Indiana well-placed to produce, profit from fuels of the future
By Wallace Tyner
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When we consume transportation fuels, we impose a "security cost" on our nation that we do not pay as individuals. Economists call this a "market failure" because this security cost in not priced in the market. Government policy can help us to correct this discrepancy through interventions on either the demand or supply sides of the equation or both. That is, we can adopt policies to reduce demand for oil or policies to stimulate production of domestic alternatives to imported oil.
The demand-side alternatives most commonly mentioned are a stiff gasoline tax so that we all have an incentive to drive less, or much higher fuel economy standards that require auto manufacturers to produce and sell more fuel-efficient cars. Our current administration has no interest in any demand-side options, so that leaves only the supply-side possibilities — among them greater use of alternative transportation fuels.
Two of the most promising alternative fuels are renewable fuels from agriculture — ethanol from corn or biomass to substitute for gasoline and bio-diesel from soybeans or other oilseed crops — and liquid fuels from coal. Fortunately, Indiana is well-positioned to become a very important supplier of both of these alternative fuels.
This year, the United States will produce about 5 billion gallons of ethanol. New plants are being announced every week. At today's oil and gasoline prices, ethanol is highly profitable without a subsidy, and it still receives a government subsidy — implemented in the days of $30 a barrel oil — to spur research. Today, most ethanol is made from corn, and Indiana is a large producer of corn. Also, with more research, we will be able to make ethanol from cellulosic materials, such as cornstalks and other agricultural "wastes" that are widely available in Indiana. Indiana is third nationally in soybean production and fifth in corn production. Five percent of the state's corn crop is used in ethanol production.
Another alternative is liquid fuel from coal, and Indiana has abundant coal resources that could be used. As part of the Illinois Coal Basin region, Indiana already has a number of top coal researchers and coal research facilities. The state annually mines more than 35 million tons of coal, and more than 130 billion tons are mined from the Illinois Coal Basin, enough to meet current U.S. coal demands for the next 100 years.
Additional research is needed to commercialize coal liquid fuels, and we will need a policy environment that supports coal liquids investments to make it happen. It takes billions of dollars to build a commercial coal liquids plant, and no private company would do that today without some sort of protection against a future oil price drop. There are, however, policy instruments at our disposal to use if we are serious about development of alternative domestic fuels.
If our government commits to coal liquids and renewable liquid fuels, Indiana could become an important alternative energy supplier. We are also well-situated to supply much of the East Coast with these alternative fuels. Jobs and energy-driven incomes could become a part of the fabric of our state economy. So the Indiana economy could benefit substantially if the United States translates talk into action. It will take additional funding for research, and it will require creation of policies that support these alternatives.
Development of alternative fuels is an important part of a comprehensive energy policy to reduce our dependence on imported oil. If we go down that path, Indiana's economy will be one of the winners.
Wallace Tyner is a professor of agricultural economics at Purdue University.
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