Ethanol's concealed costs.

ITEM: The Kalamazoo (Mich.) Gazette reported on February 11, "Not so long ago, operating cars, trucks and tractors on the byproducts of corn, soybeans and sugar beets seemed like science fiction. Today it's so mainstream that President Bush has called for allocating about $13 billion in his 2008 budget for the research, development and production of alternative fuels. He wants to reduce U.S. gasoline consumption by 20-percent in 10 years. Bush is looking to cut American dependence on foreign oil while creating markets for U.S. companies and farmers."

CORRECTION: Ethanol has many uses and certainly can be helpful in providing energy in some circumstances. However, when the government gets into what amounts to the moonshine business, it distorts markets, leading to a variety of negative results.

Subsidies and government mandates are driving the ethanol market, with politicians and lobbyists making the determinations about fuel production for the United States--not supply and demand. There were about 110 ethanol refineries running at the beginning of this year, with scores more due to come online in the next year or so. Why? Well, the leap is in no small part because the government is giving blenders a break of 51 cents per gallon to encourage production. As the Wall Street Journal has noted, that means that ethanol "typically has sold for up to 51 cents per gallon more than gasoline." (The government has also placed a 54-cent-per-gallon tariff on imported ethanol.)

Lawmakers have forced oil companies to blend their gasoline with plant-based biofuels, particularly ethanol. When you hear that ethanol is a growth industry, keep in mind that the government added about $6 billion last year in ethanol subsidies. President Bush's latest alternative-fuel program aims to increase the use of the corn-based additive to gasoline from the current 7.5 billion gallons to 35-plus billion gallons by 2017.

After instituting policies that helped hook Americans on foreign suppliers of oil, the federal government now promises to ease that addiction by subsidizing a product (ethanol) that is not economically competitive; pushes up the prices of many food staples; may increase pollution; is not as energy-efficient as gasoline; and may use more energy to produce than it generates. *

Rhetoric may be cheap, but government mandates and subsidies are not. Moreover, notes Peter Grossman in the Indianapolis Star, "corn-derived ethanol simply cannot provide a significant substitute for oil. Last year we used 14 percent of our corn crop to produce about 3 percent of all transportation fuel. To get to President Bush's goal by 2017 with corn ethanol, we'd need to use more than 100 percent of our current corn crop just for fuel." An economic professor at Butler University, Grossman notes that the expansion of ethanol production will "not only sock taxpayers with a gigantic bill, it will also push up the price of food. Corn is, after all, used everywhere. It's in animal feed, syrup, cooking oil and so on."

Increases in the prices of chicken and pork, for example, are typical examples--part of the hidden cost of government meddling. The law of unintended consequences keeps being replayed: when the government pushed more alternative fuels and additives on Detroit, it drove up the price of tortillas in Mexico. Indeed, with corn prices rising about 70 percent in the last six months, corn tortilla prices also have been jumping dramatically.

Technology Review, an MIT publication, observed in mid-February that the "jump of corn prices is already affecting the cost of food. The most notable example: in Mexico, which gets much of its corn from the United States, the price of corn tortillas has doubled in the past year, ... setting off large protest marches in Mexico City. It's almost certain that most of the rise in corn prices is due to the U.S. ethanol policy, says David Victor, director of the Program on Energy and Sustainable Development at Stanford University." By next year, estimates the U.S. Department of Agriculture, 25 percent of the U.S. corn crop will be used for ethanol production. This increase in ethanol production, according to Marshall Martin, an agriculture economist at Purdue University, "is the main driver behind the price increase for corn." (Of course, since economic follies are not restricted to the United States, those price increases led to the imposition of government price controls on tortillas south of the border this winter, which will cause even more problems in Mexico.)

While some praise the positive ecological impact of the limited use of ethanol blended with gasoline, other experts are much less enthusiastic. "Making ethanol with corn carries its own environmental drawbacks, according to a June 2006 study by the University of Minnesota in Minneapolis. The crops have to be irrigated, plowed with tractors, doused with nitrogen fertilizers and transported to ethanol distilleries, which power their machinery with natural gas or coal," writes Peter Robison for Bloomberg News.

The efficacy of ethanol as a fuel has also been called into question. An article in Consumer Reports last fall, entitled "The Ethanol Myth," reported that making a switch from cars that use 10 percent ethanol blended with gasoline to heralded vehicles that can run on E85, which has 85 percent ethanol and 15 percent gasoline, may cut gas mileage by 27 percent. On a gasoline-equivalent basis, this fuel would cost about $4 a gallon.

As difficulties with corn-based ethanol crop up, the government is responding to the problems it created. Livestock producers have gotten the ear of the government, because their feed costs have skyrocketed, so the Department of Agriculture is now encouraging, with our money, the production of cellulosic ethanol from biomass, using products such as switch grass to make the ethanol. Consumer Reports has pegged the gasoline-equivalent price for such fuel at more than $6 a gallon.

Of course, ethanol supporters argue--in much the same fashion as children begging their parents to stay up late because their friends are allowed to do so--that oil production is also subsidized, and agriculture has long been underwritten by the government, as if two wrongs make a right. Just as government financial assistance has changed the nature of farming in this country, subsidies for ethanol are also spawning similarities in the fuel market.

Archer Daniels Midland, one of the world's largest agricultural processors, has become a case study in corporate welfare--though, the New York Times happily reports, it now controls "only" 22 percent of the ethanol market. Still, the Times begrudgingly notes, "at a time when millionaire landowners get six-figure subsidies, there is fear of creating a new class of welfare-farmers hooked on green entitlements."

* See "Going Bananas Over Ethanol" in the March 5, 2007 issue of THE NEW AMERICAN.