I guess the news has finally reached Washington. In a recent post on the Political Fix blog, Bill Lambrecht pointed out that the political heat around subsidies is increasing, and this time it is fueled by ethanol. Almost two years to the date after the Show-Me Institute’s release of its case study of the E-10 ethanol mandate in Missouri, another nonprofit research organization has published a study about the inefficiencies of federal ethanol subsidies. The Environmental Working Group’s analysis of the ethanol subsidies concluded:

Americans have spent $17 billion since 2005 to achieve reductions in gasoline consumption that could have been achieved for free.

Today, proponents of ethanol are attempting to piggyback on the recent oil crisis in the Gulf of Mexico in order to gain support for their most recent push to increase the amount of ethanol in the U.S. gasoline supply and keep their subsidies. In a Post-Dispatch article yesterday, Jeffrey Tomich pointed out:

The ethanol industry is also lobbying Congress to extend a tax credit for blending ethanol with gasoline and maintain a tariff on imported ethanol — measures implemented years ago to help a fledgling industry grow. Both the tax credit and tariff are set to expire at the end of the year.

Letting the tax credits and tariffs expire wouldn’t be such a bad thing. Who knows, besides saving the American taxpayers $17 billion dollars, we might actually come up with an alternative energy idea that works.

Photo from the Kansas City Star.

Sing along:

Go ahead and hate your gasoline,

Go ahead and scam a friend.

Do it in the name of subsidies,

You can justify it with an E-10 blend.

There won’t be any markets working,

Come the judgment day,

On the inefficient morning after …

One free marketer rides away.

(continue singing)

And, I should add, rides away with 3 percent less gas mileage.

Thanks to Billy Jack Combest for the KC Star link.

The big news in Missouri today is President Barack Obama’s visit to an ethanol plant in Macon, so I thought it would be worth briefly rehashing the airtight case against ethanol subsidies, as we have done here so many times in the past.

Most obviously, ethanol costs more than gasoline, so consumers have to pay more for energy to run their vehicles. However, because ethanol diverts foods like corn from their more traditional use as energy for humans and farm animals, food prices are driven up by greater ethanol use. Ethanol backers like to claim that such costs are justified by the environmental benefits of ethanol, but those benefits appear to be completely illusory. From the abstract of a 2008 study on biofuels:

Most prior studies have found that substituting biofuels for gasoline will reduce greenhouse gases because biofuels sequester carbon through the growth of the feedstock. These analyses have failed to count the carbon emissions that occur as farmers worldwide respond to higher prices and convert forest and grassland to new cropland to replace the grain (or cropland) diverted to biofuels. By using a worldwide agricultural model to estimate emissions from land-use change, we found that corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years.

Research has repeatedly confirmed that ethanol subsidies only drive price inflation for both energy and food without cutting greenhouse gas emissions, and it is long past time for politicians to admit that such programs are nothing more than a means for buying favor with voters in agricultural states.

I’ll be appearing on the Mike Ferguson Show on The Eagle, 93.9 FM in Columbia, this afternoon to discuss ethanol. Everyone can listen live online, and I hope you will tune in.

The St. Joseph News-Press ran an article this past week about the biodiesel industry’s fight for a tax credit extension. Show-Me Institute research analyst Christine Harbin wrote about the negative consequences of corn ethanol subsidies on our blog recently, and provided good analysis about why such subsidies hurt taxpayers. The St. Joe’s article is filled with quotes from people within the industry that exemplify why the tax credits are counterproductive:

“Any further delays will cause additional harm to the industry,” said Michael Frohlich, director of communications for the National Biodiesel Board. “(The expiration has) really been devastating. What you’ve seen is a complete drop in demand.”

Frolich essentially concedes here that the subsidy drives demand, implying that ethanol cannot, on its own, be a profitable endeavor. But the industry leaders interviewed in the article go on to argue that these subsidies will make the industry competitive in the future:

“(The tax credit) is crucial in order for (the biodiesel industry) to keep running,” said Brooks Hurst, a state director for the Missouri Soybean Association. “As we’re starting out, it’s critical to make us cost competitive with petroleum diesel.”

Soybean oil is a feedstock for the production of biodiesel.

