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.

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.

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.

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.

Today’s Springfield News-Leader has a detailed account of the budget troubles facing Missouri’s third-largest city. The primary cause of the budget problem is very similar to St. Louis’ own (most) recent problem: dramatic increases in the police and firemen’s pension costs. Kansas City has also just recently completed a tense budget debate, though with different causes, so this gives us a nice opportunity to review all three cities together. Springfield now gets to decide if it is going to address its problems in a manner like that of St. Louis, which raised taxes for about the 47th time in the past decade (with voter approval, I grant you, and "47th" is hyperbolic) to deal with its pension shortfall, or like Kansas City, which admirably made tough budget cuts to deal with its problems in a systematic long-term manner.

Springfield is proposing to collect an authorized pension tax that it has had on its books for years but never bothered to collect. University City did essentially the same thing this past year for the very same reason. Anyway, the important thing to me is finding appropriate cuts in government spending. A chart accompanying the article details how Springfield is not making any substantive cuts to its spending. Instead, it is basically just moving money around from one account to the pension accounts. While they are eliminating vacant positions, they are not laying anyone off. I don’t doubt that those vacant positions will be filled just as soon as possible — they have not changed the overall environment, as Mayor Funkhauser is trying to do.

I do like the reduction in outside legal fees, as well as the cut in lobbying expenses for its Washington lobbyist. Springfield needs a lobbyist why, exactly?

Councilwoman Mary Collette questioned the wisdom of cutting in half the city’s funding for a lobbyist in Washington, D.C.

She asked Cumley to find out how much federal money the lobbyist may have helped bring to Springfield.

Carlson indicated it was in the tens of millions.

"If we cut their money in half, does that mean we’ll get half as much back from the federal government?" she asked.

Cumley said he would try to find out.

[ME: Governments hiring lobbyists to get money from other governments is insane and should be illegal. Please don't take that as an attack on lobbyists — just on government.]

Springfield deserves minor applause for a few things — and the tax hikes are small, truth be told. But really, this is just a shell game that will not change anything in Springfield in the long run. Now, if it wanted some serious change, there is an enormous asset staring Springfield right in it face: City Utilities could be sold off and better run by a private utility. I’m just supposin’…

One month into Missouri’s new ethanol fuel standards, and what have we learned? The 2006 legislation that required all gasoline sold in Missouri to contain a 10-percent ethanol blend was heralded as a great  step forward for Missouri’s environmental needs. As Governor Matt Blunt stated at the time:

“Missouri is a leader in the use of alternative fuels, and this change benefits Missouri’s consumers, economy, environment and farmers,” Gov. Blunt said. “Filling our gasoline tanks with E-10 will improve our air quality and reduce our dependency on foreign oil.  Missouri corn fields have now become the oil fields of the 21st Century.”

Except that they haven’t. A new study in the journal Science (not known for taking up right-wing causes) finds that greenhouse-gas emissions from corn ethanol during the next 30 years will be twice as high as they would be from regular gasoline. The cost discrepancy comes from previous estimates that failed to account for the carbon dioxide emissions that have arisen from the clearing of forests and grassland for biofuel production. About 2.7 times more carbon is stored in terrestrial soils and plant material than in the atmosphere, and this carbon is released when land is cleared for ethanol production.

So, while ethanol may be a boon for corn farmers, it will be a huge detriment to everybody else (I’m not talking about the CO₂ issue, but the impact on commodity prices).

So much for the government’s success at picking industry winners. The most recent estimates suggest it will take 167 years before the reduction in carbon emissions from ethanol “pays back” the carbon used by land-use change.

Good thing Missouri is one of only three states that have adopted such strict(ly stupid) industry standards.

An editorial in this morning’s Kansas City Star details some of the negative consequences of Missouri’s new ethanol fuel standards, which went into effect on January 1.

In 2006, the General Assembly passed a bill that required all gasoline sold in Missouri to contain a 10-percent ethanol blend beginning January 1, 2008, making Missouri only the third state in the country to impose such high standards.

