Being an environmentalist opposed to nuclear power is like being a vegetarian who is starving but still refuses meat. The solution to all your primary goals and needs is right in front of your face, but you still refuse to alter your mindset to see it. Let’s see here: Fewer carbon emissions? Check. Clearner burning energy? Check. Reduced use of fossil fuels? Check. Add in the benefits of more affordable energy and a decreased use of foreign energy sources, and I have never understood the opposition to nuclear power.

A short time ago I half-jokingly wrote about how the disaster movies of the 1970s helped fuel the safety-obsessed society we now live in. Smarter people than I have already constructed this equation: One overrated movie + one poorly timed, frightening, but ultimately minor accident + an enormous amount of activism from certain types opposed to nuclear power = a halt on expanded nuclear power in America + more dependence on the exact thing (oil) that environmentalists don’t like in the first place + higher energy costs for everyone.

What is the point of all this? AmerenUE wants to expand its nuclear plant in Cab Callaway County. The Fulton Sun has the story here, about a recent public hearing on the proposal. One of my neighbors showed up to oppose it:

Drey claimed that a natural disaster such as an earthquake or a terrorist attack would cause massive ecological and health problems for a very large area.

“Someone could get in with a plastic explosive through a metal detector and drop it into the plant and that would be the end of Callaway County and the rest of us,” she said.

Where to begin? First of all, the plant is already there (thankfully). It’s not like a terrorist is going to say, “Well, now they have two reactors instead of just one, so let’s target it. Why would we have wasted our time trying to detonate just one nuclear reactor? But now that there are two, it is worth our efforts!” The same goes for earthquakes, but I trust that the engineers who built it — and will build it — have, you know, considered that.

Everything has a cost and a risk. The extensive use of nuclear power has shown that it is safe — except, perhaps, when you let it be run by communists. Congressman Todd Akin (definitely not a communist, but an engineer) has proposed major revisions to American’s energy policy that include expanding the use the nuclear power:

“I have always been a supporter of nuclear energy,” Akin said. “The rewards are substantive as far as its low cost energy and its cleaner.” He noted that nuclear power becomes a more attractive energy source in the context of global warming.

I could not agree with him more.

And so goes the circle of life. With all the recent crossover between the Show-Me Institute, Reason, MoDOT rankings, etc., I feel the need to at least point out that Reason has released a new piece about the ethanol industry in America. Now, we didn’t have anything to do with this study, although we did release our own case study two months ago.

Dave over at the Arch City Chronicle was kind enough to note the work we have done with Reason, and the work of ours that they have carried in their 2008 privatization report. But back to ethanol.

The relevant Reason TV episode is very powerful. Please take a few minutes and watch it. The undeniable truth of the ethanol scam is that the entire industry would collapse if not for the subsidies and tariffs that prop it up. And, by the way, with gas prices as high as they are, this is the perfect time to find out: If an unsubsidized and unmandated ethanol product can’t succeed now, then when will it?

The Springfield News-Leader has a very sharp op-ed about ethanol that Mr. Combest linked to this morning. It raises some worthy questions regarding the effect of ethanol and the E-10 mandate on food prices. I recommend it.

But these aren’t the same as the price-control induced lines from the 1970s. According to the Post-Dispatch, Rhodes 101 Service Station in Poplar Bluff, Mo., offered gas for $2.69 per gallon on Tuesday as part of a promotion with Big River Telephone. People waited in lines for nearly 45 minutes to get the savings, which amounted to $10-$25 per customer, according to one commenter. That comes out to $13.33-$33.33 an hour. This probably isn’t a very good deal for the average middle class American, who probably earns more than than that.

However, unlike the gas lines of the 1970s, which were induced by price controls, these people still had the option of spending a bit more money to get their gas immediately. If the lines had been induced by price controls, and thus existed nationwide, they would be much longer — and the lower price almost certainly wouldn’t be worth the extra wait. That is the lesson of price controls: The posted price of gas, or anything else, may be lower under price controls, but the price consumers have to pay skyrockets once you take into account their lost time and search costs.

Today, the Post-Dispatch editors chastised the leading Republican gubernatorial candidates for turning the Missouri ethanol mandate into a major campaign issue. The editors may well be correct that “the mandate makes very little difference in the bank accounts of drivers, grocery shoppers, or even farmers.” However, contention over the mandate might provide a worthy outlet for opinions about larger issues, such as the government’s involvement in ethanol production and the appropriateness of direct intervention into other markets.

As a practical matter, the future of the current ethanol mandate will not have a large effect on the commodity prices Missourians face. Our study, which was a narrowly focused rebuttal of another study, estimates a considerable, but not overwhelming, price tag of $29 per Missouri driver per year. The P-D suggests that “for drivers, there’s probably only a tiny savings.” Regardless of whether the mandate is a net positive or net negative, we both agree that the effect is relatively small. After all, the legislation only touches statewide consumption of globally traded commodities in the event that their associated market prices are lower than those of conventional gas.

