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Congress’s Priorities on Gasoline June 29, 2006

Posted by federalist in Economic Policy, Energy, Regulation, Taxation.

Why does Congress want to inflate the cost of gasoline in America?  Federal government has mandated that gasoline be oxygenated.  Until recently, this was done primarily with MTBE.  But MTBE is now considered a toxic chemical, and producers cannot protect themselves against the liabilities of producing it.  So gasoline manufacturers are stuck using the other oxygenate, ethanol, which in this country is extraordinarily expensive to produce and distribute.

Compounding our problems is the fact that domestic ethanol production is the lovechild of two of the most powerful and irrational lobbies in America: environmentalists and farmers.  As a result taxpayers are not only supporting absurd subsidies for its domestic production, but we are also raising the market cost of the fuel by maintaining a significant tariff on imported ethanol.  Other countries, like Brazil, can produce the stuff much more cheaply.  Allowing them to sell to us without penalty would help lower our prices and balance our markets.

Gasoline fuels our economy.  More expensive gasoline slows our economic growth.  Yet the federal government mandates oxygenates, cuts off the supply of MTBE, and artificially inflates the price of ethanol.

I actually had a chance to confront my Congressman, Jim Gerlach, on this question in a “tele-town hall” teleconference he held on June 27.  Gerlach is a pure politician, a Republican In Name Only who will say and do anything to get reelected in his closely divided district.  When I challenged him on the specifics of these ethanol policies, he responded that, yes, we need to improve the supply of ethanol.  But then he went into enviro-independent-energy mode.  He described the big energy problems being faced in this country, including that catchphrase “dependence on foreign oil.”  (Oh, but he voted against pumping domestic oil from ANWR and the continental shelf.)  He mentioned the lack of refining capacity in this country (OK, maybe that’s the fault of the NIMBY crowd, not Congress).  And then he rattled off a list of other solutions to transportation costs being considered in Congress: Raising CAFE standards, subsidizing more ethanol R&D, alternative fuels, alternative energy.  Hey, why take easy action to fix an immediate problem today when you can talk and dream about big solutions to big problems tomorrow?



1. federalist - July 23, 2006

One easy objection to ethanol would be that it takes more energy to produce than it saves. However, this suggestion seems to have been proven untrue:

2. federalist - January 7, 2007

BreakingViews.com claims:

America’s policy of subsidizing ethanol production has been justified as a route to national energy independence. It’s more like a route to happy farmers. Corn and soybean prices have surged, in large part because of the demand for biofuels. But there is a lower-cost way to reduce dependence on the Organization of Petroleum Exporting Countries: Open the borders to imported ethanol.

Biofuels can be an efficient source of energy. Look at Brazil. It produces 4.8 billion gallons of ethanol a year from sugar cane, and ethanol has replaced 40% of the country’s gasoline consumption. That’s enough to make the country energy independent. The plan has worked well because a gallon of ethanol made from sugar cane produces as much as 10 times the energy required to produce it.

But the U.S. doesn’t have the right climate for sugar-cane production in quantity. So the government has turned to corn and soybeans, both crops subject to subsidies. The problem with that policy is that neither of these crops have a high net-energy balance. A gallon of soybean ethanol generates three times the energy it costs to produce it, while corn-based ethanol makes a pathetic 1.3 times its cost of production.

This all may make sense in Iowa, but it is enough to make any economist shudder. In a free market, the domestic production would be swept away by the more efficient foreign product. But this is far from a free market. The U.S. combines a high tariff on bioethanol imports and a requirement that the fuel make up 10% of gasoline. So the market is strong, but the import share is less than 5%.

Energy independence isn’t a bad idea for the U.S., not with the many unfriendly members of OPEC supplying 52% of the country’s oil imports. But fully domestic production comes at a high cost. Sugar cane from the Caribbean is a much more attractive way forward.

3. federalist - January 30, 2007

Justin Lahart details the rising pressure on corn from ethanol subsidies:

The relief that U.S. households are feeling from lower energy costs could get pushed aside by a seemingly unlikely source: corn.

After a decade of going mostly nowhere, the price of corn has shot higher since the summer, driven by government rules that pushed up demand for ethanol. At $4.05 a bushel, the price of a corn future contract is nearly double year-ago levels.

With Washington newly enamored with homegrown energy sources, despite the recent drop in oil prices, corn prices could head higher still. In time, this could push its way into food prices broadly.

Corn goes into more than a bowl of cornflakes. It’s in your bacon and eggs — corn gets fed to hogs and chickens. High-fructose corn syrup sweetens soda, salad dressing and, if you look at the label, probably your cough syrup. In his book “The Omnivore’s Dilemma,” author Michael Pollan relates that he asked University of California, Berkeley, biologists to pass a McDonald’s cheeseburger through a mass spectrometer. They found 52% of its carbon content started out as corn.

