Vinod Khosla

Vinod Khosla.
Photo: brettwayn via Flickr.

Much of what Vinod Khosla had to say in his latest post, and my responses to that post here, have been covered in previous posts. So, if some of this sounds eerily familiar, now you know why.

Admittedly, I have an advantage in this debate because he can’t respond directly to my arguments. Remember the West Wing episode where the Josh Lyman character makes the mistake of responding to a blogger?

On the other hand, I’m not an independent blogger with my own website. Thus, the fine line between courage and stupidity. May I offer an apology to Grist for my stupidity and my thanks for allowing me to express it.

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Khosla begins his defense reiterating the following belief:

In fact, I strongly believe any nascent technology that cannot exist without subsidies beyond an introductory period will not gain market penetration and is not worth supporting …

He believes subsidies should be pulled after an introductory period, as virtually every politician on the planet also professes. But, as always, the devil is in the not-discussed details. This “introductory period” is left undefined. Corn ethanol has been subsidized for about thirty years. Khosla needs to pick a hard and fast number for this introductory period for both corn ethanol and his fuel, something between two and thirty years, if he wants to be taken seriously on that subject. He also needs to define when the clock started ticking. Did it start three years ago, or is it going to start at some undetermined point in the future?

Khosla is a big supporter of laws that force companies to blend food based biofuels into our gas supply (mandates), which in turn forces taxpayers to purchase said biofuels regardless of price. This would be doing the consumer a favor if that blended gasoline actually saved them money. But it doesn’t. Ignoring the blending subsidy, the average price spread on E85 for the last 30 days is 17 percent. It needs to be closer to 25 percent to have equal value with gasoline (see Excel file here). This makes the mandate a subsidy in sheep’s clothing.

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I have not advocated subsidies for food-based ethanol …

… The corn ethanol subsidies that exist today were part of the 2005 Energy Bill, passed at a time when I had no contacts with Washington.

Is he saying that he would not have lobbied for them back in 2005 if he had contacts then, or that since they are already in place he has no need to lobby for them? Hmmm. The only fact we can hang our hats on is the fact that he is not lobbying to have them removed … yet. That may change if cellulosic ever gets to market. Corn ethanol (and the billions of dollars invested in ethanol refineries) will then switch from Trojan horse to competitor. Will he be lobbying for an end to corn ethanol subsidies (because they are driving up food prices) while keeping them for cellulosic?

By publicly acknowledging some of corn ethanol’s limitations, Khosla has managed to convince a lot of people that he isn’t a supporter of corn ethanol. The following quote makes it crystal clear where he stands on the corn ethanol issue:

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It is clear that corn ethanol has served as a stepping stone for cellulosic ethanol and other biofuels, mitigating risk and establishing a market. As a venture capitalist, I would not have invested in cellulosic without corn ethanol’s partial alleviation of the risks of creating a market, creating distribution terminals and E85 pumps, and starting our flex-fuel fleet.

There is no market for ethanol as a car fuel. Forcing consumers to subsidize cellulosic ethanol and then forcing them buy it back by blending it into their gas tanks is really twisting the definition of a “market.” A true market is created by consumer demand being met by entrepreneurs competing amongst themselves to attract buyers with the best product. This is what Consumer Reports thinks about flex fuel vehicles:

The fuel economy of the Tahoe dropped 27 percent when running on E85 compared with gasoline, from an already low 14 mpg overall to 10 mpg (rounded to the nearest mpg). This is the lowest fuel mileage we’ve gotten from any vehicle in recent years.

The FFV surge is being motivated by generous fuel-economy credits that auto-makers get for every FFV they build, even if it never runs on E85. This allows them to pump out more gas-guzzling large SUVs and pickups, which is resulting in the consumption of many times more gallons of gasoline than E85 now replaces.

The installation of E85 pumps is wholly unnecessary and would be a horrendous waste of capital. We could simply increase the percent of ethanol that we already blend into our fuel supply.

At a recent WSJ conference, 75 percent of its erudite audience “voted” (rightly) that oil was more highly subsidized than ethanol.

Biofuel advocates never pass on an opportunity to drive a wedge between environmentalists by pulling the oil subsidy card. We would all like to end oil subsidies, but that has been easier said than done with Republicans Bush and Cheney — who, contradictorily, are also huge biofuel advocates — in control for the last eight years. Go figure. By pulling this card, Khosla is trying to paint biofuel critics as supporters of Big Oil. Without knowing who was in attendance and the purpose of this conference, the results of this vote are not very meaningful, especially if the audience consisted mostly of erudite biofuel proponents. And by “heavily subsidized,” did they mean in total or as a percentage of liquid fuel consumed?

