Post by Theta Sigma on Sept 15, 2007 14:47:41 GMT -5
Ethanol Shock: Lester Brown’s rationale
Here’s why Lester Brown believes the world’s poorest people won’t be able to afford food as the ethanol industry drives crop prices up.
This is a minimally edited transcript of Brown’s address to the recent CIES World Food Business Summit in Shanghai where he addressed the coming Ethanol Shock and its impact on global food prices.
Brown’s presentation:
China now consumers more of most basic resources than does the US: grain, meat, oil, coal and steel. China consumes more of each of these than the US, except for oil. Meat consumption in China today is nearly double that of the US.
We’re not in the same league as China any more in the consumption of some basic resources.
What happens if China catches up with the US in consumption? If we assume that the economy of Chian which has been growing at more than 10% a year for several years slows to a growth of 8% per year then by 2031 the income per person in China will be the same as that in the US today. If we further assume that the Chinese will be spending their money more or less as we do in the US then we can begin to see what this means in consumption terms. In 2031 they’ll be consuming twice as much paper as the world currently produces.
Or consider a China in 2031 with three cars for every four people as in the US today. China would have a fleet of 1.1 billion cars. The current global fleet is 800 million cars.
Oil consumption in China would be 99 million barrels per day. Current world consumption is 85 billion barrels per day.
What China is teaching us is that the Western economic model, of fossil fuel based automobile centred throw-away economy is not going to work for China. If it doesn’t work for China it will not work for India which by 2031 may have an even larger population.
Nor will it work for the other 3 billion people in developing countries who are also “dreaming the American dream”. And most important, in an increasingly integrated global economy where we all depend on the same grain, oil, steel – it will not work for us in industrial countries either.
That is what China is teaching us. We have to come up with a new economic model, one that will sustain economic progress. The good news is that we can see what that new economy looks like. We have the technologies to build that economy. Instead of a fossil fuels based economy we will have an economy that is powered largely by renewable sources of energy. Instead of automobile dominated transport system we will have much more diversified transport systems.
We see glimpses of the new economy beginning to emerge around the world. In Western Europe 40 million people now get their residential electricity from wind farms. We see it in the solar rooftops of Japan, in the growing fleet of hybrid cars in the US. We see it in China where by the end of this year nearly 40 million homes will be getting their hot water from solar thermal rooftop heaters, one of the big until success stories in developing renewable energy resources. We see it in Iceland where 91% of homes are heated by geothermal electricity, virtually eliminating the need for coal for heating purposes.
We are an oil-based civilisation. Oil is a depletable resource.
We have long been concerned with the effect of rising oil prices on food production costs. We now have a new concern. The effect of rising oil prices on the demand for agricultural commodities because we now have the technologies to convert almost everything we eat into fuel for cars.
The US biofuels program began in 1978. We began using corn to produce ethanol. It was supported by a subsidy of 51 cents per gallon of ethanol produced. That program grew very slowly for the next 25 years or so. And then after Katrina when rising oil prices went up to over $60 a barrel, it suddenly became highly profitable to invest in distilleries to convert grain into fuel for cars. And we saw an explosion in investment in the US. A trend that had been rising very slowly for the last 25 years suddenly began to rise almost vertically.
Today the number of ethanol distilleries under construction in the US exceeds the number we built over the last 25 years. When those plants are finished, the demand for grain to produce fuel for cars will double. We used to have a food economy and an energy economy – two separate entities. Now suddenly they’re beginning to merge and what is happening is that the world price of grain is moving up towards its oil equivalent value because any time the food value of a commodity is less than its fuel value the market will move that commodity into the energy economy.
In effect, the price of oil is beginning to set the price of food.
If the price of oil jumps from $60 a barrel to $80 a barrel, the price of grain will follow it up. If it jumps to $120 a barrel, the price of grain will continue to follow. We are in a new economic era now where oil and food are interchangeable commodities because we can convert grain, sugar cane, soy bean – anything – into fuel for cars. This is an entirely new issue – one that we’ve never faced before. The ethanol lobby in Washington likes to say we (Americans) don’t eat very much corn and that is true. Mexicans eat a lot of corn – Mexican cuisine is a corn based cuisine and when the price of corn doubled the price of tortillas went up 60% and we had food riots and demonstrations in cities throughout Mexico
Bread prices in the UK, pasta in Italy, beer in Australia, pork prices in China – and a number of products going up in the US. Corn prices have doubled over the last year. Wheat prices are now trading at the highest level in 10 years and rice prices are beginning to rise.
