The Ethanol Mess

One of the perks of being an M.I.T. graduate is that I get an automatic subscription to the magazine Technology Review. I highly recommend it to anyone with a curiosity about science and technology. It is not technical or hard to understand (like, say, Scientific American). Rather, it is loaded with fascinating articles about cutting edge advances in technology, written for numskulls like me.

The most recent issue has an excellent discussion of the impact of government subsidies for ethanol (a topic we’ve written about before). According to recent calculations, if oil prices fall back down to $40 per barrel, the implied tax paid by consumers because of ethanol mandates will be over $15 billion.

The article lays out nicely the simple economics behind the mess we’ve created for ourselves. I wish that I was teaching intermediate microeconomics this term, because this would be a perfect exam question.


RS

To #30 fthefarmer,

It may have been 14 below in Fridley on March 7 but today on March 10 it was mid-forties above in International Falls, the icebox of the nation. It is not called local weather change, it is global climate change, for which their is plenty of strong evidence.

I agree with the point of others that the best thing that can come from ethanol production is more efficient processes and paving the way for cellulosic ethanol production.

RS

Frank C

It's nice to have gov't enact policies that make us feel good. Too bad that those policies can result in (indirectly) killing people. Ethanol is a prime recent example, where the eagerness to "do something about high fuel prices" results in rapid inflation in food prices and food shortages (e.g., Mexico and Pakistan). But a few years ago the
California legislators mandated that MTBE be added to gasoline to reduce air pollution. Too bad they failed to heed the science showing the contamination of fresh water supplies. Today, no one should question the science behind global warming for doing so could impede a radical shift in resouces necessary to avoid an inevitable rise in temperatures. Unless, of course, that global warming is NOT man-induced in which case we'll like see increase inflation and, I'm sad to say, starvation. Starvation from lack of food was nearly elminiated beginning in the mid 1990s thanks to incredible yields and efficient world distribution. Too bad we can't feel as good about that as knowing that new our hybrids burn green fuel.

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derek

There was a time when Scientific American could be said to be technical and hard to understand, and all the better it was for it. Not any more, sadly.

Albert W Mowatt

A few back there was a post on the law of unintended consequences: (wherein a complex system is governed by a simple system). I think this is a perfect example. Few things are more complex than an energy policy and fewer things are more simple than law makers "trying to help the american people." Politicians move faster than facts and slower than dirt being useful to the rest of us.

Tom

Ian #26 - I think Levitt probably meant "Like Scientific American, it is not technical or hard to understand" rather than "It is not technical or hard to understand like Scientific American is".

fthefarmer

Wouldn't it be nice if Corn or soybeans could free us from the middle East? Wouldn't it be great if Santa gave us everything we wanted? There will be fools always. We have ONE resource that could move us out of a CHAVEZ/ARAB world....COAL, yes we have been called the Saudi Arabia of coal and could convert our coal to liquid fuel, unfortunately people listen to fools like Al Gore (Invented the internet) and think we're melting. On March 7 a freind of mine who lives in Fridley, MN said it was -14 degrees F. If this is global warming I think these fools need to be ignored just like the BIOFOOLS crowd.

David G

Just too add food for thought. Who writes policy in the country.......ta da the lobbiest. So who do you think "wrote" the Ethanol Bill...ta da.....the corn lobby. There was lots of corn out there, prices were low so create huge demand and Monsanto, can get rich (at least in theory-their stock price has taken a beating lately). King Corn has done a great deal of harm in this country by promoting their cheap crops and bi-products, margarine, corn syrup etc as the answer to what ails us. In the past they have lobbied America that margarine was healthier than butter.....survey now says wrong....they make cheap sugars to add to our food...and they pushed corn oil and partially hydrogenated fats into our foods while telling us of the evils of coconut oils. As we all now know those partially hydrogenated fats are some of the worst things to consume, but what many will not know because they have been brain washed is that coconut oils are some of the healthiest in the world to consume. Maybe people will make better decisions when we are not being influenced by people who are out to simply fill their pockets with money. (I can dream can't I)

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PaulW

Though I live in CA, I agree with Midwestern Girl that resorting to name-calling the other states "fly-over" is ignorant, at best. Get a life people. You depend on the good people, and farmers, of these states to produce the foods and goods that you consume every day, at cheap prices. Yes, food is extremely cheap in the U.S. compared to other countries. For that matter, so is fuel.

