Charlie Neibergall  /  AP file
Steve Duenow fills his truck with a E85 fuel in St. Ansgar, Iowa. A corn and soybean farmer, Duenow sees the value in buying a flex- fuel truck that can burn regular gas, 10 percent ethanol or the newest renewable fuel, E85 -- a blend of 85 percent grain alcohol distilled from corn and 15 percent gas.
updated 5/19/2006 2:13:05 PM ET 2006-05-19T18:13:05

With high gas prices making alternative fuels increasingly attractive, no alternative fuel has received as much attention as ethanol. Some hail the fuel, which can be derived from plants including corn, wheat, barley and sugarcane, as a savior of American energy policy, while others see it as a fad popularized by its heavily subsidized corporate backers.

The reality is complex. Though still a tiny industry compared to gas, ethanol could become a more prominent part of the U.S. and world fuel supply in coming years.

Still, as ethanol's public profile rises, there's plenty of misinformation swirling around and a host of questions. What exactly is ethanol? How is it made and used? And is it really a viable alternative to gas? Here's what you need to know now.

What exactly is ethanol?
The fuel is derived from plants through a fairly straightforward process. In one common method Corn, is first ground into a fine powder, mixed with water, and then heated. An enzyme is then added to convert the mixture into sugars before yeast is added to ferment it. The resulting liquid, called "beer," is about 10% alcohol. A distillation process then separates the alcohol from the rest of the mixture before the remaining water is removed. The result is essentially pure alcohol. A small amount of gas is added to render the liquid undrinkable. Then the fuel can be used by itself or as a supplement to gasoline to power cars.

Ethanol has three advantages, at least in theory: It's renewable, it can be domestically produced, and it burns cleaner than gas. The world's largest producers of ethanol are the U.S., which makes it primarily from corn, and Brazil, which mashes the stuff out of sugarcane.

Beyond high gas prices, why is everyone talking about ethanol?
It's becoming an increasingly important part of the fuel supply, and has the potential to become still more crucial. President George W. Bush and members of Congress have expressed support for ethanol use. And this spring, refiners in parts of Texas and the Northeast have been replacing a gasoline additive called MTBE (for methyl tertiary-butyl ether) with ethanol. MTBE, a chemical used to oxygenate fuel, can contaminate drinking water. And Ethanol which does not present the same danger, can serve the same purpose in fuel.

That's not all. The 2005 energy bill requires that the U.S. boost its ethanol production to 7.5 billion gallons by 2012, up from about 4 billion in 2005. This sounds like a whole lot of ethanol, but bear in mind, last year the U.S. slurped up almost 140 billion gallons of gas.

Are there any problems with ethanol?
Oh, yes. Ethanol can't travel in pipelines along with gasoline, because it picks up excess water and impurities. As a result, ethanol needs to be transported by trucks, trains, or barges, which is more expensive and complicated than sending it down a pipeline. As refiners switched to ethanol this spring, the change in transport needs has likely contributed to the rise in gas prices. Some experts argue that the U. S. doesn't have adequate infrastructure for wide ethanol use.

Also, ethanol contains less energy than gas. That means drivers have to make more frequent trips to the pump.

Doesn't producing ethanol on a large scale use a great deal of energy?
Yes. Some ethanol skeptics have even argued that the process involved in growing grain and then transforming it into ethanol requires more energy from fossil fuels than ethanol generates. In other words, they say the whole movement is a farce.

There's no absolute consensus in the scientific community, but that argument is losing strength. Michael Wang, a scientist at the Energy Department-funded Argonne National Laboratory for Transportation Research, says "The energy used for each unit of ethanol produced has been reduced by about half [since 1980]." Now, Wang says, the delivery of 1 million British thermal units of ethanol uses 0.74 million BTUs of fossil fuels. (That does not include the solar energy -- the sun shining -- used in growing corn.) By contrast, he finds that the delivery of 1 million BTUs of gasoline requires 1.23 million BTU of fossil fuels.

Producing ethanol could get more efficient soon as new technologies help farmers get more corn per acre of land and allow ethanol producers to get more of the fuel from the same amount of corn. The companies developing new corn technologies include chemical giant Dupont and Monsanto, which sells genetically modified seeds as well as chemicals for protecting crops.

So where can I find ethanol?
There's a good chance you're using it already. It's mixed into gas in many regions of the country including the corn-belt Midwest, and states like California and New York which had already banned MTBE. The regions making the transition this spring are the Northeast and parts of Texas.

Cars in the U.S. can normally drive on E10, a mixture of 10% ethanol and 90% gasoline, that is sometimes called gasohol. It's how Americans usually take their ethanol. Relatively few cars available here are "flex-fuel," meaning that they can run on much higher concentrations of ethanol. The fuel E85, which is 85% ethanol, is sold at some gas stations concentrated in the Midwest.

Is ethanol cheaper than gas?
Surprise, surprise, it isn't. The move this spring by more regions to use ethanol means that demand has spiked, driving up prices. On Monday, the New York harbor price was around $3 per gallon compared with about $2.28 for gasoline (before being mixed with ethanol). In other words, for now ethanol is helping to increase prices at the pump, not to push them down.

So ethanol production and distribution are also controlled by market forces, right?
Only to a certain degree. In addition to heavily subsidizing the ethanol produced domestically, the U.S. government levies a 54 cent per gallon tariff on imports from other countries, such as Brazil, a lower-cost producer. This, of course, discourages the U.S. from importing cheaper ethanol.

Why not eliminate the tariffs?
Well, the idea behind the tariffs is to foster domestic production of ethanol. But amid the ongoing furor over high gas prices the idea of repealing the levy has gained momentum in Washington. Though it would probably annoy ethanol producers like agricultural giant Archer Daniels Midland, removing the tariffs could have some benefits. It would help ease price pressures and would likely encourage Brazil to boost its ethanol production. However, it's probably not a short-term solution.

Brazil is undergoing an ethanol revolution far more drastic than that in the U.S. Flex-fuel cars which can run solely on ethanol are widely available and the ethanol supply is short enough that the government recently reduced the mandatory ethanol content in gasoline from 25 to 20 percent.

"Brazil is the model" for how ethanol can be brought into use, wrote Citigroup analyst P. J. Juvekar in a recent report. But while buying ethanol from Brazil could be useful in the future, it's not going to reduce the pain of a road trip this summer.

What companies stand to benefit from increased ethanol use?
There is a crop of American ethanol producers. ADM is by far the largest, pumping out about one-quarter of the U.S. total. MGP Ingredients is one of the many smaller companies involved. Verasun Energy and Aventine Renewable Energy, two other producers of note, have recently filed to go public.

What can we expect to change in the future?
At present commercial corn-based ethanol comes from corn kernels. One of the more exciting ethanol prospects on the horizon is cellulosic ethanol, which can be made from a number of plant by-products, including cornstalks. Although it's unlikely to be commercially available for at least a few years, cellulosic ethanol eventually could help substantially reduce costs. In other words, your car in the future could run on the refuse of farms across the U.S.

Copyright © 2012 Bloomberg L.P. All rights reserved.


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