A Very Incomplete Story

I've watched CBS's "60 Minutes" periodically since I was a teenager. Over the decades they've aired fascinating character studies and uncovered dirt in high and low places. But there's one style of reporting that I'd be surprised if they haven't patented by now, because it's so effective at getting viewers riled at their chosen targets. You know the setup: innocent victims wronged by a Bad Company, camera angles and backdrops carefully chosen to reinforce the reactions they seek to evoke, and the reasonable-sounding correspondent getting evasive-seeming answers from some corporate official. They're very good at this, and I confess I have no more immunity to such manipulation than most viewers, except in the case of the lead segment of last Sunday's program, which I finally caught up with on TiVo. I got mad all right, but this time at "60 Minutes", because the story in question, concerning a lawsuit against Chevron for alleged environmental damage in Ecuador, is one that I know well enough to spot just how skewed the coverage was. In its eagerness to pillory Big Oil, the segment's bias let the real culprit, the national oil company of Ecuador, off the hook.

I want to be very clear about my inherent conflict of interest here, which also provides the basis for my knowledge about the facts of this case. For more than 20 years I was employed by Texaco, Inc., a subsidiary of which was the partner of the Ecuadoran state oil company, Petroecuador, in the Oriente oil fields of Ecuador from 1964 to 1992. I am also a shareholder of Chevron Corporation, which acquired Texaco in 2001--thus inheriting a lawsuit that had already been dismissed by courts in multiple US jurisdictions. I never traveled to Ecuador or worked in the divisions of the company that were directly involved with the producing operations there, but I had colleagues that did. So although I have no first-hand knowledge concerning the evidence put forward by either the plaintiffs or the defendants, I picked up enough information around the water cooler to have a good sense for what was missing from Mr. Pelley's reporting of this story.

The first questions that anyone digging into this story should have been asking concern the history and structure of the agreement governing the oil producing consortium in Ecuador. It started as a 50/50 arrangement between Texaco and a unit of Gulf Oil, one of the other "seven sisters". During the global wave of resource nationalism of the early 1970s, the state oil company of Ecuador acquired first a 25% share of the Consortium and then Gulf's entire remaining share, giving them 62.5% of the operation. (I am sure there were many times that my former employer wished that the government had simply nationalized the whole thing, back then.) This means that while Texaco collected 37.5% of the profits from the Oriente fields, Petroecuador and the government that owned it received not only the bulk of the profits, but also 100% of the royalties and taxes paid throughout the term of the concession. Even in those days, that amounted to many billions of dollars by the time Texaco's interest terminated in 1992, two years after Petroecuador became the operator, not just the majority owner of the field. The company's estimate is that Ecuador received nearly $25 billion over the life of the contract. That's consistent with production of roughly 200,000 barrels per day in that period, at an average price somewhere around $20/barrel. Out of that, Texaco earned about $0.5 billion in total, a figure that wouldn't surprise anyone familiar with oil concession contracts of that era. That equates to less than a penny per gallon of oil produced.

Now, if Texaco were responsible for all the damage alleged in Ecuador, it might not matter so much that it only earned a fraction of what it is being sued for in an Ecuadoran court. However, the allocation of revenue is extremely relevant to attempting to understand who would have benefited from cutting the corners that the plaintiffs claim were cut in the operations there. Cui bono? The answer is glaringly simple, and not just for the period after Texaco ceased acting as operator: Petroecuador--which by all rights should have been sitting in Mr. Pelley's hotseat last Sunday. Petroecuador, a company with a less than sterling reputation for operational excellence, even now. The reason they are not there is that Ecuador refused to waive its sovereign immunity in the case, and thus could not be sued even though it controlled the ongoing operation of the field since 1990, has been the main beneficiary of the region's oil wealth, and bears all responsibility for the poor state of the sanitary and healthcare infrastructure that contributed greatly to whatever ills the indigenous people have experienced. The logic of suing Texaco was inescapable: sue the party you can reach, whatever their share of the responsibility, and go for the deep pockets.

