The Entrepreneurial View #483
End the Wasteful Ethanol Mandate
by Raymond J. Keating
Kay Bailey Hutchison, U.S. senator from Texas, has a great idea on energy policy. She is introducing legislation that would freeze the federal government's biofuel mandate at current levels.
Wait a minute, some might say, isn't this just an oil state politician trying to derail the nation's shift to alternative energy sources? Absolutely not.
In reality, this is a refreshing glimmer of sanity contrasting with the government's otherwise misguided and costly ethanol policies. Indeed, ethanol craziness has been a bipartisan affair.
In the 2005 energy bill, for example, the federal government mandated an increase in the use of biofuels - mainly ethanol - from 3.5 billion gallons in 2004 to 7.5 billion gallons in 2012. The 2007 energy bill then dictated that usage rise to 36 billion gallons by 2022.
For good measure, ethanol receives other forms of government largess. Domestic ethanol producers are shielded from foreign competition by a 54-cents-per-gallon tariff on imported ethanol, and they benefit from assorted subsidies, including the 51-cents-per-gallon tax credit.
Unfortunately, but predictably, this massive government intervention in the marketplace has not worked out too well. In fact, the negatives have been widespread and quite grave.
Senator Huthison has noted: "Last year, 25% of America's corn crop was diverted to produce ethanol. In 2008, that number will grow to 30%-35%, and it will soar even higher in the years to come. Furthermore, the trend of farmers supplanting other grains with corn is decreasing the supply of numerous agricultural products. When the supply of those products goes down, the price inevitably goes up. Subsequently, the cost of feeding farm and ranch animals increases and the cost is passed to consumers of beef, poultry and pork products. Since February 2006, the price of corn, wheat and soybeans has increased by more than 240%."
On April 29, the Associated Press reported: "Trade groups such as the Grocery Manufacturers of America ... argue that increased production of corn for ethanol has driven up prices for corn, wheat and other grains. Those increases, in turn, have boosted prices for bread, meat and dairy products. ... Fueling the debate are prices for corn, wheat and other grains that have reached 30-year highs, touching off protests in Haiti, Egypt and Malaysia and dramatically increasing Americans' grocery bills."
Last August, Mark Perry, a professor of finance and economics at the University of Michigan, drove home the impact of rising corn prices alone: "So dominant has this grain become that of the estimated 45,000 items in supermarkets, more than one-quarter contain corn."
According to the AP, the International Food Policy Research Institute "concluded that 30 percent of the rise in food prices between 2000 and 2007 is due to increased production of biofuels."
Economist Walter Williams summed up the overall inefficiencies of ethanol this way: "Ethanol is 20 to 30 percent less efficient than gasoline, making it more expensive per highway mile. It takes 450 pounds of corn to produce the ethanol to fill one SUV tank. That's enough corn to feed one person for a year. Plus, it takes more than one gallon of fossil fuel -- oil and natural gas -- to produce one gallon of ethanol. After all, corn must be grown, fertilized, harvested and trucked to ethanol producers -- all of which are fuel-using activities."
Another economist, Richard Rahn, told the wasteful story of ethanol this way: "If all the U.S. cropland (371 million acres) were planted in corn to produce ethanol, it would provide 111 billion equivalent gallons of gasoline, but Americans currently consume more than 140 billion gallons of gasoline. So, if Americans imported all of their food (or starved to death), they still would only attain 80 percent of their gasoline needs if it had to come from domestically produced ethanol."
The problems with the government's ethanol mandate are not just about these stunning costs and gross inefficiencies - though those should be enough to derail the ethanol express.
While ethanol has been peddled as a positive for the environment, that clearly is not the case. Numerous reports have noted that the government's ethanol push leads to deforestation, lost wildlife habitats, an increase in greenhouse gas emissions, pollution from biofuel plants, soil erosion, and wasted water.
On the water issue, The Wall Street Journal's editorial page reported on October 17, 2007: "Ethanol plants consume roughly four gallons of water to produce each gallon of fuel, but that's only a fraction of ethanol's total water habit. Cornell ecology professor David Pimentel says that when you count the water needed to grow the corn, one gallon of ethanol requires a staggering 1,700 gallons of H2O." Wow!
The government's ethanol mandates and handouts simply make no sense - from an economic standpoint or from an environmental view.
At the very least, Senator Hutchison's biofuels mandate freeze should be implemented.
Even better, the mandates and various subsidies for ethanol should be eliminated. Let ethanol stand or fall on its own in the marketplace.
What about an alternative? Well, Senator Hutchison applied some common sense when observing: "Expanding biofuels while refusing to take other measures, such as lifting the ban on oil and natural gas production in Alaska and the Outer Continental Shelf, is counterproductive."
In the end, the right energy policy is to get government out of the way, so businesses and entrepreneurs can meet the demands of consumers and businesses. The ethanol mess shows what happens when politicians attempt to overrule the market and dictate energy usage. The resulting costs are dire for consumers, businesses, the economy and the environment.
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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