Even so, the current discussion is anything but frivolous. The ethanol savings figures given by the Missouri Corn Merchandising Council are patently false. Further, the use of coercive intervention into a fully functional market raises legitimate doubts. The Republican candidates obliviously feel that they can effectively offer different shades of conservatism through a real — although perhaps not earth shattering — debate. Whether their attempts to differentiate themselves will pay off remains to be seen, but we can’t blame them for trying.

I appeared on the McGraw Millhaven Show Monday to discuss a number of items, but for the point of this post I will limit it to our case study about ethanol. The Missouri Corn Growers Association appeared on the show yesterday to give their side of the issue, which is what debate is all about. I was unable to listen in yesterday as I was driving to Kennett (damn, the Bootheel is far away!) to give a presentation about another topic. Dapper Dan the intern, however, listened carefully and gave me detailed notes about the corn growers’ appearance, so that I could respond via this blog.

The corn grower’s rep, Gary Marshall, (not that Garry Marshall) achnowledged that E-10 ethanol gasoline has reduced fuel efficiency. He said that our estimate of a 2.5-percent reduction was too high, though, for much of the gas. He also speculated that no Missourian finds a decline in mileage, which I will further speculate is wrong, and point my valued readers here and here. The most important thing is that they admit they did a study claiming cost savings by E-10 gas and did not account for the reduced fuel efficiency. The study that the MCMC commissioned is not sound public policy research — it’s propaganda.

Next, the interview got into a canard that the ethanol industry likes to use in regard to the ethanol subsidy. The reasoning goes that we should logically ignore the subsidy, because the oil industry is subsidized, too (which it is), so they cancel each other out. Is that correct? No. Let’s go to the ultimate authority on this, the Energy Information Administration with the U.S. Dept. of Energy. Just last year, they released a report about the subsidy amounts provided to the overall energy industry. The 2007 value of the Volumetric Ethanol Excise Tax Credit was just less than $3 billion dollars ($2,990,000, to be exact; figure on page 21). Let’s compare this with oil. The federal subsidies for ALL natural gas and oil prodiction (much more than just automobile fuels) was just more than $2 billion ($2,090,000, to be exact — page 23). That is almost a billion dollars more in subsidies for ethanol alone than for the entire oil and natural gas industry combined, which, again, includes home heating oil, gas for your car, etc. Now consider that the oil and gas industry dwarfs the ethanol industry, and it is inescapable that one industry (ethanol) is MUCH MORE HEAVILY SUBSIDIZED than the other industry (traditional oil and gas).

Now, to be fair, you might say we should have incorporated the lower oil subsidies into our case study analysis. But our study never stated that oil and gas didn’t get subsidies. It refuted the calculations used in the MCMC study by insisting that they don’t get to claim the 51-cent-per-gallon subsidy as savings for Missourians, as though taxpayers didn’t pay for that subsidy in the first place. The oil and gas subsidies, small and non-distortionary as they are, were fully included in the cited gas prices used by ethanol supporters in their claims to save us money.

There is much more to consider here, but this post is already too long. I have nothing against ethanol. I dislike the subsidy, in the form of the tax credit, in the same way I dislike all agricultural subsidies. But most other agricultural subsidies are not forced upon me via mandate, like E-10 gas is. It is the combination of mandating a subsidized product that I dislike, and I like it even less when supporters of the dictate use poorly reasoned and flawed studies to tell me it’s a good thing.

P.S. — I hope you all get just how ridiculously clever the title of this post is!

Over at the Post-Dispatch, gubernatorial primary hopeful Sarah Steelman participated in a live Q&A session with the readers. Here is one interesting question:

Joe Hodes, St. Louis: Ms. Steelman,

I was inclined to vote for you until I saw your ad on the ethanol mandate. While corn ethanol has been shown to play a tiny part in driving up food prices (far less than foreign demand, oil prices and speculation), it has driven DOWN the cost of gas by 10 cents or more a gallon.

There have been over a dozen studies by universities, economists, researchers and even the energy industry showing that ethanol REDUCES the cost of gasoline–Missouri’s E10 mandate leads MO to have the CHEAPEST GAS in the nation.

Yet you say in your ad that the ethanol mandate has caused gas prices to rise. No one–even ethanol’s other critics–has been foolish enough to make such a counter-factual statement.

How could you get your facts so wrong?

Thanks,

Joe Hodes
St. Louis, MO

The mandate may be keeping the price of gas 10 cents lower than otherwise, but this gain is lost once you take into account the decreased efficiency of ethanol. E-10 fuel is 2.5 percent less efficient than regular gas, meaning it takes more fuel to go the same distance that normal gasoline would allow. If you want to drive 100 miles with a car that gets 20 miles per gallon, with ordinary gas costing $4 per gallon at the pump, it will cost you $20 for 5 gallons.