If the tax credit were eliminated altogether, the industry would likely “cease production,” Mr. Hurst added.

“The biodiesel industry is an infant industry,” he said. “We’re trying to build demand.”

The nascent or infant industry argument is one used throughout history to protect emerging industries. It suggests that new industries need to be protected temporarily in order to gain the economies of scale that their competitors already enjoy. This is later expanded by Frolich, however, who says:

“Obviously, the long-term goal is for a multi-year (tax credit) extension.”

Ethanol needs the subsidy in order to be profitable, but subsidy proponents argue for more than just economic viability. Some claim that ethanol is better for the environment than standard gasoline, and suggest that it should be subsidized for that reason alone; however, there is a substantial body of research showing that this is not the case. A 2005 study in BioScience debunked that notion by looking at the effects of ethanol use in both Brazil and the United States, concluding that it did not bring net environmental gains. From the study’s conclusion (emphasis added):

The use of ethanol as a substitute for gasoline proved to be neither a sustainable nor an environmentally friendly option, considering ecological footprint values, and both net energy and CO₂ offset considerations seemed relatively unimportant compared to the ecological footprint. As revealed by the ecological footprint approach, the direct and indirect environmental impacts of growing, harvesting, and converting biomass to ethanol far exceed any value in developing this alternative resource on a large scale.
[...]
In the US case, the use of ethanol would require enormous areas of corn agriculture, and the accompanying environmental impacts outweigh its benefits. Ethanol cannot alleviate the United States’ dependence on petroleum.

Other studies have replicated these results, such as another piece from 2005, printed in the Renewable and Sustainable Energy Reviews. The authors reached a similar conclusion about E10, the ethanol mixture used for Missouri gasoline:

The study indicates that E10 is of debatable air pollution merit (and may in fact increase the production of photochemical smog); offers little advantage in terms of greenhouse gas emissions, energy efficiency or environmental sustainability; and will significantly increase both the risk and severity of soil and groundwater contamination.

A 2004 study published in Natural Resources Research concluded that ethanol creation uses more energy than the ethanol itself provides:

Specifically about 29% more energy is used to produce a gallon of ethanol than the energy in a gallon of ethanol. Fossil energy powers corn production and the fermentation/distillation processes. Increasing subsidized ethanol production will take more feed from livestock production, and is estimated to currently cost consumers an additional $1 billion per year. Ethanol production increases environmental degradation. Corn production causes more total soil erosion than any other crop. Also, corn production uses more insecticides, herbicides, and nitrogen fertilizers than any other crop. All these factors degrade the agricultural and natural environment and contribute to water pollution and air pollution.

Missouri is at a disadvantage because the state’s ethanol mandate requires at least 10 percent ethanol in the gasoline sold here. Show-Me Institute policy analysts David Stokes and Justin Hauke published a case study analyzing the effects of the mandate, concluding that it cost the taxpayers much more than it saved — the opposite of the cost-savings argument originally made in favor of the mandate. Requiring ethanol to be used in the state’s gasoline also discourages research toward better and more efficient forms of biofuel by propping up the corn ethanol industry.

The data shows that the ethanol mandate is expensive and does not help the environment. Ethanol may even harm the environment, by discouraging more efficient and environmentally solutions. That being the case, what justification is left to protect the ethanol industry with mandates and subsidies?

This month, the University of Missouri Food and Agricultural Policy Research Institute released its 2010 US Baseline Briefing Book (PDF). Among other topics, the report explores the effects of eliminating the credits and tariffs currently in place for corn ethanol. The current corn ethanol tax credit has many unintended negative consequences, and the United States would be better off if the program were scrapped entirely.

1. This production incentive encourages overproduction. This is undesireable from an environmental perspective, because it leads to deforestation. It’s also detrimental for the American economy because it results in an inefficient allocation of resources.
2. It increases the cost of fuel for taxpayers. Each gallon of ethanol that is produced costs them $4.18. This is separate from and in addition to the price that they pay at the pump. In a piece on The Huffington Post, Nathanael Greene explains how this happens:
   

   [N]ext year the oil companies will be required to buy 12.6 billion gallons of conventional corn ethanol, but because tax payers are giving them $5.85 billion they’ll consume 1.4 billion more than required. That works out to $4.18 per extra gallon.

