“A great book which should wake up humankind!” –Klaus Schwab, World Economic Forum
Chapter 2. Deteriorating Oil and Food Security: Cars and People Compete for Food
For most of the 25 years after 1978, when the crop-based fuel ethanol program was launched in the United States, investment in distilleries was modest, trickling along well below the radar screen. Then oil prices jumped above $60 a barrel in 2005, pushing U.S. gasoline prices to over $3 a gallon. Suddenly investments in corn-based distilleries became hugely profitable, unleashing an investment frenzy. Investment in U.S. ethanol distilleries, once dependent on the ethanol subsidy of 51¢ per gallon, was now driven primarily by surging oil prices. By mid-2007 the capacity of plants under construction slightly exceeded that of all plants built since the crop-based fuel ethanol program began. Stated otherwise, when these plants are completed, the grain used in ethanol production will double. 47
The United States eclipsed Brazil as the world’s leading ethanol producer in 2005. While Brazil uses sugarcane as the feedstock, U.S. distillers use grain—mostly corn. The estimated 81 million tons of the 2007 U.S. corn harvest used to produce 8.3 billion gallons of ethanol represents one fifth of the country’s entire grain harvest, but it will supply less than 4 percent of its automotive fuel. 48
Brazil , the world’s largest sugar producer and exporter, is now converting half of its sugarcane harvest into fuel ethanol. With 10 percent of the world’s sugar harvest going into ethanol, the price of sugar is rising. Cheap sugar may now be history. 49
In Europe, the emphasis is on producing biodiesel. In 2006, the European Union (EU) produced 1.2 billion gallons of biodiesel from vegetable oil, mostly in Germany and France, and 417 million gallons of ethanol, most of it distilled from grain in France, Spain, and Germany. To meet its goal of obtaining 10 percent of its automotive fuel from plant-based sources, the EU is increasingly turning to palm oil imported from Indonesia and Malaysia, a trend that is leading to the clearing of rainforests for oil palm plantations. The Netherlands, concerned about the impact this could have, is reconsidering its import of palm oil for biodiesel production. 50
In Asia, China converted some 4 million tons of grain—mostly corn—into ethanol in 2006. In India, as in Brazil, ethanol is produced largely from sugarcane. Malaysia and Indonesia are investing heavily in oil palm plantations and new biodiesel refineries. 51
Production of corn, now the world’s dominant feed grain as well as the leading ethanol feedstock, overtook wheat roughly a decade ago. In 2006, the world corn harvest exceeded 700 million tons, wheat was just under 600 million tons, and rice was 420 million tons. The “big three” account for 85 percent of the 2-billion-ton world grain harvest. 52
The U.S. corn production is huge, accounting for 40 percent of the global harvest and two thirds of world corn exports. The corn harvest of Iowa, the leading corn-producing state, exceeds the entire grain harvest of Canada. 53
Iowa is also the epicenter of ethanol distillery construction. Robert Wisner, Iowa State University economist, reports that the state’s demand for corn from processing plants that were operating, under construction, or being planned as of late 2006 totaled 2.7 billion bushels. Yet even in a good year the state harvests only 2.2 billion bushels. As distilleries compete for grain also used to feed livestock and poultry, Iowa could become a corn-deficit state—with no corn to export to the rest of the world. 54
What happens to the U.S. corn crop is obviously of concern to the entire world. Leading importers like Japan, Egypt, and Mexico will be particularly affected by any reduction in U.S. corn exports.
As the share of the U.S. grain harvest going to ethanol distilleries escalates, it is driving up food prices worldwide. In September 2007, the price of corn was nearly double that of two years earlier. Wheat prices had more than doubled, reaching historic highs. Soybean prices were up by more than half. 55
The countries initially hit by rising food prices were those where corn is a staple food. In Mexico, one of more than 20 countries with a corn-based diet, the price of tortillas in early 2007 was up by 60 percent. Angry Mexicans in crowds of up to 75,000 took to the streets in protest, forcing the government to institute price controls on tortillas. In the summer of 2007, Italian consumers organized pasta boycotts to protest soaring prices. Meanwhile, the British were worrying about rising bread prices. 56
From an agricultural vantage point, the world’s appetite for crop-based fuels is insatiable. The grain required to fill an SUV’s 25-gallon tank with ethanol just once will feed one person for a whole year. If the entire U.S. grain harvest were to be converted to ethanol, it would satisfy at most 18 percent of U.S. automotive fuel needs. 57
Historically the food and energy economies were separate. But with so many ethanol distilleries now being built to convert grain into fuel, the two are merging. In this new situation the world price of grain is moving up toward its oil-equivalent value. If the fuel value of grain exceeds its food value, the market will simply move the commodity into the energy economy. If the price of oil jumps to $100 a barrel, the price of grain will follow it upward. If oil goes to $120, grain will follow. The price of grain is now keyed to the price of oil.
