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Article posted Aug 14 2012, 7:13 AM Category: Economy Source: Jeffrey Tucker Print

The Amazing Ethanol Scam

by Jeffrey Tucker

Corn prices are officially through the roof, spiking to record highs. It's been headed this way through six years of crazy volatility. Now the spike is undeniable. At the same time, crop yields are lower they have been since 1995.

Everyone blames the drought, as if the market can't normally handle a supply change. The real problem is that the corn market is fundamentally misshaped by government interventions that have made a mess of this and many more markets. The distortions are never contained, but spread and spread.

The implications are quite radical, especially given the food price riots around the world the last time this happened.

It is probably going to hit the U.S. this time. Internationally, some writers are raising the specter of a price-driven famine in parts of the world.

“Corn is the single most important commodity for retail food,” Richard Volpe, an economist for the USDA told the Los Angeles Times. “Corn is either directly or indirectly in about three-quarters of all food consumers buy.”

Fine, then, answer me this, Mr. Government Economist Man: Why is 40% of the corn crop being burned up in our gas tanks? The answer is a Soviet-like, fascist-like, stupid-like government mandate. It is actually relatively new. It came about in 2005 and 2007. It mixes nearly all the gas we can buy with a sticky product now in rather short supply.

Of all the government regulations I've looked at in detail over the last 10 years, the ethanol mandate is, by far, the worst. There are no grounds on which it is defensible. None!

Of course, you might just think that it is great to vastly subsidize Illinois farmland and corn growers and ethanol makers, at the expense of everyone else in the planet and for zero savings in energy. In that case, we should agree to disagree.

I don't recall much debate in 2005 and 2007 when these draconian, civilization-attacking laws were imposed in the name of the environment and security. If a debate took place, it sure blew right past me. Organizations like the Institute for Energy Research and newsletters like The Daily Reckoning were trying to draw people's attention to what was taking place, but most people figured this was just some wonky and forgettable concern.

Kate Incontrera spoke the truth in the The Daily Reckoning, July 16, 2007: "One of the obvious side effects of the ethanol craze is that the price of corn has risen 73% in the past year — but that isn't the only food whose price is on the rise… And because animal feed with corn in it is more expensive, that cost trickles down to chicken, beef, eggs, cheese and — making soda-chugging Americans cringe — high fructose corn syrup."

Also, from 2006, Greg Guenthner predicted everything that was coming down the road. It is worth your time to have a look at this report, just to demonstrate that some people had their eyes on the trends that matter.

The more you look at this, the more you see that this is halfway to the realization of the freakiest dream of the Rousseauian left: the abolition of the internal-combustion engine as we know it. It is a sledgehammer to the whole idea of market-provided energy. And paradoxically, it represents the worst of crony capitalism: an outright subsidy to agribusiness.

Looking this up and examining the history, it appears that government has been trying to put corn in our gas tanks for decades, even back to the 1960s. There were tax breaks, subsidies, lofty national goals, smiley stickers for executives who publicly backed this nonsense, but none of it took. Finally, our masters brought out the brass knuckles and everyone shaped up, culminating in a coercive mandate imposed six years ago.

Now we are stuck with this de facto mandate that we have to put corn in our gas tanks, all based on the kooky idea that fossil fuels are just too primitive, that we have to mix our gas with a movie-theater treat to make it truly clean and efficient.

But clean and efficient are two things that ethanol is not. The reason your edger and weed whacker don't fire up in the spring months is most likely due to the presence of corn in the tiny gas tanks. The fuel mixture does not stay stable over time and tends to gum up engines. This is why the store shelves are filled with gas-tank additives of all sorts that did not used to exist. The whole point is to correct for the mess that ethanol makes.

Of course, there is a huge industry out there dedicated to debunking the idea that there is anything the matter with ethanol. But here's the problem: People who make the pro-ethanol argument are either 1) the same people who think we ought to turn our toilets into composting pits or 2) speaking for industries highly dependent on the many forms of ethanol subsidies, so they have every incentive to deny the obvious for as long as possible.

But ask people who depend on a stable and reliable fuel for their livelihoods, and sometimes their lives. Talk to any boaters. You don't have to know any. Head over to any boaters' forums and see what they say. They go out of their way to find the few gas stations that actually sell ethanol-free gasoline, mainly because they can't afford to take risks that come with bad gas and bad engines. They find stations that sell no ethanol gas, like those listed at pure-gas.org.

Another fact: Though people have thought for centuries that corn is a decent fuel, it took the mandates to force it into cars. Why? Because consumers knew better. Manufacturers knew better. The petroleum industry knew better. Government and the corn industry had a different idea and gave it to us all good and hard.

Nor is it efficient. As even Paul Krugman admits, "Even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains." We also have to add the huge expenditure associated with fuel additives, engine fixes, lawn mower replacements and the vast frustration that comes with the regulatory wrecking of the internal-combustion engine.

