Switching to snake oil

The plan that President Bush unveiled in his State of the Union Address to cut gasoline consumption by 20% over the next 10 years is so shot through with loopholes, exceptions, and escape clauses that it’s impossible to say what would happen to gasoline consumption were Congress to vote his plan into law. That’s probably a good thing, because without the politically convenient fine print, the president’s plan would almost certainly send fuel prices shooting through the roof.

Cutting oil consumption in any significant manner means increased reliance on ethanol and other biofuels because they are easily the most cost-competitive alternative to gasoline on the market. Accordingly, it’s worth noting that the president’s own Department of Agriculture reports that ethanol costs about $2.53 per gallon to produce – even with the subsidies. Without them, economist Doug Koplow calculates that production costs would be at least $1 per gallon higher.
Accordingly, the president’s plan would increase fuel prices because gasoline costs only about half what ethanol costs on a Btu basis in wholesale markets.

Government support is unlikely to bring corn ethanol costs down because it is the very definition of a mature technology. Alas, the manufacturing costs associated with producing 200 proof grain alcohol have proven fairly fixed over time.

Cellulosic ethanol, however, is an emerging technology, so costs might well come down in the future. But they have a long ways to go. The US Energy Information Administration estimates that the capital costs associated with building cellulosic ethanol processing plants are five times greater than they are for corn ethanol facilities, which have capital costs that average $1.50 per gallon according to the US Department of Agriculture. Accordingly, cellulosic ethanol would cost $7.50 per gallon using state of the art technology – and that’s before we even get to the price of the feedstock itself.

The above analysis probably explains the fine print. Most notably, the president proposes to give three separate cabinet secretaries the authority to kill the entire plan – in whole or in part – should the costs associated with living under his “20-by-10″ initiative ever get too politically troublesome. This is like making a New Year resolution to lose weight, but giving yourself an escape clause that explicitly gives you the right to waive the resolution should you ever grow tired of the diet.

Guardian