With E-10, fuel only costs $3.90 per gallon at the pump, but you now need 5.125 gallons to travel 100 miles, costing you $19.99. A paltry savings of one cent. But this analysis so far doesn’t even take into account the ethanol subsidy that Missouri taxpayers pay. That subsidy is currently 51 cents per gallon, and will fall to 45 cents when the new farm bill takes effect. So, it would actually cost you an additional $2.61 to drive 100 miles, but that cost is paid in taxes instead of at the pump. So, it comes to $22.60 for the same trip. If all actual costs were shown at the pump, E-10 would be priced at 41 cents per gallon more than normal gasoline.

Here is Steelman’s response:

Sarah Steelman: The facts speak for themselves. The studies from the Missouri Corn Growers and others don’t take into account the subsidies that we pay on our tax bills for ethanol. Secondly, they don’t take into account the decreased fuel efficiency of ethanol, meaning that you have to fill up your tank more times to go the same distance. I would invite you to read the Show-Me Institute’s recent study on the topic. The Show-Me Institute, unlike other groups, does not have a financial interest in ethanol. The Show-Me Institute study states that the ethanol mandate will cost Missourians over $1 billion over the next decade. This figure doesn’t even take into account the increased price of food caused by the mandate. I am the only candidate willing to stand up against the special interests who forced the ethanol mandate on our state. If ethanol can stand on its own two feet, let it do so in the free market.

Check and mate. The study in question, detailing the real costs involved with Missouri’s ethanol mandate, can be found on the Show-Me Institute website.

The Show-Me Institute appeared in two major newspapers this past weekend. The Kansas City Star carried an op-ed by Dr. Joe Haslag, which johncombest.com also linked. To review the full op-ed (the Star had to do some length editing) you can check on the version hosted by the Missouri Political News Service.

The Springfield News-Leader also ran a very detailed article on ethanol use in Missouri, written by Chad Livengood. I was quoted a few times in it, and wish to make one correction. The article says that our study did not count the decrease in fuel efficiency that results from using E-10 fuel instead of ordinary gasoline, as part of the additional cost to Missouri drivers. Actually, our study does include it as part of the additional cost. I may have misspoke in my phone interview, or perhaps was unclear somehow, but it’s not a big deal — these things happen, and blogs are a quick and convenient way to make a brief correction. While our study was a very focused piece, this News-Leader article takes a wide look at ethanol in Missouri and I recommend it highly.

Are rising oil prices all bad? Well, they certainly increase the price of many things. We have already seen car companies take huge hits because of the increasing scarcity of oil. But this effect isn’t uniform across all industries. For example, the concrete industry is booming. One of the executives at J.M. Marschuetz Construction Co. tells us why:

“Who would have thought in a million years that concrete would cost less than asphalt?” asked Jason Marschuetz, the company’s vice president. “The oil prices are ultimately helping us because even though we’re getting hammered once — for diesel — the asphalt companies are getting hammered twice — for diesel and asphalt.”

Concrete and asphalt are substitutes for a variety of applications, including paving roads and driveways. When oil prices rise, concrete gets a little bit more expensive while asphalt gets much more expensive. The result? People use concrete instead of asphalt whenever they can. We should see this trend across the economy — goods and services which are relatively less dependent on oil should become cheaper relative to the oil-guzzling competition.

This is just one of the many ways in which we are less dependent on oil than one might think. Oil may be the cheapest alternative for a variety of applications at $130 a barrel, but if the price increases much, there are numerous ways to achieve the same ends that use less oil. In econo-speak, the demand for oil is more elastic than it appears.

Finally, keep in mind that all the people in the concrete industry see their incomes rise during the oil-induced boom. New jobs are created in the industry as well, because new plants are coming online — such as the plant in Ste. Genevieve. Chrysler workers may be out of a job because of rising oil prices, but new opportunities are opening up because of the same cause.

KY3 News has a story (link via Combest) discussing MoDOT’s expected budget shortfall, because of the rapid increase in gas prices. The piece includes some commentary from Missouri’s three gubernatorial candidates, all three of whom agree that raising the gas tax is off the table and that other solutions must be found. While the articles does not explicitly state the candidates’ ideas, it does mention one solution offered by Rep. Kenny Hulshof:

Hulshof called the public private partnership idea (also known as some type of toll road) intriguing. “Imagine a parallel truck lane along Interstate 44 with just truck traffic that’s built with private funds,” Hulshof asked attendees during his hour session with the Chamber.

Here at the Show-Me Institute, we couldn’t be happier. David Stokes, an expert of sorts on public-private partnerships, has been advocating this type of solution for a long time, and recently gave a presentation in Mexico, Mo., discussing alternative ways to fund and fix the state’s roads. His policy study highlights the benefits of this type of partnership, and outlines the ways in which it can alleviate MoDOT’s budget problems. Although Hulshof stopped short of advocating public-private partnerships, it is good to hear that the idea is at least garnering some discussion.