If you've read this far and still have an open mind about the case, then you might be interested in looking at Chevron's side of the story. My purpose here is not to make their case or to suggest that Texaco operated the Ecuadoran fields in the 1960s, '70s and '80s to the standards that prevail today, decades later. But I do feel the need to point out that there is another side to this story that you didn't see last Sunday, and it is not remotely the black and white tale of a big corporation behaving badly that "60 Minutes" portrayed. I am disappointed that CBS allowed itself to be used to paint such a one-sided picture, sullying the reputation of a company I knew inside and out, and of the tens of thousands of fine, responsible people who worked there--not a gang of environmental criminals. I know "60 Minutes" can do better.

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Cash for Guzzlers

Congress appears to be moving closer to providing financial incentives for Americans to trade in older cars for more efficient new models. There are good reasons to support such a measure--and a few caveats--though the longer it takes to implement, the less relevant its benefits might seem. That argues against incorporating it as yet another element of the mammoth American Clean Energy and Security Act of 2009--the Waxman-Markey Bill. (Monday's posting examined another aspect of that legislation.) If this provision were enacted quickly, the US would join Germany and the UK, both of which have instituted similar, temporary "cash for clunkers" programs to spur car sales that have been devastated by the recession and credit crisis. This has important implications for the recovery of ailing US automakers, including the Fiat/Chrysler alliance that is expected to result from the latter's bankruptcy filing.

The incentives of up to $4,500 per car are intended to promote the sale of up to a million new, more energy-efficient cars at a time when total US car volumes are down by roughly a third from their pre-crash levels. Despite a drop in the market share of large SUVs, the resulting slower turnover of the US car fleet will delay efforts to make the fleet more efficient, with a corresponding impact on both oil consumption and emissions. The measure also targets the most valuable segment of available fuel economy gains: "gas guzzlers" for which every one-mpg improvement can translate into 40-75 gallons per year in savings for the average driver, compared to gains of less than 10 gallons per year for each one-mpg increment above 35 mpg. While it's not clear that the implied price of oil associated with these subsidies could justify the outlay, it at least stands a much better chance of delivering a financial payout for taxpayers and consumers than devoting subsidies of many thousands of dollars per car to chasing the rapidly-diminishing returns on fuel economy above 50 mpg.

At the same time, we should be clear about what such a program can and can't do. While it could provide a well-timed boost to help struggling carmakers get back on their feet, the program's one-year timeline risks merely accelerating car sales that would happen anyway, leaving Detroit in an even bigger hole next year, after the benefit expires. It is a stop-gap, not a substitute for the sales growth that should accompany the eventual economic recovery. Nor would the old cars traded in disappear from the fleet, unless the final legislation required their scrapping. That compromises the measure's fuel-efficiency benefits in two ways, by keeping the same guzzlers on the road, just in different hands, and by depressing used car prices, making other older, less efficient cars more affordable, relative to the more efficient new cars the measure is intended to promote.

It also can't summon into existence vehicles that don't yet exist. That means it probably won't help the Euro-style economy cars that Ford is gearing up to produce in a converted truck factory, because they likely wouldn't be ready in time. It can't help GM with the launch of its new Chevrolet Cruze 40-mpg subcompact, which is apparently still over a year away. And it certainly won't affect the retooled cars Chrysler is supposed to build using Fiat's technology--they will still be on the drawing board when this benefit ends. The cars (and carmakers) that will benefit the most are the ones already on offer. While it should help Toyota reverse the slide in Prius sales that accompanied lower oil prices and the expiration of its eligibility for hybrid car tax credits, most of the cars likely to benefit will be solid, mid-mpg models like the Honda Accord and Chevy Malibu. A revolution in fuel economy is not in prospect with this legislation.

My advice is to view this measure as a belated addition to the economic stimulus package that might also do a bit of good in reducing oil consumption and emissions. And unlike some of the slow-acting and less-well-defined elements of the February stimulus--which I've recently heard referred to as the "porkulus"--this program appears to be prompt, precisely targeted, and well-bounded.