Now let's look at what's happened to crops since 2005. The percentage of crops devoted to corn have gone from 24% in 1999 to 30% today. Meanwhile, the crops devoted to soybeans, hay and wheat have all gone down, thereby increasing feed costs for ranchers and consumers. Again, this is not the market talking. This is not what any actual market players are pushing. This all results from government mandates.

Meanwhile, the price index of Illinois farmland has tripled in the same period. Even though every price signal would otherwise indicate to farmers to plant less corn, they plant more. And even though land values all over the U.S. went into a major bust in 2008 and following, Illinois farmland goes up and up. This is a result of government intervention, building artificiality into the system and creating unpredictable distortions.

It almost seems hard to believe. It's a scandal that government has degraded home appliances, indoor plumbing, paint, cosmetics, gas cans and so much else. Yet the ethanol nonsense might be the worst of all, because it represents a fundamental attack on the technology and literal fuel of modernity itself. As you look back at it, it's been going on a very long time, from the initial ban on lead fuels, and now look where we are.

In the name of efficiency and "clean fuels," the government is shutting down the technology essential to life as we know it. And the spillover effects are everywhere, affecting nearly everything we eat. As usual, all these regulations are premised on the supposition that conditions will never change and that the state can take the existing world and pound it into its preferred shape. But the existing world as the state knows it is always a world of the past. Introduce one change and the whole model blows up.

That is what is happening with ethanol right now. The mandate is causing vast distortions and crazy costs for everything and everything. The scandal is how little we know or care. Maybe famine will make the difference?
_
Jeffrey Tucker is the publisher and executive editor of Laissez-Faire Books, the Primus inter pares of the Laissez Faire Club, and the author of Bourbon for Breakfast: Living Outside the Statist Quo and It's a Jetsons World: Private Miracles and Public Crimes, among thousands of articles. Click to sign up for his free daily letter. Email him: tucker@lfb.org | Facebook | Twitter





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Comments 1 - 10 of 10 Add Comment Page 1 of 1
Anonymous

Posted: Aug 14 2012, 4:57 PM

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1272 Many people don't realize that the real driving force behind ethanol blend fuel isn't environmental or governmental but strictly business. The corn crop in the US is dominated by ADM - Archer Daniels Midland. Corn is a very poor source for alcohol, very inefficient and uses boatloads of petroleum fertilizers and pesticides, but ADM wields big influence. It's why we're seeing soy products everywhere now when they used to be just health store items. ADM dominates the soy market too. And since corn is a genetically engineered crop the lovable folks at Monsanto are also in on it. Governments are the enforcement arms of big businesses. This has long been true and a fact that escapes many people who blame governments for follies and foul ups. Just follow the money.

Coyne Tibbets

Posted: Aug 15 2012, 12:05 AM

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97104 The whole basis of capitalist economics is the law of supply and demand, by which price is set. (So that when supply is higher than demand, the price low; when reversed, high.)

There's lots of things we could use to make alcohol, but the market wanted to use corn, to increase demand. Which drove up the price, but that's okay because everyone will go into corn-growing and the supply will go up and drive the price down into the basement again.

Now there's a supply shortage and, surprise, the price goes up!

Given that, it is astounding to read a Laissez-Faire capitalist arguing that the only reason the market price isn't 'independent of supply and demand", is because of [excuse, excuse, excuse].

Next thing you know, he'll be arguing for distribution of wealth.
Chris

Posted: Aug 15 2012, 12:46 AM

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Can you cite the actual article and not something you made up?

"...the only reason the market price isn't 'independent of supply and demand", is because of [excuse, excuse, excuse]."

This makes no sense, of course the price is determined by supply and demand. The government intervention drove the price up, that's the point. You seem to have ignored that in favor of blaming the market for choosing to produce ethanol to meet the government's mandates by using predominantly corn, no doubt due to it's lower price. The government should not be throwing a monkey wrench into already highly complex markets, it distorts price signals which leads to over/under production and massive waste/shortages.
Peter

Posted: Aug 15 2012, 9:56 AM

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81161 Quote : ' it distorts price signals which leads to over/under production and massive waste/shortages. '

Can you make up your mind ?
Chris

Posted: Aug 15 2012, 3:54 PM

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If a product is over produced, it leads to waste, if it's under produced, shortages. Understand?
Anonymous

Posted: Aug 15 2012, 6:18 PM

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6464 "Because, don't you see? Ethanol is bull****!"
Anonymous

Posted: Aug 15 2012, 7:35 PM

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24209 Lack of supply? Ethanol isn't strictly corn to begin with. The price gouging comes from oil prices that run farm equipment. The most obvious example of that is milk, because feed & fuel raise costs.

The US government will seize farms. The US will also pay farmers to stop growing one crop for favor of another. I can predict the US to mandate strict control over US agriculture & fresh water supplies. Because the Federal government is run buy corporations ... not just US corporations ... and food is a profitable commodity.

Look at all the videos where Federal agents seize property from farmers that are self-sufficient, they'll even prevent the Amish from free distribution.

