Thinking About Energy

"Perspective"

05/10/2008

Paul Munnis


I have been thinking about the criticism that America is causing the cost of food to rise by converting corn into ethanol and soybeans into bio-fuel and using both to stretch the energy supply of gasoline and diesel fuel.

I think that we need to think about this even more.

The financial and economic news is that the devaluation of the dollar is driving up commodity prices which is setting off supply speculation on every commodity. I know that corn, wheat, rice, and oil are all commodities and so are rising in price from this currency devaluation which is a government action caused by a need to lower the deficit due to the Iraq War. By devaluing the dollar by 50% the American deficit is reduced by 50% and the inflationary impact is passed on to individuals to solve. Government has been washing its hands on dollar devaluation and it is causing world hunger and high priced oil as a result. There is some recent evidence that the Treasury is intervening now to slow the rate of dollar devaluation.

Our shopping baskets tell us that the cost of food is rising in America. The media is telling us that the cost of food is rising elsewhere setting off food riots and causing some to eat dirt. One such place is Haiti.

In this poorest country in the Western Hemisphere, 80% of the population lives in abject poverty, and natural disasters frequently sweep the nation. Two-thirds of all Haitians depend on the agriculture sector, which consists mainly of small-scale subsistence farming. Following legislative elections in May 2000, fraught with irregularities, international donors - including the US and EU - suspended almost all aid to Haiti. The economy shrank an estimated 1.2% in 2001, 0.9% in 2002, grew 0.4% in 2003, and shrank by 3.5% in 2004. Suspended aid and loan disbursements totaled more than $500 million at the start of 2003. Haiti also suffers from rampant inflation, a lack of investment, and a severe trade deficit. In early 2005 Haiti paid its arrears to the World Bank, paving the way to re-engagement with the Bank. The resumption of aid flows from all donors is alleviating but not ending the nation's bitter economic problems. Civil strife in 2004 combined with extensive damage from flooding in southern Haiti in May 2004 and Tropical Storm Jeanne in northwestern Haiti in September 2004 further impoverished Haiti.

Another such place where far too many hungry people exist is Darfur and Americans are feeling rightly bad about the hunger going unsolved. In the Sudan, the nation that Darfur belongs to, war -- which broke out in the western region of Darfur in 2003 -- has displaced nearly two million people and caused an estimated 200,000 to 400,000 deaths. The UN took command of the Darfur peacekeeping operation from the African Union on 31 December 2007. As of early 2008, peacekeeping troops were struggling to stabilize the situation, which has become increasingly regional in scope, and has brought instability to eastern Chad, and Sudanese incursions into the Central African Republic. Sudan also has faced large refugee influxes from neighboring countries, primarily Ethiopia and Chad. Armed conflict, poor transport infrastructure, and lack of government support have chronically obstructed the provision of humanitarian assistance to affected populations. Restoring large amounts of surplus corn to the U.S. storage system is not going to feed even one hungry mouth in Sudan but it will hurt our oil supply and it will hurt American farm income. The problem in the Sudan region is a lack of peace. One cannot distribute food to this war torn area of the world.

I am thinking that when Brazil converted to the use of ethanol there was no food crisis as a result. They use sugar cane and we use corn and soy-beans and we are converting to prairie grasses and that conversion is well along. I am told that about a three year cycle is needed to establish the prairie grasses then they are tough, durable, and renewable. Already some are into production. Once it comes on then corn and soybeans will be displaced for ethanol production except that the surplus will still be given over to ethanol production for to not do that means that costly fuels must be used to dry and store the corn surplus before it can be stored for animal feed.

I am thinking back to the huge overproduction of grain that America is famous for and also thinking about how it rotted and became feed for rats and field mice. I am thinking about more of it stored in silos waiting for better market prices. I am thinking about the huge farm subsidies we gave people not to grow crops. I am thinking about the fact that now this is going into ethanol and biomass fuel production and is stretching our oil supply. I am thinking about the energy costs of drying grain and storing it for later use. I am thinking about the fact that the by-product of ethanol production is cattle feed. I am thinking that restoring the oversupply of grain to America is not going to feed even one more hungry mouth abroad but is going to reduce farm income and oil supply here in America. I am thinking that the NY Times Editorial calling for Congress to terminate, reduce, or curtail ethanol production is not a well thought out editorial that is based on the mid-west experience. I think it is perpetrating myths about world food production and world hunger that are not the realities on the ground.

As we look at people starving all across the world I am thinking of the refusal of our government or of our businesses to pay for the cost of transportation for our surplus grain to those foreign lands. I don’t see any change in that attitude because of ethanol production. In fact the cost of shipping has risen dramatically and I am also thinking of articles that I read that castigated America for exporting feed grain to the rest of the world and destroying the third world markets for food. The hungry and poor want free food while free market advocates want feed grains privatized for private profit. Many hungry nations have poor quality soil and they can’t fix the problem without fertilizer much of which is an oil refinery byproduct. Irrigation for crops in some barren lands is another key problem although Israel has demonstrated how to obtain good crop yields with a water ration that is carefully applied using drip irrigation methods. I am trying to understand the new farm bill that claims to focus more on world hunger. I understand the following features are a part of the new farm bill:

• Nutrition programs increase by $10.361 billion with appropriate benefit increases that are indexed to the cost of living

• Vital assistance to food banks increased by $1.25 billion

• New funding boosts organic agriculture, fruit and vegetable programs, and local food networks

I am also trying to understand how this feeds the world hungry. They tell me that there are provisions for that in the new far Bill as follows:

• Provides $60 million to purchase food overseas to feed people in need on top of the existing Food for Peace international aid program, along with an evaluation of this change and its effect on U.S. response times

• Reauthorizes the McGovern-Dole International Food for Education and Child Nutrition Program for infant, child, and school nutrition programs in underdeveloped countries and provides an infusion of $84 million in additional funding

But the hunger in Darfur alone eclipses that amount many times over. This seems like slim funding for a big problem.