In doing so, as the Star correctly documents, the General Assembly overlooked several problems with the “new brew”:

• Fuel with 10 percent ethanol has about 3 percent less energy than gasoline made from petroleum. Fuel mixed with ethanol gets fewer miles to the gallon.
• Ethanol is subsidized with a 51-cent federal tax credit. Increased consumption of blended gasoline leads to higher taxpayer funding for the ethanol industry.
• It takes a lot of water — as well as fertilizers that create pollution — to produce corn-based ethanol. As a result, ethanol has some negative effects on the environment.

Missourians can debate whether ethanol is an effective solution to Missouri’s energy needs and whether its costs are justified. But it is important for voters to be aware of these costs and recognize that ethanol is not the “free lunch” panacea that some pretend it to be. And what Missourians especially don’t need is a political coup that only replaces “Big Oil” with “Big Corn” for “Big Bucks.”

An letter to the editor in today’s Springfield News-Leader laments the decision by Gov. Matt Blunt to keep a $42 million subsidy for ethanol production, rather than shifting that money toward water conservation in Southwest Missouri. The worst part of this state funding of ethanol production is that it would cause more water to be used by the plant, damaging the region’s groundwater:

The proposed Rogersville ethanol plant, just a few miles east of Ozark,
if built will use 1.3 million gallons of water a day! As will each new
subsidized plant built in Missouri.Hundreds of reliable Internet sources condemn ethanol production: for
its toxic emissions and effluents; as an ineffective gasoline
alternative; for dramatically raising food prices; but most
frightening, for its contamination and horrific waste of ground water.

Some politicians seem as though they’ve been led to believe that ethanol is the cure-all solution to our energy crisis. In reality, ethanol is more costly than gasoline; it takes more fuel to make a gallon of ethanol than that gallon produces for consumers. Also, ethanol’s environmental repercussions, as pointed out in the op-ed, make ethanol production a poor strategy for solving our foreign oil dependency. Instead of wasting tax dollars on a fuel that does more harm than good, let’s use it to conserve a substance we all need in order to live … water.

A letter to the editor in the Jefferson City News-Tribune discusses corn ethanol, pointing out that it’s not a cure-all for our energy problems, because the United States can’t produce enough of it to match our current oil usage:

Therefore, all our corn equals about 34 billion gallons (gasoline
equivalent) of the 150 billion gallons we consume each year.

Also, there’s the fact that we use corn for other uses besides fuel. The letter continues:

But, if we convert all our corn
to fuel what happens to the poultry and livestock industries that
require the carbohydrate removed from corn when it’s converted to
ethanol?

In the rush to make ethanol the solution to our energy problems, with all the subsidies and tax breaks that includes, many officials are ignoring the market system that would determine the true value of ethanol. If ethanol is actually a cost-effective replacement for oil, there would be little need for subsidies to produce it.

An editorial in the Columbia Daily Tribune deplores a new rule requiring ethanol to be mixed in with gasoline starting in 2008:

This unholy interference in the free marketplace was promoted by Gov. Matt Blunt and eagerly engineered by corn growers and ethanol plant promoters, Democrats and Republicans alike. As a result, already the price of corn has doubled and millions of gallons of new refinery production are coming on line, all because big government suddenly got bigger.

This is a bad law, but fortunately it will someday be obsolete. As scientists study energy, they come up with new fuels and technologies that are safer, cheaper, and more efficient. Eventually we’ll have better ways of powering cars than burning gasoline or ethanol. We might even have better vehicles than cars. So, I’m not going to let this law disturb my long-term happiness and optimism. This requirement will eventually look as funny as those laws about not tying your horse to a lamppost.

There’s recently been a sort of backlash in the local media regarding the state and federal govt’s efforts to  subsidize the ethanol industry and build expensive plants all over the midwest and elsewhere. An article from the STL Post-Dispatch summarizes the general concerns fairly well, and an article in the Southeast Missourian gives a taste of the unease in a city near such a plant. However, the best synopsis of the real issues confronting the current ethanol push can be found over at the Kansas City Star, which makes several good points about the economic difficulties surrounding it. According to the Star:

More water, pesticides and land are being used to grow corn for ethanol, raising environmental concerns. It takes a lot of energy to make ethanol, which, when blended with gasoline, gets fewer miles per gallon than gasoline alone.

