and corn, and opening protected agricultural markets.
Both are from "How Brazil Broke its Oil Habit," The Wall Street Journal, 6 February 2006, p.A9.
Posted by Tyler Cowen on February 6, 2006 at 08:19 AM in Economics | Permalink
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» Cane-Based Ethanol in Brazil from Knowledge Problem
Lynne Kiesling Tyler beat me to mentioning today's WSJ article on cane-based ethanol in Brazil, so I simply refer you to him and his commenters.... [Read More]
Tracked on Feb 6, 2006 12:12:00 PM
Comments
Good morning. I am talking from Brasil, I think WSJ
article reflects the major opinion here in Brasil, for which much of my fellow nationals are proud.
I have a somewaht dissedent view. I agree that alcohol migt be a sensible choice when oil is over 50 dollars per barrel.
But Brasil obliges that all gasoline marketed inside Brasil have to blend 25% of alcohol, in volume. This 25% is not related to international oil prices. And I believe there is a rarely talked about cost in maintenance expenses borne by vehicles owners here in Brasil.
In summary, if alcohol was so good, I think it would not be
necessary to make it compulsory for all vehicles , speacilly
when oil prices are so high.
Like your blog very much.
Posted by: Kochen at Feb 6, 2006 9:29:23 AM
I like the second sentence, and if the first sentence had read "It makes no sense to tax ethanol when we don't tax more environmentally damaging fuels such as oil", I would like it as well. But as written, it grates on me.
First, in trade policy terms, the Brazilian government is not friendly; it is one of the most influential opponents of American trade policies (Mercosur, anyone?), while some accuse the Saudi government of being an American client-state, doing everything it can to help the US manage the price of oil.
Secondly, IMHO, the idea that we should move away from oil because Saudi Arabia is somehow an enemy is one of the stupidest, most counterproductive ideas in politics today. It reminds me too much of the idea that "Germany attacked us in the Great War, so we should impose punitive economic policies that will ensure Germans hate us even more in the future and become more likely to start another, more destructive war." I remember how that turned out, and while there are many compelling environmental reasons for a move away from oil, I fear that doing so would lead to more, not less, violence in the Middle East.
Posted by: DK at Feb 6, 2006 9:32:44 AM
I think ethanol subsidies need to be cut for two reasons. The first is the obvious distortion to the farm and energy markets. The second I think strikes at their real purpose and long term impact:
Ethanol (and hydrogen filling station) subsidies create a pleasant fantasy of a low cost transportation future.
The man on the street thinks the government is working to keep gas prices low. He thinks those future technologies the President outlined in the State of the Union speech are serious attempts to get there.
If we are going to have a free-ish market future in transporation (and I think we are) then we should at least be honest with the population about what that means. It is up to them to figure out what prices will prevail, and what their response will be.
(it boggles my mind that people think a free market in ethanol will be low at the same time a free market in oil is high. supply and demand means ethanol will chase gasoline higher)
Posted by: odograph at Feb 6, 2006 10:02:16 AM
DK,
A more common and sophisticated version of the second argument that you present goes something like this:
US policies that encourage (or don't discourage) oil consumption have played a role in the country consuming a massive 25% of world oil production. In an era of high prices and declining reserves this leads to several undesirable outcomes. This include facilitating support for elements that intend us harm and have the wherewithal to accomplish it (Iran, Venezuela, and other groups that do receive some funding through Saudi Arabia) as well as necessitating US military involvement in the region. The statement that concerns about imported oil amount to claiming Saudi is an enemy are either misinformed or a canard.
I agree with your other points including: “mov(ing) away from oil would lead to more, not less, violence in the Middle East” - if you changed “would” to “could”. However, in either case it is a poor foundation for a US energy policy.
Posted by: Jack at Feb 6, 2006 10:06:25 AM
Well, the Saudi angle strikes at the market/non-market fantasy as well. Remember when prices go up, the President needs to meet with the Saudis and get "promises" about production. This is another veneer on our market system. It allows the consumer to think prices are being managed.