Food prices are a big deal for U.S. consumers. The Labor Department calculates that food costs represent 15% of all consumer costs, points out Merrill Lynch economist David Rosenberg. The tally for energy costs is 9%. (Of course, consumers also indirectly pay for the energy costs that go into making and transporting agricultural goods. Then again, some of that energy comes from…corn.)

Steep food prices had a big effect on consumers back in the early 1970s, when inflation started soaring. The combination of grain exports to Russia and poor crops sent wheat and corn prices higher in 1972. The following year, grocery bills started rising sharply. By August 1973, food prices were nearly 20% higher than their year-earlier level. Red meat was so dear thieves started hijacking meat trucks. Food, before oil, was seen as the source of runaway inflation.

Corn is a bigger component of the nation’s food supply now than it was then. Thanks in large part to the way the U.S. government structured subsidies to producers, at the end of 2005 the price of corn was nearly 25% lower than it was 30 years earlier even as food prices more than tripled.

That encouraged food companies to figure out more ways to use corn — high fructose corn syrup, first developed in the 1970s, didn’t come into widespread use until the 1980s. Low prices also meant feeding corn to animals was more and more of a winning proposition.

“If you look at cattle and hogs and chickens, what they really are, are devices for turning low-value corn into high-value meat,” says Bianco Research strategist Howard Simons.

While high prices will encourage farmers to plant more corn, the increased demand for ethanol created by government mandates could eat that up, says Mr. Simons. What’s more, it could leave other crops in short supply, pushing their prices higher.

4. federalist - June 18, 2007

Kim Strassel updates the outcome of corn ethanol manipulation in her 18 May essay, “Ethanol’s Bitter Taste“:

Just as the smart people warned, the government’s decision to play energy market God and forcibly divert huge amounts of corn stocks into ethanol has played havoc with key sectors of the economy. Corn prices have nearly doubled, which means livestock owners can’t afford to feed their animals, and food and drink manufacturers are struggling to buy corn and corn syrup. Environmentalists are sour over new stresses on farmland; international aid groups are moaning that the U.S. is cutting back its charitable food giving, and many of these folks are taking out their anger on Congress.

Call it a case study in how a powerful lobby can overplay its hand.

5. federalist - October 24, 2007


A research team featuring Paul Crutzen, who won a Nobel Prize for his work on ozone depletion, recently showed that the intensive cultivation of biofuels in the U.S. and Europe produces up to 70% more greenhouse effect than the fossil fuels they displace (nitrous oxide, a byproduct of the fertilizers used, has nearly 300 times the heat-trapping properties of carbon dioxide)

So let’s sum up the ways you’re paying to prop up an industry that’s bad for energy security and bad for climate worries: higher taxes, higher gas prices and higher food prices.

6. federalist - January 30, 2008

Oops again: Scharlemann and Laurance conclude from recent studies that

Using biofuels … could have a greater environmental impact than burning fossil fuels, according to experts. Although the fuels themselves emit fewer greenhouse gases, they all have higher costs in terms of biodiversity loss and destruction of farmland.

In other words, let’s not ruin the biosphere to “save” the atmosphere.

7. federalist - February 8, 2008

Another reality check from Gilbert Metcalf:

The tax credit for ethanol is an example of a cost ineffective subsidy. The cost of reducing CO2 emissions through this subsidy exceeded $1,700 per ton of CO2 avoided in 2006 and the cost of reducing oil consumption over $85 per barrel.

8. federalist - February 18, 2008
9. federalist - April 30, 2008

WSJ reports ethanol from Brazilian sugarcane is so much cheaper than corn ethanol that even punitive tariffs might not keep it out of this country:

Even with a 54-cent tariff imposed on Brazilian ethanol exports, Brazil wholesale hydrous ethanol prices are around $2.18 a gallon, compared with around $2.55 a gallon on average now for U.S. ethanol.

10. federalist - March 29, 2009

WSJ updates us on the ethanol scam, concluding, “Ethanol is one of the most shameless energy rackets going, in a field with no shortage of competitors.”

11. federalist - June 24, 2011

Astonishingly, it looks like Congress has finally found the gumption to turn down this special interest.

A broad bipartisan majority of the Senate voted Thursday to end more than three decades of federal subsidies for ethanol….

The tax breaks, which now cost about $6 billion a year, had long been considered untouchable politically because of the power of farm-state voters and lawmakers. Iowa’s role as the site of the first presidential caucuses has further elevated the political potency of the biofuel.

Presidential hopefuls made a quadrennial ritual of going to Iowa and pledging to support the tax breaks, tariffs and mandates that supported production of ethanol motor fuels from corn. This year, however, some Republican presidential candidates have pointedly refused to endorse ethanol tax breaks.

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