The End of Ethanol?

by: Tom Lindmark

I have never been one for Malthusian disaster scenarios, given that the humans have proven to be quite adept at engineering around each and every predicted crisis. That’s not to say, however, that shortages of necessities haven’t had an impact on the course of world history, which is what Ambrose Evans-Pritchard speculates might be behind the tumult in the Mideast.

The surge in global food prices since the summer – since Ben Bernanke signalled a fresh dollar blitz, as it happens – is not the underlying cause of Arab revolt, any more than bad harvests in 1788 were the cause of the French Revolution.

Yet they are the trigger, and have set off a vicious circle. Vulnerable governments are scrambling to lock up world supplies of grain while they can. Algeria bought 800,000 tonnes of wheat last week, and Indonesia has ordered 800,000 tonnes of rice, both greatly exceeding their normal pace of purchases. Saudi Arabia, Libya, and Bangladesh, are trying to secure extra grain supplies.

The UN’s Food and Agriculture Organization (FAO) said its global food index has surpassed the all-time high of 2008, both in nominal and real terms. The cereals index has risen 39pc in the last year, the oil and fats index 55pc.

The FAO implored goverments to avoid panic responses that “aggravate the situation”. If you are Hosni Mubarak hanging on in Cairo’s presidential palace, do care about such niceties?

I am inclined to concede the point that food prices might well be one catalyst in the upheaval but I don’t subscribe to the implication found later in his article that we might be facing “mass famine.” Though he couches that possibility within an argument that there are solutions I think it is a leap to assume that a series one-off crop failures portends anything more than just that.

But the situation does present the US with an opportunity. Specifically, an opening to end the subsidization of ethanol. It’s been pretty much politically unthinkable that this monster could be put down given the clout of the farm vote. End the subsidy and you tank corn prices, an outcome that none of the 40 or so Senators who hail from states which produce that crop would abide. The global demand for grains changes the math entirely.

As Evans-Pritchard points out, as people get richer their tastes change and one of those changes is a switch to animal-protein diets. US farmers are going to have a a favorable floor on grain prices for the foreseeable future, thus the political risk in ending the subsidy is gone, save for that would be forthcoming from the actual refiners of ethanol. But if the political class can’t take on that group of rent seekers then we have little chance of ever rationalizing the budget.

There is a strong moral argument for ending the ethanol subsidy. Given that the environmental case for the fuel is so suspect that even Al Gore has disavowed it as a viable renewable energy source and that its termination would not wreak havoc on the farm states’ economies there is no reason not to seize the moment.