3. It drives up the prices for corn, soybeans, and wheat. This is bad for consumers because they have to pay more for food. This is also bad for the environment because it leads to land-use change and further overproduction and deforestation. The FAPRI report quantifies that eliminating the tax credit for corn ethanol would cause the prices of these grains to fall. According to p. 64, if the production incentives were removed, the average corn prices would decrease by approximately $0.15 per bushel during the 2010-2019 period:
   
4. It discourages the development of biofuels that are cleaner and more renewable than corn ethanol. These alternatives are forced to compete at a disadvantage because they do not receive the financial favor that corn ethanol does.

The corn ethanol production incentive program is an application of the broken window fallacy. Politicians in Washington fail to consider the cost to taxpayers, and the aforementioned negative consequences. When taxpayers are forced to spend their money on subsidizing the overproduction of corn ethanol, they cannot spend it on something else, such as infrastructure or education or alternative renewable fuels.

Supporters of the production incentives will argue that discontinuing the program would hurt farmers’ bottom lines. However, government payments constitute a very small amount of their compensation relative to sales, as shown on p. 62 of the report. For this reason, eliminating the production incentives would not actually be detrimental to this group:

I have been thinking about ethanol lately because the hotel with which our office building shares a parking garage seems to be hosting some type of conference that has brought down some people from Iowa. Our garage contains several cars marked as belonging to “Iowa State” or “Iowa Department of Transportation,” and they all sport large bumper stickers proclaiming that they run on ethanol fuel. Good for them. I am glad they are visiting Missouri, where they get ethanol in their gas whether they like it or not. (I am pretty sure they like it.)

This is topical because just the other day the Government Accountability Office released a report recommending that we do away with the ethanol tax credit. The Post-Dispatch’s “Political Fix” has the story here. Now, the bad part is that the tax credit is no longer needed because another government mandate is forcing ethanol on us:

But the GAO said the tax break is no longer needed now that the industry has prospered under a government mandate for ethanol use, called the Renewable Fuel Standard.

So, the ethanol industry “prospers” because of a federal mandate, a federal subsidy, and an additional state mandate. But I guess getting rid of one of them amounts to some progress, at least.

Here is some of the work we have done at the Show-Me Institute about ethanol.

The definition of rent-seeking behavior:

The expenditure of resources in order to bring about an uncompensated transfer of goods or services from another person or persons to one’s self as the result of a “favorable” decision on some public policy.

Ladies and gentlemen, I present to you the modern ethanol industry. The Kansas City Star has a story about how industry representatives now want to require some type of “nation of origin” sticker on all the gas we buy — in an effort to appeal to patriotism, I guess. “Buy American corn instead of evil, foreign oil,” or something like that. Of course, here in Missouri, we are forced to buy gas made with American corn in a 10 percent ethanol blend, because of our state’s obscene ethanol requirement.

I love the response from the oil companies, who know how difficult this proposal would be to implement — and how stupid it is, anyway:

“Growth Energy (the pro-ethanol group) clearly doesn’t understand fuel markets, consumers, supply or demand,” Charles T. Drevna, president of the National Petrochemical and Refiners Association said in a prepared statement.

There is a new gas station not too far from my house that chooses to sell higher ethanol blended gas at lower per-gallon prices. This is not because of the law — rather, it is the market at work. I have not yet chosen to purchase that gas, even though one of our cars can run fine on higher ethanol blends. I may one day choose to buy it; I may not. That is how free markets are supposed to work, rather than passing government mandates to tell everyone they have to put ethanol blends into their engines whether they want to or not.

Here is our case study about the economic effects of the ethanol requirement in Missouri.

The results of a new survey of members of the American Economic Association suggest that the Show-Me Institute is in good company.

The survey finds economists in consensus on several key policy issues:

• 51.6 percent agree: “The U.S. should place more stringent caps on medical malpractice awards.”
• 63.7 percent agree: “Barriers to entering the medical profession should be reduced.”
• 78.3 percent agree: “Government subsidies on ethanol in the U.S. should be” reduced at least somewhat.
• 42.4 percent agree: “State governments in the U.S. should eliminate mandates about what health insurance must cover.”
• 62 percent disagree: “Employers in the U.S. should be required to provide health insurance to their full-time employees.”