Show-Me Institute policy analyst David Stokes will be interviewed Monday morning at 7:10 a.m. on the Allman and Crane show, broadcast on 97.1 FM Talk. Stokes will be talking about his recently published case study, “The Economic Impact of the Missouri E-10 Ethanol Mandate,” which he cowrote with Justin Hauke.

Be sure to tune in, and tell your friends to do the same!

No, that’s not an oxymoron. Seriously. …

When political units are small and decentralized, competitive pressure can create market-like outcomes. It’s imperfect, because consumers — i.e., citizens — have to purchase bundles of services rather than purchasing each service separately. However, it’s much better than a large, centralized polity. The key is that the cost of switching to a new political jurisdiction is low. The smaller the polity, the smaller the cost when everything else is equal.

The Post-Dispatch reports on this sort of competition at work in Missouri. The small town of Albany has passed an ordinance legalizing the use of golf carts within city limits. Each golf cart must have an attached seven-foot orange flag, and an annual permit costing $15. Why, exactly was this ordinance passed? Well…

City Administrator Derek Brown said several residents asked the city to legalize the use of golf carts, saying the practice would be cheaper than traveling around town in a car.

It seems gas prices have played a large role in this, but the point is that residents asked for it, and got it. Sure, this sort of thing happens on the federal level, too, but the difference in this case is that residents who don’t like it can leave at a much lower cost. If they do leave, the city’s coffers will begin to dwindle, pressuring city officials to change the law — or, perhaps, become a niche city for golf carr lovers.

This sort of system is exactly what the founders had in mind with federalism. A central government is better apt to provide a few things like defense and dispute resolution between the smaller political units. At the same time, smaller competing polities, like states, counties, and municipalities, provide a somewhat competitive market for government. This does a better job of providing each citizen with the bundle of policies they want. The problem seems to be preventing the transfer of political power from state and local governments to the national government.

Prime Buzz reports:

Missouri 6th District congressional candidate Kay Barnes today released a major policy stance on energy, a 5-point plan to deal with rising gas prices.

Naturally, I have a point-by-point response.

The 5 points of her new plan are:

• Increasing domestic drilling, by compelling oil companies to use the leases they currently have to drill on federal lands.

Increasing domestic drilling is a good idea to help alleviate the effects of the high price of gas in the short term. However, compelling oil companies to drill more is the wrong way to go about this. I’m not sure about the details of the leases to these federal lands, but I can suggest one way to structure them: If the leases were tradeable commodities (perhaps they wouldn’t be leases anymore) then we can expect whoever values the lease the most to purchase it — which probably would be whoever is willing to drill now. On the other hand, the oil companies may be betting that there is no end in sight, and holding oil in the ground until the price rises even more. If that is the case, a bit of pain now is much better than extreme pain later.

• Repealing tax breaks and subsidies for big oil companies, or redirect such subsidies toward renewable energy sources such as biofuels.

I’m all for making the tax system less complicated by removing exceptions, and I’m in favor of eliminating subsidies — but redirecting them toward biofuels is a bad idea. The incentive to develop alternatives is already huge, and not likely to be affected by government action. Attempts to manipulate the market may end up doing more harm than good.

• Supporting House-passed legislation directing the Commodity Futures Trading Commission to curb speculation in the energy markets. A so-called “Enron loophole” had previously exempted electronic energy traders from U.S. regulation.

Speculation actually eases the pain of economic change. When speculators bet on future price changes, they either prematurely increase or decrease the price, depending on what they think the future holds. This eases the pain of economic change because it makes price changes more gradual, rather than arriving as sudden shocks. These speculators also probably know more about future price movements than anyone else. After all, they are the ones with money on the line.

• Lowering federal trade and budget deficits, which would strengthen the value of the dollar when buying foreign oil, thus indirectly lowering the cost of oil.

A surefire way to strengthen the value of the dollar would be to raise interest rates by slowing the growth of the money supply. Barnes wouldn’t have control of that, however, so it’s hard to fault her for leaving this out. However, the high price of oil isn’t the only concern when it comes to manipulating exchange rates. A more favorable exchange rate means less foreign investment in the U.S., and fewer exports.

• Increasing fuel economy standards for cars and trucks, something that Congress started doing again for the first time in three decades when it passed higher fuel economy standards six months ago.

This will either be irrelevant or raise the cost of cars for the average consumer. It will most likely be irrelevant, because consumers are voluntarily choosing to buy more fuel-efficient vehicles. It’s amazing how well markets coordinate action.

This policy bundle seems rather questionable to me. There is some merit to at least part of some of the five points, but I have trouble throwing my hat behind any single policy on the list. I wonder what Kay’s opponent, incumbent Sam Graves, is proposing.