I've talked before in various blogs about what I see as a perceived social contract on gas prices. It isn't that I think there should be such a social contract ... it's that I think it is out there.
And the SOTU and all its follow-on discussions dance around that contract.
Posted by: odograph at Feb 6, 2006 10:17:27 AM
Jack,
The US is 25% of world GDP so I don't see how consumption of 25% of the world's oil is caused by US policy. It has more to do with the fact that we are a very productive country.
Posted by: asiequana at Feb 6, 2006 10:31:59 AM
Jack, are you saying that I am misinformed or using a canard? I am directly addressing the sentence Tyler quoted, which implies that Brazil is in some sense more friendly than Saudi Arabia and that this sense is relevant to our trade policies. I think my point is quite on the mark if we are assessing the merits of that sentence. And yes, I agree that it is a canard, which weakens the original sentence, and which is exactly why the sentence grates on me so much.
My larger point really is that economic policies including trade should be based on rationality rather than on rhetorical tropes about who our "friends" or "enemies" are, regardless of whether Japan or China or Saudi Arabia is the rhetorical enemy-du-jour. And yes, the Wall Street Journal knows better.
Posted by: DK at Feb 6, 2006 10:41:29 AM
It's not that I don't favor an end to agricultural protectionism and a more diversified energy market, but I have had an alcohol-fueled car. Once Americans start getting frustrated because when it won't start on a winter morning -- as it often won't in freaking Brazil, where even the worst winter isn't exactly comparable to Canada's -- they would quickly see the folly of this plan.
Posted by: Cisco at Feb 6, 2006 10:52:04 AM
DK, No intention to call you anything. My apologies if it appeared that way. I agree with your points.
asiequana, Yes, I am aware that the US GDP is the same portion of global production as oil consumption - 25%. But there is no requirement that these two be linked. I am sure that a global comparision would should that some countries use a much lower portion of oil (ie. Japan) and that in general economically developed countries use a lower percentage of global oil than their portion of global production.
In any case, my claim is not that the US should not be using a lot of oil. Instead, I said that US policies encourage a higher level of use than needed and that the impacts of this are negative. One of the reasons that I included the 25% figure was to illustrate the impact of US consumption of global oil markets, although I did not develop this point. If the US were to reduce consumption by 10%, this would knock the bottom out of global prices and the impact of transfer of funds to dangerous parties.
Posted by: Jack at Feb 6, 2006 10:54:09 AM
cool, thanks, Jack. I would agree BTW that "imported oil" is a real concern, although I am more concerned about the "oil" part that the "imported" part.
I read a similar WSJ article last week -- perhaps they are doing a series on ethanol? -- and it did have a lot of interesting points, although it was better as energy policy than as foreign policy.
The big thing I don't get about ethanol is whether Brazilian sugar-derived ethanol has a better energy balance than US corn-derived ethanol. I've heard that producing ethanol from corn uses more energy (for tractors, fermentation, and distilling) than the resulting ethanol contains. I've also heard that sugar is a really difficult crop to grow and harvest (hence the history of slavery in the sugar industry), but I've never heard a convincing explanation of the total energy balance including sugar growing, fermentation, and processing. Does anyone know how that works out?
Posted by: DK at Feb 6, 2006 11:05:15 AM
Why does everyone worry about using energy to produce ethanol? If it takes 100 Joules of coal energy to produce 90 Joules of liquid fuel, that is a net GAIN, because you can use ethanol in a car, and you can't with coal (or nuclear, wind, solar...).
The problem is if you are burning oil to get the energy you use. That is just stupid, and can only happen if the government is involved.
And the comments about sugar cane being hard to grow are just wrong. For centuries it was maintained that cutting cane was too hot and hard for europeans, so dark skinned slaves were needed. But as soon as slaves were unavailable (for example, in Australia) european men, paid by the tonne, proved perfectly capable of doing the work. These days of course it is all done by machines and the question is irrelevant.