Other interesting results:

• 83.3 percent agree: “The U.S. should eliminate remaining tariffs and other barriers to trade.”
• 70.3 percent agree: “The U.S. should allow payments to organ donors and their families.”

The Post-Dispatch has a quick-hitter about a rebuilt gas station in Brentwood that is now offering E-85 gasoline. (I used to fill up at this station all the time when I lived in Brentwood Forest.) Because there is no mandate to sell E-85, the station owners have to include the reduced energy output of ethanol gas in their pricing. According to the story, they are selling it for 20 cents less per gallon.

This is how markets are supposed to work. Our new SUV (just doing my part to get the economy moving) is a flex fuel vehicle. I honestly didn’t think much about that when we bought it, I was much more concerned with making sure my wife and I had the ultimate set of rims. But if a station gives me enough of a price reduction on the E-85 gas, I will certainly consider buying it. This is the nature of capitalism: The government does not tell me what I have to buy; businesses give me a choice. Recent events have probably made people forget about that.

Yesterday, I was privileged to testify at a hearing on Senate Bill 11, proposed legislation that would discontinue Missouri’s ethanol gasoline mandate. If you are wondering why I use the term “privileged” here, I assure you that it has nothing to do with what I said — although I was definitely honored to be invited to testify by Sen. Bartle’s office. For a journalist’s take on the hearing, the News-Leader has the story (link via Combest).

It was a privilege because being at the committee hearing allowed me to listen to a truly wonderful debate among the seven senators involved in the ethanol issue, and larger issues of free markets versus government investment. Sen. Bartle was truly amazing. He expressed the power and beauty of free-market ideals with clarity and passion. One of his best lines was when he said, “This used to be an argument that Republicans had with Democrats. Now it’s an argument a small group of Republicans has with everyone else.” (The only thing I might add to that would be to say, “… a small group of Republicans, and an even smaller group of libertarians …”) It was inspiring to hear with arguments, which I obviously agreed with completely.

Just like the famous series of debates referenced in the title of this blog entry, though, all the senators involved did a great job of arguing their points. Having just read the new Andrew Jackson biography, I am aware that while history has glorified Daniel Webster for his speeches, the other participants (Benton, Livingston, and Hayne) all acquitted themselves well as a new nation tried to determine its future course. In the same way, the members of the committee that supported the ethanol mandate (i.e., all of them) made excellent arguments about how the mandate supports Missouri business, benefits drivers with competition, and more. I don’t agree with those arguments, but Sen. Stouffer and others, from both parties, did a fine job in making them.

While the outcome failure of this bill is essentially preordained, Sen. Bartle had the courage to bring it up, and demonstrated intensity in debating it. The members of the committee also skillfully argued for their constituencies. I think many of them agreed with much of what Sen. Bartle said, but decided that an exception should be made for ethanol. If this is an indication of the quality of debate we are getting in Jefferson City now, I may have to reverse my support for term limits. …

Frequent visitors to this blog know that I have a thing or two to say about renewable energy, specifically ethanol. I don’t care for ethanol, even if my friend Willie Nelson loves. It drives up the costs of gasoline and food and makes our cars less efficient. It attracts large government subsidies, and those new corn commercials are starting to get very annoying.

I figured it was only a matter of time until some sort of scientist would muster proof that ethanol = bad. Finally, the Royal Society of Chemistry’s Energy & Environmental Science journal has published a study ranking alternative energy sources in terms of their relative abilities to address problems with “global warming, air pollution mortality, and energy security,” and “other impacts of the proposed solutions, such as on water supply, land use, wildlife, resource availability, thermal pollution, water chemical pollution, nuclear proliferation, and undernutrition.”

Surprise, surprise — ethanol finished dead last.

Hopefully, these findings will not fall on deaf ears. And, if you haven’t read it by now, here is the Show-Me Institute’s ethanol study. Still looking for more ethanol fun? Why not try searching for “ethanol” on Policy Pulse and seeing what pops up?

Oh, and if you didn’t already know, today’s blog title comes from Thomas Dolby’s classic ’80s hit “She Blinded Me With Science.”