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Setting Green Power Goals

Much of the attention on the pending climate legislation in Congress has focused on its inclusion of the latest effort to establish a national cap and trading system for greenhouse gas emissions. However, a quick review of the table of contents of the Waxman-Markey Bill reveals a host of other energy provisions, beginning with "Title I, Subtitle A, Renewable Electricity Standard", which would set aggressive goals for the rapid deployment of renewable power throughout the country by 2025. Although this builds on the numerous state-level Renewable Portfolio Standards already in place, it would supersede their inconsistent targets and definitions. After comparing the bill's numerical targets, which would kick in as soon as 2012, to the current level of generation from its included renewable sources, I can only wonder whether the bill's authors actually expect the US electricity sector to attain these goals, or regard the RES as yet another source of future government revenue, when suppliers that fall short pay the penalties the legislation would impose.

The key language in the entire section delineating the national RES is found in the definitions of what constitutes a "Renewable Resource": wind, solar, geothermal, biomass power, landfill methane, marine & hydrokinetic energy, and "qualified hydropower." The latter limits the contribution from our largest current renewable electricity source to "electricity solely from increased efficiency achieved, or additions of capacity made, on or after January 1, 2001..." The US now has 77,885 MW of hydropower capacity, about 1% less than in 2001. Last year these dams generated 250 million MW-hours of electricity, 6.1% of 2008 total US generation. That large baseline quantity would be excluded from the RES, which would only count new hydropower capacity. The latest tally by the DOE indicates that between now and 2012, when Waxman-Markey would require 6% of the nation's power to come from renewable sources, only another 236 MW of hydropower is expected to come into service. They might as well not have counted it at all.

It's also worth noting that, appropriately enough, the bill counts actual annual generation, not capacity in place. That works very much against energy sources with low capacity factors--those that generate power much less than 24/7. That notably includes the fastest-growing renewable sources, wind and solar power. Last year, the average US wind turbine produced only about 28% of its rated output, based on actual generation and the simple average of reported year-end 2007 and 2008 wind capacity figures. And the theoretical maximum for solar is even lower, at around 23% even in a sunny locale such as Southern California. That means you need lots of wind and solar capacity to produce the same amount of power as from coal-fired power plants, which generated at an average of 73% of rated capacity last year.

Without counting existing hydropower, it is difficult to see how the country will achieve the 2012 RES goal, let alone the much loftier "25 by 25" target. The total contribution of wind, solar, geothermal, biomass power and landfill methane last year was 124 million MWh, or 3% of net generation. Reaching 6% by 2012 would require a sustained average annual growth rate of 19% per year. The 8.5% goal for 2014 would extend that requirement for another 2 years. Yet in the last four years, encompassing a period of remarkable growth from wind and solar power, the broader category of renewable electricity defined by Waxman-Markey grew by 8.1%. In effect, year after year we would have to beat last year's stellar growth rate of 17.5%--reflecting the high fossil-energy prices and credit bubble of the previous several years--and get further help from energy efficiency and conservation, which could help to shrink the denominator of this fraction. The most recent data-point we have is the first-quarter performance of the wind sector, which added 2,836 MW of new capacity. On an annualized, capacity-factor-adjusted basis, that would increase total renewable power output by about 22% this year. It remains to be seen whether the tax credit and grant provisions of the stimulus bill will be sufficient to sustain such high rates, without the infusions of "tax equity" from investment banks and other financial institutions that helped fund the projects now coming online. Nor do we know whether these growth rates could be sustained, once the transmission bottlenecks inherent in the current electric grid structure--which cannot change materially within the next six years, despite all the recent hype about a "smart grid"--begin to bite.

What happens if the electric power industry falls short of these ambitious goals? Referring again to the discussion draft of the Waxman-Markey Bill, we see, "A retail electric supplier may satisfy the requirements of paragraph (1) (as modified, where applicable, under paragraph (3)) in whole or in part by submitting in lieu of each Federal renewable electricity credit that would otherwise be due, a payment equal to the lesser of—‘‘(A) 200 percent of the average market value of a Federal renewable electricity credit for the previous compliance year, as determined by the Secretary; or ‘‘(B) $50, adjusted on January 1 of each year following calendar year 2009 based on the Gross Domestic Product Implicit Price Deflator." That $50 per MWh equates to 5 cents per kWh, or roughly half of the prevailing average retail price of electricity last year.

