Congress Considers Bailing Out Its Ethanol Mistakes 23 comments
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From Wednesday’s WSJ, here is a foretaste of what’s to come as Congress and the new administration ramp up their stimulus plans next month.
The Journal points out that the ethanol industry is on the ropes due to the collapse in the price of oil. Three of the major producers are near bankruptcy despite federal subsidies. So what does any self-respecting company do in such straits these days? You know the answer to that one.
So here they go again back to the taxpayer for help. The Renewable Fuels Association, the industry lobby, is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion. The lobby would also like Congress to ease the 10% limit on how much ethanol can be added to gasoline for conventional cars and trucks — never mind the potential damage to engines from such an unproven mix.
Of course, the ethanol industry wouldn’t even exist without the more than $25 billion in taxpayer handouts over the past 20 years. Congress only recently passed energy and farm bills that further greased ethanol production with a 51 cent a gallon tax credit, corn subsidies, plus increasingly stringent biofuel mandates. We were told, as usual, that profitability was just around the corner.
Ponder this for a minute. Congress, having created an industry that is now failing, is considering the expenditure of an immense amount of money to perpetuate their mistake.
As if that were not enough, the entire project has turned out to be something of an unmitigated disaster. Diversion of corn to the production of ethanol has been blamed for wide spread famine in the lesser developed countries, the excessive use of water in the production process has created unintended environmental consequences and the final product is questioned as to its efficacy in lessening demand for oil and reducing carbon emissions. Even some of its strongest proponents are abandoning the industry.
The Environmental Working Group and five other environmental organizations said this week they oppose a bailout because subsidies “for corn-based ethanol have produced unintended, yet potentially catastrophic environmental consequences, with little or no return to taxpayers in energy security [or] protection from global warming.”
Don’t expect any of this to dissuade Congress from coming to the aid of the industry. This is one of those bits of pork that will be buried deep inside some larger bill, of which there are going to be many. Boone Pickens was at one time an energy advisor to Bob Dole. Pickens was and is an ardent opponent of ethanol on purely economic grounds. After ardently arguing his position with Dole, the Senator and at that time Presidential candidate explained to him that there were 22 corn producing states. Each state had two senators. Therefore, the United States was going to have an ethanol industry.
When you watch the money start flying out the door next year keep that explanation in mind. It will tell you much more about why things are being done than all of the economic and financial analysis you are likely to see bandied about.
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This article has 23 comments:
My one bone with Obama's cabinet picks...
My one bone with Obama's cabinet picks...
reform what branch of gov't?
On Dec 26 02:27 PM AviGandhi wrote:
> Let's not forget it's the agribusiness companies who are the masterminds
> behind the ethanol farce. Before corn-based ethanol is seen as the
> con that it really is, we're going to have to reform agriculture.
>
>
> My one bone with Obama's cabinet picks...
Thank goodness we have the EPA looking out for us.
Milk? don't worry about it. We can genetically enhance super cows that produce twice as much milk.
Loved your article and the comments.
Solution: don't buy the inferior in every way product (ethanol).
Famos, for the last word.
We have simply relied on the free market to give us cheap oil for too long and hoped that cartels and political instability would go away. Well, with war in the Middle East and the recent $150/bbl price in oil, it makes sense for the US to ultimately replace 25% of it's gasoline with ethanol. It can be part of the solution.
Of course corn ethanol doesn't yield as much energy as oil, but you have to see the big picture and take off the geek hat with the propellor on top. If the US imports 70% of it's oil and most of those imports become unavailable, the US national security is put at a severe risk. So oil is the cheapest source of energy right now... this doesn't mean we put our head in the sand for another 5 years until the next oil embargo, war or price spike. We need US energy independence ASAP... and I don't see a better plan on the table with a reasonable chance of being implemented. Get real everyone.
I ask this because it's not at all outside the realm of reason and probably will occur (i.e, as it did in the mid-to-late 30's, early-60's, late-80's); in fact, we're pry due, though proponents of ethanol see only good weather, year in and year out, decade after decade as a given, in fact they have to as an underlying assumption of its sheer sustainability.
On Dec 27 01:37 AM M-F wrote:
> Corn ethanol will be a bridge to cellulosic ethanol and perhaps ethanol
> from 'sugarcorn' a promising new plant which has no kernels or cobs.
>
>
> We have simply relied on the free market to give us cheap oil for
> too long and hoped that cartels and political instability would go
> away. Well, with war in the Middle East and the recent $150/bbl price
> in oil, it makes sense for the US to ultimately replace 25% of it's
> gasoline with ethanol. It can be part of the solution.
>
> Of course corn ethanol doesn't yield as much energy as oil, but you
> have to see the big picture and take off the geek hat with the propellor
> on top. If the US imports 70% of it's oil and most of those imports
> become unavailable, the US national security is put at a severe risk.
> So oil is the cheapest source of energy right now... this doesn't
> mean we put our head in the sand for another 5 years until the next
> oil embargo, war or price spike. We need US energy independence ASAP...
> and I don't see a better plan on the table with a reasonable chance
> of being implemented. Get real everyone.
Sun, wind and bio are myths from the left.
We are. There is a much greater interest and work on renewable energy than imagined 10 years ago. What we want is to let our current system let us get there.
But be careful buying stocks for the long term in a group that is not making money now. There are many private firms who may be the long term winners.
This experiment illustrates a couple of dilemmas with government efforts to get us off foreign oil:
1) How to deal with oil prices that can fluctuate between $150 and $35 within the space of a year and stay irrationally low for decades. Will ethanol producers have to hedge against oil price collapses in the future? That could raise overall cost.
2) If periodic infusions of taxpayer money are necessary to partially insulate our economy from the violent price swings of oil and prevent recessions such as the early 70's and early 80's, then how do we determine HOW MUCH is worthwhile spending. Obviously, even partial energy independence is worth something, as it reduces the economic destruction that high oil prices can cause. Lassiez faire is not an option unless you think 15% inflation, 12% unemployment, oil wars, and the bankruptcy of American businesses caused by the whims of the tinpot dictators at OPEC is acceptable.
3) If taxpayers are going to lose massive amounts of money either way, through petroleum dependency OR through subsidies for alternatives, why not just use fuel taxes to reduce consumption (cutting the income tax by an equal total amount)? Europe has about the same population and GDP as the US but uses only 20% of the oil we use. If we only used 20% of what we use right now, our economy would be more or less indifferent to oil prices and we could get almost all our oil domestically or from Canada. Of course, a consumption reduction of just 10% would do more for our energy independence than the ethanol experiment ever did and the net cost would be zero if a $0.50 gas tax was offset by income tax cuts. I burn 750 gallons a year, so if my income tax dropped by $375 I would break even. Actually I would do better than that, because no additional government debt would be created trying to keep gas prices low.
But of course, that idea doesn't buy off any Midwestern swing states, so I guess we'll continue to spend billions chasing pie-in-the-sky technologies and fighting oil wars with Chinese debt.