All Commentary
Wednesday, January 26, 2011

Is Ethanol a Good Choice for Consumers?

Not if the price system is any guide.

The Environmental Protection Agency has decided that gasoline can contain at least 15 percent corn-based ethanol. Ethanol is what I call a “political fuel.” The EPA (despite all the claims that it operates according to the dictates of pure science) is a political tool of President Obama.

The EPA’s decision is anticonsumer. Ponder this from U.S. Agriculture Secretary Tom Vilsack, who declared that the decision “gives consumers the option of purchasing domestically produced renewable transportation fuels,” as though this is a great decision for fuel users. If ever a quote needed a “not so fast” rejoinder, this is it.

To fully understand why Vilsack’s comment is outrageous, one first has to understand what would occur with resources in a free market. By freely choosing goods via a system of mutual exchange, consumers direct resources from lower value to higher value uses.

Corn has many uses, from straight food (and, yes, I love to eat corn on the cob) to being the most important ingredient for Jack Daniel’s Tennessee Whiskey. (Being from Tennessee, I say the names “Jack Daniel’s” and “George Dickel” with the proper reverence they deserve.) Corn also is used to make many other things, from sweeteners to decorations to animal feed.

So decisions must be made about where to direct corn. For example, behind our property is a 100-acre farm where a farmer grows corn to feed his beef cattle. For him that is the best use of the factors of production (and the corn itself), and as long as consumers continue to purchase his beef (at prices that support his operations), he will direct corn to that end.

When the discussion turns toward corn as the key ingredient in an alcohol-based fuel, the question is: Do consumers wish to purchase this fuel when they have other alternatives? Indeed, they already have the choice of gasoline, which is petroleum-based and performs better in most internal combustion engines.

Consumer Choice

In fact, consumer choice expressly points toward gasoline, and no wonder. First, oil companies can make a profit selling gasoline at less than $3 a gallon. (True, many costs are socialized by government policy.) Second, it is impossible for companies that produce ethanol to make a profit selling a gallon for $3. (While ethanol hardly qualifies as premium whiskey, nonetheless it is instructive to note that a gallon of Jack Daniel’s would sell for about $80. Even an inferior corn-based whiskey certainly would sell for more than $3 a gallon. )

What does this mean? Consumers have shown they are willing to pay a lot of money for a corn-based alcoholic drink but not willing to pay enough for a gallon of alcohol fuel to make a profit for the producer.

There are other problems with ethanol. Because the alcohol eats through the seals, it cannot be moved by pipeline, so railroads and trucks bring the fuel across the country, adding to the transport costs.

So we have an inferior fuel that is more expensive than gasoline, yet 40 percent of the nation’s corn crop is dedicated to making it. This is not by consumer choice; the decision to use ethanol, to force motorists to put it in their vehicles, and to subsidize it comes from government, which supersedes the wishes of consumers.

When Vilsack claims that the 15 percent blend is good for consumers, he is wrong. Consumers already have rejected ethanol, but that does not matter to the government. Indeed, ethanol is a good deal — for ethanol producers — but it destroys the wealth of others.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.