The Amazing Ethanol Scam

by Jeffrey Tucker
Aug. 14, 2012

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?
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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: [email protected] | Facebook | Twitter