The Last Barrel

 Vol. 233 No. 6

This editor has said it before, and I’ll say it again—there is NOTHING that the U.S. federal government does well. The latest example is ethanol, as outlined in a study authored this spring by the Mosbacher Institute for Trade, Economics and Public Policy at Texas A&M University. It concludes that U.S. ethanol policy is a complete failure.

Entitled, U.S. Ethanol Policy: The Unintended Consequences, the study is authored by Institute Director James M. Griffin, within the George Bush School of Government and Public Policy at A&M, and Mauricio Cifuentes Soto, a graduate student assisting him. Mr. Griffin also holds the Bob Bullock Chair in Economics and Public Policy. The authors say that the heart of the problem is the Energy Independence and Security Act of 2007 (EISA), which mandated a steep rise in U.S. ethanol production.

EISA’s goals were to ease imported petroleum dependency, cut greenhouse gas emissions and reduce motorists’ fuel costs. EISA mandated that ethanol production should grow from 4.9 billion gal in 2006 to 36 billion gal by 2022. Today, however, at 14 billion gal/year, the U.S. is not even half-way there. Worse, the policy’s unintended negative consequences, especially those influencing world food prices, far outweigh the intended benefits.

The consumer’s perspective. For average U.S. citizens, the blend of 10% ethanol in gasoline (E10) offers pros and cons. The Btu efficiency of a gallon of ethanol is about 40% less than a gallon of conventional gasoline. Thus, an E10 blend requires 4% more fuel than conventional gasoline, costing the consumer an extra 15 cents/gal. Second, most Americans don’t know that ethanol blending companies, until recently, received a 45-cent/gal subsidy. Yes, refining costs to make E10 are lower, but on balance, these effects net out to about 2 cents/gal, or $3 billion/year.

As relates to energy security, benefits look large at first glance. Comparing June 2011 ethanol output (910,000 bpd) against total petroleum imports (11.8 MMbpd) might indicate that ethanol has boosted energy security 7.7%. The authors say this is wrong. First, given its lower Btu efficiency, ethanol only displaces 655,000 bopd, or 5.6% of imported petroleum. More importantly, the percentage of import dependency (contrary to rhetoric mouthed by President Obama and his minions) is a misleading indicator of security, since the world oil market is global. For instance, even though the U.S. imports no oil from Iran, a disruption of Iranian supplies would still trigger increases in all oil prices.

Environmental angle. Ethanol was expected to slash greenhouse gas emissions, say Griffin and Cifuentes. The logic was that corn, while growing, absorbs CO2 from the atmosphere and then, in ethanol form, releases it, thereby making ethanol environmentally neutral. However, a life-cycle analysis—including CO2 emissions in plowing, planting, applying fertilizer, harvesting the corn, delivering it to the ethanol plant, and producing the ethanol—tells another story.  Life-cycle CO2 emissions for ethanol are only 20% less than for conventional gasoline. Thus the 2011 reductions in CO2 emissions were miniscule—0.42% of the U.S. total and 0.08% of the worldwide figure.

Food supply consequences. While the outcomes for emissions and energy security have been small but positive, the unintended consequences of U.S. ethanol policy on food prices have been “the polar opposite,” say the authors. After 2007, EISA mandates drove up ethanol production at the expense of corn usage for food. From 2007 to 2011, corn used for food fell nearly 3 billion bushels. By 2011, 37% of the U.S. corn crop went toward ethanol production, and prices shot up to $7.50/bushel, compared to $3.09/bushel in 2006. 

The U.S. is the world’s largest corn producer, accounting for 53% of world corn exports. The hefty rise in corn prices has prompted many U.S. farmers to increase corn acreage at the expense of other grain products. Since the U.S. is also a major exporter of all other grains, prices for those items have more than doubled, too.

As grain prices have risen, they have impacted broad food price indices. Between January 2007 and September 2011, the United Nations’ aggregate food price index increased 68%, with cereals up 69% and dairy products up 46%. The authors point out that Americans spend 11.4% of disposable income on food. If prices rise, they can spend less by substituting cheaper or less-processed foods, eating out less, etc. Even so, the loss to U.S. consumers, due to ethanol, is $40 billion.

Meanwhile, global food price increases have been devastating in other countries. The International Monetary Fund reports a 40% jump in its world food price index during the 2007-2011 period. Worse, people in places like Kenya (Obama, take note), Pakistan and Cameroon pay 40% or more of their income for food and have no alternatives to higher prices—all they can do is eat less.

Given the paltry emission and energy security gains, and the consequences for food supplies, the authors are calling for repeal of ethanol mandates and a complete overhaul of U.S. ethanol policy. This would be in addition to Congress allowing ethanol subsidies and the tariff on Brazilian ethanol to expire on Dec. 31, 2011.

This is yet another one of a plethora of U.S. federal programs that don’t work. Given the food consequences, it is tempting to blame just the congressional Democrats, since they initiated EISA as part of their gimmicky “100-Hour Plan” in 2007, when they gained the majority. It’s rather ironic that all these good liberals, who claim to be such great humanitarians, have sponsored such devastating legislation. Yet, when high prices for cereal, bread and produce cause you outrage at the grocery store, you’ll also have to blame Republicans, since many voted for EISA, too. It passed the Senate 86-8, and the House 314-100.