Additionally, this forum goes to show that anything posted to the internet somehow becomes Gospel truth. These studies that keep being quoted are in the minority, and refuted by the majority of scientists. Corn ethanol does produce more energy than it consumes, about 30% additional that is. However, gasoline LOSES 20% or more energy per unit. Corn ethanol is the short-term path financially, scientifically, and logistically towards a cellulosic ethanol, butanol, and fuel cell future.

Don't you understand that petroleum, natural gas, and coal essentially are food inputs also? They just haven't been converted into corn, wheat, soybeans, oranges, and almonds yet. If you didn't know, fertilizers, tractor fuel, pesticides, computers, and almost every item used to produce food falls back on fossil fuels. Therefore, no matter what, we are filling our cars with food, whether it is ethanol or gasoline. It's just that with corn ethanol we get a few more miles per gallon of fossil fuel.

A bunch of you are victims of the alarmist mentality. Turn off your computer, breathe some fresh outdoor air, drive down to the corner ice cream shop and later fill up with some ethanol-enhanced gasoline (or E85 for your FFV). You'll feel better and perhaps get a few sun rays (I hear Vitamin D does a body good) at the same time.

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Badger

There's nothing new about it, just need to learn from history. Since the seventies, Brazil has been experimenting with this ethanol silliness. A huge headache and one important reason for their dismal economic performance during the last few decades.

Davey

Here, read this:

http://online.wsj.com/wsjgate?subURI=%2Farticle%2FSB120459389654809159-email.html&nonsubURI=%2Farticle_email%2FSB120459389654809159-lMyQjAxMDI4MDA0NDUwOTQzWj.html

Now, I'd say that there are probably a few commodity bubbles forming around the globe right now. High oil prices, whatever "high" means, likely aren't sustainable. When the price comes down, and it always does in the oil market, lots of corn growers are gonna have a problem. Commodity prices can drop in the blink of an eye, but if you have 1,000 acres of corn that is halfway ready for market when oil prices crater, you're gonna be sellin' your farm to cover the loss.

Michael @4, that's the way we 'uns tawk hear in th' fliovar states.

Ian

The fact that an "M.I.T. graduate" regards Scientific American as "hard to understand" has just struck a blow against my, previously high, opinion of that institution.

Sonny Day

The real issue here is that ethanol is actually harmful to the environment and increases global warming emissions instead of decreasing them.

A recent article published in Science (speaking of hard to read periodicals) shows that "when land clearance (caused either directly or by the displacement of food crops) is taken into account, all the major biofuels cause a massive increase in emissions." (Monbiot.com)

Even creating ethanol form "agricultural waste" will "increase the rate of soil erosion 100-fold" and would require farmers to use more fertilizer (which would off gas nitrous oxide which is 296 times more powerful a greenhouse gas than CO2) and would "wipe out all the carbon savings biofuels produce, even before you take the changes in land use into account" (Monbiot.com)

I would strongly recommend you all to check out the following brief article with references here:

http://www.monbiot.com/archives/2008/02/12/the-last-straw/

Before we argue if subsidies are good or bad, should we not first be addressing the fact that ethanol does the opposite of what it is intended to do?

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JR

It's true that the Cornell study was the only one of many studies to estimate that it takes 1.3 gallons of oil to produce a gallon of ethanol. The other studies, however, all said that it takes at least .8 gallons of oil to produce a gallon of ethanol from corn, and several said that the ratio was about 1:1. So at best we're burning about the same amount of oil as we're getting back in ethanol, for all the billions $$ we're investing in corn as a fuel. And our shift to consuming corn as fuel has more than doubled the price for a bushel in the past 2 years, which concatenates down the food chain. Real food prices have risen sharply for many since we've begun pumping corn into our SUVs.

