All Commentary
Sunday, July 1, 2007

Ethanol versus the Poor

The law of unintended consequences strikes again.

Gardner Goldsmith is a freelance writer in New Hampshire.

It is nearly axiomatic that anything Cuban “President” Fidel Castro says will be false, incorrect, misleading, and downright pernicious. It’s not as if the bearded relic from the Cold War—who seems to have replaced his traditional olive military clothing with a more sedate sweatsuit look—has a stellar record for veracity or economic punditry. But recently, el Presidente’s grumblings have been worth hearing, not because they are precisely right, but because they are at least on the right track.

At the end of March Castro spoke out with great fire and resentment about the attempt by the Bush administration and Congress to increase ethanol use in the United States. “More than 3 billion people in the world are being condemned to a premature death from hunger and thirst,” he said in a March 29 op-ed published in Granma, the official Cuban Communist Party newspaper.

Coming from a man responsible for the torture, death, and exile of many people, these humanitarian claims are more than a bit hypocritical. But despite the source, and the overblown nature of the rhetoric, there is a barely discernible ring of truth to his words.

Ethanol, of course, is derived from the fermentation of certain carbohydrate-rich plants, such as sugar cane, wood pulp, sugar beets, and—as shocking as it seems—corn. And since politicians in Washington for decades have taken it upon themselves to interfere in not only the energy markets, but also pretty much every market, they recently have shown no qualms about forcing consumers to use more ethanol in their automobiles.

As H. Josef Hebert of the Associated Press reported on May 1, “There is an ethanol juggernaut moving through Congress that will call for a sevenfold increase in biofuels production—almost all of it ethanol—over the next 15 years.”

This push includes the approval on May 2, by a 20–3 vote in the Senate Energy and Natural Resources Committee, of a bill that would require 36 billion gallons of “renewable fuel” use by 2022. It includes a proposal by House Speaker Nancy Pelosi to have an “energy security” bill ready for a vote by the summer, just in time to feed off anger over high fuel prices, and just in time to promote ethanol even more. The push encompasses loan guarantees, tax breaks, and subsidies for the building of cellulose-based ethanol plants in the United States, much like a 2002 law, the Renewable Energy Systems and Energy Efficiency Improvements Program, that wasted $73 million through grants and loans to farmers to buy renewable energy systems. And finally, it piles all of this on top of a requirement passed two years ago making oil refiners double the amount of ethanol in their gas products, from 4 to 7.5 billion gallons.

Of course, President Bush has pledged to cut gasoline consumption (“addiction”) by 20 percent over the next decade. Ethanol is to play a large part in that plan.

So much for the free market.

Such a comment could come off as glib, or merely colorful—a punctuating sentence with little more than rhythmic literary value. But it is of far greater significance, for this interference by politicians in the market for fuel (added to the massive existing interference) has real-world impact, and Fidel Castro, of all people, understands.

“The market” encompasses and integrates every market sector. It represents the dynamic flow of usable capital, time, natural resources, skills, preferences, and opportunities each participant uses to fulfill his needs. Only the individual can make the proper judgments about these factors, and when he participates in any market sector, he helps establish a price system that imparts this information to other participants of not only his sector, but others as well. As a result, absent political interference, the personal needs of market participants drive capital, time, skills, and other resources to their most productive uses, maximizing human effort in all sectors, and minimizing waste.

But by imposing their will on participants in the market for fuel, politicians not only commit the unethical act of coercion, they intercede in, and interfere with, the proper flow of capital in all sectors of the market.

As strange as it appears, and as insincere as it is, Castro’s statement about starvation and thirst points this out.

U.S. government requirements for increased ethanol use have already caused a higher demand, and thus higher prices, for corn, and the trend will only worsen as more government strictures interfere with the market. These higher prices have devastating effects on people living on the margins. In Mexico the cost of corn tortillas has more than doubled in the past year. Between August and December 2006, anticipation of increased demand for corn drove prices from $2.09 to $3.01 per bushel, making it more difficult for the impoverished to afford the basic foodstuff on which they rely.

