H.L. Mencken once remarked that there is a "well-known solution to every human problem—neat, plausible, and wrong."
That quote comes to mind when considering the vocal group of neoconservatives, agribusiness lobbyists, and politicians that claims that the best way to cut American oil imports, and thereby impoverish the petrostates (and, in theory, reduce terrorism), is to require automakers to manufacture "flex-fuel" cars that can burn motor fuel containing 85 percent ethanol or methanol.
Their rationale is simple: Using more ethanol from corn or other biomass, as well as methanol from coal or other sources, will create competition in the motor-fuel market and depose oil as the main transportation fuel. Oil prices will fall, the petrostates will suffer, and a newly energy-independent United States will zoom back to its position as the world's undisputed superpower. Their rhetoric is so attractive that several members of Congress have introduced legislation that would require automakers to produce flex-fuel cars.
Unfortunately, this idea betrays a near-complete ignorance of the world petroleum business. The ethanol producers and the flex-fuel-car advocates are wrong because their solution replaces only part of the crude-oil barrel and won't reduce demand for that entire barrel in any meaningful way. Here's why.
When it is refined, a barrel of crude yields several different "cuts" that range from light products, such as butane, to heavy products, such as asphalt. Even the best-quality barrel of crude (42 gallons) yields only about 20 gallons of gasoline. Furthermore, certain types of crude oil (such as light sweet) are better suited to gasoline or diesel production than others. The overall point is that even the most technologically advanced oil refineries cannot produce just one product from a barrel of crude—they must produce several, and the market value of those various cuts is constantly changing.
The problem for the ethanol advocates is that there's very little growth in gasoline demand, while the demand for other cuts of the barrel is booming. In short, the corn ethanol producers are making the wrong type of fuel at the wrong time. They are producing fuel that displaces gasoline at a time when gasoline demand—both in the United States and globally—is essentially flat. Meanwhile, demand for the segment of the crude barrel known as middle distillates—primarily diesel fuel and jet fuel—is growing rapidly. And corn ethanol cannot replace diesel or jet fuel, the liquids that propel the vast majority of our commercial transportation machinery.
In June, the Energy Information Administration released its Annual Energy Outlook, which expects domestic demand for diesel fuel to grow about four times faster than that of gasoline through 2015. Looking further out, toward 2030, diesel demand is expected to increase about 14 times faster than that of gasoline. Indeed, by 2030, the EIA expects U.S. diesel consumption to rise by 51 percent over 2006 consumption levels while gasoline use will increase by just 3.6 percent.
In July, the Paris-based International Energy Agency released its medium-term oil market report, which said that "distillates (jet fuel, kerosene, diesel, and other gasoil) have become—and will remain—the main growth drivers of world oil demand." Between 2007 and 2013, the IEA expects distillate demand to increase nearly double while global gasoline demand will grow only slightly.
The surge in diesel demand is due in large part to the ongoing "dieselization" of the European automobile market, as well as continued economic growth in Asia and the United States. This increasing demand for diesel, combined with a global lack of refineries that can produce the type of low-sulfur diesel that is now mandated in the United States and Europe, means that diesel will continue selling for a premium relative to gasoline. And given a chronic shortage of high-quality refining capacity in Europe, that price differential will likely persist for a decade or more to come.
That increasing diesel demand (and the increasing value of diesel fuel) means that U.S. refineries are buying more foreign crude, not less. That's a bitter fact given that cutting dependence on foreign oil has been cited ad nauseam as the justification for the corn ethanol mandates as well as continued federal research funding for the mirage of cellulosic ethanol.
As an executive at a large domestic oil refiner (who asked that his name and company not be disclosed) explained it, "ethanol is making diesel more expensive relative to gasoline because it's expanding the pool of gasoline. But to make diesel, we have to process more crude, which in turn is raising the price of crude." He went on, saying that for some refiners, "gasoline is being thrown into the market as a diesel byproduct."
In other words, ethanol is doing absolutely nothing to reduce overall U.S. oil consumption or imports because refiners have to buy the same amount of crude (or more) in order to meet the demand for products other than gasoline—that is, jet fuel, diesel fuel, fuel oil, asphalt, etc.
The most recent oil import data back up this conclusion. Since 2000 domestic crude-oil production has declined by about 600,000 barrels per day. Meanwhile, domestic corn ethanol production capacity has surged about fivefold. In July, according to the Renewable Fuels Association, U.S. ethanol output stood, coincidentally, at about 600,000 barrels per day. Given those numbers, America's overall oil imports should be flat or only slightly higher, right? After all, corn ethanol boosters claim that their fuel will reduce America's need for foreign oil. But the latest numbers from the Energy Information Administration show no decrease in imports. In fact, it's just the opposite. In July 2000, the United States was importing about 11.6 million barrels of crude oil and petroleum products per day. By July 2008, total imports had increased to about 13 million barrels per day. The same trend holds true when looking only at crude oil imports. In July 2000, crude oil imports were about 9.4 million barrels per day. By July 2008, they had increased to 10.1 million barrels per day.
The punch line here is obvious: The corn ethanol scam cannot, has not, and will not significantly reduce overall oil use or significantly cut oil imports because it only replaces one segment of the crude-oil barrel. Furthermore, all the talk about "cellulosic ethanol," a substance that, in theory, can be profitably produced in commercial quantities from grass, wood chips, or other biomass, is largely misplaced because, like corn ethanol, it will only supplant gasoline.
Unless or until inventors can come up with a substance (or substances) that can replace all of the products that are refined from a barrel of crude oil—from gasoline to naphtha and diesel to asphalt—then the United States, along with every other country on the planet, is going to continue using oil as a primary energy source for decades to come. And that will be true no matter how much corn gets burned up in America's delusional quest for "energy independence."