Tell me, which is worse: a cartoon camel that encourages kids to smoke, a creepy clown that encourages kids to eat unhealthily, or an anthropomorphic letter “e” with a green mustache that encourages kids to use an inefficient fuel source that drives up the costs of food and fuel?

Sure, the latter of the three isn’t pure evil, but he still makes me uneasy. Edgar the “E” Man is the new mascot for EPIC, the Ethanol Promotion and Information Council. With a round short body, an inflatable mustache, and a hat that looks like it was stolen from Luigi, Edgar travels the land promoting ethanol to all the impressionable little minds that need molding. Yes, there is a form you can fill out to have Edgar appear at your party. He even has a Facebook account.

Is it possibly taking things to far to use an inflatable letter “e” to promote ethanol by manipulating children? Before you know it, we’ll see Eli the Eminent Domain Eagle and Karl the Tax Kredit Kangaroo. I just pray that Chester Cheetah, Captain Crunch, and the Stay-Puft Marshmallow Man can form some sort of mascot union, and keep Edgar the “E” Man out.

Although a few free-market ideals have been coming from Jefferson City recently, one in particular caught my eye — a bill having to do with ethanol. The Richmond Daily News reports on a bill in the works that, if passed, would remove the ethanol mandate from Missouri law. The article makes many great points, the best of which is its citation of the Show-Me Institute’s ethanol study.

Ah, now there’s a thought — living in Missouri without a ethanol mandate. Already, Missourians are getting a glimpse of this eventuality every time the price of gasoline prices drop below the price of ethanol. Hopefully, we are on our way to having a choice of whether or not we want ethanol in our engines.

*Former Show-Me Institute intern Pat Eckelkamp contributed this terrible pun of a title.

So, gas prices have sure gotten low lately. I’m showing my age here, because they are the lowest I’ve seen them since I started driving. And the best part about gas being so cheap is the fact that it is no longer required to include an ethanol blend.

According to Missouri’s ethanol mandate, if gasoline prices drop below those of ethanol prices, then retailers are no longer required to sell the ethanol blend. The Kansas City Star covers the story here. Well, this is good news for Missourians. No longer will our engines be clogged with this substance that drives up the costs of gasoline and food and makes our cars less efficient.

Be sure to read the Show-Me Institute’s study of ethanol. Hopefully, gas prices will stay low — not only for the sake of my wallet, but also for the sake of Missouri residents who are no longer forced to purchase ethanol.

This past Friday I attended a conference on the economics of ethanol and got insulted by one of the speakers. Now, I was not personally insulted — but, in response to previous speakers who criticized the ethanol industry, the head of the National Corn Growers Association began his remarks by ripping think tanks. I think he said, paraphrasing, “When I grow up, I want to work at a think tank so I can just chuck spears instead of having to catch them.” He then accused the Cato Institute of being a tool of the oil industry, and of just repeating big oil’s talking points. So that was fun. …

The conference itself was awesome. It is organized by the Weidenbaum Center at Washington University, which must have had some passing knowledge of my contribution to the debate, because they sent me an invitation. Speakers included Jerry Taylor of the Cato Institute, Max Schulz of the Manhattan Institute, Jason Henderson of the KC Federal Reserve, and numerous other economists and professors. Some of them didn’t even hate ethanol, and a few of them actually liked it, stunningly enough.

I can’t do the all-day conference justice in a single blog post, so I’ll focus on one of the widely discussed points: Ethanol exists primarily as a policy industry, not a market industry. This was the primary idea presented by Jason Henderson. As a policy industry, the entire ethanol industry is built on government policies that support it, rather than on market forces that demand it. Without friendly government laws, the industry would be dramatically smaller. There are many problems with this, but when you are trying to be neutral, as Mr. Henderson was, the main issue is that those same policies that support the industry can change overnight — and then your industry ceases to exist (or becomes a lot smaller).

I might suggest that the plaintiffs’ trial bar is in a similar situation, in that its success or failure can dramatically differ depending on which party is in charge at the time. All industries are, at some level, deiven by policy in our regulated economy. But it is not hard to see how demand for clothes, or food, or books, or many other things, will still exist no matter whether the government tries to help or hurt an industry. But without government price support and mandates, there would be almost no demand for ethanol, and the potential gains — even if you accept the most optimistic estimates by its most ardent supporters — are so small that government support is really not adding much of a net benefit to our country. This is particularly true in comparison to nuclear power, which is also heavily subsidized but has such a positive upside for meeting our energy needs that those subsidies have a much greater public good potential. (But, yes, changes to nuclear policy need to be made, too.)