It's true that oil at $100/bbl makes a number of energy alternatives economically feasible, but uncertainty about oil prices creates caution for alt-energy investors. Manufacturers of alternative energy options need to see a sustained high price for oil, oil at $100/bbl for a decade or more. As we saw in the late 1970s and early 1980s, when oil hits a price equivalent to $100 bbl, Americans bought smaller cars and installed solar and wind power systems. And, as we saw in the mid-1980s, when oil dropped back to the equivalent of $20-30/bbl Americans abandoned these alternatives. Many alt-energy companies that grew rapidly during the Carter years disappeared just as rapidly during the Reagan years, a fact of which investors today are much aware.

Corn-based ethanol is a distraction, intended to make us feel like we're doing something whilst keeping us from having to make the really hard changes that are necessary. If our goals are to reduce dependency on petroleum and to reduce carbon emissions, then we have to make oil expensive and keep it expensive. Consumption of fossil fuels drops when the price rises, but picks up again as soon as it falls. Even at $3.00/gal people are still buying SUVs. If we implement a tax on petroleum (gradually, say over 5-10 years) such that a gallon ends up costing $6-7, and keep it at that price, we won't need to set a CAFE standard for cars and all manner of energy alternatives will thrive. $6/gallon oil & gas will end our dependency on petroleum and greatly reduce the volume of carbon we're dumping into the atmosphere.

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Midwestern Girl

@4: Because there's nothing those of us not located on a sea coast love like being referred to as fly-over states, New York and LA are NOT the majority of America!

a student of Economics

Rather than subsidizing ethanol, or having the government pick any "winners" for that matter, we should have broad-based carbon tax, with the proceeds used to lower payroll taxes.

Tax pollution, not work.

That would increase incentives for anyone who had an effective low or zero pollution fuel, technology, transportation method, living arrangement, good, service, idea, etc..

By refunding the revenues via lower payroll taxes, overall efficiency would increase.

Join the Pigou Club!

jonathan

A question: are the ethanol subsidies displacing wheat and, if so, how much is that contributing to the tripling of flour prices?

My very personal guess is that our opinions about the economy now and for the future are being affected not only by gas but a necessity such as flour.

Lord

We have been told how all these new alternative sources of energy would come on line once oil reached $30, $40, $50, $60, .... and the horizon is still empty. Apparently they are all little more than wishful thinking.

a student of Economics

It gets worse:

"Using good cropland to expand biofuels will probably exacerbate global warming," concludes the study published in Science magazine.

The ethanol subsidy racket is bad science and bad economics.

The sooner the voting population realizes this, the sooner the shameful subsidies can be ended.

Tucker

I read the article and having written part of my undergraduate thesis on agricultural economics I was disappointed in it. There have been a large number of articles (National Geographic had one as well, and the Economist issue on expensive food touched on it as well) on similar things and all of them say the same thing. Corn derived ethanol is a bad idea. Not only that but the costs of increased corn planting includes- higher food prices in other basic crops (esp. Soybeans) and meat; increased use of fertilizer to make up for the high N use of corn (and subsequent pollution from the petroleum based fertilizers); and permanent loss of topsoil. US farmers don't follow best use practices in their farming, they use about double the amount of chemical fertilizer they need as 'crop insurance' and fail to follow proper crop rotation techniques because of the nature of existing subsidies. Further we have high trade barriers to foreign ethanol.

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Mikel

The recent policy enacted to "decrease dependence on foreign oil" has been enacted for the same reason that all government policies are enacted: There is a temporary congruence of events wherein a policy's (the one under discussion) enaction will cause an increase in both compaign donations and votes for candidates.
It has been observed repeatedly (I don't think a citation is necissary here) that the main job of a politition after being elected is to be re-elected.
Therefore, when a political situation arises wherein a group of polititions can garner votes while simultaniously giving defacto farm subsedies to corn (major campaign contributors) they will jump at the oppertunity.
This policy is not thaught out to HELP AMERICA, this policy is a stategy for political re-election campaigns.

P.S. minimum production requrements are never a good idea. If it is economical to produce something, people will produce it. If not it is stupid to force them.

P.P.S. due to the economic requirements of writing another (reasonably) inteligent comment, and the prodigiously higher viewability of this current post, I hope that the readership will forgive my copy/paste from the previous ethenol/corn artical.
-HMB

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