The House Energy and Commerce Committee has been holding hearings on this bill for the last several weeks, and the final bill reported to the House could look quite different, though many of its critics seem much more interested in the initial allocation of tradeable credits under its greenhouse gas provisions than in the RES. If passed by the House, the bill is likely to alter again once the Senate has its turn. I hope both bodies will take a serious look at its definitions of renewable resources and the timing of initial targets that depend mainly on our ability to continue expanding wind power at high growth rates and integrating its non-dispatchable, intermittent contribution into an existing power distribution network that will become increasingly strained, until its own expansion and updating really get under way. Missing these targets wouldn't only impede our environmental progress; it would result in a hefty new tax on electric power, over and above the effective tax from the likely cap & trade system.

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Is the Energy Crisis Over?

A quick check of Google Trends this morning confirmed my gut feeling that, other than from government officials, references to an ongoing energy crisis have fallen significantly in the last year. Google's statistics show that searches on this phrase have fallen back to about where they were in 2004 or 2005, though still somewhat higher than 2007. Their track of news references shows this trend even more strikingly. Without graphing the correlation, it appears to go hand in hand with energy prices that have fallen to levels that are no longer adding to our economic pain and in some respects provide significant relief. Does our waning interest in an energy crisis reflect the archetypal fickleness of the American psyche, or has the energy crisis that generated such a fever pitch of concern last year truly abated, and if so, will it soon return? A quick tally of some key statistics provides a mostly positive assessment, at least for now. While this doesn't justify complacency, it seems like a genuinely positive indicator at a time when good news has been in short supply.

The question I posed would have been a lot easier to answer if the Energy Information Agency's handy one-page summary of US primary energy production and consumption had been updated since 2007, when about the best one could say was that our net energy imports had stabilized at just under 30% of total consumption. But looking at the major components of US energy supply and demand in 2008, we see more than a few "green shoots." Net imports of crude oil and petroleum products, a much more useful measure of our dependence on foreign suppliers than just looking at crude oil imports, have fallen steadily from a peak of 13 million barrels per day in the summer of 2006 to around 11 million barrels per day. That didn't occur because US crude production was up--it's not--but because of the lagged but profound response of demand to higher prices.

Even if petroleum imports begin growing again as the economy recovers, they will do so in a global market that for at least the next several years will have ample spare capacity--a crucial measure of the market's ability to meet higher demand without creating another severe price spike. In a webcast earlier this week, Global Insight, CERA and IHS Herold (the sponsor of this blog) presented analysis suggesting that the combination of lower demand and higher output have lifted global spare oil capacity from its minimum of barely a million barrels per day in 2005 to more than 6 million this year, or nearly 8% of demand. Together with high oil inventories in consuming countries, this should cap the eventual recovery of oil prices well below the levels we saw last year. It remains to be seen whether $80 oil would prove as harmful to the weak economic recovery most economists expect next year as $140 oil did to an economy teetering on the brink of collapse.

Natural gas presents a remarkable and more uniformly positive story. A few years ago I was seriously worried that a steady decline in US gas output, coupled with strong demand supported by environmental regulations were setting us up to become major importers of gas from outside North America, putting the US in much the same position for gas as we were already in for oil. What a difference a couple of years makes. As detailed in a recent Wall St. Journal article, gas production has rebounded sharply as a result of the exploitation of enormous deposits of gas in deep shales that until recently had looked inaccessible. Marketed gas production last year was up 7% over 2007 and a whopping 13% above its 2005 trough. As a result, imports are down, especially in the form of LNG. This mini "gas bubble" could deflate, if the low gas price and tight credit continue to depress drilling activity, particularly by the independent gas producers who were mainly responsible for the recent surge in production. But as the Journal notes, the underlying resource looks robust enough to carry us well into the future. Whatever its other pitfalls, the Pickens Plan would not fail for lack of natural gas.

