Thursday, August 07, 2008

Ethanol and the Future

As mentioned previously, one of my favorite job perks is receiving various economic journals & magazines, such as The Regional Economist, the St. Louis Fed's quarterly publication. There's a good article about ethanol in the latest edition. Some parts of the article I found interesting:

The Energy Policy Act of 2005 required that 5.4 billion gallons of biofuels be blended with gasoline in 2008. This amount would then increase to 7.5 billion gallons in 2012. The Energy Independence and Security Act of 2007 (EISA) increased the target for 2008 to 9 billion gallons and extended the mandate through 2022, when 36 billion gallons of biofuel are to be blended.

To achieve this policy goal, Congress has provided numerous incentives for domestic ethanol producers over time, such as subsidies and import tariffs... (and) a tax credit for gasoline blenders....

Government mandates and incentives have meant that demand for corn has risen. As more corn is planted to meet demand, fewer of other crops are planted, and this drives up food prices all around.

According to the U.S. Department of Agriculture (USDA), the percentage of the domestic corn supply used to produce ethanol has increased from less than 5 percent in 2000 to 22 percent last year. The USDA’s latest long-term projections indicate that nearly 5 billion bushels of corn, or about 31 percent of total projected supply, will be used to produce ethanol in 2017. At the same time, the USDA projects that the price of corn in nominal terms will fluctuate between $3.50 per bushel and $3.80 per bushel. ... a substantial step-up from the roughly $2.25 per bushel average price seen from 2000 to 2006.

Okay, the government has mandated we produce 36 billion gallons of biofuel by 2022. That could mean sugar ethanol or other biofuels like switchgrass. However, most of it will come from corn ethanol simply because "the infrastructure to support ethanol from switchgrass is 'virtually nonexistent.'"

So, it doesn't take a genius to figure out that prices are going to rise a good bit due to government intervention in the corn market.

Where's the benefit? It won't make us more energy-independent.

"Using all corn grown in the U.S. to produce ethanol would replace only 12% of the gasoline used for transportation in the U.S...The increased percentage of the corn crop used in ethanol production, according to the USDA, largely comes at the expense of corn used for livestock purposes (feed) and, perhaps more important, buffer stocks (inventory). In addition, the increased acreage devoted to corn reduces the area devoted to other important crops, like wheat and soybeans. All else equal, this means higher prices for those crops also."

Studies have shown that ethanol production produces more carbon emissions than burning standard gasoline. The environmental and resource costs of producing it are greater than the benefits gained. The E10 blended gasoline you put in your car reduces your fuel mileage by about 2%.

So, why the bad energy policy? Answer: The farm lobby. Our farmers are struggling to compete, so instead they squash the competition of poor farmers in places like Africa and South America by subsidizing our production and keeping poor countries' goods out of our markets.

Barack Obama is a supporter of these subsidies & tariffs and kissed up to the farm lobby, helping him with the now historically-important Iowa Caucus. John McCain is against them.

From the NY Times (HT: Greg Mankiw):

Mr. McCain advocates eliminating the multibillion-dollar annual government subsidies that domestic ethanol has long enjoyed.... Mr. Obama, in contrast, favors the subsidies....

On the campaign trail, Mr. Obama has not explained his opposition to imported sugar cane ethanol. But in remarks last year, made as President Bush was about to sign an ethanol cooperation agreement with his Brazilian counterpart, Mr. Obama argued that “our country’s drive toward energy independence” could suffer if Mr. Bush relaxed restrictions, as Mr. McCain now proposes.

“It does not serve our national and economic security to replace imported oil with Brazilian ethanol,” he argued....

The candidates’ views were tested recently in the Farm Bill approved by Congress that extended the subsidies for corn ethanol, though reducing them slightly, and the tariffs on imported sugar cane ethanol. Because Mr. McCain and Mr. Obama were campaigning, neither voted. But Mr. McCain said that as president he would veto the bill, while Mr. Obama praised it.

1 comment:

Keith Walters said...

Have you seen this:
http://www.foreignaffairs.org/20070501faessay86305/c-ford-runge-benjamin-senauer/how-biofuels-could-starve-the-poor.html