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.
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