[Editor Note: MasterResource publishes a variety of energy- and classical liberal-related essays. We are not afraid of the pursuit of truth and certainly have found it. This post by Marc Rauch, vice-president and copublisher of The Auto Channel, presents a provocative thesis about how ethanol was blocked by government policy (taxation and then Prohibition) from capturing major energy markets more than a century ago. Comments are particularly welcome.]
Debates today rage over the ethanol mandate. Be that what it may, there is a market niche for ethanol as an anti-knock agent and an oxygenate to meet clean air standards. But did you know that a market for ethanol, a free-market market, existed or could have developed except for the unintended consequences of a major government intervention?
Events of the American Civil War set in stone social and economic conditions that have been with us ever since, and they are certain to be with us long into the foreseeable future.
Perhaps the least considered of the events were the Revenue Acts of 1861 and 1862, which were passed by the U.S. Congress to fund the Union’s military efforts. Ramifications of these bills included the first Federal income tax statute and the levying of excise taxes (often referred to as “sin taxes”) on tobacco and ethyl alcohol (ethanol).
Alcohol’s tax rose to more than $2 per gallon, regardless of whether the alcohol was intended for consumption or industrial purposes. In today’s money, that’s purchasing power equivalent to about $120. In 1860, rent for 4 rooms was $4.45/month; land was selling for $3 to $5 an acre; and a laborer’s wage was 90 cents a day.
In 1872, some of the taxes were repealed – income tax, for example. The alcohol tax remained in place for decades until finally removed by the 1906 Free Alcohol Act.
The high tax on alcohol priced alcohol out of consideration for use as lamp and kitchen stove fuel, colloquially referred to as “burning fluid” or sometimes “camphene.” The alcohol-turpentine fuel had come into wide spread use earlier in the 1800’s as whale oil became too expensive and hard to come by.
The beneficiary of alcohol’s forced decline in popularity was the nascent petroleum oil industry and their principal product, kerosene. Up until the imposition of the tax, alcohol burning fluid and kerosene were similarly priced. After the tax was levied, alcohol burning fluid cost as much as 10 times more than kerosene. Kerosene had also been taxed to help the war effort: a paltry 10 cents.
The earliest efforts at building stationary and mobile internal combustion engines used alcohol fuels: Samuel Morey in 1826; Nicholas Otto in 1860; Henry Ford’s Quadricycle in 1896. Other builders of horseless carriages, such as Charles Duryea, used the new fuel “gasoline” because of it’s dramatically lower price. However, early automobile racers all used alcohol or alcohol blends for more power.
In countries that didn’t have domestic petroleum resources and onerous alcohol taxes, alcohol fuels became the preferred engine fuel. In 1899 Germany, the price of gasoline and alcohol fuel were both equivalent to approximately 27 cents. Tests conducted in Germany and France showed that alcohol optimized engines were at least as efficient as gasoline optimized engines.
The first decade of the 20th century saw significant improvements in internal combustion engines for the new fangled automobile, as well as powered aviation. Higher compression engines were required for better performance and heavier vehicles. But higher compression engines revealed a gasoline problem: Gasoline in high compression engines caused engine knock – abnormal detonation that was so severe it could shake the engine apart.
There were two solutions to this problem: The first was ethanol. The second was to add ethanol to gasoline. Either solution came with its own problem: Cost – the tax-bloated price of ethanol made it unattractive and threatened efforts to portray the automobile as a device that could be afforded by the masses.
There was another problem, a problem for the petroleum industry: they couldn’t control ethanol production and supply – ethanol can be produced by anyone, anywhere, and from a variety of raw materials. But still, the oil industry was in the cat-bird seat, they had price on their side…until President Teddy Roosevelt.
The history of Teddy Roosevelt’s campaign against corporate monopolies is well known. Less well known were the Congressional Ways and Means Committee Hearings held in 1906, during his administration. These hearings resulted in the Free Alcohol Act that removed the exorbitant tax on alcohol production.
By removing the tax, ethanol fuel became less expensive than gasoline for the first time. This meant that the top scientists and engine builders of the day could work towards better performing vehicles that relied on low cost ethanol and ethanol blends. Henry Ford’s Model T was the most famous of new vehicles that could now be powered by gasoline or ethanol (the Model T had two simple adjustments located on the dashboard and steering wheel column).
