Special Report

Indefensible Biofuels

Ethanol's ablest advocate comes up short.

By and 7.23.08

Send to Kindle

Advocates claim that ethanol mandates and subsidies protect our planet, enhance U.S. security, and ease our pain at the pump. In fact, ethanol policy hurts all Americans except for the tiny slice of the population that grows corn or distills it into ethanol.

What is ethanol? Basically, in the United States, it is moonshine derived from the starch in corn. You can drink it. Rowdy collegians have been known to mix 1 part ethanol with 40 parts fruit juice to make huge vats of punch for parties.

The law does not allow you to drink and drive, but it now forces your car to drink before you can drive. Moonshine is in your gas tank because the corn and ethanol lobbies joined forces with defense hawks and oil industry bashers, and persuaded Congress to enact a Soviet-style production quota of 15 billion gallons of Corn-ahol by 2015.

That was a colossal mistake. Government coddling of the ethanol industry makes our food more expensive, raises our taxes, and forces consumers to pay higher prices for motor fuel blends that deliver fewer miles to the gallon.

It also contributes to the global grain inflation that is pushing millions of the world's poorest people to the brink of starvation.

DURING THE PAST two years, corn prices have tripled, wheat prices almost doubled, and rice prices increased almost 150 percent. This rampant inflation in the price of basic staples threatens to push 100 million people back below the absolute poverty line (defined as a household income of $1 a day or less). This would wipe out all the gains the poorest billion people achieved during the past decade.

Josette Sheeran, executive director of the UN World Food Program explains the dire consequences: "For the middle classes" in poor countries, the rise in food prices means "cutting out medical care. For those on $2 a day, it means cutting out meat and taking the children out of school. For those on $1 a day, it means cutting out meat and vegetables and eating only cereals."

And those who subsist on 50 cents a day may not survive at all.

According to the World Bank, "Almost all of the increase in global maize [corn] production from 2004 to 2007 (the period when grain prices rose sharply) went for bio-fuels production in the U.S., while existing stocks were depleted by an increase in global consumption for other uses."

The Bank also notes that although biofuels supply only 1.5 percent of total motor liquid fuels, they accounted for almost half the increase in global consumption of major food crops in 2006-07.

Rising corn prices inflate the price of other staples, because all grains compete for customers and in some cases for land as well. The world is in the midst of a new hunger crisis, and U.S. ethanol policy is a significant aggravating factor.

Food price inflation also puts a real strain on low-income U.S. households. It is not just corn flakes that cost more. Eggs, meat, and milk from corn fed livestock are more expensive, and prices rise on down the line. We're experiencing the worst food inflation in the United States in 17 years.

Ethanol boosters sometimes go to humorous lengths to dress up this economic ugly duckling. Last September, at an energy policy luncheon sponsored by National Review, former-CIA director and ethanol proponent James Woolsey denied that ethanol was inflating food costs, claiming the price of corn had fallen to what it was before America started making fuel out of it -- just above two dollars per bushel. At the time, corn was going for $3.82. Today, it trades well above $7.00.

Ethanol's ablest defender is Robert Zubrin, a colleague of Woolsey at the pro-ethanol Set America Free Coalition. Author of the book Energy Victory, Zubrin writes "In Defense of Biofuels" in the latest New Atlantis.

Zubrin denies that ethanol policy inflates U.S. food prices or exacerbates world hunger, or that increased ethanol production could have these ill effects in the future. He writes, "At bottom, the entire food versus fuel argument boils down to a Malthusian conceit -- that there is only so much that can be grown, so if we grow more of one thing, we must necessarily grow less of something else. But this is simply false."

WELL, NO, the underlying premise is not Malthus but Econ 101, in which we learn that resources are finite. Hence, changes in either demand or supply affect price.

Zubrin argues as if the supply of farmland were practically infinite. He asserts that the United States has 800 million acres of farmland, of which only 280 million acres are being cultivated. This leaves "plenty of farmland in the United States that could be used to grow more corn...or more of the other staple crops needed to meet domestic or international demand."

But as Inigo Montoya from The Princess Bride might say, we don't think that word ("plenty") means quite what he thinks it means. Dermot J. Hayes, the Pioneer Hi-Bred International Chair in Agribusiness at the Iowa State Center for Agricultural and Rural Development, says that "Zubrin's just wrong."

According to Dr. Hayes, Zubrin must be counting land that is totally inappropriate for cultivation, like "land in Wyoming where you couldn't get a tractor to work."

Adds Dennis Avery, Director of Global Food Issues at the Hudson Institute, "Efforts to force-feed the U.S. corn ethanol industry are likely to trigger lots of forest clearing," because even "if all the current output of U.S. corn and soybeans were put into biofuels, it would replace only 12 percent of our gasoline demand and 6 percent of our diesel needs."

Good farmland is a finite resource. It can be expanded, and technology can make it more productive, but farmland is not free for the taking, not all of it is of equal quality, and most of the best farmland in the United States is already under cultivation.

This means that land for corn competes with land for soybeans and cotton. Thus, when corn plantings increased by 18 million acres from 2003 to 2007, soy plantings fell by 10 million acres, and cotton plantings by 3 million acres.

