Saturday, January 5, 2008

ADM Carbon Sequestration

Archer Daniels Midland (ADM) announced an ambitious project yesterday to further improve the net carbon balance in ethanol production. At its plant in Decatur Illinois, the company will spend $85 million including money from the Department of Energy to pump carbon dioxide released during the production of ethanol into an underground sandstone formation that will store 1 million tons of carbon dioxide over a three year period. This would be particularly important for ethanol plants that heat their fermentors using coal rather than natural gas. The reason is that coal is a much cheaper and less volatile form of energy while natural gas has seen a strong surge in prices over the past year. On the flip side, ethanol production in a natural gas powered ethanol plant leads to a reduction of 16 - 20% greenhouse gas emissions over gasoline while coal powered plants only see a reduction of about 3 - 5% (National Geographic Oct. 2007 Issue). So if a company could reduce or eliminate the emission of GHGs during ethanol production, a cheap form of energy (coal) would become a reasonable alternative. This is, of course, if the process can be made economically viable, which is hard to tell at this point. ADM hopes that the procedure will prove to be a benefit to their plant and serve as a model for all industries, not just the ethanol industry, that carbon sequestration works. I guess we will just have to wait and see since the results won't be available until 2012.

Friday, January 4, 2008

$100 Oil

With oil reaching $100 per barrel, the entire energy market has seen reverberations. Most would agree that an ideal situation in the future will be one in which we can uncouple the oil markets from the ethanol and corn markets but right now that simply can not be done. Some of the growing pains seen in the ethanol and ag markets in the past year are a direct result of traders, such as those on the Chicago Board of Trade (CBOT), trying to find a level at which corn is priced correctly relative to ethanol relative to oil. The only way to uncouple this phenomenon is to transition towards an ethanol industry built on corn but made of cellulosic feedstocks that don't impact the grain markets. However, with oil, corn, and ethanol tied together, their prices are guaranteed to move in tandem.

This fact was pointed out in the Des Moines Register's article "Crop, ethanol prices mirror oil's rise," and can be linked to by following the link shown below.

The article points out that as oil has approached $100 a barrel in recent days, ethanol has moved up 22 cents per gallon on the CBOT to $2.22 per gallon and corn prices have continued to rise; reaching $4.66 per bushel on Thursday. Many of my friends would clamor to claim fowl against the ethanol industry or the corn farmers for the record profits that they must be making with these amazing new prices. However, the ethanol plants are only averaging around 3.5 cents per gallon of ethanol produced because of their higher input costs (corn). Similarly, farmers should not be made out to be the culprits in some kind of price write-up scheme. There input prices to grow the corn, such as seed and fertilizer have also reached record levels this year, which serves to negate much if not all of the additional profits the farmers might be seeing. Unfortunately, baring the introduction of a new feedstock, such as switchgrass, or the removal of oil's volatility from the energy markets this new scenario of oil, ethanol, and corn prices moving together will probably be something the industries and consumers must be ready to deal with for quite some time to come.

Below is DTN's calculation for their hypothetical South Dakota ethanol plant with input costs calculated.

Note: The above green line is the net income seen for E100 per gallon, while the net profit is around 3.6 cents per gallon.

Thursday, January 3, 2008

Worldwide Biomass

Looking towards the future of a global renewable fuels market, we need to have only one word in mind... biomass. As technology improves, processing will eventually switch from sugars, such as corn or sugar cane, to plant material that is harder to break down, such as lignin and cellulose. While it is imperative that we are watchful not to do more harm than good by, for example, reducing rainforest area to process into biofuels, there is a large potential for developing countries to take part in this effort because of their biomass concentration. Below is an interesting picture to illustrate that fact.
With the correct implementation of conservation and re-planting techniques, these areas could potentially be a great source of revenue. Either way, it is important in this period of extreme flux in our energy and agricultural systems that we pay attention to what may lie ahead so that we can decide with a clear mind and clear conscious what path we should take.

Wednesday, January 2, 2008

Ethanol: At What Cost?

A common piece of conversation surrounding ethanol isn't energy security, or the potential environmental benefits, but what ethanol will mean to the consumer. Questions like, at what price will filling up on E10 or E85 be more costly to me than purchasing regular unleaded gasoline? Although I think that looking only at ethanol's price to determine whether to fill up with it is to ignore the benefits that are unable to be calculated, such as a decrease in geo-political tensions due to the decrease in oil imports, or the decrease of greenhouse gases into the environment, but I also agree with these people that consumers will wait until retailers price ethanol correctly.

This discussion has become more interesting recently when oil prices rocketed up to nearly $100 per barrel, which saw a jump in gasoline prices. A similar jump in ethanol inventories allowed ethanol to be priced less than gasoline for the first time and retailers jumped at the opportunity to blend more ethanol into their gasoline. But now that prices in both sectors are beginning to stabilize, there has to be a way to track these prices to see whether it is worth it to fill up.

By following the link below, you will find an easy way to input the price of unleaded gasoline (with an 89 octane rating so as to match the E10 blended octane number), that will be responsive to local gasoline pricing.

I've found that many websites will calculate the prices for E10 and E85 based on the price of regular 87 octane gasoline, which is a different product all together and misleading since the price will be lower due to lower potential engine performance.

One interesting thing found when using the calculator above was that the current price of E10 is priced correctly (approximately 10 cents per gallon cheaper and in some cases 12 cents per gallon cheaper than gasoline). Again, this will depend on region, but assuming that regular gasoline is priced at $3.03 per gallon, E10 should be priced at least 8 cents per gallon cheaper or $2.95 per gallon to be an equivalent source of energy. E85 should be priced at least 69 cents per gallon cheaper, or $2.34 per gallon in order to be as cost effective as unleaded gasoline. Keep in mind that the current price of gasoline at $3.03 is regional and subject to change in different parts of the US.
While E10 is priced approximately 10 cents per gallon cheaper, it will remain a better purchase. E85, for the most part, has been sold for $2.45 per gallon (according to AAA's website at, and so it is not economical. This is the case for two reasons -- the demand is simply not there due to the lack of flex fuel vehicles and so it is still a "boutique fuel" that comes at a high infrastructure cost to the gas station. The second reason in simply that the retailer wants to make a profit on the fuel. Current E100 rack prices are at $2.21 per gallon and so anything priced above that will be profit for the retailer. Unfortunately, unless the gasoline prices take off towards much higher values, it is reasonable to say that ethanol and gasoline prices will probably trend together. In other words, the costs will stay consistently within the value recalculated for their energy density. As we saw above, E10 is currently the better buy but retailers should adjust their E85 prices so that consumers are more enticed to buy the fuel.