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"The distillate must be chemically treated to remove the remainder of the water before it can be used for fuel in an engine that is not specifically built for the task."

Ethanol does not have to be chemically treated to remove excess water. Pure ethanol can be had simply by filtering through charcoal. Most people with home stills at least use molecular sieves made from zeolites to extract the water. These are generally little balls made from "microporous crystalline solids with well-defined structures." They soak up water but not ethanol, and can be dried and reused over and over again. The company that was the subject of this article well sell you zeolite pellets for $4.75 a pound with free shipping. There are also ways to dehydrate the ethanol using dried corn or other biomass to extract the water, different low pressure distilling methods, and other means that do not necessarily require the use of toxic chemicals.

"Also, An engine built to operate most efficiently with ethanol would need a higher compression ratio than one built for gasoline. This is determined in the engine design and not alterable during operation, so any engine that uses a variable mixture of the two is not optimized."

I've read that there are some turbo-charged fuel injected engines that run more efficiently on ethanol than gasoline. Ethanol normally produces something like 30% less energy than gasoline, but there are already cars with engines capable of doing better than that on or roadways, and there are modification people can make to existing engines that will allow them to use more than the 20% or 25% or so ethanol their engines can already handle and modifications that will help with fuel efficiency. And if gas prices remain high as they are expected to do, the lower efficiency of ethanol in standard engines won't matter that much to consumers because even if they have to burn more ethanol to get where they are going, they'll still spend less because ethanol is considerably cheaper than gasoline at the moment. If gas prices go much higher, I'm buying a still. I'd rather not fund the crazy Arabs with my fuel purchases anyway.

[The distillate must be chemically treated to remove the remainder of the water before it can be used for fuel in an engine that is not specifically built for the task]

Alcohol mixes readily with water and will combust even at a 50/50 ratio with only a comparable reduction in efficiency. You can burn a shot of booze right out of the bottle, but be careful if you try it because the flame is difficult to see.

[An engine built to operate most efficiently with ethanol would need a higher compression ratio than one built for gasoline.]

A regular gasoline engine can switch to ethanol using the same compression ratio with only a few minor modifications to the fuel system. If it's a carburated engine then the jets need to be changed to deliver more fuel. Similarly, if the engine is fuel injected, then the injectors must be upgraded and the computer recalibrated to deliver more fuel.

While a significant performance increase will be seen by increasing the compression ratio from the 9:1 typical of gas to 13:1 for ethanol, it isn't strictly necessary.

http://running_on_alcohol.tripod.com/id32.html

I'm currently modifying my '78 M-Benz with a user programmable aftermarket fuel injection system (Megasquirt)in order to increase fuel economy as well as performance and toyed with the idea of converting to alcohol at the same time, but I decided it wasn't economical at all getting an estimated 10 MPG. The money incentive won't be there until you can buy ethanol for less than HALF what gasoline costs.

http://www.bgsoflex.com/megasquirt.html