Should we not look past our noses to the larger issues of dependence on oil?

Above we have the oil independence argument yet again. We just used roughly 25 percent of our corn crop to increase liquid fuel supplies roughly 2 percent. Raise your hand if that sounds smart to you. The Consumer Reports article explains how our Flex Fuel fleet has actually increased oil use. Luckily, Prius sales have passed through a million, small car sales are going ballistic, and SUV sales are tanking. The market and consumer choices are starting to respond. Imagine a future where we grow dependent on plants for our liquid fuel. Uncontrollable, unpredictable weather would be sending random OPEC-like shocks through the economy. Most of the biofuels we will be using will be coming from other countries anyway (sugar cane). The world is now flat. We are all interdependent. Why don’t we strive to end our dependence on foreign sources of cars and computers while we are at it?

Below he acknowledges that corn ethanol will hit a limit (because it will drive the cost of food to an intolerable level?):

I have consistently argued that food-based ethanol cannot scale beyond roughly 15 billion gallons or so in the U.S. …

He then spends considerable effort trying to downplay the role biofuels have had (and will have) in raising the cost of food by quoting some numbers from a USDA press briefing. You could not ask for a more biased source when it comes to corn ethanol. Here are some quotes from Secretary Ed Schafer, where he spends over a thousand words praising corn ethanol during the USDA “food” briefing:

One of USDA’s missions is to make sure the American people have access to safe, abundant, and affordable fuel supplies.

So developing diversity in our portfolio of fuels is, if anything, an even more urgent matter than it has been in the past, and it is one that remains central to both our energy security and our national security. And that is what our biofuels program is all about.

Can someone explain to me how the Department of Agriculture got into the fuel business?

In response to the following reporter question:

Given that, do you have any sympathy for the 24 Republican senators who on May 2 signed a letter saying that we need to look at potential waivers of the Renewable Fuels Standard and let the marketplace take care of the issue on that end as well?

… he says:

I have no sympathy for 24 or 28 or 50 senators, whoever signed it, that clearly aren’t seeing the facts.

Khosla goes on to quote from the aforementioned press release:

While corn prices certainly have some impact on biofuels, their impact is constantly overstated by sources like the WSJ. In fact, they would do well to see what the USDA has actually said on the subject. Yesterday, USDA Chief Economist Joe Glauber noted:

“On the international level, the President’s Council of Economic Advisers estimates that only 3 percent of the more than 40 percent increase we have seen in world food prices this year is due to the increased demand on corn for ethanol.”

A minor point, but the above quote is actually from Glauber’s boss, Secretary Schafer. Interestingly enough, following on the heels of his boss, this is how Glauber (the chief economist) concluded his part of the presentation (I don’t recommend the video, he is a painfully slow public speaker):

Lastly, no question, biofuels also has been a very, very important part of this picture. As I mentioned, in the U.S. we’ve seen increases over the last two or three years, and as we increase capacity and add more capacity to the ethanol processing manufacturing sector, that we’re going to see — again we’re calling for about a 33 percent increase in corn use in ethanol this year.

Let’s go back and examine the estimate that the increased demand for corn ethanol accounts for only 3 percent of this year’s global 40 percent food price increase. Legislation to increase biofuel production was introduced three years ago. Production has been ramping up very rapidly for the last two years. Let’s start by assuming, just for the sake of demonstration, that each of the five major reasons given for rising costs are equal:

  1. Biofuels (8 percent)
  2. Bad weather (8 percent)
  3. Rising demand for livestock products (8 percent)
  4. Rising oil prices (8 percent)
  5. Market speculation and hoarding (resulting from rapidly rising prices and dwindling surpluses — 8 percent)

Now let’s put in place Schafer’s claim that corn ethanol accounts for only 3 percent of the 40 percent global increase in prices (0.03 x 40 percent = 1.2 percent). Since the U.S. produces roughly one third of the world’s biofuels, we can multiply that by 3 to get a rough approximation of global biofuel impacts (3 x 1.2 = 3.6):

  1. Biofuels (3.6 percent)
  2. Bad weather (9.1 percent)
  3. Rising demand for livestock products (9.1 percent)
  4. Rising oil prices (9.1 percent)
  5. Market speculation and hoarding (resulting from rapidly rising prices and dwindling surpluses — 9.1 percent)

We can stop here because the contribution by biofuels (not just corn ethanol) to global food inflation is obviously significant. Nobody actually knows how these numbers are distributed. According to the FAO, crop displacement effects by biofuels account for 39 percent of the increase in maize prices, 21 percent in rice, and 22 percent in wheat. But before we stop lets make some stabs at redistributing these percentage points for the sake of discussion.

