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The Government’s Infatuation With Corn Ethanol

As mentioned in a post earlier this week, in 2007 Congress passed the Energy Independence and Security Act which included a mandate that oil refiners begin blending biofuels into our nation’s gasoline supply. It began requiring that 9 billion gallons of renewable fuel be blended in 2008, which slowly increases until it maxes out at 36 billion gallons in 2022. For reference, the United States currently uses around 135 billion gallons of oil per year.

The rationale for this policy was to reduce our nation’s “dependence” on oil imports, while some supporters also believed that ethanol was better for the environment than burning oil. Unfortunately, ethanol has not had a significant impact in either of these areas, while costing consumers money. As Robert Bryce points out, ethanol policy is going to get worse:

Every day that the drought continues garroting the American Midwest, the lunacy of turning corn into motor fuel becomes ever more obvious and ever more outrageous.

Over the past six weeks, corn prices have soared by about 50 percent. They recently hit $8.20 per bushel, an all-time high. And if drought conditions in the United States and Europe persist, prices may continue climbing. Several factors are influencing grain prices, among them the reduced amount of grain available in storage and increased meat consumption in the developing world. (Remember that most corn is used as livestock feed, not food for humans.) But there is no doubt that the corn ethanol mandates imposed by Congress are distorting the market, which will mean higher prices for everything from milk to cheeseburgers.

And yet the ethanol scam continues. Indeed, thanks to the Environmental Protection Agency, which is allowing retailers to increase the percentage of ethanol that can be mixed into gasoline, the biofuel disaster now extends from the grocery store to the service station. That could mean bad news for your lawn mower and weed whacker, which aren’t designed to run on fuel containing more than 10 percent ethanol. If all that weren’t bad enough, consider this: The United States is now exporting large quantities of corn ethanol to—wait for it—Brazil.

You don’t have to be an economist to understand why the ethanol sector is driving food prices higher. This year, about 4.3 billion bushels of corn will be converted into motor fuel, according to Bill Lapp, president of Advanced Economic Solutions, an Omaha-based commodity consulting firm. That means that nearly 37 percent of this year’s corn crop, which Lapp estimates to amount to about 11.6 billion bushels, will be diverted into ethanol production.

Compare those numbers to those of 2005, when corn was selling for just $2 per bushel. That year, 1.6 billion bushels of corn —or about 13 percent of domestic corn production—was distilled into ethanol.

Previously, the maximum amount of ethanol that could be blended into your tank was capped at 10 percent. However, the EPA has increased the maximum from 10% to 15%, a 50% increase.

Once you account for the fact that a gallon of ethanol contains less energy in it than a gallon of pure gasoline, ethanol is more expensive per mile traveled than gasoline. This — among other reasons — is why it doesn’t make very much sense to continue to increase the amount of ethanol in our tanks.

And as Bryce pointed out, it is diverting a lot of our corn crop into fuel, rather than being used for food. The United States can handle moderate increases in the price of corn, because as a country we are fairly wealthy, but these price increases can wreak havoc on people in other countries who spend a good portion of their income on food. Some have estimated (PDF) that these policies are killing thousands of people abroad. It’s certainly something that should be thought about closely before we decide to continue increasing the amount of corn we divert into a fuel that isn’t providing any enormous advantages over gasoline.

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