Oil vs. ethanol: What’s riskier?

The price of crude oil broke through the $120 a barrel barrier earlier this week. In part, according to Bloomberg News, the price increase is influenced by political unrest in Nigeria, Africa’s largest oil producer. Rebel attacks on an oil flow-station curtailed an unspecified amount of the country’s oil output.
 
Instability in the oil-producing areas of the world is often cited as a major reason for creating a domestic ethanol industry by subsidizing the industry and supporting it by mandating the ethanol content of gasoline at the pump. Corn-based fuel grown right here in Minnesota, so the reasoning goes, contributes to the American security and energy independence. But other news stories this week raise questions about the absoluteness of that claim. Spring planting for Minnesota farmers is behind schedule, and delays in getting the state’s corn crop in the ground can have significant negative effects on the state’s corn yield and hence ethanol production.
 
Energy independence or weather dependent
“I believe our nation’s addiction to foreign oil represents a threat to our national security, our economy, and our freedom,” writes Sen. Norm Coleman on his website, parading the patriotic pitch for ethanol. “By 2025 it is estimated that nearly 75 percent of America’s oil supply will be imported, much of it from volatile regions of the world dominated by tyrants.”

Praise God and pass the legislative mandates and ethanol subsidies that are helping the United States achieve energy independence based on a stable source of fuel — home-grown Midwest corn. But not so fast.
 
A cold and soggy spring across the Midwest is keeping farmers out of the fields, reports the St. Paul Pioneer Press. Only 8 percent of Minnesota’s corn crop is in the ground, compared to a normal 65 percent by the first week in May. In Minnesota, the target date to plant is April 25. Every additional day of delay reduces potential yield.
 
Using data from the National Corn Growers Association to justify state support for the ethanol industry, Minnesota Department of Agriculture website claims, “an increase of just two bushels per acre results in an additional 150 million bushels of corn, which can produce 420 million gallons of ethanol.”  A bushel of corn produces about 2.8 gallons of ethanol. Conversely, then, a reduction of just two bushels per acre due to late planting or adverse weather conditions would reduce ethanol output by 420 million gallons.
 
A University of Minnesota Extension Service report found that while bushel per acre yields continue to rise in Minnesota, “weather remains the major limiting factor in determining corn yield.” In low-yield years, early frost, dry or dry hot weather and late planting and cold wet weather produced deviations from the upward trend lines for corn yields between 20 to 50 percent measured in bushels per acre. Based on an output of 160 bushels per acre (the 2005 yield cited by the study), weather could reduce corn yields between 32 and 80 bushels per acre. That’s a lot of ethanol.
 
It’s also a lot of math and a lot of assumptions, but the analogy is simple: weather is to ethanol supply as political unrest is to oil supply — perhaps even more so.
 
Weighing the risks
Speaking at a Chicago City Seminar in Nov. 2007, Cato Institute senior fellow Jerry Taylor discounted the notion that because corn is grown right here in the United States and oil is harvested in areas of the world where instability, terrorism or simple antipathy to the United States can dramatically affect supply, ethanol supply is more dependable than oil supply.
 
The assumption of dependable supply made by ethanol supporters is not supported by data, according to Taylor. From 1960 to 2005, a period which includes the 1970s oil embargo by the Organization of Petroleum Exporting Countries (OPEC) and the recent worldwide growth in demand for oil, corn production was twice as variable as oil imports. It was riskier to depend on corn than on oil imports for consuming needs.
 
Looking at the historical record, Taylor points out that oil prices go through boom and bust periods and that this particular boom looks a lot like the 1973-1986 price explosion — “actually, almost eerily so looking just at price movement and duration up to this point,” he wrote in an email.  “Hence, current oil market behavior is not unprecedented.”
 
“Oil markets may indeed become more volatile over time,” he adds. “But they would have to become twice as volatile in absolute terms to match the historical volatility of corn markets. Because it doesn’t always rain the optimal amount, the sun doesn’t shine the optimal amount, corn yield can vary considerably.”
 
Taylor could have added a cold soggy spring and late planting to that weather litany. According to the USDA, the current spring planting situation in Minnesota is not unprecedented. Similar conditions in 2001 produced the lowest yields in a decade.
 
“Bottom line,” says Taylor, “if you move from oil to ethanol you trade off a set of geopolitical risks for a set of natural risks that are at least twice as great as geographical risks you left.”  As a source of energy, data reveals “corn is even more risky than oil.”