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					                      Ethanol -
                Too Good To Be True?

                                    A Presentation
                                          by
                               The Wheeler School Team
                                    30 April 2008

                          2008 Moody’s Mega Math Challenge




30 April 2008        The Wheeler School Team             1
  Presentation Structure
   n    Objective
   n    Key Assumptions
   n    Ethanol for 10% Reduction in
        Gasoline
   n    Impact on CO2 Emissions
   n    Cost Efficiency
   n    Impact on Grain Prices
   n    Energy Independence
   n    Conclusion and Recommendation


30 April 2008      The Wheeler School Team   2
  Ethanol Case Study

                n   Objective
                    n   To evaluate the impact of use
                        and production of corn-derived
                        ethanol on
                         n   Environment
                         n   Grain prices and developing nations
                         n   Fuel production cost
                    n   To recommend other alternative
                        ways of achieving energy
                        independence



30 April 2008   The Wheeler School Team                     3
  Key Assumptions
   n    1. Ethanol production and corn prices based
        on data imported from Internet
   n    2. Sources of data used are accurate
   n    3. Changes in ethanol production costs and
        environmental benefits will be insignificant
        during the time period under consideration
   n    4. No expected large economic fluctuations
   n    5. E10 and E85 will continue to be the
        dominant ethanol fuel forms


30 April 2008        The Wheeler School Team      4
  Ethanol Required to Replace 10% of
  Gasoline usage (1/2)

   n    2007 U.S. Fuel statistics                   [1]


         n      Total Fuel Consumption = 142,421 million gallons
         n      Ethanol Additives        = 6,847 million gallons
         n      Net Gasoline Consumption = 135,576 million gallons
   n    Goal - Reduce annual Net Gasoline Consumption to
         n      0.9*135,576 = 122,018 million gallons
   n    Our Calculations show
         n      Converting all fuel to E10 alone will not reduce the net
                gasoline usage to the desired level

       [1] U.S. Energy Information Administration
       [2] Renewable Fuels Association, Ethanol Industry Statistics



30 April 2008                     The Wheeler School Team                  5
  Ethanol Required to Replace 10% of
  Gasoline usage (2/2)
   n    Efficiency of Ethanol derived fuels
         n      E10: ~ identical to pure gasoline
         n      E85: ~ 75% of pure gasoline
   n    System of simultaneous equations
         n      0.90*QE10 + 0.15*QE85 = 122,018 million gallons
         n      QE10 + 0.75*QE85 = 142,421 million gallons
   n    Therefore,
         n      0.10*QE10 + 0.85*QE85 = 23,305 million gallons ethanol



       Estimated quantity of Ethanol to replace 10% of
  annual U.S. gasoline usage is 23,305 million gallons per year

30 April 2008                  The Wheeler School Team                   6
          Impact on CO2 Emissions (1/2)

          n    CO2 emissions per gallon of gasoline                              [3]


                n     2,421 grams of C * 0.99 (oxidation factor) * (44/12) (ratio
                      of the molecular weight of of CO2 and C)
                n     = 8.79 kg / gallon

          n    CO2 emissions per gallon of Ethanol                             [4]


                n     Based on combination of several contributing factors
                      including
                       n   Ethanol usage, Ethanol refining/transportation
                       n   Production/transportation of corn, Absorption by corn crops
                n      Estimated net emissions = 5.27 to 5.52 kg / gallon

[3] Environmental Protection Agency
[4] Dias De Oliveira, et al., “Ethanol as Fuel: Energy, Carbon Dioxide Balances, and Ecological Footprint .”

      30 April 2008                        The Wheeler School Team                                       7
  Impact on CO2 Emissions (2/2)
  n    Impact of CO2 emissions due to Ethanol Usage
        n   DCO2 emissions
             n = (change in gasoline usage)*(CO emission per gallon)
                                               2
               + (change in Ethanol usage)*(CO2 emission per gallon)

                n   = (0.9*135,576 – 135,576) million gallons * 8.79 kg / gallon
                    + (23,305 – 6,847) million gallons * X kg / gallon
                                   [Note: X is in the range 5.27 to 5.52]
        n   DCO2 emissions = -28.5 to -32.6 million metric tons



     Net reduction in CO2 emissions due to Ethanol usage
  is estimated to be 28.5 to 32.6 million metric tons per year

30 April 2008                    The Wheeler School Team                           8
  Cost Efficiency of Corn-Derived Ethanol
  (1/4)
   n    Cost/Benefit analysis based on
         n      Total Costs <= Quantifiable Benefits + Non-quantifiable
                Benefits
   n    Total Costs =
         n      Price of Ethanol + US Government Ethanol subsidies (direct)
                + US Government corn subsidies (indirect)
   n    Quantifiable Benefits =
         n      Value of Energy produced + Value of reduced CO2 emissions
   n     Potential Non-quantifiable benefits:
         n      Energy independence
         n      Reduced volatility in energy markets
         n      Intrinsic value of reduced CO2 emissions
         n      Future value of developing infrastructure for ethanol
                production
30 April 2008                  The Wheeler School Team                    9
  Cost Efficiency of Corn-Derived Ethanol
  (2/4)
   n       Computing Costs and Benefits
             n      Price of Ethanol [5] = $2.35/gallon
             n      US Government direct subsidy [6] = $0.51 per gallon
             n      US Government (indirect) corn subsidy
                     n  Sinusoidal with growth model based on 2006 and 2007 data            [7]

                        n    Takes into account the fact that 18% of US corn production is
                             currently converted into Ethanol
                        n    Subsidy = $0.19 per gallon
             n      Total Costs = $(2.35 + 0.51 + 0.19)/gallon * 23,305 million
                    gallons
                                                 = $ 71,080 million



  [5] April 2008 futures price for Ethanol, Chicago Board of Trade
  [6] Runge and Senaurer, “How Bio-fuels Could Starve the Poor,” Foreign Affairs
  [7] The Farm Subsidy Database, “http://farm.ewg.org/farm/progdetail.php …..”