Land for corn also competes with land for wheat. U.S. farmers increased corn acreage by 18 percent over the past year but increased wheat acreage by only 1 percent. Corn is busting out all over in what used to be known as the "wheat belt."

The increase in corn is not going to meet food demands. Ethanol manufacture is consuming all the new corn and then some. The calories contained in one tank of biofuel gasoline are enough to feed one person for a year. This means the additional corn consumed by ethanol manufacture could feed over 235 million people a year. Instead, it is fueling SUVs and Priuses.

SO ETHANOL PRODUCTION is pushing up the price of food. Zubrin would also have us believe that it pushing down the price of oil, by augmenting the global supply of liquid fuels.

Zubrin's evidence is a Wall Street Journal article that cites Merrill Lynch analyst Francisco Blanch, who says that global production of biofuels, by helping plug the gap between the demand for and supply of liquid fuels, keeps oil and gasoline prices 15 percent lower than they otherwise would be. Thanks to ethanol, Zubrin calculates, we're cutting OPEC's global revenues by $180 billion a year.

There are two problems with this assertion. One is that oil prices jumped from $102 a barrel, when the WSJ article appeared in late March, to $120 a barrel only six weeks later, and today sells for close to $130 a barrel. In the interim there was no decline in biofuel production and none announced or planned. So there is really no way to tell whether, or how much, biofuel production reduces oil prices.

Second, Zubrin loathes OPEC partly because he views it as a cunning cartel that restricts oil supply in order to increase oil prices. Even if that's true -- and we are not disputing it -- the celebrated WSJ article he cites goes on to say that OPEC cut production by 400,000 barrels a day last year -- about 100,000 more barrels per day of liquid fuel than biofuel production added to the fuel supply.

For all we know, the 300,000 barrel a day increase in biofuel production did nothing to lower oil and gasoline prices, because OPEC deliberately cut production by more than that amount to offset the supply increase from biofuels.

Zubrin also makes no mention of the fact that ethanol is more expensive than regular gasoline even with oil selling as high as $130 a barrel. Why? Because even if it's cheaper per unit, it gets about one thirds fewer miles per gallon.

ZUBRIN REALLY beggars belief when he claims "Adam Smith would love ethanol," because it provides such steep fuel savings for such a small subsidy -- "only" about $4 billion dollars a year. But that figure is misleading because it only counts one of many handouts enjoyed by ethanol manufacturers, the blender excise credit.

In fact, government support is provided at all stages of biofuel production and consumption, and by both federal and state governments. According to the Global Subsidies Initiative, when all the subsidies are added together, ethanol will cost the American taxpayer between $9 billion and $11 billion in 2008, more than double Zubrin's estimate.

Federal subsidies increase with production. The blender's excise credit that costs us "only" $4 billion now, when production is at 9 billion gallons, will cost $28 billion in 2022, when production will be at 36 billion gallons. And remember, that's only one of the subsidies.

Zubrin says government support for ethanol "allows for the elimination of $8 billion in preexisting government-funded crop price supports, such as payments to farmers not to grow crops." He seems to confuse counter-cyclical payments ("price supports"), which pay farmers when commodity prices fall below a target price, with the Conservation Reserve Program (CRP), which pays annual rent to farmers who agree to take part of their land out of production.

In either case, what Zubrin seems to be saying (he provides no details) is that if ethanol policy increases corn prices, then counter-cyclical payments to corn farmers will decline and corn farmers will withdraw acres from the CRP. But note that the supposed savings materialize only if ethanol policy does what Zubrin assured us it doesn't do -- inflate corn prices.

Even if corn farmers withdraw acreage from the CRP, there would be little or no taxpayer savings, because the program operates under an acreage cap that applies collectively to all eligible crops. If Farmer Jones pulls 100 acres of corn out of the CRP, that simply frees up space for Farmer Brown to enroll 100 acres of wheat in the program. There will be no "ethanol dividend" for struggling taxpayers.

UNDAUNTED, ZUBRIN wants to press on to "energy victory" over OPEC, with a bigger ethanol mandate, and the requirement that all new cars sold in the U.S. be flex-fuel vehicles, that can run on gasoline or biofuels.

Zubrin sees this requirement (costing about $100 per car) as a way to create a robust global competition among motor fuels, "protecting not just America but the entire world from escalating looting by the oil cartel."

If only it were so easy to change the world! It is, at the very least, counter-intuitive to claim that ethanol, which makes up 1.5 percent of world liquid fuels, is already inflicting a $180 billion annual penalty on OPEC and that ethanol, which accounts for almost half the increase in global production of major food crops, has no effect on grain prices in global markets.

The results of ethanol policy are dismal. Oil prices are at an all-time high, OPEC's profits are at an all-time high, and ethanol production is at an all-time high. There is simply no evidence that ethanol is eroding OPEC's economic power or enhancing U.S. energy security.

There's a better solution -- market-driven innovation. Auto companies have the biggest possible incentive to develop affordable automobiles that abolish pain at the pump. It's called $130 oil. Unlike Zubrin's proposal, the automakers's road to energy victory won't fleece consumers or lead to manufactured starvation.

Like this Article

Print this Article

Print Article
About the Author

William Yeatman is an energy policy analyst at the Competitive Enterprise Institute.

About the Author

Marlo Lewis is a Senior Fellow at the Competitive Enterprise Institute.