Ethanol And The Law Of Unintended Consequences

The Wall Street Journal has an article today about the consequences that have resulted from the Federal Government’s decision to heavily subsidize the production of corn-based ethanol

[T]he great virtue of ethanol is that it represents a “sustainable,” environmentally friendly source of energy–a source that is literally homegrown rather than imported from such unstable places as Nigeria or Iran.

That’s one reason why, as Jerry Taylor and Peter Van Doren note in the Milken Institute Review, federal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it–despite recent high oil prices.

That’s also why the percentage of the U.S. corn crop devoted to ethanol has risen to 20% from 3% in just five years, or about 8.6 million acres of farmland. Reaching the President’s target of 35 billion gallons of renewable and alternative fuels by 2017 would, at present corn yields, require the entire U.S. corn harvest.

The most immediate consequence of this should be pretty obvious, the price of corn has skyrocketed in the last year. That’s great news for corn producers, but it’s bad news for the rest of us, and even worse news for poor countries like Mexico:

Mexico is in the grip of the worst tortilla crisis in its modern history. Dramatically rising international corn prices, spurred by demand for the grain-based fuel ethanol, have led to expensive tortillas. That, in turn, has led to lower sales for vendors such as Rosales and angry protests by consumers.


There is almost universal consensus in Mexico that higher demand for ethanol is at the root of price increases for corn and tortillas.

What’s worse, the supposed environmental benefits of ethanol just aren’t true:

As an oxygenate, ethanol increases the level of nitrous oxides in the atmosphere and thus causes smog. The scientific literature is also divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol’s net energy output is a marginal improvement of only 1.3 to one. For purposes of comparison, energy outputs from gasoline exceed inputs by an estimated 10 to one.

And because corn-based ethanol is less efficient than ordinary gasoline, using it to fuel cars means you need more gas to drive the same number of miles. This is not exactly a route to “independence” from Mideast, Venezuelan or any other tainted source of oil. Ethanol also cannot be shipped using existing pipelines (being alcohol, it eats the seals), so it must be trucked or sent by barge or train to its thousand-and-one destinations, at least until separate pipelines are built.

If nothing else, the continued survival of the ethanol subsidies is a testament to political power.  Forget about Big Oil, the real winner in the energy sweepstakes these days is Big Corn.