Our own David Stokes had an interview yesterday with KQTV Channel 2, based in St. Joesph, discussing the institute’s newly released ethanol study. Here is a synopsis of the the interview; in the meantime, we are working on getting a video link.

The answer is corn, which makes ethanol, which leads me to my post, which suggests that gubernatorial candidate Sarah Steelman was listening to the Show-Me Institute …

Yesterday, Steelman held a press conference calling for an end to the notoriously bad ethanol mandate. She cited the mandate as one of the reasons that food and gas prices are at all-time highs, and that it must be repealed because of these unintended consequences. As many of you know, the Show-Me Institute recently produced a case study highlighting the negative effects of the mandate and its cost to Missourians. Initially, Steelman supported the mandate, but thanks to our study (at least, I’d like to think so) Steelman is among the growing list of officials who realize that the mandate was a mistake and have lobbied for its repeal.

Although our study does not focus on food prices, this effect is mentioned — along with the additional taxpayer costs that government subsidies bring. I commend Ms. Steelman for recognizing that the ethanol mandate is a bad deal for taxpayers, and I hope that her fellow politicians follow suit.

The failure of this regulation provides further evidence that such mandates are almost never a good deal for taxpayers, and shouldn’t be implemented in the first place. However, that’s a broader topic for a different day.

The Post-Dispatch reports that Chrysler is closing its minivan plant in Fenton, laying off 2,400 workers. Political Fix has the responses of several prominent politicians, including this from Missouri Rep. Sam Page:

My sympathies go out to the employees who lost jobs today and their families. These men and women were hard workers, who made a good product. But they, like many Americans, have fallen victim to higher gas prices and a bad economy. They have suffered because of a government unable or unwilling to fix this problem.

We must now look forward at bringing new industry to our state. Missouri has given Chrysler $32 million in tax incentives to keep its plants operating here. After the loss of up to 2,800 good-paying, benefit-providing jobs, it is clear that that investment has not been returned. Instead, we need to be welcoming companies committed to investing in Missouri’s economy.

I have to commend Page for admitting that the government is perhaps incapable of fixing a problem. All too often, this lesson seems to be lost in political matters. In this particular case, it is very unlikely that the government can fix the problems posed by the increasing scarcity of energy. In fact, the cure is likely worse than the disease. Any incentives that the government can muster to spur innovation in energy provision are likely to be minuscule in comparison to the incentives already in the marketplace for such innovations, and the marketplace doesn’t discriminate based on politics.

Another lesson is to be learned from Page’s quote: Tax incentives for individual businesses are a bad idea. There is no guarantee that the business will stay in the area once the tax incentives are granted and no guarantee that the state will pick the best candidate for the incentive. Furthermore, a lower tax rate for everyone is a much more effective means of stimulating growth because it encourages greater productivity and attracts entrepreneurs that the state might not have even been aware of, let alone tried to pursue. Rather than handing out tax incentives, lowering taxes would be a great way to “welcome companies committed to investing in Missouri’s economy.” Hopefully, this is what Page has in mind.

I’m a meticulous record-keeper, particularly when it comes to either my car or my finances.

In our recent ethanol case study, Dave Stokes and I argued that the E-10 savings projections reported in the Missouri Corn Merchandising Council’s study were wrong partly because they failed to address the fuel efficiency decrease of ethanol-blended fuel that had been noted in numerous scientific studies, including one by the Environmental Protection Agency.

So, I’ve been curious to see how much the E-10 mandate has affected my car’s individual performance. After filling up my car this morning, I looked through my fuel log and made a back-of-the-envelope calculation of the difference in fuel efficiency this year.

My car has a 13-gallon tank, but I typically fill up about 12 gallons on average. In 2007, my car averaged 308 miles between fill-ups (25.67 miles/gallon). This year, my car has averaged 281 miles between fill-ups (23.42 miles/gallon). That’s a drop in fuel efficiency of 8.77 percent.

Now, admittedly, this is a little bit of an ad hoc calculation and other variables clearly impacted my car’s gas mileage. But Missouri’s E-10 mandate has obviously played some role.

So, how much has the drop in fuel efficiency cost me? Let’s say I fill up my car twice a month (24 gallons). With $4-per-gallon gas, the 8.77 percent drop in fuel efficiency will cost me nearly $100 this year.

So much for E-10 savings.

We were all over the airwaves of Missouri yesterday, talking about ethanol and our recent case study. Justin, sitting at a very impressive desk, appeared on Columbia’s KMIZ-TV as part of a well-done sort of point-counterpoint piece. The ethanol supporters admitted that ethanol has a lower energy content than ordinary gasoline, but said this difference is too small to measure — as though math can’t measure small numbers, which add up to millions of dollars a year statewide, or $29 a year in added costs for the average Missouri driver. That ain’t so small anymore.

I, myself, was a guest on the Mark Reardon show (to listen, click on the podcast at the right side of that page) on KMOX radio in St. Louis. We both appreciated the opportunity to discuss the issue, and thank both KMIZ and KMOX for the invites.