The emerging competition between the owners of the world’s 860 million automobiles and the 2 billion poorest people is uncharted territory for humanity. Suddenly the world is facing a moral and political issue that has no precedent: Should we use grain to fuel cars or to feed people? The average income of the world’s automobile owners is roughly $30,000 a year; the 2 billion poorest people earn on average less than $3,000 a year. The market says, Let’s fuel the cars. 58
The risk is that rising grain prices will lead to chaos in world grain markets and to food riots in low- and middle-income countries that import grain. One likely consequence is more failing states as governments that are unable to provide food security lose legitimacy. The resulting political instability could disrupt global economic progress. At that point, it would not be merely the price of food but the Nikkei Index and the Dow Jones Industrials that would be affected by the massive diversion of grain to the production of automotive fuel.
Although there are no alternatives to food for people, there are alternatives to using food-based fuels. For example, the 4 percent of U.S. automotive fuel currently supplied from ethanol could be achieved several times over—and at a fraction of the cost—simply by raising auto fuel-efficiency standards by 20 percent. 59
Another way to reduce the fuel needed for cars is to shift to highly efficient gas-electric hybrid plug-in cars. (See Chapter 12.) This would allow motorists to do short-distance driving, such as the daily commute, with electricity. If wind-rich countries such as the United States, China, and those in Europe invest heavily in wind farms to feed cheap electricity into the grid, cars could run primarily on wind energy—and at the gasoline equivalent of less than $1 a gallon. 60
While it makes little sense to use food crops to fuel cars if it drives up food prices, there is the option of producing automotive fuel from fast-growing trees, switchgrass, prairie grass mixtures, or other cellulosic materials, which can be grown on wasteland. The technologies to convert these cellulosic materials into ethanol exist, but the cost of producing cellulosic ethanol is still more than double that of grain-based ethanol. More research is needed. 61
Another option that is fast gaining attention is the use of wasteland to produce jatropha. This four-foot woody shrub bears inedible golf ball–sized fruit with seeds containing oil that can be turned into biodiesel. In addition to being a drought-resistant, low-maintenance shrub with a 50-year lifespan, jatropha requires little fertilizer or water. 62
The Indian State Railway has planted 7.5 million jatropha plants along rail lines in that country and uses the oil in its diesel-powered locomotives. The government has identified 11 million hectares of wasteland that can be used for this shrub. One of the early enthusiasts, O. P. Singh, a horticulturalist for India’s Ministry of Railways, says that one day “every house will have jatropha.” 63
Jatropha diesel can be produced for $43 per barrel, a price comparable to that of sugarcane-based ethanol but well below that of other biofuels. Companies that process vegetable oils are offering farmers in India long-term, fixed-price contracts for their harvest of jatropha seeds. A U.K. biodiesel company, D1 Oils, has already planted 150,000 hectares of jatropha in Swaziland, Zambia, and South Africa. A Dutch firm, BioKing, is developing plantings in Senegal. China is also considering large-scale production of jatropha. 64
47. F.O. Licht, “Too Much Too Soon? World Ethanol Production to Break Another Record in 2005,” World Ethanol and Biofuels Report, vol. 3, no. 20 (21 June 2005), pp. 429–35; DOE, World Crude Oil Prices, and U.S. All Grades All Formulations Retail Gasoline Prices, at tonto.eia.doe.gov, viewed 31 July 2007; Renewable Fuels Association, op. cit. note 6.
48. F.O. Licht, “World Ethanol Production 2007 to Hit New Record,” World Ethanol and Biofuels Report, vol. 5, no. 17 (8 May 2007); corn used for ethanol in 2007 marketing year, from September 2007 to August 2008, from USDA, ERS, op. cit. note 6; corn ethanol conversion is author’s estimate, based on Keith Collins, chief economist, USDA, statement before the U.S. Senate Committee on Environment and Public Works, 6 September 2006, p. 8; energy content of ethanol relative to gasoline from Oak Ridge National Laboratory (ORNL), “Bioenergy Conversion Factors,” at bioenergy.ornl.gov/papers/ misc/energy_ conv.html, viewed 3 August 2007; U.S. gasoline consumption in 2007 from “Table 2: Energy Consumption by Sector and Source,” in DOE, EIA, Annual Energy Outlook 2007 (Washington, DC: February 2007); USDA, Production, Supply and Distribution, op. cit. note 6.