I am thinking about the huge amount of money that we were sending to the mid-east and now we are using homegrown ethanol and bio-mass fuel in its place. That money is staying home now – going to American farmers in the mid-west instead of to Saudi Arabian and to their oil sheiks. The cost of a barrel of oil is now $120 and climbing and so every barrel of oil that we offset or stretch using bio-mass for stretching the fuel supply is a big savings to our economy. When I think about that $120 per barrel and then do the math I can see that a lot of speculation is going on and it is driving up the price of oil. My calculation is that based on the dollar devaluation then a barrel of oil should have inflated 56% from the bench-mark price of $65 per barrel. That work out to an adjusted price of $101.40 per barrel. The rest of the price increase is speculation and is not justified. That is largely an OPEC problem maybe reflecting reduced oil demand from the US as alternative energy kicks in as well as pure speculative play in the futures market. It is said that China, India and others are also driving up oil demand but at these prices they are incented to develop alternative energy solutions themselves. There are real credibility problems with many of the oil stories I am seeing these days.

I am thinking about the pain of many as we convert from a cheap fuel economy to high priced fuels and the impact of this on businesses across the land. It is driving some folks out of business but they may have the capital to start up a different sort of business unit or to invest in alternative energy.

I am also thinking about the way that wind is coming on, and solar, and the research being done to create cellulose-based grasses that can be converted to bio-mass fuels instead of using corn. I am thinking about the savings on the American deficit as a result. I am thinking about the nice return on investment these suppliers are earning.

I am thinking about all of the unproductive acreage that can be converted to use crops such as prairie grass and how it will convert scrub land to productive land and displace the need for corn and soybeans. I am also thinking that such grasses are not commodities the way that corn and soybeans are and that when it comes on then the cost of the commodity crops will come down once again but not to the former low levels because the farm bill is removing the subsidies for those crops and they are now responding to world prices for commodities and are much more influenced by the devaluation of the dollar than they are by anything else that we can name.

I am thinking that the prairie grasses just get cut like hay, that a couple of crops per year can be harvested and that they don’t need to be replanted annually thus making them a cheap product to produce even with high priced fuel used in agriculture.

I am thinking that we would be fools to give this up because the oil companies are squawking about the impact. But then I realize there are a fair number of fools in Congress who are supported by big oil and to whom they owe allegiance to and so we need to make sure that they do some thinking too about who they need to support if they want to be elected again.

I am thinking that the stock market is so bad under the Bushies that many have pulled out and are looking for a place to invest and I think the local ethanol and bio-diesel plants might be a good investment along with some bonds in Minnesota Light and Commuter Rail transportation. It’s hard to think we are going to scrap these because oil is going to become so cheap once again.

I think that ethanol and bio-mass fuels are here to stay, just as in Brazil, and I am thinking that a flex-fuel engine would sure be nice to have, especially in a hybrid configuration. I am thinking of a guy I know who has a Prius and who gets an average of 44 mpg and his driving includes a lot of open road commuting to and from Rochester. I am thinking of my neighbors who are dumping their SUV’s and replacing them with more fuel efficient vehicles and of the car dealers who are selling them. I am thinking about the next generation hybrids using lithium batteries for storage and can be plugged in overnight to produce an average of 100mpg. All this has my attention. I am wondering if I could convert an old lawnmower to a solar powered model that stores the charge in an on-board battery bank -- maybe using a scrap refrigerator motor to turn the blades. Sounds like a fun summer project for a home garage mechanic that has some time on his hands because the car isn’t going anywhere that is not necessary -- less “honey-do weekends” for adults.

All in all I think that we are on the right track. We need to push more research dollars into the use of alternatives to corn and work out high quality production processes for cellulose plants and materials to be converted to bio-mass fuel. The smaller Ford Ranger trucks formerly built in the Twin Cities will soon be in high demand because they are small, light, and fuel efficient, and I think that Ford is making a huge mistake in closing that plant up in the Twin Cities. We will end up buying Toyota light trucks instead – probably with hybrid engines and lithium batteries in them -- more advantage for Japan. I am convinced that there is enough food in the world to feed people but that it is government(s) that are the problem with world hunger and that those who would help solve the problem need to concentrate on a source of funds to pay to ship the surplus to where it is needed and also to figure out how to do that without harming the incentives to grow food locally.

If I am wrong in some of my facts you should tell me so that I can get my facts straight and think more clearly.

In closing I am thinking that any President of the United States worth his salt would be leading the nation with conservation of energy programs and in working on solving the world hunger crisis.

That leadership is oddly missing in the U.S. today.