How Free Trade Can Help Solve the Energy Crisis

WASHINGTON DC (By Robert McFarlane and George Philippidis, Wall Street Journal) July 27, 2008 ― The unprecedented escalation in oil and food prices is a clear and present danger to our economy and national security. The root cause of this crisis is our dependence on a single commodity, oil, for transportation — we burn 145 billion gallons of gasoline a year. The only permanent solution is diversity in our fuel supply to ensure competition and choice in the marketplace.

While a number of alternatives to oil are being developed, we already have one strategic solution at our disposal: biofuels, both domestic and from Latin America.

Biofuels like ethanol and biodiesel are cheaper than fossil fuels, and will become even cheaper if we eliminate the senseless tariff on ethanol imports from Brazil. Ethanol can be used safely as a 10% blend with gasoline in all existing cars, and as an 85% blend in the increasing number of flexible-fuel cars on our roads. That means a 10% to 85% potential drop in gasoline use and, hence, freedom from the oil stranglehold.

The public has been bombarded with lies and half-truths about biofuels, especially in the last six months. Americans should realize that biofuels are superior to fossil fuels. Biofuels are renewable, nontoxic and biodegradable. They are also beneficial to the automobile engine, the environment and the economy.

Biofuels are available today by the billions of gallons from a variety of sources: corn, sugarcane and soon from cellulosics. Cellulosic ethanol promises to dramatically boost domestic production in the near future. In the meantime, sugarcane ethanol already produced in Latin American sugar mills can become a key U.S. fuel supply.

Cellulosic biomass, in the form of existing agricultural and wood waste, is abundant (over a billion tons annually), inexpensive and requires no additional land. It has no food or feed value and therefore no effect on food availability and prices. A number of technologies are pursued for production of cellulosic ethanol and other biofuels, such as butanol and biodiesel. Most likely there will be no single technology winner. Rather, technologies will be adapted to the particular characteristics of local biofuel feedstocks.

Lower fuel prices will come only with an ample supply of alternative fuels. Cellulosic ethanol can extend corn ethanol's potential of 15 billion gallons per year, but it will not happen overnight. Resolving commercialization issues, building a large number of plants, and ramping up cellulosic ethanol production to billions of gallons will require a number of years.

To quickly boost its biofuel supply, the U.S. should partner with Latin America. Sugarcane ethanol from Brazil, Colombia, Peru and Central America should become an integral part of the U.S. energy strategy. An increase in Latin American cane ethanol capacity is the fastest, most cost-effective and lowest-risk strategy to secure abundant ethanol fuel. The U.S. needs Latin America for energy security, and Latin America needs the U.S. for capital and technology infusion. It's a classic win-win partnership — provided U.S. trade barriers to sugarcane ethanol are eliminated.

Biofuel production is sustainable. The U.S. corn ethanol industry is investing in technology improvements to reduce land demand through higher productivity and to minimize its carbon footprint. Cellulosic ethanol will come from existing waste materials, not additional land.

Still, both corn and cellulosic ethanol can learn sustainable business lessons from Brazil. Its sugar mills have become biorefineries that co-produce sugar, ethanol and electricity in a renewable fashion, thus satisfying food, fuel and energy needs at the same time. The plants are self-powered by renewable energy derived from cane fiber and other biomass. As a result, Brazilian ethanol today is cost-competitive with oil at just $70 a barrel ($45 a barrel before the dollar weakened) without government subsidies — a significant price advantage over gasoline.

The U.S. should immediately pursue a multifaceted biofuels strategy. First, while the corn industry improves productivity and sustainability, the U.S. should treat the commercialization of cellulosic technologies as a matter of national security — a new Manhattan Project deserving all the necessary resources to accelerate deployment.

Second, the U.S. should pursue closer energy integration with Latin America though regulatory convergence and open biofuels trade, thus encouraging private investment in sugarcane ethanol production. This is the fastest and most efficient means to boost ethanol availability within three to four years, and displace gasoline use to an extent significant enough to cause oil demand and prices to drop.

Third, consumers should be educated and financially incentivized to switch to flexible-fuel vehicles, creating demand for mass production of such vehicles, which will dramatically cut U.S. dependence on foreign oil.

Energy security can not be achieved with a silver bullet. It is not a competition between corn ethanol and sugarcane ethanol or between biofuels and plug-in hybrids. The sooner we realize that U.S. energy security needs all of the above, the sooner our country will be able to commit to a coherent long-term energy policy. U.S. and Latin American biofuels are the kick-start needed to break oil's unbearable monopoly in transportation fuels.