James Fussel has an excellent article in the Kansas City Star detailing some of the potential avenues for combating rising fuel costs in the long term. If you take just one thing away from the article, it’s that there has been a flurry of innovation as gas prices have risen. From plug-in hybrid cars to pure electric cars to hyrdrogen fuel cell cars, small breakthroughs have been made across the board in attempts provide cheaper alternatives to conventional gas-powered cars.

This is precisely what we should expect from a well-functioning market. As the price of gas increases, it becomes more profitable to both conserve and seek out alternatives. The practical result is exactly what we’ve seen. Consumers are buying more fuel-efficient cars while producers are looking for ways to make cars more fuel-efficient, as well as seeking alternatives to gasoline.

This is all occurring despite misguided political efforts, such as Missouri’s E-10 mandate. I shouldn’t have to point out that ethanol was not mentioned in the Star’s article as one of the promising new technologies. A better strategy for lawmakers would be to cultivate the competitive environment that is necessary for the innovation we are seeing. In other words, enforce property rights and that’s it. Any attempt to "fix" the market is apt to cause worse problems than it solves.

I will be appearing on KMOX’s Mark Reardon Show today from 2:10 to 2:30 p.m. to discuss our recent ethanol case study. Please go to kmox.com to listen in.

In a Joplin Independent op-ed, Missouri Rep. Ed Emery has a familiar concern with the state’s ethanol mandate. He has noticed a 10-percent decrease in his car’s fuel efficiency since gas stations began switching to a 90/10 gasoline/ethanol blend in anticipation of the E-10 mandate going into effect.

The Show-Me Institute recently took this decrease in efficiency into account in a study on the impact of the ethanol mandate. The key conclusion of both Emery’s piece and the study is that consumers are getting the shaft both because of the subsidy and the loss of fuel efficiency. We should expect no less when government actors intervene in the marketplace.

Emery sums up the empirical evidence nicely:

Historically, government mandates do not represent good compromise; they violate market forces, pick winners and losers, and frustrate technological progress-all bad for the consumer.

John McCain has proposed a $300 million prize to the first person who can develop an automobile battery that "far surpasses existing technology." In addition, U.S. automakers will receive a $5,000 tax credit for every zero-carbon-emissions car that they can develop and sell.

Well this is pretty vague. But more importantly, it’s really silly.

The incentive for alternative fuel technology already exists, and the first person to develop and market a practical alternative to the standard combustion engine will be rewarded much more than a mere $300 million. McCain argues that this would amount to about one dollar per U.S. citizen, and is "a small price to pay for helping to break the back of our oil dependency." I, personally, would be willing to pay a lot more than $1 for a practical alternative to fossil fuels. But no politician has the right to make that decision for me (or for any other taxpayer). The government shouldn’t be in the business of deciding good and bad business ideas. We already have a pretty good system in place to do just that.

Today the Show-Me Institute released a new case study about Missouri’s requirement that gasoline sold in the state must contain a minimum level of ethanol. Responding to a study by The Missouri Corn Merchandising Council that touted hundreds of millions in savings for Missourians, case study authors Justin Hauke and David Stokes point out that the inclusion of additional factors, such as the cost of ethanol subsidies and the decreased energy output efficiency of ethanol-blended fuel, means that Missourians will see a net loss of nearly $1 billion in the next 10 years.

From the case study:

Ethanol mandates will not solve Missouri’s energy problems. Contrary to the results implied by the MCMC study, ethanol mandates will not translate into fuel savings for Missouri consumers. In contrast, Missouri consumers can expect to pay more because of E-10 legislation than they would have paid otherwise.

Hauke also addressed ethanol mandates recently in this blog, noting that these subsidies hinder Missouri’s efforts to eliminate "excessive, job-killing revenues" from the state budget.

The full case study can be found on the Show-Me Institute website.

Just to follow up on Justin’s commentary …

Yesterday morning, after a heated struggle in the Senate, a bill that would have implemented a windfall tax on major oil companies was defeated. In typical fashion, oil companies were singled out for their "excess profit" by senators who are simply pandering to their constituents. In this time of economic trouble, it is not surprising that politicians are trying to deflect the spotlight from themselves and their failed policies onto the big oil companies by insinuating that they are doing something wrong by acting in a completely legal, free-market way. In no other profession is there such scrutiny for making a profit —— in fact, we are generally encouraged to work hard and succeed. Isn’t that part of the American dream?

Also, our economy thrives when profits are up and people are working. However, it appears this is not encouraged when companies become increasingly wealthy. Rather than trying to stifle the profits of oil companies, as though it were some sort of deserved punishment, politicians (from both sides) should be focused on lowering gas prices and promoting energy alternatives. Even if a windfall tax were to be enacted, it likely would be counterproductive, with oil companies only increasing the price for consumers, to make up for the lost profits (Justin’s post is much more thorough on this economics aspect).