For example, if item No. 5 is the biggest player (and I suspect it is) and we continue this redistribution thought exercise by doubling its impact we get:

  1. Biofuels (3.6 percent)
  2. Bad weather (6.13 percent)
  3. Rising demand for livestock products (6.13 percent)
  4. Rising oil prices (6.13 percent)
  5. Market speculation and hoarding (resulting from rapidly rising prices and dwindling surpluses — 18 percent)

We can also make some assumptions about the role of oil prices on global food inflation. I suspect that the United States uses more fossil fuel to produce food than any other country in the world. We use fossil fuels to grow, transport, package, process, and refrigerate it. Yet in the face of record oil prices, according to Schafer:

Here in the U.S., we’re fortunate to be dealing with a much smaller scale of food price increases. As Joe’s slides will show you, last year our overall food prices were up 4 percent [verses 40 percent for the global average]. That’s about 1.5 percent higher than the average annual increase of 2.5 percent that we’ve been seeing since 1990.

This suggests that oil prices are having much less impact on the price of global food than some would like us to believe. And last but not least, note that biofuel production is the only item we have control over.

Given that foods using corn as an ingredient make up less than a third of retail food spending [in the United States], overall retail food prices would rise less than 1 percentage point per year above the normal rate of food price inflation when corn prices increase by 50 percent.

A year ago, a bushel of corn was selling for $2.50. Last month, it crossed $6.00. That is an increase of well over 100 percent, not 50 percent. Americans spend a small percentage of income on food. No American will starve because of high food prices. The concern should be for those who will. However, our politicians are not elected by the third world. Their goal is to convince American voters that the high price of food has nothing at all to do with putting 35,000 square miles of corn and billions of gallons of oil into SUV gas tanks.

Roughly 2.8 billion people live on less than $2 a day, and 1.2 billion of them live on less than $1 a day. To say that someone lives on less than $2 (American equivalent) a day is an attempt to describe a level of poverty that most Americans would find difficult, if not impossible, to comprehend. It is hard to believe, but you and I can live on $2 a day. If you don’t eat for three days, you will have accumulated $6. That is enough to buy (or at least it used to be) a twenty-pound bag of rice or wheat flour or corn meal. Now if you can get someone who has a pot and a fire to help you cook it, you will get your caloric requirements met for several weeks. You can then invest in a blue tarp, a pot, maybe a propane cook stove. Find yourself a nice cardboard box and you’re on your way — just like 2.8 x 10^9 other people.

Corn ethanol is not just affecting the price of corn products. This article from the inestimable Robert Rapier sums it up:

… you will see that in fact, as corn prices climbed due to ethanol mandates, the amount of acres devoted to wheat and soybeans decreased — which has exacerbated an already difficult wheat situation. My good friend Nate Hagens (a very level-headed guy) at The Oil Drum notes today:

Hard red wheat is limit up again (i think thats 9 days out of 11) and is at $19.80 a bushel. When it broke $6 a bushel last summer that was an all time high. I have to believe there are going to shortages. I know I can’t buy in bulk at local bulk food store right now — orders are backlogged. Ticker symbol MWH8. I don’t know enough about the differences between soft and hard wheat other than the hard has more protein and is used in breads, bagels etc. Wow. $20 a bushel …

Khosla continues:

What is responsible for the bulk of the food price increase? Principally soaring energy costs, increasing demand, and droughts in certain countries amongst others. The WSJ fails to note the impact of higher energy prices on food prices: A 2007 study by John Urbanchuk at LECG suggests that increases in petroleum prices have 2-3 times more impact than increases in corn prices on the food Consumer Price Index alone.

The above referenced study compared a dollar increase in the price of a gallon of gas to a dollar increase in a bushel of corn. If you account for actual increases in the cost of a bushel of corn, you find that corn has 1.4 times more impact on the cost of food than oil.

