Economists Blast Ethanol, the 'Nicorette Gum of America's Oil Addiction'

From VOA News:

The U.S. program subsidizing the use of corn for the production of fuel ethanol came under sharp criticism at a Senate hearing Wednesday. Economists told the panel the program leads to higher food prices.</em>

Twenty percent of the U.S. corn crop goes into ethanol production, and corn prices worldwide have increased by 50% over the past year (see chart above, corn prices have increased 3.5 times since 2005, from $1.61/bu. to $5.59/bu.). John Sununu, a Republican senator opposed to farm subsidies, says corn prices have risen in part because America is using increasing amounts of corn to produce fuel for automobiles.

Calling the U.S. ethanol program a disaster, Sununu said it is replete with taxpayer subsidies as both farmers and ethanol producers receive tax breaks from the government. In addition, he said, imports of cheaper sugar-based ethanol are blocked by high tariffs.

And from a related article from Forbes, "The Ethanol Industrial Complex"

Ethanol, once heralded as the homegrown Nicorette gum of America's oil addiction, is getting a second look from lawmakers suddenly concerned about the unintended consequences of merging the fuel and food markets.

What a great sentence!

Is the ethanol bubble about to burst? This from Slate.com's Daniel Gross' article "Corn Dogs":

Judging by recent financial results, the big villains in the ethanol story—the American companies that are responding to government mandates by buying about 20% of the U.S. corn harvest and processing it into fuel—aren't exactly thriving. In fact, their bottom lines and stock prices are suffering pretty badly.

What gives? In theory, business should be gangbusters in the ethanol patch. Government policy has mandated consumption of the fuel, thus stimulating investment (and record high levels of production, see chart above).

But just because the government forces people to buy your product doesn't mean it's a surefire win. The combination of high oil prices, tariffs that protect domestically produced ethanol from imports, and tax credits for companies that blend ethanol into gasoline has stimulated something of an ethanol bubble. And as always happens during a bubble, excess capacity—and the vicious competition it creates—winds up eroding margins.

(Click charts to enlarge.)

Comments

[HilBily]

Very interesting how what started as anti-ethanol oil company propaganda is now repeated parrot-like in what seems every corner of the universe. The problems that ethanol presents are all fixable. Big Oil is afraid of renewable motor fuel mostly because the distillation process for ethanol and its variations is greatly simpler than that for turning crude oil into gasoline. Try to imagine switchgrass or hemp, even, grown on any available plot of ground in this country--no need for fertilizer, or plows, or any special attention--then being cut and sold to the local fuel plant. The technology involved to turn raw material into fuel is not much different than what bootleggers use to make booze.

[bm1087]

I would spend 5 a gallon for ethanol knowing that every cent stayed in the U.S. vs. all the money going over seas to countries that despise our country. If it wasn't for the speculators, corn would back off. This is ridiculous propaganda. Corn is just the doorway to better means and big oil doesn't want them to cut in on their parade. So the US gov reps are OK with profits in the billions for oil cos, gas 4 a gal, but complaining about the only alternative we got? I'm long ethanol for support sake only, as I'll probably never make a dime as an investment.

[TAS]

Ethanol is a perfect example of harmful unintended consequences by the Gore minions and narrow special interests, primarily the environmental left. The responses to your post of the blindly naive pro-ethanol crowd will likely mirror some of those at my post criticizing ethanol months ago when it was not fashionable to state the obvious. These poor souls need some oil, coal and nuclear companies in their narrow portfolios. We need to read their words in posts carefully, so as not to fall victim to bumper-sticker intellect.

[PFPProf]

What we need is a higher tax on gasoline, combined with an income tax rebate. No one can conclude that we do not need to reduce consumption of non-renewable resources. By reducing consumption of gasoline, we'll reduce consumption of ethanol, thus helping the problem.

I would agree that other crops should be cultivated for ethanol production and that ethanol should be included as a part of our energy policy - as should solar, nuclear, coal, wind, and others. We need research and we need personal constraint in consumption.

Good luck doing this without the help of prices.

[jjason]

Anything that will reduce the flow of my money to OPEC and other foreign nations (except Canada) I will support.

I think that tax breaks at the Federal and State level are necessary for ethanol, solar, wind, clean coal and nuclear.

But I also think that those companies that make huge profits should be capable of giving some of those profits back to consumers.

We have been fleeced too long by OPEC and the complicit oil companies.