We say we don’t eat much corn… but if you open your refrigerator, you’ll see milk, eggs, cheese, meats, chicken, pork, yogurt, ice cream – these are all corn products. (because they are produced through animals eating corn and other feed – ed). As the price of corn goes up the price of every one of those products will be affected.
We’re looking at food price rises now unlike any that we’ve seen before. By the end of next year, 2008, nearly 30% of the US grain harvest will be going into the production of fuel for cars. And this is starting to affect grain prices throughout the world. Already we’ve seen corn prices double, wheat prices climb dramatically – but this is only the beginning. Don’t assume this is a temporary event. In the past decades we’ve had occasional grain price rises but it’s always been because of weather and once weather returned to normal, then prices followed. Now we’re looking at a very different situation altogether.
We’re looking at competition in the global market between 800 million automobiles and the world’s 2 billion poorest people for the same commodity, the same grains.
We’ve never faced anything like this before. There is no human agency or international office to mediate the competition between cars and people for food.
How do we deal with this issue which is a moral issue, an economic issue, a political issue? How we deal with it will tell us a lot about the future of our civilisation. My concern is that as grain prices go up, many of those on the lower rungs of the global economic ladder will begin to fall off. FAO reports already a rise in the amount of hunger and malnutrition in the world just in the last few years and unfortunately I’m afraid we are going to see more.
My most basic concern is that rising food prices in lower and middle income countries will create a degree of political instability in the world that could disrupt global economic balance. It is certainly something that you as food retailers are going to have to deal with because this is where people will see the food price increases.
In the US I refer to the reaction of people going by supermarket checkout counters when they see these rises in prices. I describe this as ethanol shock.
But because the increase in prices will be seen by consumers at the outlet level of the market, you’re going to be under pressure to explain or justify – or if not to justify then to explain what you are doing to discourage the massive diversion of food commodities to fuel for cars. This is a new issue for you. Neither you or the world have faced anything like this before. But it is something you are going to have to wrestle with.
The good news is there are alternatives. For example, in the US if we were to increase the fuel efficiency of cars by 20% it would save more fuel than we could produce if we converted the entire US grain harvest into fuel for cars. And we could do it at a fraction of the cost.
From an agricultural point of view, the automotive fuel demand for commodities is insatiable. Consider the grain required to fill one SUV tank with ethanol would feed one person for a year.
Agriculture cannot produce enough fuel to make a major difference and to offset the coming decline in global oil supplies. We’re going to have to find another model. I think we have got one in the US – the use of a switch to plug in hybrid cars.
The average car sold in the US last year achieves about 22 miles per gallon. The Prius hybrid made by Toyota gets 55 mpg. If we just shift to hybrids we could cut gasoline use to half in the US. If however we take a hybrid car and increase the size of the storage battery and have a plug in facility so we can plug it in and recharge the batteries at night when we are sleeping, then we can run these cars virtually on electricity. We can do short distance driving – commuting to work, grocery shopping – almost entirely using electricity. If at the same time we were investing in hundreds of wind farms across the country then we would be running our cars virtually on wind energy at a gasoline equivalent cost of les than $1 per gallon.
The exciting thing is there are now five automobile makers coming to market with plug-in hybrid cars: Toyota, Nissan, Honda, Ford and Daimler Chrysler.
GM calls its hybrid Volt. It estimates under average driving conditions in the US the Chevrolet Volt will get 151 mpg because most days it will have a 40 mile a day electricity capacity so if you plug it in during the night, you’ll be running on electricity. Only if you drive longer than that will you need gasoline. So during the week you use electricity, at the weekends you might use fuel.
We’re on the edge of an explosion in wind generated electricity in the US. In Texas the governor has put together a coalition of wind farm development companies to build a 7000MW wind farm. That’s equal to a dozen coal-fired power plants or a half dozen nuclear power plants. This is big.
The key to restructuring the energy economy is to get the market to tell the ecological truth. I personally think if I understand what is happening on the climate front that we are going to have to think about cutting emissions dramatically and quickly.
Can we cut carbon emissions 80% by 2020 – difficult for sure, impossible? No. we can do it.