If anything, the electricity picture is even more encouraging. Demand in 2008 was essentially flat, compared to the prior year, and the composition of generation shifted modestly away from coal (down 1%) and other fossil fuels (down 4%), while electricity from nuclear, hydro and other renewables expanded by 2%, led by a 51% increase in wind power output. Wind, solar and geothermal power accounted for just 1.6% of all generation, but the broader group of low-emission sources, including nuclear, made up nearly 29% of the total. This looks set to continue growing, as long as the current nuclear fleet, which accounted for 2/3 of that figure, stays on line and eventually expands.

I recently ran across an interesting analysis examining the extent to which the economic crisis might have been precipitated by an oil price shock--the primary feature of the energy crisis that attracted so much attention in 2007-08. I expressed similar suspicions last December, if in less elegant economic terms. Which was the chicken and which the egg is of more than merely academic interest, because if the energy crisis was a principal contributor to the bursting of a financial bubble that couldn't last forever, rather than merely another manifestation of that bubble, then it seems that the chances of another devastating energy price spike in our near future ought to be a little lower. That would be another piece of good news to add to a generally positive current view of energy.

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Cap & Trade: No Free Lunch

One thing I still miss about living in the New York metro area is receiving the Times on my front doorstep every morning. So instead of pouncing on Tom Friedman's latest column the morning it's published, I often don't see it for a couple of days, until I run across it on the Internet. The net effect is to raise the bar for Friedman remarks on which I feel compelled to comment, because they're usually superseded by other, more interesting topics on which to blog. Unfortunately, the theme of Mr. Friedman's column of last Saturday is likely to be with us for some time, working its way insidiously into our assessment of energy and climate policy. Cutting through its convoluted logic, it suggests that we can significantly increase the price of energy to send a signal concerning greenhouse gas emissions but somehow end up spending less on energy and becoming richer in the process. While I continue to support the basic idea of a cap & trade system for managing our emissions, touting it to the public as a free lunch seems likely to set us up for a future backlash not unlike the one the financial industry is now experiencing, after we learned that the cheap credit we've enjoyed came with a steep hidden price.

In his script for a hypothetical speech by President Obama, Mr. Friedman sets out his thesis this way: "Yes, the cost of gasoline or kilowatt hours will rise in the short term. But in the long term, your actual bills and expenses will go down because your car, appliances and factory will become steadily more productive and give you more power for less energy." This exaggeration of the basic principle that higher energy prices stimulate greater energy efficiency incorporates several basic fallacies, the most important of which is that while higher prices affect all consumers and businesses more or less immediately--some businesses may have hedged their energy purchases for a time--their capital stock of energy-consuming devices turns over slowly. It also ignores the diminishing returns to higher fuel economy. Someone buying a new, more efficient car might offset most or all of the fuel price increase via higher fuel economy, but the other 93% of car owners are stuck with higher bills for at least another year. The only means by which the remainder of the population can manage this higher expense is through reduced consumption, if not of energy then of other goods and services. We saw that effect on steroids last year, and we are still living with the hangover from it. But even the consumer who bought the frugal car might be worse off, if it cost much more than the model he would have bought otherwise. In effect, he traded some wealth for lower expenses.

The impact on businesses looks similar. While business investment is hardly a zero-sum game, higher investment in energy efficiency would come at least in part at the expense of other kinds of investment, perhaps in new computer equipment or staff hiring or training. Higher prices on energy thus promote improvements in energy productivity at the expense of other kinds of productivity. Although this certainly reduces expenses, it would take some time to reduce them in absolute, rather than merely relative terms, and without increasing top-line revenue. That might sound equivalent in terms of its impact on profits, but it often isn't. Expense improvements tend to get competed away in the marketplace, and are thus often not sustainable sources of earnings. So while business investment in energy efficiency might ultimately shield consumers from higher prices for finished goods and services, it seems unlikely to do much for corporate profits or stock valuations.

