Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”     Thomas Sowell

June 18, 2008

Lesson In Unintended Consequences #2

by Brad Warbiany

The government likes to support biodiesel. It has all the buzzwords. “Recycling”. “Sustainable”. “Environmentally-friendly”. So they subsidize efforts to blend diesel with biodiesel.

One main problem here. Americans don’t use much diesel. So they’re subsidizing foreign, not domestic, use. In fact, they’re simply sending money for non-American-produced diesel that won’t be consumed on American soil to foreign fuel companies:

The problem began when Sen. Chuck Grassley (R., Iowa), the friend of farmers, inserted the so-called “Blenders’ Credit” into the Jobs Act of 2004. The idea was to increase biofuels production and consumption in the U.S., as biofuels were thought to be environmentally friendly and a viable alternative to fossil fuels. The credit provides $1 for each gallon of biodiesel that is mixed with regular diesel in the United States. The provision has not dramatically increased domestic consumption, but it has increased production and exports to Europe’s thriving and subsidized diesel markets.

Under World Trade Organization rules, the U.S. government cannot extend the credit only to American companies or to fuels produced in America. Thus, foreign companies are eligible whenever they bring their biodiesel stateside for mixing. But the limited American market for the fuel has given birth to an unintended consequence known as “Splash and Dash.”

Rep. John Shadegg (R., Ariz.) demonstrated the concept’s simplicity last week by referring to an article that received little attention when it was published last year. It works like this: A foreign tanker carrying 9 million gallons of biodiesel from Brazil or Malaysia sails to an American port. While it waits, 9,000 gallons of American diesel is added — that’s right, a .1 percent blend — so as to earn the blender a $9 million tax credit. The tanker heads to Europe, where diesel cars are far more common and biodiesel is further subsidized.

In some cases, tankers have reportedly made round trips from Europe to the U.S. simply to collect the subsidy. Thus we “import” and “export” the same fuel from and to the same country.

“Just think of it,” said Shadegg. “If I produce biodiesel anywhere in the world where the cost of shipping it to the United States before shipping it to the end consumer is less than a dollar a gallon, then I’m going to take advantage of this subsidy.”

(Emphasis added).

Does lowering the cost of fuel for Europeans really seem like a great use of our tax dollars (and those of our children/grandchildren, since we’re borrowing the money anyway)? Now, you’d think that this program would be universally opposed in the United States…

But you’d be wrong:

Last week, Shadegg proposed a bill (H.R. 5713) to end “Splash and Dash” by limiting the blenders’ tax credit to biodiesel that is actually consumed in the United States. But domestic producers are already upset by this idea: Although they resent foreign firms’ use of “Splash and Dash” to take away their competitive advantage, they still want their subsidy for the biodiesel they export to Europe. Grassley, the original author of the tax credit, wants to make Splash and Dash less profitable but continue those subsidies for American exporters that have so angered the Europeans.

Of course oil producers don’t worry that much about ending the subsidy to foreigners. While an infintesimal proportion of their tax dollars support the foreign subsidy, a far greater amount of our tax dollars go right into their own pockets.

But hey, I’m sure if we just elect Obama/McCain/Barr/Cthulhu, he’ll solve all these problems and “reform” the government!

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  1. I can’t stop laughing.

    Comment by Jeff Molby — June 18, 2008 @ 12:56 pm
  2. I’m pretty sure Barr would get around to addressing this as President if he could. Of course he’d most likely be vetoing the Federal Government to a halt so it probably wouldn’t matter anyway.

    Comment by Ben — June 18, 2008 @ 1:28 pm
  3. This is pretty damn funny!

    Comment by Eric — June 18, 2008 @ 4:52 pm
  4. Wow, Jeff & Eric officially have a very macabre sense of humor.

    I’d find it a lot more funny if I weren’t paying for it.

    Comment by Brad Warbiany — June 18, 2008 @ 4:58 pm
  5. oh, it’s disturbingly funny, twisted, sick, all those sorts of things. But funny never the less.