In the US we pay $3 a gallon for gasoline. That covers the cost of pumping the oil, refining it to gasoline and getting the gasoline to the service station and pumping it. It does not include the cost of climate change. Or air pollution or damage from acid rain.
I don’t know what the cost will be of beating climate change – but what will the cost be of climate change? The study concluded that we are looking at a massive market failure. The market does not tell you the truth about the cost of burning fossil fuels. The cost of burning a gallon of gasoline is closed to $10 than $3. The cost of burning coal huge compared with market prices.
We are all economic decision makers as consumers, corporate planners, government policy makers, bankers. We rely on the information of the market to make our decisions. It is telling that burning coal is cheap but in fact it is not. It tells us a gallon of gasoline in the US costs us $3 when in fact when you incorporate all of the costs it is closer to $10 per gallon. The challenge is to get the market to tell the truth and the way to do that is to adjust the taxation system. Lowering income taxes and offset that by introducing carbon taxes. In the process we get the economy steered in an environmentally sustainable direction.
Who is Lester Brown?
Lester R. Brown is Founder & President of The Earth Policy Institute
Described as “one of the world’s most influential thinkers” by the Washington Post, Brown is President of Earth Policy Institute which he founded in May 2001. Some 30 years ago, he pioneered the concept of environmentally sustainable development. He is also known as the Founder and former President of the Worldwatch Institute. During a career that started with tomato farming, Brown has been awarded 23 honorary degrees. Brown has authored or co-authored 50 books. One of the world's most widely published authors and sought-after speakers, his books have appeared in some 40 languages. His most recent book is entitled Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble. He is a MacArthur Fellow and the recipient of numerous prizes and awards. In 1985 the Library of Congress requested his personal papers noting that his writings and work had “already strongly affected thinking about problems of world population and resources”.
Earth Policy Institute (EPI), a non-profit environmental research organisation based in Washington, DC, was established in 2001 to provide a vision of a sustainable future along with a roadmap of how to get from here to there. EPI works at the global level simply because no country can create an environmentally sustainable economy ‘an eco-economy’ in isolation. EPI’s publications include five books, Eco-Economy Updates, which are four-page analyses of current global issues, and a set of Eco-Economy Indicators that track progress in building a sustainable economy. In addition to English, its books are published in 22 languages, including all of the major languages.
Here’s why Lester Brown believes the world’s poorest people won’t be able to afford food as the ethanol industry drives crop prices up.
This is a minimally edited transcript of Brown’s address to the recent CIES World Food Business Summit in Shanghai where he addressed the coming Ethanol Shock and its impact on global food prices.
Brown’s presentation:
China now consumers more of most basic resources than does the US: grain, meat, oil, coal and steel. China consumes more of each of these than the US, except for oil. Meat consumption in China today is nearly double that of the US.
We’re not in the same league as China any more in the consumption of some basic resources.
What happens if China catches up with the US in consumption? If we assume that the economy of Chian which has been growing at more than 10% a year for several years slows to a growth of 8% per year then by 2031 the income per person in China will be the same as that in the US today. If we further assume that the Chinese will be spending their money more or less as we do in the US then we can begin to see what this means in consumption terms. In 2031 they’ll be consuming twice as much paper as the world currently produces.
Or consider a China in 2031 with three cars for every four people as in the US today. China would have a fleet of 1.1 billion cars. The current global fleet is 800 million cars.
Oil consumption in China would be 99 million barrels per day. Current world consumption is 85 billion barrels per day.
What China is teaching us is that the Western economic model, of fossil fuel based automobile centred throw-away economy is not going to work for China. If it doesn’t work for China it will not work for India which by 2031 may have an even larger population.
Nor will it work for the other 3 billion people in developing countries who are also “dreaming the American dream”. And most important, in an increasingly integrated global economy where we all depend on the same grain, oil, steel – it will not work for us in industrial countries either.
That is what China is teaching us. We have to come up with a new economic model, one that will sustain economic progress. The good news is that we can see what that new economy looks like. We have the technologies to build that economy. Instead of a fossil fuels based economy we will have an economy that is powered largely by renewable sources of energy. Instead of automobile dominated transport system we will have much more diversified transport systems.