49. Sergio Barros, Brazil-Sugar-Annual Report-2006, GAIN Report BR6002 (Washington, DC: USDA, Foreign Agricultural Service, April 2006); CEPEA, Indicadores de Preços—Açúcar Cristal, at www.cepea.esalq.usp.br/acucar, viewed 31 July 2007.
50. F.O. Licht, op. cit. note 48; “Stung by Bad Experience, Dutch Propose Tough Criteria for Importing Sustainable Biofuels,” International Herald Tribune, 26 April 2007; “EU Ministers Agree Biofuel Target,” BBC News, 15 February 2007.
51. F.O. Licht, op. cit. note 48; corn ethanol conversion author’s estimate based on Collins, op. cit. note 48; F.O. Licht, “E-5 Mandate to be Introduced by May,” World Ethanol and Biofuels Report, vol. 4, no. 15 (7 April 2006), p. 355; Eric Unmacht, “Faced with Soaring Oil Prices, Indonesia Turns to Biodiesel,” Christian Science Monitor, 5 July 2006; Naveen Thukral, “Malaysia Approves 52 Biodiesel Plants So Far,” Reuters, 16 August 2006.
52. USDA, Production, Supply and Distribution, op. cit. note 6.
53. Ibid.; USDA, Crop Production 2006 Summary (Washington, DC: 2007).
54. Robert Wisner, e-mail to Janet Larsen, Earth Policy Institute, 2 January 2007, data updated 29 December 2006 in preparation for Iowa State University Crop Advantage seminar, Cedar Rapids and Burlington, IA, 4–5 January 2007; historical corn production data for Iowa at USDA, National Agricultural Statistics Service, “Quick Stats,” Agricultural Statistics Database, at www.nass.usda.gov, viewed 27 December 2006.
55. Madelene Pearson and Danielle Rossingh, “Wheat Price Rises to Record $9 a Bushel on Global Crop Concerns,” Bloomberg, 12 September 2007; wheat, soybeans, and corn from Chicago Board of Trade, op. cit. note 5; historical commodity prices from futures.tradingcharts.com, viewed 3 October 2007.
56. Ronald Buchanan, “Mexico Protest Prompts Food Price Assurance,” Financial Times, 1 February 2007; Carolyn Said, “Nothing Flat about Tortilla Prices: Some in Mexico Cost 60 Percent More, Leading to a Serious Struggle for Low-Income People,” San Francisco Chronicle, 13 January 2007; “Italy Urged to go on Pasta Strike,” BBC News, 13 September 2007; Karen Atwood, “Rising Price of Wheat Signals End of Low-Cost Food, Warns Premier Chief,” The Independent (London), 5 September 2007.
57. Lester R. Brown, “Distillery Demand for Grain to Fuel Cars Vastly Understated: World May be Facing Highest Grain Prices in History,” Eco-Economy Update (Washington, DC: Earth Policy Institute, 4 January 2007); corn ethanol conversion is author’s estimate, based on Collins, op. cit. note 48; energy content of ethanol relative to gasoline from ORNL, op. cit. note 48; U.S. gasoline consumption in 2007 from DOE, op. cit. note 48; USDA, Production, Supply and Distribution, op. cit. note 6.
58. Ward’s Communications, Ward’s World Motor Vehicle Data 2006 (Southfield, MI: 2006), p. 240; income calculations from World Bank, “GNI Per Capita 2006, Atlas Method and PPP,” World Development Indicators, at siteresources.worldbank.org, updated 1 July 2007, and from U.N. Population Division, World Population Prospects, op. cit. note 2.
59. Corn used for ethanol in 2007 from USDA, Feed Grains Database, op. cit. note 6; corn ethanol conversion author’s estimate based on Collins, op. cit. note 48; energy content of ethanol relative to gasoline from ORNL, op. cit. note 48; U.S. gasoline consumption in 2007 from DOE, op. cit. note 48.
60. California Cars Initiative (CalCars), “All About Plug-In Hybrids (PHEVs),” at www.calcars.org/vehicles.html, viewed 27 December 2006.
61. Patrick Barta, “Jatropha Plant Gains Steam in Global Race for Biofuels,” Wall Street Journal, 24 August 2007.
63. Ibid.; Ben Macintyre, “Poison Plant Could Help to Cure the Planet,” The Times (London), 28 July 2007.
64. Barta, op. cit. note 61; Rebecca Renner, “Green Gold in a Shrub: Entrepreneurs Target the Jatropha Plant as the Next Big Biofuel,” Scientific American, June 2007.
Copyright © 2008 Earth Policy Institute