    Comment by Eric — June 18, 2008 @ 5:07 pm
  6. maybe i’m wrong.. but aren’t the trucks that
    transport every single good we buy, and
    basically make the American way of life
    possible powered
    by diesel?

    Comment by tim — June 18, 2008 @ 6:42 pm
  7. Wow, Jeff & Eric officially have a very macabre sense of humor.

    I’d find it a lot more funny if I weren’t paying for it.

    Yeah, I suppose. I guess I just feel like I got my money’s worth out of it. You couldn’t possibly invent a story that absurd.

    Comment by Jeff Molby — June 18, 2008 @ 7:36 pm
  8. maybe i’m wrong.. but aren’t the trucks that transport every single good we buy, and
    basically make the American way of life
    possible powered by diesel?

    Yes, but aside from heating oil (which is basically just diesel fuel), that’s the only use of diesel in this country. Almost every non-commercial vehicle on the road runs on unleaded fuel.

    Comment by Jeff Molby — June 18, 2008 @ 7:41 pm
  9. Tim:

    maybe i’m wrong.. but aren’t the trucks that
    transport every single good we buy, and basically make the American way of life possible powered by diesel?

    What’s your point?

    Comment by Eric — June 19, 2008 @ 9:24 am
  10. One main problem here. Americans don’t use much diesel. So they’re subsidizing foreign, not domestic, use. In fact, they’re simply sending money for non-American-produced diesel that won’t be consumed on American soil to foreign fuel companies.
    My point is that the entire premise of this post
    is ignorant and wrong. Americans use massive amounts of diesel. Whether it’s indirectly or not doesn’t matter. So tell me.. what’s so funny about it?

    Comment by tim — June 19, 2008 @ 9:36 pm
  11. diesel is the lifeblood, read lifeblood as literal, juice of both transportation and construction. in both the US and any country on the planet. jesus, you would think any of you would know that, with even a cursory familiarization of anything.

    and that’s not to say this particular article is bunk on knowledge regarding the sham of “biodiesel.” what the article itself is adressing is entirely spot on. the issue of “biodiesel,” the regulation of such, and the consequences are quite correct. but seeing so many of you assuming that this fuel is unimportant and doesnt factor in our US economy in a significant way is so ignorant that it’s absolutely mindboggling. let’s me know what nancyboys you forum goers really are.

    Comment by oilnwater — June 19, 2008 @ 10:13 pm
  12. oh, and i saw this like 2 or 3 days ago and was like “W T F” in my mind, and thought someone, ANYONE, would have simply set any of you straight on what actually runs on diesel. it really lets me know how either white collar and/or no-collar this forum really is. the vast majority of you know next to nothing about life in general. take that how you will, whatever.

    Comment by oilnwater — June 19, 2008 @ 10:18 pm
  13. seriously, even many fucking toddlers know this. t-o-d-d-l-e-r-s. “Big Engine Need Other Gas, When We Going To McDonalds Mommy?” what the fuck are you peoples’ occupations anyway? jesus dude i have a hunch most of you could simply use a Malthusian cleansing posthaste.

    Comment by oilnwater — June 19, 2008 @ 10:51 pm
  14. Hey oilnwater –

    I’d suggest you stick to criticizing the writing and not go off dropping f-bombs and calling the contributors to this site toddlers. The former adds to the discussion while the latter just makes you look like an asshat who should be ignored, which is a shame because you have made some good points here before.

    Comment by Quincy — June 19, 2008 @ 11:34 pm
  15. save it. asshatterty is a commodity that will never be in short supply on an opinion forum. but really seeing this here… i knew i always thought lesser of the “minds” here for some nebulous reason, but this thread’s responses opened my eyes in a very visceral way to the lack of life experience so many of you have. i mena the very basic act of touching, or working with, or anything regarding how things work. i always assumed i was largely ignored here and probably should be. but how can you guys just say things that are so blatantly wrong and not be called out on it? i mean objectively and horribly wrong.

    Comment by oilnwater — June 19, 2008 @ 11:45 pm
  16. oilnwater,

    Because whenever you deem one of our arguments “wrong” you rarely come up with a legitimate case to rebut.