We see glimpses of the new economy beginning to emerge around the world. In Western Europe 40 million people now get their residential electricity from wind farms. We see it in the solar rooftops of Japan, in the growing fleet of hybrid cars in the US. We see it in China where by the end of this year nearly 40 million homes will be getting their hot water from solar thermal rooftop heaters, one of the big until success stories in developing renewable energy resources. We see it in Iceland where 91% of homes are heated by geothermal electricity, virtually eliminating the need for coal for heating purposes.
We are an oil-based civilisation. Oil is a depletable resource.
We have long been concerned with the effect of rising oil prices on food production costs. We now have a new concern. The effect of rising oil prices on the demand for agricultural commodities because we now have the technologies to convert almost everything we eat into fuel for cars.
The US biofuels program began in 1978. We began using corn to produce ethanol. It was supported by a subsidy of 51 cents per gallon of ethanol produced. That program grew very slowly for the next 25 years or so. And then after Katrina when rising oil prices went up to over $60 a barrel, it suddenly became highly profitable to invest in distilleries to convert grain into fuel for cars. And we saw an explosion in investment in the US. A trend that had been rising very slowly for the last 25 years suddenly began to rise almost vertically.
Today the number of ethanol distilleries under construction in the US exceeds the number we built over the last 25 years. When those plants are finished, the demand for grain to produce fuel for cars will double. We used to have a food economy and an energy economy – two separate entities. Now suddenly they’re beginning to merge and what is happening is that the world price of grain is moving up towards its oil equivalent value because any time the food value of a commodity is less than its fuel value the market will move that commodity into the energy economy.
In effect, the price of oil is beginning to set the price of food.
If the price of oil jumps from $60 a barrel to $80 a barrel, the price of grain will follow it up. If it jumps to $120 a barrel, the price of grain will continue to follow. We are in a new economic era now where oil and food are interchangeable commodities because we can convert grain, sugar cane, soy bean – anything – into fuel for cars. This is an entirely new issue – one that we’ve never faced before. The ethanol lobby in Washington likes to say we (Americans) don’t eat very much corn and that is true. Mexicans eat a lot of corn – Mexican cuisine is a corn based cuisine and when the price of corn doubled the price of tortillas went up 60% and we had food riots and demonstrations in cities throughout Mexico
Bread prices in the UK, pasta in Italy, beer in Australia, pork prices in China – and a number of products going up in the US. Corn prices have doubled over the last year. Wheat prices are now trading at the highest level in 10 years and rice prices are beginning to rise.
We say we don’t eat much corn… but if you open your refrigerator, you’ll see milk, eggs, cheese, meats, chicken, pork, yogurt, ice cream – these are all corn products. (because they are produced through animals eating corn and other feed – ed). As the price of corn goes up the price of every one of those products will be affected.
We’re looking at food price rises now unlike any that we’ve seen before. By the end of next year, 2008, nearly 30% of the US grain harvest will be going into the production of fuel for cars. And this is starting to affect grain prices throughout the world. Already we’ve seen corn prices double, wheat prices climb dramatically – but this is only the beginning. Don’t assume this is a temporary event. In the past decades we’ve had occasional grain price rises but it’s always been because of weather and once weather returned to normal, then prices followed. Now we’re looking at a very different situation altogether.
We’re looking at competition in the global market between 800 million automobiles and the world’s 2 billion poorest people for the same commodity, the same grains.
We’ve never faced anything like this before. There is no human agency or international office to mediate the competition between cars and people for food.
How do we deal with this issue which is a moral issue, an economic issue, a political issue? How we deal with it will tell us a lot about the future of our civilisation. My concern is that as grain prices go up, many of those on the lower rungs of the global economic ladder will begin to fall off. FAO reports already a rise in the amount of hunger and malnutrition in the world just in the last few years and unfortunately I’m afraid we are going to see more.
My most basic concern is that rising food prices in lower and middle income countries will create a degree of political instability in the world that could disrupt global economic balance. It is certainly something that you as food retailers are going to have to deal with because this is where people will see the food price increases.
In the US I refer to the reaction of people going by supermarket checkout counters when they see these rises in prices. I describe this as ethanol shock.
But because the increase in prices will be seen by consumers at the outlet level of the market, you’re going to be under pressure to explain or justify – or if not to justify then to explain what you are doing to discourage the massive diversion of food commodities to fuel for cars. This is a new issue for you. Neither you or the world have faced anything like this before. But it is something you are going to have to wrestle with.
