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Trivia Tidbit Of The Day: Part 463 -- Ethanol Costs.

Snake Oil-

With the Iowa caucuses just around the corner, candidates in both parties are furiously positioning themselves as "corn-friendly" candidates for President. We hear a lot about we can grow our way to energy independence, or how our farmers need help competing against heavily subsidized European farmers, or how alternative energies are better for the environment than traditional fossil fuels-- all of which are valid to varying degrees.

If we can grow enough corn to feed people and animals here and abroad, plus fuel our cars and homes, plus make plastic and other associated products, and still have enough left over each year to cover the Corn Palace in Mitchell, South Dakota, more power to America. Unfortunately, we can't do all of that just yet, and to the extent that we attempt to do so, we're creating all kinds of negative externalities. When we use government tools to subsidize ethanol, we're costing ourselves far more than we're gaining from the deal.

The American Enterprise Institute recently co-authored a study with the Brookings Institute that examines the costs and benefits of American ethanol policy. Despite giving ethanol benefits every benefit of the doubt and erring on the side of pro-ethanol when the data were unclear, it is fairly obvious that ethanol is not any sort of panacea:

If annual production increases by three billion gallons in 2012--a plausibly modest number when the EPA made its own calculations--we estimate that the costs will exceed the benefits by about $1 billion a year. If domestic production reaches the more "optimistic" Energy Department projection for that year, net economic costs would likely top $2 billion annually.

Obviously, ethanol has some benefits. It's just that the costs greatly outweigh the benefits. Some of the purported benefits are not even realistic; for example, to really achieve energy independence or otherwise boost national security, we would have to grow many times more corn than has ever been grown in the United States:

The picture on the energy side is a little brighter. For each barrel of oil displaced by ethanol, there are benefits in the form of slightly lower oil prices and reduced potential for economic dislocation from oil-price spikes. We estimate these to be in the neighborhood of $500 million annually in 2012.

But the emphasis here should be on the word "little." In 2005, the ethanol program used about 15% of U.S. corn supplies but displaced less than 2% of gasoline use. Even if all corn produced in the U.S. were devoted to distilling ethanol, the renewable fuel would amount to about 12% of the gasoline demand in 2005.

Let's visualize that for a moment:

So 15% of all corn grown in the United States is set aside to make corn oil and makes a 2% impact on the gasoline market. Hmm. Well, why not just throw everything we've got at this? How about we use all of our corn-- and then some? And why not, if it could mean stopping Global Warming and shattering OPEC?

Well, all of our corn would make a 15% dent in the gasoline supply:

Incredible costs. Not a lot of payoff.

Indeed, here is a breakdown of the costs and benefits:

Clearly, it's a mixed bag in more than just money terms, but the costs of ethanol are stunningly predominant relative to the benefits. Ethanol is just simply not a miracle cure for what ails America.

And that's too bad, considering that this is the safe and politically correct answer-- indeed, the only answer-- for nearly everyone in Washington, DC.

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Posted by Will Franklin · 3 December 2007 10:22 AM

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