It really befuddles me that some members of Congress think that limiting profits for certain corporations is a good thing. If Congress wants a windfall tax for the oil industry, who’s next? My bet is on you, Warren Buffet. Perhaps some some comments by our neighbor to the east, Sen. Richard Durbin, are what really have me interested in this topic:

The oil companies need to know that there is a limit on how much profit they can take in this economy.

I didn’t realize that it was up to Senator Durbin to determine how much profit is too much. In a free-market economy, market forces will dictate when a consumer is no longer willing to spend. Can you imagine if Sen. Durbin were to say this to an average American family? There would be complete anarchy. If Durbin were to take this approach with the citizens in his state, I have a feeling he wouldn’t be reelected anytime soon. Thankfully, the bill didn’t pass and no one is going to be punished for doing something every American strives for: success.

To link this story back to Missouri (after all, we are Missouri-focused), as Justin pointed out, one of our state’s senators voted in favor of the windfall tax, but at least wasn’t quoted saying such outlandish things.

Claire McCaskill wants Congress to pass a windfall profits tax on oil companies.

What would be the effects?

Well, first of all, gas prices would be higher, not lower. Demand for gasoline is inelastic, at least in the short run. Gas station owners are already squeezing out a mere two cents in profit per gallon of gasoline sold. Therefore, with no real retail markup, the higher wholesale gasoline costs incurred by distributors would have to fall on consumers at the pump in order for the retailers to break even. So we’re worse off here. If you like paying $4.00 per gallon, how about if we add another 20 cents or so to that?

And which investors will pay for the tax — the rich or the broad middle class? Robert Shapiro, President Clinton’s former undersecretary of commerce, argues that ownership of industry shares is "broadly middle-class," with the majority represented by institutional investments in mutual funds, pension funds, and individual retirement accounts that are held on behalf of millions of ordinary Americans. This coincides with my previous post about energy investors and who benefits from oil profits.

And, lastly, the early 1980s experiment with a windfall profits tax suggests that tax revenues would be significantly lower than expected. When Congress passed the windfall profit tax in 1980, the Congressional Budget Office projected that it would raise $393 billion in tax revenues. According to Congressional Research Services, it only raised $80 billion. That would be enough revenue to run the government for about 10 days, based on the 2008 fiscal budget.

Remember, gas prices are about three times as high in Germany and other European countries, where combined excise taxes, fuel taxes, windfall profits taxes, and VAT taxes are passed on by oil companies to the consumers. Oh, and if you factor in the exchange rate, they’re about 4.5 times higher.

So why are we debating this, again?

Slate magazine’s popular "Explainer" series discusses why gas is cheaper in Missouri than in the rest of the nation. Before we go further, sit back and appreciate that fact. OK, now we can continue. It’s a great article, which is generally true for "Explainer," and it touches all the important issues. I was a little perplexed when the headline indicated ethanol was going to get the credit, but the explanation was spot-on. Ethanol may well be cheaper than oil right now. It has other factors that likely change that in the big picture (subsidies, slightly reduced gas mileage, etc.) but that is not the point of this article, which is simply what we pay  when we fill up today at the pump.

My favorite part of the article is the section on how the retailers that sell gas in Missouri often sell other products (left unsaid is that the main product is beer) that allow them to keep gas prices low and make nice profits on those other sales. We often forget in Missouri how much stricter other states can be about who, when, and what can sell alchohol. Here, we just buy it at gas stations, grocery stores, liquor stores, blood donation centers, anywhere. And we can buy it just about anytime except early Sunday mornings. My friends and I made innumerable late-night beer runs from Fairfield, Conn., to Portchester, N.Y. (one-hour round trip if you drove really fast), in college because of Connecticut’s stupid 8 p.m. alchohol sales cut-off law. Dear God, do I love Anheuser-Busch and its lobbying efforts!

The Show-Me Institute will soon release a counter-response to a Missouri Corn Merchandising Council study that claims Missouri consumers will save nearly $2 billion during the next 10 years as a result of the state’s recent E-10 fuel mandate, which requires all unleaded fuel sold within the state to contain a 10-percent ethanol blend.

While I’ll leave the details of our case study to the release, suffice it to say that the MCMC study ignores important E-10 cost factors, such as the EPA-documented decrease in fuel efficiency and the cost of taxpayer subsidies. When David Stokes and I recomputed the numbers with these costs in mind, we found that the E-10 mandate will actually cost Missourians nearly $1 billion during the next decade instead of saving them $2 billion.

But today’s agricultural news highlights an even more important point about ethanol usage. Today, corn futures prices surpassed their all-time high in trading on the Chicago Board of Trade. Bloomberg lists the causes for this increase in food prices (emphasis added):

[Agricultural prices] have gained 60 percent in a year, fueled by [demand], market speculation and the push to grow corn for ethanol.