No. the scenario here is not all our corn is going to fuel. Hell Henry Ford created the Model-T to be "of the earth" ... The body of the car was made of hemp fibers and the car ran on hemp seed oil. Ford wanted farmers to be able to grow their own fuel.

The issue at hand is about control & money ... this article is a limited view of it.
Bob Robertson

Posted: Aug 16 2012, 11:25 AM

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199168 Some 10 years ago or more, the writer L. Neil Smith noted that the "left" seems to have a horror for anything to do with fire. Firearms, combustion engines, atomic energy, etc.

Incandescent lightbulbs are just another example. That filament BURNS! Put it OUT!

The complete idiocy behind mandating ethanol is just another example of this horror. The idealistic socialist will not be satisfied until everyone (they fool themselves by thinking everyone -else-) is starving to death, freezing in the dark.
Anonymous

Posted: Aug 16 2012, 11:01 PM

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7120 ok kids...just acknowledge that we're in a depression, like '29, the stock market will fall, again...and our government has been the root problem for 83+ years!!! we need to restructure our government...and completely fine every politician, every time they try to think for themselves...ie; make bad mistakes without our say...and make so that if they even sneeze without our permission, they get a heavy fine...
Fine, let's tell Uncle Sam, to get their noses out of the food markets, out of corn particularly, and slap their wrists...hopefully...they'll learn...but then...now we need to be rid of Obama, and Romney, and Romney's cohort....we can turn the economy around by our selves...start buying bicycles, and there are several models out there that can be driven year 'round, without Gasoline, or Diesel, or even Kerosene...some of these are fully contained, with a body, run on Vehicular batteries, have a wiper ass'y, etc...We really do not need to drive all over the country...we really do not need OPECs' crude, we really do not need a Canadian Mess being built across our country...Stop the nonsense...and let's get back to our lives...?
RoseMarie Herrington

Posted: Aug 18 2012, 6:51 PM

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71212 by Jeffrey Tucker
But clean and efficient are two things that ethanol is not. The reason your edger and weed whacker don't fire up in the spring months is most likely due to the presence of corn in the tiny gas tanks. The fuel mixture does not stay stable over time and tends to gum up engines. This is why the store shelves are filled with gas-tank additives of all sorts that did not used to exist. The whole point is to correct for the mess that ethanol makes.

••••••••••••••••••••••••••••••••••••••••••••••••••••••••

....Mr. Tucker: You've got the part above just bass-ackwards... Ethyl alcohol is a solvent. It works to remove gums and varnish buildup in fuel systems caused by hydrocarbon OIL/Gasoline which has gone stale and become gummy over the winter in garden equipment small gasoline tanks. The best thing to do after running your weed-eater or lawn mower for the last time in the season is to drain the remaining fuel and run the engine until its carb bowl runs dry. You should check yourself here, being wrong on certain points may make someone disengage from your whole article.

Ethanol batch fermented from corn starch isn't a very efficient process and gov't mandating makes certain elements of this industry even worse. However, solvent alcohols containing a missing oxygen atom which hydrocarbon oils do not contain, becomes the sole element for increasing an engine's combustion efficiency, cleaning the engine from the inside out and improving the emissions profile.

Ethanol only contains 66% of the BTU's of gasoline. That is why most motorist's mileage falls a few mpg while the emissions value becomes far cleaner. I agree that ADM and Monsanto with genetically-modified corn are monopolist corporations and G stands for GREED. I'm disheartened to learn that GMO corn stover won't biodegrade on the corn fields. People need to understand far more about what is going on here.

•••••••••••••••••

Anonymous
No. the scenario here is not all our corn is going to fuel. Hell Henry Ford created the Model-T to be "of the earth" ... The body of the car was made of hemp fibers and the car ran on hemp seed oil. Ford wanted farmers to be able to grow their own fuel.

•••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••

....Anon; Please demonstrate some proof for hemp fibers being used in the early Model-T's car body. Please demonstrate some proof that the Model-T gasoline engine ran on hemp oil as a Diesel engine might have - but gasoline? Uh uh... I believe that iron ore was smelted in Detroit to produce steel for both Model-T car bodies and frames. And this iron ore was carried into Detroit by rail cars owned by John D. Rockefeller of the Standard Oil Company.

Ford's first four month's of Model-T automobiles (September 8th, 1908) featured a duel-fuel carburator which had an adjustable fuel jet (open for neat, wet ethanol and closed for 65 octane gasoline). The carb was an updraft (not downdraft) model with the air cleaner located underneath the carb which hung to the side of the engine.

This carb was replaced January 1, 1909 with a downdraft model that combusted gasoline only. It was Standard Oil's boss who didn't want to see agri-based ethyl alcohol (fermented from sumac agri-waste gathered from along the roadside) compete with new markets for refined crude oil. At the turn of the century, Rockefeller's market was for C10 to C17 kerosene jet fuel used as lamp oil - an illuminant. The thinner gasoline fraction (C5 to C10) didn't have a market until FoMoCo invented the automotive assembly line complete with internal combustion engines.

Lotsa half-truths being bantered about here.

RoseMarie Herrington
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