Wednesday, May 7, 2008

My suspicious nature

By Ed Smallwood

There’s something wrong. Something doesn’t smell right. I’m not talking about all of the things that are wrong about the world right now. I’m not even talking about the obvious things that are wrong. I’m talking about the current food shortage.

I remember when California started having rolling-blackouts back in 2000. I had been thinking a couple of months prior that we had invented a whole lot of consumer electronic devices, and a whole lot of new computer systems for business, and hadn’t built many new power plants. It seemed logical that we would have to start to do something about the increased use of electricity or we would start having problems. Miraculously, the California Independent System Operator (ISO) starts telling us that we would have to start conserving power because we didn’t have enough. We would have to face the possibility of rolling-blackouts if we didn’t. Then they started happening. What a coincidence! We were using too much power! I remember lying next to my baby daughter while she napped in the middle of one of these rolling-blackouts, thinking about how this could be happening in one of the most advanced countries in the world.

The problem was, it wasn’t true. It was true that California hadn’t been building the power plants, but other states and other countries, such as Canada had. California had been hooking its power grid to the other sources, and in fact, had the power. The problem was that companies such as Enron were fraudulently shipping the power out of the state of California to pump up the costs and make a bundle, part of the scheme that forced them into bankruptcy when it collapsed.

Now flash forward 7 years. I’d been reading a book called Plan B 2.0 by Lester Brown. One of the points he makes is that the plans on using corn-based ethanol as fuel will be putting our food into our cars instead of our mouths. This may not be a good idea over the long term. A few months later, as oil goes over $100 per barrel, gasoline starts flirting with $4 per gallon, and ethanol starts making economic sense, the cost of rice starts increasing. Rice starts being rationed. Congress starts to debate the logic of creating distilleries to produce ethanol out of corn, and in fact, seriously considers a moratorium on the building of these distilleries.

Just a second here. Something seems wrong—really wrong. Could the production of corn-based ethanol really be causing these food shortages? Or is someone trying to take advantage of us again? My suspicious nature suspects the latter.

Here are my thoughts. The oil industry has been raking in record profits the last couple of years—profits never before seen in any industry. Single companies such as Exxon Mobil have been making money in amounts that have never been seen in all of recorded history except in government revenues. And they are desperate to make sure nothing changes. Nothing.

There are some problems with this. Change is inevitable. Hubbard predicts that we have reached peak oil production. Production costs will continue to increase from this point out, cutting into oil company profits. That’s a given. The oil companies want to minimize this by drilling in ANWAR and off the coast of California, and by forcing Saudi Arabia to produce more oil.

Are we sure Saudi Arabia has the oil to produce? Hubbard predicted that they would hit their oil peak about a year ago, and that they would reduce their output as a result. Saudi Arabia has refused to tell us what their reserves are for decades. We don’t know if they can increase production. ANWAR has enough oil in it to fuel the U.S. for a few days if there was no other source of oil in the world. Days, not years. Drilling there is not going to save us. But it is business as usual, which is what is most comfortable for people who drill for oil, which includes the President, by the way.

So how does this affect the food crisis? The main difficulty right now is that rice production in several countries, including Australia and Myanmar, has been hit hard by droughts and floods. The rice that is being rationed here in the U.S. is not domestically grown, it is imported. U.S. rice and corn production have hardly been affected. However, ethanol produced from corn does pose a threat to gasoline use, and by extension, the bottom line of oil companies.

However, we have only just begun to build most of these distilleries. Our domestic use of corn to produce ethanol is barely begun. How is this affecting corn use? A little bit, perhaps, but I doubt all that much.

Unless you are driving a flex-fuel car built here in the U.S., you aren’t using much ethanol in your tank anyway. Most cars can’t tolerate more than 20% ethanol, and more than about 5% cuts their fuel economy. Flex-fuel cars can handle up to 85% ethanol, but you know if you’re using this fuel. It’s clearly marked as E85 at the very few stations that sell it.

Most of the increase we have seen in food prices at the market is because it is more expensive to transport the food to the market—the result of higher fuel costs, not the diversion of food into fuel at this point.

There is absolutely no doubt that as time goes on we will want to stop using corn to make ethanol. We cannot replace oil with corn based ethanol—we don’t grow enough corn and we never will. However, I don’t think that this is what the oil companies fear. What they are afraid of is that these same distilleries will work just fine in the production of cellulosic ethanol. This is currently not economically viable—the enzymes needed to turn cellulose into sugar for the yeast to consume are too expensive right now, but this is likely to change. As gasoline prices increase, the cost of those enzymes becomes less of an issue.

The key is that these oil companies must stop you from doing anything different. They must make sure you have no options except to buy their expensive gasoline, and they must force others to sell them oil at a reasonable rate. Anything that disrupts this must be stopped at all costs, and cellulosic ethanol could be a disruptive technology.

I strongly believe that this food shortage is being hyped as a way to stop ethanol before it gets a chance to affect gas prices. I am skeptical of the media reports, and very skeptical of Congressional Representatives getting up and trying to put a moratorium on distillery building.

I fully agree that corn-based ethanol is not a long term solution to oil, and I will cover my thoughts on long term solutions in a future post. However, it makes sense as a short-term solution as better solutions are being worked on.

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