Posted by: Patrick at Feb 6, 2006 4:54:38 PM
Sugar cane is BY FAR the most energy dense known crop. It produces about 6x the energy per cultivated acre that corn does. You can wikipedia Ethanol Brazil and get more info.
Posted by: michael vassar at Feb 6, 2006 7:49:58 PM
I've tried looking for infomation on ethanol now and then and it's a very frustrating experience. But none the less, here are some things about ethanol I've discovered that appear to be true:
1. One liter of ethanol has 68% the energy of a liter of gasoline, meaning that unless people are decieved or compelled they will probably want to pay less for ethanol blends than standard gasoline.
2. Ethanol is added to all or most blends of modern gasoline in very small amounts as an anti knock agent.
3. No country burns large amounts of ethanol in cars without government intervention.
4. Despite Australia's huge agricultural sector, including vast amounts of sugar cane production, and a much higher tax on gasoline than in the United States, no one seems to want to produce ethanol for fuel without government subsidies.
5. In general people and companies don't think energy in vs. energy out ratios are important, they think money is important.
6. My head hurts when people talk about "cellulistic" ethanol.
Posted by: Ronald Brak at Feb 6, 2006 9:28:30 PM
Try algae!
Posted by: mickslam at Feb 6, 2006 10:05:15 PM
Thanks Michael Vasser for your really succinct and helpful answer!
Patrick, a 90% efficiency for converting coal to liquid fuel would be miraculous. But that won't save corn ethanol -- especially in that case, it will be cheaper to put your super liquid fuel directly in cars rather than putting it in tractors to harvest corn to make ethanol for cars. As you said, that "can only happen if the government is involved."
Ronald, great points. But Re #5, real people do care about energy balances, for simple and monetary reasons. First, saying a technology has a bad energy balance is a way of proving that it is unprofitable across all possible market conditions in the short run. For example, there are (extreme) shifts in the oil supply and energy demand curves which could make solar energy a cost effective substitute for oil (in power plants if not in cars). If corn ethanol has a negative energy balance, then even infinite shifts in those curves would not make unsubsidized corn ethanol profitable.
Second, energy balances may affect whether a technology has any hope of becoming profitable in the future. If the energy cost of moving the corn to the silo is too high, then no amount of government investment will ever make corn ethanol cost effective, short of genetically engineering the corn to walk itself to the ethanol plant.
Let's note exactly what's at stake here -- the point of the original article is that the U.S. might want to consider applying the Brazilian government's strategy of promoting an ethanol transition. I think that would be a bad economic policy, but I'd like to know whether it would be the equivalent of spending tax dollars on a perpetual motion machine, or whether (like hot fusion and mars missions) it is something that could theoretically be possible if the government doesn't screw it up as badly as it usually screws things up.
Posted by: DK at Feb 6, 2006 11:44:40 PM
DK: I'm no fan of ethanol, but your logic fails.
Do you eat meat? The production of meat involves huge energy loss, but it's gain for the meat eater is that it is a very concentrated source of energy.
If I want to launch the space shuttle, I don't really care about how much energy was spent making the fuels and putting them in the tanks. I am really, REALLY concerned about the amount of thrust I can generate from a given weight & volume of fuel.
We run trains, tractors and trucks on diesel because they are large enough that the extra engine weight needed to operate at the higher combustion temperature allows effective use of the energy.
But airplains use jet fuel.
Most fuel cell technologies seem to me to have as their primary benefit the fact that the worst of the pollution occurs during cell recharging. This is "good" because it means that pollution can be moved to more politically acceptable locations than urban highways.
Comparing ethanol to gas as direct substitutes requires considering issues of land use, water use, processing, transportation (pre- and post-processing), and political risk as well as direct applicability.
Posted by: Nathan Zook at Feb 7, 2006 9:24:05 AM
Jack,
Yes Japan is a more efficent user of oil. But it is only because they have a more concentrated population, more than 10 times as concentrated. Hence transportation costs are lower. Japan also generates more of it's electricity from nuclear power than we do.
If the US is 25% of world GDP and consumes 25% of the oil then we are average in terms of efficiency. So US energy policy doesn't appear to distort consumption in the US vs. ROW.