Indeed. It’s not just higher grocery store prices that Missourians can look forward to, though, but a higher tax bill as well. The governor recently released his 2008 fiscal year budget summary, which — despite the governor’s conviction to implement “a balanced budget that does not rely on excessive, job-killing revenues” — contains the following important line item:

$6.4 million increased funding to support an expected seven ethanol plants and $28.5 million to support an estimated nine biodiesel plants. Total funding for Missouri ethanol producers will be $15 million and total funding for Missouri biodiesel producers will be $33.8 million.

Well, right there is an easy $50 million we could save each year in order to sustain the governor’s commitment to a budget that "does not rely on excessive, job-killing revenues.” Oh, and this doesn’t include the $0.51-per-gallon federal ethanol subsidy, either.

Take a look at the personal income figures reported in the governor’s own budget summary, comparing Missouri income growth to that of the United States as a whole during the past three years:

Why is Missouri income growth below the national average? Could it be that excessive taxes and wasteful spending are hurting Missourians more than the government admits? Is the E-10 mandate really going to “save” Missourians money? Or is this just another example of corporate welfare, redistributing wealth from one taxpayer to another?

My bet’s on the latter.

Last week, I posted about rising fuel prices and an unsuccessful bill aimed at combating the cost. One provision of that legislation was to cut the government red tape surrounding the building of refineries, to make them easier to build. Well, it appears one town in South Dakota has heeded his suggestions and given its OK to proceed with building a new refinery by allowing for the proposed site to be rezoned. I would like to think that the town’s decision was based solely on my prior post, but I guess I can’t take credit for everything. Supporters of the rezoning cited "the once-in-a-lifetime economic opportunities the $10 billion project would bring" as their reason for supporting the project. Whatever the reason, this is one step in the right direction.

Yesterday afternoon, Sen. Kit Bond outlined his energy bill, which somehow faltered in the Senate. It seems that typical politicking got in the way of a bill that could have substantially lowered our rising gas prices. Shocking. I know. This bill would have helped combat the ridiculously high gas prices in several different ways. It called for environmentally friendly drilling in places such as Alaska and oil shale deposits in the Rocky Mountains, which would have relieved some of our dependence on foreign oil while increasing the supply. This spike in gas prices may be attributable partly to speculating, but mostly to simple economics. I don’t care how many econ courses I take, it all comes down to supply and demand. With the increase in world demand, something needs to be done to increase supply.

Sen. Bond also called for "Streamlining the oil refinery permitting process, without relaxing any requirements." Hooray! I am OK with taking baby steps to get the the free market, as long as we get there. The U.S. government has put up so many regulations, it has become nearly impossible to build refineries. Hopefully, this "streamlining" can lead to some deregulation, and we can see a substantial drop in gas prices. All in all, I think Sen. Bond summed it up best when criticizing a colleague who actually suggested the oil industry be nationalized (no joke, albeit that is funny):

"I can tell you, you don’t want the government running energy. The free
market may not be perfect, but it doesn’t screw things up like the
government does."

Oh, and of course we can talk about the taxation issue as well, but Justin has already covered that aspect.

A summer gas tax “holiday” seems to be all the rage these days. Last week, the Missouri house approved a bill to rebate the $0.17/gallon Missouri gas tax consumer will pay throughout the summer. On the presidential campaign trail, both Senators Clinton and McCain have voiced their approval of a federal moratorium on summer gas taxes despite, as David pointed out yesterday, overwhelming opposition from economists of all stripes. In fact, more than 200 economists recently signed a petition against the gas tax break — including four Nobel laureates.

Politicians like scapegoats, and big oil companies are an easy target when oil futures trade at more than $120/barrel. But has the run-up in gas prices really made “Joe American” worse off? (Hat tip to Tim Iacono for this idea.)

During the past year, retail gasoline has increased from $2.80/gallon to approximately $3.60. An average American consumes approximately 500 gallons of gasoline per year. So let’s be conservative and assume that the entire purchase was at the higher price, resulting in a $400 higher gasoline bill this year (500 gallons * $0.80 = $400).

But the typical American is also heavily invested in energy stocks through mutual funds in their 401k accounts. A middle-class American family (in their 30s with household income between $40k–$80k) has about $90,000 in retirement accounts. On average, about 70 percent of these accounts are invested in broad U.S. equity indices, of which energy stocks compose about 13 percent. Energy stocks are up about 17 percent during the past year. So the increase in the average American’s wealth from high energy prices is about $1,392 ($90k * 0.7 * 0.13 * 0.17 = $1,392). That means that a typical American family is nearly $1,000 wealthier from the run-up in energy prices during the past year (in a very simplistic sense).

Of course, this ignores the several-trillion-dollar loss in home equity values most Americans have suffered lately, so it’s a small consolation. But it’s an interesting way of looking at the world.