Mr. Friedman's assertion ultimately rests on an energy analogy to the experience of the electronics industry. If there is a Moore's Law for energy, it has yet to be discerned, let alone quantified. In the early phases of any new technology, "experience curve" effects can emulate Moore's Law-style improvements for a while. Then, as cumulative output grows the rate of change slows dramatically. Last year's DOE study on the feasibility of obtaining 20% of our electricity generation from wind energy included some interesting observations on cost. While the cost of new wind power fell dramatically between the 1980s and 2000, in classic experience-curve fashion, that decline appears to have bottomed out in 2002 and actually reversed somewhat since then. Moreover, when wind capacity is pushed further along its supply curve, the cost of incremental capacity is expected to go up, as prime wind locations are exhausted and new development is forced into more expensive regimes, in coastal waters or further from markets. Creating a bigger market for energy efficiency won't necessarily drive the cost of efficiency dramatically lower than it is now, or will be once the wave of efficiency investments triggered by $100 oil and $10 natural gas rolls through.

Like Mr. Friedman, I believe we should put a price on emissions of greenhouse gases--if not this year then fairly soon--in order to promote efficiency and the adoption of cleaner technologies over time. However, we shouldn't imagine this will be easy or cheap, let alone something that will create mountains of new wealth out of, literally, thin air. Haven't we all just been through something like that, to our regret? We can't suddenly start collecting fees on behalf of an environmental service--storing our waste carbon in the atmosphere--that has been free since the dawn of time and expect that this won't impose a burden on someone. More precisely, it represents a different kind of wealth transfer than the one we all complained about last year--sending our money to OPEC--in which those who use energy (most of which is still derived from fossil fuels) will send money to those who use less of it and to those who are developing new ways of producing and using it with fewer emissions--and of course to those administering these programs. That should benefit investors in green technology, but someone else will get the bill.

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Dangerous Delusions

If you've read this blog for any length of time, you know that it's not my practice to single out individual officials or politicians for particular praise or criticism, preferring an even-handed and scrupulously non-partisan approach. So it is with some reluctance that I feel compelled to share my considerable alarm about the views expressed by the new Chairman of the Federal Energy Regulatory Commission (FERC), Mr. Wellinghoff. His suggestion that "baseload capacity is going to become an anachronism" and that renewable energy can meet all our future energy needs represents a dangerous delusion, at least for the next several decades. I am not dismissing the vital contribution of renewables in addressing climate change, or the potential of a smarter electricity grid to accommodate a greater share of generation from renewable sources than would be feasible today. However, while I appreciate the benefits of visionary leadership in moving the country towards those goals, that vision must be grounded in reality, and not skewed by wishful thinking or the ingrained habits of a long career spent in advocacy for renewable energy.

My first recommendation to Mr. Wellinghoff would be to read today's Washington Post op-ed by Dr. James Schlesinger, the nation's first Secretary of Energy, and Dr. James Hirsch, a former official of that department's predecessor agency. More than 30 years ago, they were responsible for the early research initiatives that helped to develop many of the renewable energy technologies that Mr. Wellinghoff promotes. Their deeply informed comments on the inherent limitations of renewable energy lead to inescapable conclusions about the need to balance these intermittent and cyclical energy sources with the stability provided by large, central generating facilities capable of producing electricity around the clock, without daily or seasonal fluctuations.

My next suggestion to him would be to invest some time analyzing the electricity statistics of Denmark, which leads the world in deriving nearly 20% of its electricity needs from wind power. These data demonstrate the dramatic seasonal variance in Denmark's wind output. In 2008 alone, the country's 3,180 MW of wind turbines generated as little as 234 gigawatt-hours (GWh) per month (May) and as much as 1,050 GWh (Jan.), resulting in monthly effective capacity factors ranging from 10% to 44% of installed capacity. The monthly stats also demonstrate how this remarkable volatility can be accommodated without causing massive disruptions to the Danish economy. This is only possible through tight integration of the Danish electricity grid with those of its neighbors via robust interconnections--big power lines. When Denmark has more wind power than it needs, it is exported to Norway, Sweden and Germany. When its wind turbines are becalmed, it draws on the enormous hydroelectric reserves of Norway and nuclear and hydropower from Sweden. Because of the variability of wind power, Denmark's electricity import/export balance fluctuates daily, monthly, seasonally, and even from year to year. But the US isn't Denmark. We have 55 times as many people, and no neighbors with bigger power grids than ours.

