The politics of ethanol


Congress isn't talking about the hidden costs of ethanol and how it will impact your wallet
OpinionJournal.com has a fabulous piece on how government intervention has distorted the public perception of ethanol.

We have nothing against corn-based ethanol per se, assuming it competes in the market on the same basis as other fuels. Ethanol's problem is that it is expensive to make and provides far fewer miles per gallon than gasoline. So its supporters have worked the political system to subsidize ethanol, and more recently to force Americans to buy it.

U.S. taxpayers today pay twice for ethanol: once in crop subsidies to corn farmers and again in a 51-cent subsidy for every gallon of ethanol. Without such a subsidy, ethanol simply wouldn't be cost competitive with gasoline. Then last year, Congress went further and passed a new ethanol mandate, requiring drivers to use at least 7.5 billion gallons annually by 2012.

The immediate consequence of this new mandate was higher gasoline prices this spring, since the ethanol industry was ill-equipped to meet the new demand. Ethanol must also be carried by truck or rail, rather than through pipelines, and it requires special blending facilities. All this has both raised prices and created gas shortages around the country. But rather than blame their new mandate for the higher prices, the Members of Congress blamed, of course, Big Oil.

This is a script we've seen before. Government intervention causes market disruption which then gets blamed on the primary players in the market while the government uses the disruption as an excuse for further intervention.

It happened with gold and banking in the 1920s. It happened with Prohibition. It happened with the gas crunch in the 1970s. And at least another half-dozen times that I can remember during the last century.

When you hear some politico or bureaucrat or company saying that Americans should be required to do something, just ask yourself, who profits?

Follow the money.

Oh, one other thing. Ethanol only gives about 80% of the power of gasoline, so eight gallons of gas will get you just as far as ten gallons of ethanol. Add that to the additional transport costs (ethanol can't go through gas pipelines and has to be trucked), and all of the sudden ethanol is about twice as expensive as gasoline.

Is the tradeoff still worth it?

And what else might you not have been told that will hit your wallet?

See, the free market lets you choose what to buy. A given price at any given moment is going to give you a pretty good idea of value, even if you are not an expert. You don't have to know much about cars to know that there is a difference between a Lexus and a Volkswagen. You know that there is a difference between McDonald's and a top rated restaurant.

People are willing to pay more for value, while competition keeps prices down. Value changes with availability and demand, that is why flashlights cost more before a hurricane. And that is why prices drop as more merchants get more stock in.

Mess with the prices and you deprive the market of feedback, which will screw up the supply and demand. That will cause shortages in what's needed and surpluses of what isn't.

That is why planned economies never work. There is no other feedback fast enough to respond.

— NeoWayland

Posted: Sat - June 17, 2006 at 05:22 AM  Tag


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