When we think about ethanol, most of us in the U.S. think about corn. If we were in Brazil we would think about sugar cane. Essentially we think about ethanol produced from a fermentation process. But ethanol can also be made from hydrocarbons found in fossil fuels. In particular ethanol can be made from ethane. Ethane is the second-most common compound in natural gas–after methane. Ethane can be converted to ethylene by steam cracking. And ethylene can be catalyzed to become ethanol.

This is (potentially) relevant because a few weeks ago the U.S. Energy Information Administration reported that “Proved reserves of U.S. oil and natural gas in 2010 rose by the highest amounts ever recorded since the U.S. Energy Information Administration (EIA) began publishing proved reserves estimates in 1977.” The following graphic illustrates the dramatic change in U.S. natural gas reserves.

U.S. natural gas reserves expanded dramatically in 2009 and 2010.

Consider the following scenario: 1) A drought in the Midwest causes corn prices to rise to unprecedented levels. 2) Technological advances (horizontal drilling and hydraulic fracturing) lead to a surging supply of natural gas. Event 1) reduces the profitability of corn-based ethanol production while event 2) increases the profitability of fossil fuel-based ethanol. Considering the wide-ranging cries to suspend the RFS ethanol mandate, one could imagine Big Oil supporting a looser biofuel mandate in order to take advantage of the changing economic picture.

I think a dramatic policy change is unlikely, but the surging natural gas supply adds an interesting wrinkle in the whole ‘food vs. fuel’ debate.

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