Can The Ethanol Market Stand On Its Own Two Feet?

from the etha-what? dept

Soaring energy prices have created an ideal climate for alternative energy investment, as evidenced by the boom in that space. You'd think, then, that with the market doing a good job of sorting things out, there'd be little need for the government to intervene. But while entrepreneurs and VCs are seeking to build sustainable, profit-making businesses, the ethanol industry has sought to profit from the largesse of the US taxpayer. The industry has been helped by direct subsidies as well as indirect ones, such as laws that impose added costs on its rivals. While many people champion higher CAFE standards in order to protect the environment, the ethanol lobby has been a particularly big booster of them, because of a 1988 law carved out an exception for vehicles that could run on ethanol. Meanwhile, this favorable treatment towards the industry causes problems in other pockets of the economy. Increasingly, companies have to be concerned with "agflation", the soaring price of agricultural commodities due to the heightened demand for corn (which, as you learned in econ 101, increases prices for corn substitutes, like rice and wheat). If ethanol is going to be a meaningful energy source in the future, it needs to stand on its own in the market. Otherwise, the existing setup appears to be just more counterproductive agriculture subsidies, cynically concocted in the name of national security and the environment.

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  1. identicon
    David Sternlight, 3 Jul 2007 @ 7:43pm

    Re: Efficiency

    The limitations of the internal combusion engine aren't the pacing factor in auto efficiency. Toyota, for example, is widely expected to introduce the next generation of Prius in 2008 or 2009, with efficiency reportedly of 80-95 miles per gallon, through use of more lightweight lithium ion batteries and refinement of the hybrid synergy drive, still at a very early stage of technological efficiency. The Camry now is also available in a hybrid synergy drive that will only improve over time.

    This expected tripling or quadrupling of gasolene consumption efficiency has the effect of doubling or tripling the world's oil supply used for transportation without spending a penny on exploration or extraction. We aren't going to run out of oil any time soon. Economics teaches us that as resource supply declines, increased efficiency and substitutes appear. The "Chicken Little's" of the past have repeatedly been proven wrong. There was a widespread panic about copper shortages, for example, some years ago, to the extent that smart people at the then AT&T went to poorer performance alloy wires. Now with the advent of cellular, microwave, fiber optics, we hear little or nothing about the "copper shortage" and copper prices in real terms are in the toilet.

    Initial quick-fix technological reactions to perceived impending shortages have often been wrong, in retrospect. Just so with some of the approaches to oil. The tar sands development in Canada have made that country the leading emitter of Carbon pollution. Ethanol (in the US) is a scam which benefits mostly Archer Daniels Midland at the price of massive inflation and unemployment if the weather creates a shortfall in corn production. In contrast we are just getting started with increased auto efficiency and there the problem is public taste and entrenched obsolete production capacity in Detroit and not technology. Amory Lovins showed us how to produce comfortable 100 mpg cars well over 20 years ago; we are just getting started.

    "We have met the enemy and they are us" to quote Pogo, not some "oil shortage".

    By the way, reducing gasolene demand through increased auto efficiency is a far better and less costly national security strategy than any other. The Arab oil producers are the marginal producers of OPEC, and the Saudis and other countries with large reserves are the marginal producer of the marginal producers. Swings in oil demand are very leveraging on them. Buying a hybrid car will save the lives of untold numbers currently threatened by terrorists who are ultimately funded by oil money.

    David Sternlight, Ph.D.
    Los Angeles

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