Furthermore, ethanol has played a significant role in reducing costs for consumers elsewhere. Merrill Lynch has estimated that oil prices may be up to 15 percent higher than current levels if not for ethanol.

I believe that number is for world prices, including Brazil. I think it said that that the U.S. price of gasoline would be 25 percent higher were it not for ethanol. I have not been able to trace down the actual study. In all seriousness, I would like to see how increasing our liquid fuel supply roughly 2 percent can reduce the price of gasoline 25 percent, especially considering that E85 has been costing more than gas for the last month. Did the study include the 3 billion in blender’s tax credits? You just can’t believe everything you read on the internet.

Mandates reduce the ability of any specific party to manipulate or hinder the market by limiting access to biofuels.

Inversely, they also hobble free market competition, allowing government to pick winners instead of consumers and entrepreneurs. Will biofuels slow the entry of high mileage cars into the market by keeping the juice flowing to SUVs?

While I am certainly an advocate of biofuels, it is vital that we understand that biofuels themselves have differences — we can do them poorly, or we can do them right.

In theory, yes. But today’s on-the-ground reality has to end.

We cannot discuss drugs without differentiating between cocaine and aspirin. Criticism of biofuels is certainly fair game (such as palm oil-based biodiesel from Indonesia’s rainforest, which actually hurts the environment more than it helps).

Palm oil is the most productive biofuel per acre of them all, beating cane and cellulosic by a wide margin. How do you justify accepting the science that shows palm oil creates more GHG than it displaces via carbon sink displacement while rejecting the science that says biofuels made from soy, canola, and corn all do the same things (and in the case of canola and corn, also release vast amounts of nitrous oxide)? Last year, we dedicated 35,000 square miles (an area the size of Indiana) of the most productive farmland on earth to our gas tanks. The latest peer-reviewed science has shown that farmers around the world respond to those price signals by plowing up more carbon sinks to make up for the food that goes into gas tanks, be it soybeans, canola, or corn. If those farmers are half as efficient as American farmers, they will convert 70,000 square miles of carbon sinks to crops. It would take 24 hours driving at 60 mph to go around a rectangle that big, assuming you don’t have to slow down at the corners.

… but there is an obligation to stick to the facts. Unfortunately, the WSJ‘s editorial failed to meet even this basic threshold.

I reprint part of that WSJ editorial below:

Spiking food prices, global shortages and Third World riots have managed to elicit repentance from some ethanol evangelists. Not Vinod Khosla. As the Silicon Valley billionaire explained last week in an interview with the San Francisco Chronicle, ethanol’s contribution to the crisis is “very minor” and “overblown.”

“Food prices have been going up,” Mr. Khosla conceded. “But there are massive PR campaigns trying to ascribe most of the blame to biofuels.” Apparently “lots of people” are behind the plot, though Mr. Khosla singled out one: “Clearly, the American Petroleum Institute has been very, very concerned about food prices, and you wonder why.”

Gosh. API is a trade group for the oil and gas industry that is radioactive on Capitol Hill. But we didn’t realize that API’s tentacles were wrapped around the World Bank, the International Monetary Fund and the USDA, all of which blame ethanol for inflationary pressures on food prices. Nor did we appreciate how much authority API’s views carried with the U.N.’s special rapporteur for the right to food, Jean Ziegler, who says Western biofuels programs are “a crime against humanity.”

I’m not a big fan of the WSJ, and I do empathize with Khosla for how he was portrayed, but going back over my post, I don’t see how their portrayal is all that inaccurate. I’m assuming they at least have the quotes right. I have yet to see anyone ascribe “most” of the blame to biofuels. Biofuels share the blame. That’s more than enough when children start to go hungry. The “massive PR campaign” conspiracy theory ices the cake for me.

Back in the seventies, almost a third of the human beings on the planet were not getting enough to eat. Thanks to the green revolution, we managed to wrestle that number down to about 800 million and hold it steady for a decade or two. Dropping fertility rates, China’s booming economy, and one child policy were big factors helping to hold that line. That number has started to grow again. We may be heading right back to where we were in 1970. The role of today’s food based biofuels in this looming debacle becomes more prominent with every new gallon produced on displaced croplands.

How bad should we let it get before we pull the plug on mandates for biofuels that displace food, biodiversity, and carbon sinks?