    I know that you’ve got a decent education and that you’re not incapable of debating this stuff, and every once in awhile you bring up points that have some validity to them. But those points seem to happen less and less often and are usually replaced by personal attacks that seem based in little more than you being pissed off because of how we treated your candidate in the race. And nobody here is really interested in hearing about it. That’s why you get ignored.

    Up the quality of your responses, people will start taking your criticism seriously and possibly reconsider our positions on some topics.

    Comment by UCrawford — June 20, 2008 @ 5:25 am
  17. All this from a person who doesn’t even use proper GRADE SCHOOL punctuation and grammar (and he calls us toddlers?)

    Comment by Stephen Littau — June 20, 2008 @ 9:14 am
  18. I wasn’t aware of the details of gasoline vs. diesel vs. biodiesel usage in the U.S., so I looked it up.

    Apparently, using 2005 figures, motor gasoline use is roughly twice diesel fuel usage: 9.16 million barrels per day used for motor gasoline, versus 4.12 million barrels per day for diesel (including other fuel oil).

    And while I didn’t readily find a comparison of petroleum diesel versus biodiesel fuel consumption, most of the numbers look like it’s a least a magnitude different (we use at least ten times as much petroleum-based diesel fuel).


    Comment by Akston — June 20, 2008 @ 10:50 am
  19. As to the point of this article – that simple government solutions to complex problems are rife with laughable unintended consequences – I say the assertion is proven time and again with countless stories like these.

    I think of it in terms of a leverage analogy. In order for a small group of people (say congress) to move an economy of 300 million participants, they often use the leverage of a national edict, like that $1 per gallon of mixing credit. As they move their end of the lever in what appears to them to be a small increment, massive changes occur on the leveraged end. It’s impossible to enact subtle, organic changes in a nation via national edict. For those types of changes, government has to refrain from leveraging power nationally and defer to ever-more-local control.

    Who is the best suited to decide what 300 million people should do? Those 300 million people themselves. As the decisions are made further from the people directly involved in the transactions, increased exaggeration is the inevitable consequence of that increased leverage.

    This, of course, doesn’t even begin to address any ethical issues of who should have the right to decide what for another person.

    Comment by Akston — June 20, 2008 @ 11:08 am
  20. Akston –

    Thanks for the numbers. It helps clarify that oilnwater actually did have a valid point, as 1/3 of fuel usage ain’t chump change.

    oilnwater –

    If you don’t know the difference between calling someone out using facts and reason and throwing a tantrum and calling names, might I humbly suggest you find other people to bother?

    Comment by Quincy — June 20, 2008 @ 4:41 pm
  21. oil,

    You’re correct, I misspoke. Americans use less diesel as a percentage of total automotive use than Europeans, but that doesn’t mean that we “don’t use much diesel”.

    It doesn’t change the fact, as pointed out by the article, that we’re currently exporting more diesel than we PRODUCE domestically. Again, it’s an indication that these subsidies have a ludicrous unintended consequence.

    But hey, feel free to criticize throwaway lines while missing the whole point of the post. Commenters like you are what makes blogging such a rewarding activity.

    Comment by Brad Warbiany — June 21, 2008 @ 11:52 am
  22. I believe that both Oil and Brad are correct.

    Diesel is a heavily used in the US and is a large function of the cost of our products, especially food. Almost everything in farming is run by diesel and then the transporting of food is mainly done with diesel.

    Brad is also correct in saying that it makes no sense that we are subsidizing diesel to go to Europe. I believe another reason for high diesel prices is that the gov’t passed some stupid law in regards to sulfur content a couple years ago, which has helped increased the price of diesel as well with little to no benefit. These are big reasons why diesel prices have skyrocketed even more than gasoline prices. A few years back diesel prices were lower than gasoline, now they are 60-70 cents higher.

    A sure way to lower food as well as other prices is to stop some of the insane gov’t practices such as the ones described above that are increasing the diesel prices without giving us much or any benefit.

    Comment by TerryP — June 21, 2008 @ 10:02 pm

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