Dr. Henry I. Miller says Political Liquor’s Economic Hangover Just Beginning — that is, our ethanol policy is going to have all sorts of unpleasant consequences:
From pre-school to planning funerals, green is in. Very in. But green policies and decisions need to be based on more than a vague desire to save the planet. The principles of the natural sciences and economics must play an essential role — a part of policy-making that often eludes politicians. The latest examples are the federal government’s efforts to reduce the United States’s dependence on imported oil (now more than 60 percent) by shifting a big share of the nation’s largest crop, corn, to the production of ethanol for fueling automobiles.Good goal, bad policy. In fact, in the short- and medium-term, ethanol can do little to reduce the vast amount of oil that is imported, and the ethanol policy will have widespread and profound ripple effects on other commodity markets. Corn farmers and ethanol refiners are ecstatic about the ethanol boom, of course, and are enjoying the windfall of artificially enhanced demand. But it is already proving to be an expensive and dangerous experiment for the rest of us.
The U.S. Senate is debating new legislation that would further expand corn ethanol production. A 2005 law already mandates production of 7.5 billion gallons by 2012, about 5 percent of the projected gasoline use at that time. These biofuel goals are propped up by a generous federal subsidy — via tax credits — of 51 cents a gallon for blending ethanol into gasoline, and a tariff of 54 cents a gallon on most imported ethanol, to keep out cheap imports from Brazil. This latest bill is a prime example of the government’s throwing good money after a bad idea, of ignoring science and economics in favor of politics, and of disdain for free markets.
President Bush has set a target of replacing 15 percent of domestic gasoline use with biofuels (ethanol and biodiesel) over the next 10 years, which would require almost a five-fold increase in mandatory biofuel use to about 35 billion gallons. With current technology, almost all of this biofuel would have to come from corn because there is no other feasible, proven alternative. However, it is unlikely that American farmers will be able to meet such demands: Achieving the 15 percent goal would require the entire current U.S. corn crop, which represents a whopping 40 percent of the world’s corn supply. This would do more than create mere market distortions; the irresistible pressure to divert corn from food to fuel would create unprecedented turmoil.
Thus, it is no surprise that the price of corn has doubled in the past year — from $2 to $4 per bushel. We are already seeing upward pressure on food prices as the demand for ethanol boosts the demand for corn: Nationally, food prices were up 3.9 percent in April, compared to the same month a year earlier. Until the recent ethanol boom, more than 60 percent of the annual U.S. corn harvest was fed domestically to cattle, hogs and chickens, or used in food or beverages. Thousands of food items contain corn or corn byproducts. A spokesman for one of California’s largest cattle ranches and feedlots noted that since the end of 2005, the company has experienced a 36 percent increase in the cost of feed, “which translates to an additional expense of $101 per head raised.” Reflecting these trends, the National Cattlemen’s Beef Association has demanded an end both to government subsidies for ethanol and to the import tariff on foreign ethanol.
The poultry industry is also squawking. The National Chicken Council is demanding remedies from senators who represent the big southern poultry states, and the National Turkey Federation estimates that its feed costs have gone up nearly $600 million annually.
The law of unintended consequences strikes again.