The federal government continues to hand out an extravagant 51-cent-a-gallon subsidy for domestic ethanol while slapping a 54-cent-a-gallon tariff on imported ethanol, such as that made from sugar cane in Brazil.

The first paragraph presents an efficiency problem: corn-based ethanol is simply not cost-effective. While ethanol does burn cleaner than conventional gasoline, there are other hidden externalities, such as the water issues discussed in this STL P-D article and the rising costs of feed for animal stock, which in turn drives up the price for associated goods like meat and dairy products. The second paragraph demonstrates how the gov’t, eyes aglow with the political possibilities inherent in helping agribusiness, only serves to exacerbate this inefficiency. If politicians were really concerned about cheap, independant, clean energy, we’d eliminate both the subsidies for the domestic stuff and the tariffs on the imported stuff.

The Brazilians are old pros at the ethanol game, and it’s likely we could benefit from their expertise. Furthermore, let’s not forget basic economics and the gains from trade. If the Brazilians make cheaper ethanol that we can, and we can in turn provide some good or service better than they, then it’s in both our best interests to trade. The KC Star sums up this notion nicely:

Congress should eliminate the tariff on imported ethanol, and reduce or eliminate the federal subsidy for domestic ethanol. Both moves would be positive blows for free markets, making it easier to evaluate the true costs of corn-based ethanol.

It seems a little foolish to be dumping millions of tax-payer dollars into a largely unproven technology. Rather, we should wait for the unfettered decisions of a free market to determine the best alternative to imported gasoline, and then, maybe, look to gov’t to facilitate the transition. As stated in the STL Post-Dispatch:

As the United States — like many other countries of the world — hastens to find ways to curb its dependence on oil, we must make sure we don’t trade one set of environmental, political and economic problems for another.

I couldn’t agree more.

One of the most popular canards in politics today is the notion that we need to reduce our dependence on "foreign oil." Governor Blunt repeated this chestnut at an address to (who else?) the Missouri Corngrowers Association.

I don’t blame Blunt for pandering to a powerful constituency. Lots of politicians—Democrat and Republican—have used the alleged problem of foreign oil as part of their justification for providing more welfare to corn farmers. But just because everyone says we need to end our "dependence" on foreign oil doesn’t mean it’s true.

The most fundamental thing to understand about oil economics is that oil is that it’s an interchangible global commodity. (It is, in economics jargon, fungible) if we stopped buying oil from Iran or Saudi Arabia, they would just turn around and sell their oil to China, France, or Japan instead. Oil-exporting countries, by and large, don’t care who they sell their oil to, and the laws of supply and demand ensure that they’ll be able to sell their oil to somebody, albeit perhaps at a somewhat lower price.

It’s sometimes argued that all the oil in the Middle East requires us to get involved in foreign conflicts like the war in Iraq. But this doesn’t make a whole lot of sense either. Obviously, there are lots of good reasons to prefer a peaceful, democratic Middle East to one ruled by erratic despots. But despots seem just as willing as anyone else to sell us oil. Foreign countries don’t sell us their oil as a personal favor. They sell us oil because we have the money to pay for it. No matter who’s in charge in Iran or Saudi Arabia, they’ll most likely be interested in the revenues that come with oil exports. And as the richest country on Earth, we’ll have little trouble outbidding other nations for the oil we need.

But doesn’t our dependence on foreign oil make us subject to blackmail from those countries? Jerry Taylor and Peter Van Doren, two economists at the Cato Institute, explain why this is silly:

Even if you think that OPEC has the means and motive to use this alleged oil weapon, there’s not a thing we can do about it. First, even if every drop of oil we consumed came from Oklahoma, Texas, and Alaska, a cutback in OPEC production would raise domestic oil prices as high as if all our oil came from Saudi Arabia. That’s because there are no regional markets for oil — only global markets — and because prices always reflect opportunity costs in free markets, regional prices invariably rise to the world price. In 1979, for instance, Great Britain was "energy independent" — virtually all the crude oil it consumed came from the North Sea. But the oil price spike of 1979 hit Great Britain as hard as it hit Japan, a country dependent upon imports for its oil. No country can wall itself off from the world market.