We can't yet know the mix of central and distributed power, or of baseload and variable power that the US will ultimately need to power our economy and meet the emissions reduction targets we will take on. Improvement of the grid and the advent of "dispatchable demand", including smarter appliances and electric vehicles that could be preferentially recharged when renewable electricity is abundant will certainly increase the amount of renewable energy that can be absorbed usefully. However, that will not entirely obviate the need for large baseload power plants, and pursuing an agenda that makes it more difficult to build at least enough new nuclear power plants by the 2020s and 2030s to maintain nuclear's present 20% share of net generation would be disastrous for both US energy security and for our ability to reduce our contribution to climate change. I can only hope that Mr. Wellinghoff is open to modifying his views, as he adapts to his new role.

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The Water Behind Ethanol

US ethanol producers didn't need more bad news. Despite federal and state blending subsidies and a steadily increasing federal mandate for the use of their product, the US ethanol industry has been suffering badly from low margins in the wake of last year's oil-price collapse. A number of companies, large and small, have been forced to seek Chapter 11 bankruptcy protection. The bankrupt VeraSun, a former industry leader, recently sold seven of its plants to independent oil refiner Valero, and several others to its creditors. But while last year's "food vs. fuel" controversy has largely died down, thanks to lower corn prices, a new study from the University of Minnesota suggests that some ethanol production uses even more water than previously estimated--as much as 2,000 gallons of it for every gallon of ethanol produced in states where crops must be irrigated. This finding further undermines the environmental benefits of a fuel that saves significant amounts of oil but requires large inputs of natural gas and other fossil fuels, and thus offers only modest greenhouse gas improvements over gasoline.

As with its other environmental liabilities, most of ethanol's water impact occurs upstream of the ethanol plant. Process water for slurrying corn and boiling, fermenting and distilling fuel ethanol only accounted for 3% of the total water consumption analyzed by Chiu, Walseth and Suh in their paper, "Water Embodied in Bioethanol in the United States". They also reported a remarkably wide range for the ratio of total water consumption (irrigation and process) per unit of produced ethanol by state: under 10:1 in Iowa, Kentucky and Ohio, and over 1000:1 in California, Colorado, New Mexico and Wyoming. Fortunately the latter states contributed just 3% of the 2007 ethanol production tallied in the study, resulting in a national average of 142 gallons of water per gallon of ethanol. However, two significant ethanol-producing states, Kansas and Nebraska, accounted for 14% of ethanol production but more than half of all US water consumed for ethanol, with ratios above 500:1. A useful chart in MIT's Technology Review illustrates these variations from state to state.

These findings add to an already daunting list of concerns about the long-term sustainability of an alternative energy policy that has so far relied mainly on biofuel produced from a food crop requiring extremely high inputs of water and natural-gas-derived fertilizer. The water dependency of corn ethanol looks even more unsustainable under various scenarios of climate change, which ironically this fuel is intended to help mitigate. Simply put, if water in the West and Southwest is likely to be in even tighter supply in the future, the last thing we should be doing with it is to divert it to the production of such a water-intensive oil substitute. The urgency of converting biofuel production to cellulosic feedstocks requiring little or no irrigation is high, at least for those states with water:ethanol ratios above the national average, but unfortunately urgency and bigger research budgets don't guarantee making today's demonstration-scale cellulosic ethanol technologies economical at larger scales. Breakthroughs don't arrive on demand.

The results of Chiu, Walseth and Suh provide further support for a thorough reevaluation of US biofuel policies. Rather than trying to squeeze ever more ethanol into gasoline, with uncertain consequences for motorists, and stretching our agricultural resources by expanding unsustainable crop-based biofuels of questionable value for reducing greenhouse gas emissions, the administration should ask the Congress for authority to freeze the conventional ethanol portion of the Renewable Fuel Standard at its current level of 10.5 billion gallons for 2009. That still represents a 9% increase over 2008's consumption of 9.6 billion gallons, which took well over a trillion gallons of water to produce. Further increases should await either economic cellulose-based biofuel, or the imposition of prudent standards limiting the embodied water and fossil-energy content of this fuel. That won't help today's overbuilt ethanol industry, but it would ensure that its survivors enjoy a more viable, sustainable future.

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