TORONTO -- To supporters, ethanol is a wonder fuel - clean,
renewable and cheap.
Well, scratch cheap from the list of attributes.
Historically, it is true that ethanol has been less
expensive than gasoline. But not this year. Ethanol is now on
the verge of becoming the more expensive fuel, based on recent
benchmark New York Harbor prices.
Blame it on corn, the ingredient of choice for making
ethanol in North America. Towering corn stalks typically
dominate the midsummer landscape across the farm belt, but not
this year, as a devastating drought threatens to wipe out as
much as a quarter of the US corn crop.
Ontario officials say 10% to 20% of the province's crop may
That has sent the corn futures soaring to near-record highs
in recent weeks, pushing up the price of everything it is used
for, including ethanol and animal feed, and creating havoc
throughout the global food chain.
The price spike is also raising some awkward questions about
the wisdom of Canadian and US rules that require refiners to
blend ethanol into their gasoline.
If there is not enough corn to go around, where should it go
- food, feed or fuel?
Roughly 40% of the US corn crop now goes to ethanol, and the
share increases every year, amplifying price pressures when the
market is tight. The rest of the US crop goes to food, animal
feed and various industrial uses.
And because the US is a major global corn exporter, the
drought is making food more expensive everywhere.
Barack Obama is under pressure to scrap the ethanol mandate
in the face of the extreme conditions - the worst to hit the
farm belt since the early 1950s. Cattle ranchers, poultry
producers and food producers have all asked the US Environmental Protection Agency to
suspend the mandate until corn prices ease.
Similarly, the Food and Agriculture Organization of the
United Nations recently appealed to the Obama administration
for relief after the agency's food index shot up 6% in
An immediate, temporary suspension of that mandate
would give some respite to the market and allow more of the
crop to be channelled toward food and feed uses, the
FAO's Brazilian director-general, Jose Graziano da Silva,
pleaded in a recent opinion piece in the Financial Times.
Reaction has been surprisingly muted in Canada, where a
two-year-old federal mandate requires that refiners blend at
least 5% renewable fuel into gasoline supplies. Several
provinces impose additional regional mandates, including
Ontario and British Columbia. The US imposed a 10% mandate five
The Canadian ethanol industry is already playing
defense, insisting that high energy prices, not diversion of
corn to ethanol plants, are causing food prices to spike.
In a statement, the Canadian Renewable Fuels Association
said cutting ethanol production would not meaningfully
lower food prices or alleviate drought concerns.
The federal government has offered two main reasons for the
ethanol mandate: meeting the country's greenhouse-gas reduction
targets and making Canada a clean energy leader.
The mandate has spawned a thriving domestic industry, which
now counts roughly 20 ethanol plants, producing some 2.2
billion liters/year. That's enough to meet roughly 85% of the
Canadian refineries get the rest from the United States and
are now the largest foreign buyer of US ethanol.
So Canada is at least indirectly contributing to the global
supply crunch for corn, identified by the UN.
And while it is true that ethanol and other biofuels curb greenhouse-gas
emissions, it is a benefit that comes at a steep price to
Ottawa and the provinces generously subsidize the industry
to the tune of roughly $250 million/year, making ethanol one of
Ottawa's priciest greenhouse-gas reduction schemes going.
If there is a more efficient way to lower greenhouse gases,
Ottawa and the provinces should do it.
And if ethanol truly is the answer to making energy less
expensive and more sustainable - as the industry insists - then
the product should stand on its own in the market, without
subsidies or mandates.
The push for ethanol has always been good
politics. But in a world of scarcity and steep prices, it is no
longer an obvious policy winner.
The Globe and Mail (via Dow Jones