If Americans used ethanol at the levels required to truly wean us from foreign oil (which does not really need to happen, but that is another post), than the issues affecting food prices and availability really would be a serious concern, rather than having only the more minor effects seen recently. The lack of any real demand for ethanol was the central focus of the gentlemen from the think tanks, and while the corn growers hate to hear this, it’s the truth. So, why the hell do we give millions of dollars a year to ethanol blenders and corn growers? I think you all know the answer. Missouri’s mandate that all gas sold within the state contain 10 percent ethanol is the biggest joke of all.

In the interest of being fair — which I am not required to do, but will try anyway, because I am a wonderful person — there are two decent arguments for subsidizing ethanol. The first, which is accurate but misplaced, is the fact that growing more corn for ethanol has caused more farmland to be devoted to production, and reduced payments that the government makes to farmers for leaving their land fallow. While this is a positive thing, it does not follow that just because we have two bad policies (farm policies in general, and ethanol mandates specifically), that we need to continue both of them because one of those bad ideas makes the other slightly less bad.

The other legitimate argument really is better. Supporters say that corn ethanol is just the bridge to future biofuels with much more potential, like cellulosic ethanol. This may be true, and in the end it might work out that this has been money well spent. I don’t think that will be the case, as I trust the market to pick better options than government bureaucrats would, but I’ll admit that this is a decent argument in favor.

At the Show-Me Institute, we love ethanol. More to the point, we love writing and blogging about the lunacy of America’s — and Missouri’s — ethanol policies. Here in Missouri, one of the most prominent critics of the state’s E-10 ethanol mandate has been SEMO Professor Michael Devaney. He was published back last month in the Southeast Missourian, with another great article on the subject. This is another in a series of ethanol articles he has written for the paper.

I love his summary of the situation we are in when it comes to the government getting involved in places that it has no business (as if that were rare):

No one is smart enough to predict with certainty which of these technologies will ultimately prevail, least of all politicians who are easily influenced by powerful special interests. It is more certain that American taxpayers will continue to subsidize corn ethanol regardless of the outcome.

Of course, I would be remiss if I did not take this opportunity to link to our own case study on this issue.

We have a new winner in the easiest-to-write blog post title contest. I deserve no praise, and am certainly no genius, for combining the corporation “Bunge” with the verb “jump.” Nonetheless, I simply must point out a great post by David Nicklaus over at Mound City Money concerning recent comments made by Bunge CEO Carl Hausmann about Missouri’s ethanol mandate. Check out the entry, and the comments, as well as the Show-Me Institute’s own contribution to the debate on ethanol. The highlight of Mr. Hausmann’s talk is clearly:

“I believe very much in free markets. … I hate government mandates, including biofuels.”

Beautiful.

On Wednesday, an appellate court heard arguments about the proposed $165 million ethanol plant for Webster County. The Springfield News-Leader highlights the case. What it basically comes down to is an ongoing feud between Gulfstream Bioflex Energy (GPE) and The Citizens for Groundwater Protection (CGP). This is the second Missouri plant that the two groups have fought over, the first fight occurring in 2006.

The CGP is afraid of the amount of water the ethanol plant will suck from the surrounding area, a fear that is eerily similar to Spaceballs, although, to be fair, Spaceball One was after oxygen — not water. Besides the fear of water shortages in their personal wells, Webster County residents are also resistant to the amount of pollution the plant would create, making any remaining water unusable.

Does Missouri really need more ethanol right now? I won’t go into the details that have been outlined many times before, but ethanol is not the key for Missouri’s energy. Already, we are too bogged down by it with our E-10 ethanol mandate. The new plant will not only hit residents economically with increased fuel and food costs, but will also literally have their life source cut off.

Be sure to read the Show-Me Institute’s case study, “The Economic Impact of The Missouri E-10 Ethanol Mandate.”

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.

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.

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!

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.

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.