30 April 2008                                             The Wheeler School Team      10
  Cost Efficiency of Corn-Derived Ethanol
  (3/4)
   n    Computing Costs and Benefits (cont’d)
         n      Value of energy produced based on 3 March ’08 per gallon
                price of regular gasoline [8]
                 n   Value of energy = $3.162/gallon * (0.1*135,576) million
                     gallons of gasoline replaced
                                    = $42,869 million
         n      Value of reduced emissions based on based on carbon credit
                market price [8]
                 n   Value of CO2 reduction = $ 33.15 * 32.6 million metric tons
                                            = $1,080 million
         n      Quantifiable value = $43,949 million


 [8] European Climate Exchange



30 April 2008                    The Wheeler School Team                       11
  Cost Efficiency of Corn-Derived Ethanol
  (4/4)
   n    For net benefit of corn-derived Ethanol fuel
         n      Non-quantifiable Benefits >= Total Costs - Quantifiable
                Benefits
                 n   Non-quantifiable Benefits >= $ 27,132 million
   n    However
         n      Transportation sector is responsible for only 28% of the total
                annual fuel consumption, and
         n      86% of the total energy is derived from fossil fuels
   n    Hence
         n      Replacing 10% of gasoline by Ethanol is equivalent to
                reducing dependence on non-renewable fuels by only 3%

         Proposed 10% gasoline replacement by Ethanol does
         not appear to be a cost effective way of producing fuel

30 April 2008                    The Wheeler School Team                  12
  Impact on Grain Prices and Developing
  Nations (1/2)
   n    Corn Price as a function of Ethanol Production
         n      Based on 2006-07 data from Renewable Fuels Association
                and Chicago Board of Trade
         n      Modeled as a linear function with least squares regression
   n    Predicted corn price in 2008
         n      Based on current rate of Ethanol production, i.e., 9.3 billion
                gallons
                 = [0.0007*(Ethanol Produced)/(12*1000) + 0.8274] / 100
                 = $ 5.43 per bushel
   n    Modeled corn price if Ethanol production is increased
        to reduce gasoline usage by 10%
         n      Based on predicted Ethanol production of 23,305 million
                gallons
                 = 0.0007*(Ethanol Produced)/(12*1000) + 0.8274/100
                 = $ 13.42 per bushel

30 April 2008                  The Wheeler School Team                     13
  Impact on Grain Prices and Developing
  Nations (2/2)
   n    Example of impact due to increased food prices
         n      Average family income spent on food in Mexico [9] = 45%
         n      Average yearly increase in real income [10] over the next 5
                years = 5%
         n      Since corn plays a significant role in the national diet, it is
                assumed that food prices will have direct correlation with
                corn price
         n      Estimated family income spent on food in 5 years from now
                 = [45*(13.42/5.43) / (100*1.055)]*100 = 87.1%

       [9] mexicolaw.com     [10] finfacts.com



 Proposed use of corn-derived Ethanol as fuel additive will have
 severe negative impact on food prices in developing countries

30 April 2008                    The Wheeler School Team                   14
  Better Approach to National Energy
  Independence (1/2)
   n    Corn-derive Ethanol is not an effective approach
         n      It is expensive
         n      Reduced emissions are only a small fraction of the total
                annual CO2 produced in US
         n      Will significantly increase food prices worldwide
   n    Cellulose-based Ethanol can be a better alternative
         n      Considerable improvement in CO2 emissions [4] (1.75
                kg/gallon versus 5.27 kg/gallon for corn-derived Ethanol)
         n      Minimal impact on grain prices, if any
         n      A clear disadvantage is the current cost of production [11]
                (twice the cost of corn-derived Ethanol) – but could probably
                be reduced with advances in technology
         n      An example: 30% of the automotive fuel in Brazil is made
                from sugarcane (cellulose-based)
 [11] Wikipedia.com

30 April 2008                  The Wheeler School Team                     15
      Better Approach to National Energy
      Independence (2/2)
       n    Hydrogen Fuel Cells offer another alternative for
            achieving energy independence
             n      Eliminates CO2 emissions
             n      Has highest energy to unit weight ratio          [12]


             n      The only disadvantage – it is prohibitively expensive to produce
             n      However,
                     n   Cost of one gallon of gasoline equivalent dropped form $5 in 2003 to
                         $3 in 2007
                     n   Progress is being made to reduce this further to $2 by 2015
     [12] US Department of Energy

Although there will be additional costs associated with the transportation
  and delivery infrastructure, Hydrogen Fuel Cell technology may in the
    long run be the best alternative to achieve energy independence

    30 April 2008                      The Wheeler School Team                            16
  Conclusion and Recommendation
                n   Conclusion
                    n   Costs associated with corn-derived Ethanol
                        for fuel far outweigh the benefits
                         n   It is expensive to produce, and has
                             relatively small impact on reducing CO2
                             emissions
                         n   Diverting corn to Ethanol production
                             severely impacts the worldwide grain prices
                             (as further evidenced by recent riots in Haiti
                             and Bangladesh)
                n   Recommendation
                    n   Invest in long term solution(s) such as the
                        Hydrogen Fuel Cell technology
                    n   Seek better alternative(s) in the
                        near/intermediate term such as Cellulose
                        based Ethanol

30 April 2008       The Wheeler School Team                          17

				
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