Posted by: asiequana at Feb 7, 2006 1:22:17 PM
Japans populations is a lot more concentrated than in the U.S. but their cars are also smaller and more fuel efficent on average than the U.S. And Australia with the most dispersed population in the first world still averages better fuel efficency than the U.S., so we can't just look at population concentration. (It is interesting to note however that of the three countries gasoline is most expensive in Japan and cheapest in the U.S.) And if we talk about efficiecy in the technical sense of ratio of output to input of a system I don't think we can say the U.S. is average in efficiency. I think we'd have to look at a lot of different things to get a countries general efficency and that could be quite difficult. It's easy to look at the average fuel efficency of cars but when looking at oil consumption as a whole it gets more confusing. Using PPP Americans are about 22% richer than Australians but use about 60% more oil per person with Australia using about $2.40 worth of oil a day per person while the U.S. uses about $4 a day per person. And to further complicate things Australia has a warmer climate which means less heating costs, but its agricultural and mining sectors are a much larger part of its economy and they both tend to be large consumers of oil.
Posted by: Ronald Brak at Feb 7, 2006 8:18:54 PM
The discussions about energy output of ethanol vs. input gas is mind numbing. However, reducing trade barriers is pretty simple. Why not just drop trade barriers for Brazillian ethanol as originally suggested?
If the Brazillians cannot make money on it, then they will eventually do something different. But if they are making ethanol at $1.00 per gallon, and we are paying $2.50 at the pump for gasoline, then why not let the market work its magic?
JBP
Posted by: John Powers at Feb 8, 2006 3:31:40 PM
If anyone wants to know the current price of ethanol, it was about three dollars a gallon for industrial use in the U.S. last year. When adjusted for its lower energy content, the ethanol energy equivalent of one gallon of gasoline costs about $4.40. This figure would presumably be even higher without subsidies.
I've tried to find reliable prices for ethanol in Brazil and the best I can come up with is an example of the price difference between ethanol and gasoline. Apparently it costs Gildo Ferreia $29 to fill up his car with Ethanol compared to $36 to fill up on gasoline. Allowing for ethanol's lower energy content this means that ethanol is about 18% more expensive than gasoline in Brazil.
Posted by: Ronald Brak at Feb 8, 2006 7:39:46 PM
Alternatively, if one actually wants to know the wholesale cost of fuel ethanol it is posted live here
http://www.ethanolmarket.com/fuelethanol.html
It is between $2.30 to $2.50 per gallon, which is not $3.00 per gallon. It tends to approach a cost of a equivalent gallon of gasoline, when adjusted for fuel value and tax breaks.
JBP
Posted by: John Powers at Feb 9, 2006 9:09:39 AM
Thanks for the link JBP. I guess my source was unreliable, (I got it by googling "ethanol price") or industrial ethanol has higher standards for quality or is not subsidised.
Posted by: Ronald Brak at Feb 9, 2006 6:40:58 PM
I did some more sums, this time on Brazilian ethanol vs. Australian petrol. The product cost of one litre of gasoline in Australia, before any taxes or distribution costs, is roughly 44 U.S. cents. One litre of Brazilian ethanol costs roughly 36.5 cents, but has less energy. The ethanol energy equivalent of one litre of gasoline costs about 53 cents, which is roughly 20% more. And although ethanol will be more expensive to transport and distribute because of its bulk, when you consider the environmental benefits of Brazilian ethanol that’s not such a bad deal.
Posted by: Ronald Brak at Feb 10, 2006 11:36:24 PM
Ronald,
Where did you get the cost per liter of Brazilian Ethanol?
JBP
Posted by: John Powers at Feb 11, 2006 5:47:05 PM
These guys have it at 11 pence per liter.
http://www.dft.gov.uk/stellent/groups/dft_roads/documents/page/dft_roads_024054-06.hcsp
Or about 16 cents per liter, if am reading this right.
JBP
Posted by: John Powers at Feb 11, 2006 5:55:32 PM