The good news is there are alternatives. For example, in the US if we were to increase the fuel efficiency of cars by 20% it would save more fuel than we could produce if we converted the entire US grain harvest into fuel for cars. And we could do it at a fraction of the cost.
From an agricultural point of view, the automotive fuel demand for commodities is insatiable. Consider the grain required to fill one SUV tank with ethanol would feed one person for a year.
Agriculture cannot produce enough fuel to make a major difference and to offset the coming decline in global oil supplies. We’re going to have to find another model. I think we have got one in the US – the use of a switch to plug in hybrid cars.
The average car sold in the US last year achieves about 22 miles per gallon. The Prius hybrid made by Toyota gets 55 mpg. If we just shift to hybrids we could cut gasoline use to half in the US. If however we take a hybrid car and increase the size of the storage battery and have a plug in facility so we can plug it in and recharge the batteries at night when we are sleeping, then we can run these cars virtually on electricity. We can do short distance driving – commuting to work, grocery shopping – almost entirely using electricity. If at the same time we were investing in hundreds of wind farms across the country then we would be running our cars virtually on wind energy at a gasoline equivalent cost of les than $1 per gallon.
The exciting thing is there are now five automobile makers coming to market with plug-in hybrid cars: Toyota, Nissan, Honda, Ford and Daimler Chrysler.
GM calls its hybrid Volt. It estimates under average driving conditions in the US the Chevrolet Volt will get 151 mpg because most days it will have a 40 mile a day electricity capacity so if you plug it in during the night, you’ll be running on electricity. Only if you drive longer than that will you need gasoline. So during the week you use electricity, at the weekends you might use fuel.
We’re on the edge of an explosion in wind generated electricity in the US. In Texas the governor has put together a coalition of wind farm development companies to build a 7000MW wind farm. That’s equal to a dozen coal-fired power plants or a half dozen nuclear power plants. This is big.
The key to restructuring the energy economy is to get the market to tell the ecological truth. I personally think if I understand what is happening on the climate front that we are going to have to think about cutting emissions dramatically and quickly.
Can we cut carbon emissions 80% by 2020 – difficult for sure, impossible? No. we can do it.
In the US we pay $3 a gallon for gasoline. That covers the cost of pumping the oil, refining it to gasoline and getting the gasoline to the service station and pumping it. It does not include the cost of climate change. Or air pollution or damage from acid rain.
I don’t know what the cost will be of beating climate change – but what will the cost be of climate change? The study concluded that we are looking at a massive market failure. The market does not tell you the truth about the cost of burning fossil fuels. The cost of burning a gallon of gasoline is closed to $10 than $3. The cost of burning coal huge compared with market prices.
We are all economic decision makers as consumers, corporate planners, government policy makers, bankers. We rely on the information of the market to make our decisions. It is telling that burning coal is cheap but in fact it is not. It tells us a gallon of gasoline in the US costs us $3 when in fact when you incorporate all of the costs it is closer to $10 per gallon. The challenge is to get the market to tell the truth and the way to do that is to adjust the taxation system. Lowering income taxes and offset that by introducing carbon taxes. In the process we get the economy steered in an environmentally sustainable direction.
Who is Lester Brown?
Lester R. Brown is Founder & President of The Earth Policy Institute
Described as “one of the world’s most influential thinkers” by the Washington Post, Brown is President of Earth Policy Institute which he founded in May 2001. Some 30 years ago, he pioneered the concept of environmentally sustainable development. He is also known as the Founder and former President of the Worldwatch Institute. During a career that started with tomato farming, Brown has been awarded 23 honorary degrees. Brown has authored or co-authored 50 books. One of the world's most widely published authors and sought-after speakers, his books have appeared in some 40 languages. His most recent book is entitled Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble. He is a MacArthur Fellow and the recipient of numerous prizes and awards. In 1985 the Library of Congress requested his personal papers noting that his writings and work had “already strongly affected thinking about problems of world population and resources”.
Earth Policy Institute (EPI), a non-profit environmental research organisation based in Washington, DC, was established in 2001 to provide a vision of a sustainable future along with a roadmap of how to get from here to there. EPI works at the global level simply because no country can create an environmentally sustainable economy ‘an eco-economy’ in isolation. EPI’s publications include five books, Eco-Economy Updates, which are four-page analyses of current global issues, and a set of Eco-Economy Indicators that track progress in building a sustainable economy. In addition to English, its books are published in 22 languages, including all of the major languages.