The ethanol fuel industry would now get it’s time in the sun, except for three obstacles: The first was the petroleum industry’s head start. Three decades of kerosene dominance gave the oil industry an overwhelming financial war chest to be used for marketing and political tutelage.
The second obstacle was the First World War. Although the war ignited the need for mechanical innovation, the innovations were primarily used for military purposes. Had the war not occurred, higher compression engines in consumer automobiles would have been introduced, and these engines would have required greater quantities of anti-knock ethanol.
The third obstacle was National Prohibition. With the war out of the way, and the public ready to roar into the Roaring 20’s, ethanol was eliminated from the scene; and nothing can kill competition like a law banning one of the two competitors.
In the early 1920’s, ethanol still had its supporters in the top industry scientists of the day, including those at General Motors, the world’s largest automobile manufacturer. Ethanol was the only solution to engine knock. However, after the GM scientists invented leaded gasoline (tetraethyl-lead), and combined their patents with Standard Oil and Dupont Chemical, the world’s two largest companies in their respective industries, the prospect of billions of dollars in profits from leaded gasoline put aside any consideration of ethanol-gasoline blends in America.
In countries that did not have Prohibition, such as Great Britain, ethanol did compete successfully for many years. In fact, Standard Oil (and its derivative companies) marketed ethanol and ethanol-gasoline blends in those countries, advertising them as superior to leaded or unleaded gasoline. “The Forbidden Fuel” (written by Bernton, Kovarik & Sklar) points out how the ethanol-gasoline blends were labeled as “the most perfect motor fuel the world has ever known,” and providing “extra power, extra economy and extra efficiency.”
A Standard Oil promotional pamphlet advises that with 10 gallons of their ethanol-gasoline blend in a fuel tank it is possible to pour almost a pint of water into the tank “without the slightest trouble – in fact in some circumstances with better running.”
The end of Prohibition in America did mean that ethanol could once again compete with petroleum oil fuels, but what had been a significant head start for the petroleum industry prior to the Free Alcohol Act was now an insurmountable advantage. It would require industry acknowledgement that tetraethyl-lead, and then MTBE, was deadly; economic devastation caused by foreign oil dominance; and considerable environmental concerns to compel government action that cautiously encourages ethanol use.
The U.S. government did choose the winner in the energy fuel war, and that its continued interference has made it impossible for a free engine-fuel market to exist.
Imagine a biofuel world where the disadvantages to using oil could have been ameliorated or altogether avoided, as I have posited elsewhere. This is where my thesis becomes more controversial: going from the historical fact of a nonlevel playing field for biomass through the 1930s to biomass outcompeting petroleum in the more recent past and today.
PRINTED RESOURCES The Forbidden Fuel – Bernton, Kovarik & Sklar Sustainable Ethanol – Goettemoeller & Goettemoeller Alcohol Can Be A Gas – David Blume Turning Oil Into Salt – Korin & Luft Petropoly – Luft & Korin Fill Your Tank With Freedom – Evans & Khan Internal Combustion – Edwin Black British Petroleum and the Redline Agreement – Edwin Black The Motor Gasoline Industry – Robert Schmer Ethanol Fact Book – CFDC & Growth Energy The Energy Balance of Corn Ethanol (Update) – US Dept. of Agriculture (Shapori-Duffield-Wang) The Prize – Daniel Yergin The Quest – Daniel Yergin
Gasoline and Alcohol Tests on Internal Combustion Engines – Robert M. Strong 1909 http://pubs.usgs.gov/bul/0392/report.pdf Motor Fuels From Farm Products – Jacobs & Newtin 1938 https://play.google.com/books/reader?id=bagoAAAAYAAJ&printsec=frontcover&output=reader&hl=en&pg=GBS.PA11 Henry Ford, Charles Kettering and the Fuel of the Future – Wm. Kovarik 1998 http://www.environmentalhistory.org/billkovarik/about-bk/research/henry-ford-charles-kettering-and-the-fuel-of-the-future/ Ford 1st Flex-Fuel Car, the Model T: https://www.youtube.com/watch?v=5qDYoEupI28