The recent high price of gasoline has led to a search for alternative fuels in the form of biofuels. The primary candidate at this time is ethanol. The remainder of this commentary will be directed towards this gasoline substitute.
As of this time, the vast majority of ethanol is being produced from corn. The economics of this process is very inefficient. Large governmental subsidies are required to make mixtures containing this product competitive. Furthermore, the rush to purchase corn for ethanol production has more than doubled the price of corn. This has not only raised the cost of ethanol production even further but has adversely affected food prices. As a result, the use of other crops such as cellulosic switch grass are being considered.
In addition to the per gallon cost of ethanol, the fuel value must be considered. In today's automobile engines, pure ethanol only produces 2/3 of the power generated by gasoline. This is largely because the ethanol molecule contains an oxygen atom which means it is already partially oxidized. As a result, this forces the government to subsidize ethanol even further to make it competitive.
The high subsidies for ethanol are, as usual, being spread amongst the taxpayers. On a personal level, there is nothing we can do about this so the most logical approach is to base your purchase decision on the subsidized price vs. performance as a fuel. The table below shows some tradeoff points where the value of ethanol supplemented fuel equals regular gasoline.
For example, if regular gasoline is $4.00 per gallon, the price of 10% ethanol gasoline must be 13 cents per gallon cheaper or $3.87 per gallon to be of equivalent value. Any differential greater than this should push you towards the ethannol blend. In general you should find the actual differential hovering around the calculated value but some stations will have better values than others. Those owners of 85% ethanol compatible cars may think that the large price differential automatically makes this fuel a bargain - but, as shown in the table, a very large price difference is required to make 85% ethanol a good value.
If you want to find an even better value, you may want to compare prices at several gas stations. In that case your final descision should be based on the price spread between the station with the lowest regular gas price and the station with the lowest ethanol blend price.
So far we haven't mentioned a potential advantage for ethanol blends. Ethanol is equivalent to a high octane gasoline and prevents engine knock at high compression ratios. However, few automobiles produced today need this extra protection. But high compression engines are inherently more efficient than today's engines. In this scenario, ethanol begins to show it's colors. In fact at a 19:1 compression ratio 100% ethanol can be used and will produce the same MPG as today's gasoline engine.
But all this hype does not equate to rationality. Taking ethanol produced from corn as an example, we appear to be jumping from the frying pan into the fire. Corn based ethanol has been highly subsidized from the beginning with the promise that it would eventually become competitive with oil. In reality, since mid 2005 the price of oil has risen from $60 per barrel to $130 per barrel while during this same three year period corn has gone from $2.50 to $6.25 per bushel. Corn prices have gone up faster than oil! Beyond this there is an additional cost due to the effect of corn prices on our food costs. Corn is a major component of animal feed costs. Also, farm acres have been diverted from other crops to corn production which causes the price of other commodities to rise.
The current panic towards U.S. self sufficiency in energy is overblown. The hysteria has been fueled (no pun intended) by the recent rapid increase in oil prices and, to a degree (again no pun intended), in the irrational fear of global warming. Unfortunately, none of the proposed alternatives are more cost effective than oil. Furthermore, any proposal that assumes we should pay a high premium for energy that does not produce CO2 is based on a false premise - manmade global warming. It is equivalent to the religion of the Ancient Egyptians which committed vast numbers of its population to back-breaking work building huge pyramids. It may have made them feel it was worthwhile at the time but in reality it was based on ignorance and was a diversion of resources from meaningful activities.
Most of the recent price rise we have seen in oil has been due to the increasing demands for oil from India and China as they become more industrialized. Another big factor is the dramatically declining value of the U.S. dollar. This has occurred in response to our very high imbalance of trade with other countries. A drop in the value of our currency is one way that this imbalance is neutralized (see above chart).
We must let economics decide if and when we should introduce alternative fuels. A strategic reserve of fuel should be kept on hand to allow us time to react if current fuel prices go above the cost of alternatives. But it would be self-defeating to preemptively switch to alternative fuels that are much more expensive than fuel oil.