But this unnatural increase in costs is not restricted to corn. Government intervention in one sector has effects on all. For example, the sharp, artificially increased demand for corn, and its relative increase in value to farmers, has prompted, and will continue to prompt, those farmers to shift acreage accordingly. As most economists recognize, but few politicians seem to consider, this rapid, nonmarket driven shift in acreage has caused reallocation of resources away from other produce and toward corn. Such shifts mean rapid changes in the supplies of these other forms of produce, and, as a result, higher prices. Keith Collins, chief economist at the U.S. Department of Agriculture, testified before a Senate committee in January, “Looking ahead to the 2007 crop of corn, it is quite likely, based on current ethanol plant construction, that corn used in ethanol production will rise by more than 1 billion bushels from the 2.16 billion bushels of the 2006 corn crop used for ethanol. Use of 1 billion bushels, at a trend yield of 152 bushels per acre, would require an additional 6.5 million acres of corn, if corn consumed in other uses remains unchanged from this year’s projected levels.”

This can mean only higher prices for people interested in buying not just corn, but also other produce.

“With ethanol fueling a push for more corn acres, major crop prices are generally expected to be higher over the next couple of years than in the past,” Collins said. “Soybeans, while facing competition from ethanol feed co-product . . . are still likely to face higher prices over time, as lower expected soybean acreage offsets the lower soybean meal demand, and soybean oil is demanded for biodiesel production.”

Then, of course, there are all those products that rely on corn for their creation. With a nonmarket player intervening in the proper flow of capital, prices for everything from cereal to sodas sweetened with corn syrup to poultry and pork must increase in cost. Since the passage of the 2005 energy bill requiring an increase of ethanol production to 7.5 billion gallons, the cost of poultry alone has increased 40 percent.

As Collins told the committee, “Livestock and poultry profitability declines under higher corn feeding costs. For example, for hogs, which are heavily dependent on corn… a $1 per bushel increase in the price of corn would raise the price of producing hogs by about $6 per cwt (hundred weight).”

These are all costs that will be passed on to the consumer. They will not only make it more difficult for the poor to afford their basic foods, but they will also decrease the money that would normally be available to purchase other products, thus retarding the pace of economic growth and harming everyone.

These economic realities merely compound the problems inherent in the use of ethanol as a fuel itself. As has been noted by Edmund Contoski, in his book Makers and Takers, corn-based ethanol is still a net energy loser. “The energy needed for growing the corn (for farm machinery, fertilizers and pesticides) and distilling the alcohol is more than you get from burning the ethanol that is produced,” he writes.

Thus the government push for ethanol indirectly increases the price of the fuel required to ship produce, harming consumers—especially poorer people—once more.

And there are other drawbacks. Ethanol is not compatible with colder temperatures. This makes it virtually impossible to run it through pipelines, and necessitates shipment by truck or train, which increases costs—and energy use—even more. On arrival, the ethanol can only be used above certain temperatures, for if it is cool, the aerosolized particles left over from ethanol combustion stubbornly remain at lower atmospheric levels, causing terrible smog. That is why politicians from California—particularly Los Angeles—fought the U.S. government over required ethanol content during the winter months.

Supporters of the congressional and presidential push to force ethanol on us seem oblivious to these scientific and economic realities, but highly attuned to the special interests who would gain from the program. Ethanol advocates self-servingly bandy about claims that we need to “help the environment,” and “get off of foreign oil.” Meanwhile, they force on us higher costs that retard our ability to better our lives, a fuel that creates smog in winter and takes more energy to make than it produces, and a series of unconstitutional mandates that earlier Americans would have loudly protested. How much better off we would be if the energy planners lifted their smothering hands from the marketplace. That means deregulation and desubsidization.

Of course, that kind of thinking is a pipe dream, about as realistic as expecting Fidel Castro to ever be on the right track about economics again.