The Artificial Ethanol Market

“Gee, the lack of humility before nature that’s being displayed here, uh . . . staggers me . . . Don’t you see the danger, John, inherent in what you’re doing here?  Genetic power is the most awesome force the planet’s ever seen, but you wield it like a kid that’s found his dad’s gun . . . I’ll tell you the problem with the scientific power that you’re using here, it didn’t require any discipline to attain it. You read what others had done and you took the next step. You didn’t earn the knowledge for yourselves, so you don’t take any responsibility for it. You stood on the shoulders of geniuses to accomplish something as fast as you could, and before you even knew what you had, you patented it, and packaged it, and slapped it on a plastic lunchbox, and now you’re selling it!”

            —Jeff Goldblum as Dr. Ian Malcolm in Jurassic Park


In the course of filling your car up over the last few years, at some point you’ve no doubt  noticed a sticker on the pump advising you that the fuel contains some percentage of ethanol.

Did you ever wonder how that came to be?  I mean, I didn’t ask for ethanol in my gasoline. I’ll bet you didn’t ask for it.  And it’s doubtful you know anyone who did.  So why is it there, when no purchaser of gasoline was asking to buy it?

The answer, in short, is the federal government, at the behest of special interest lobbies, decided to require it.

Environmental legislation and regulation in the 1990s required refiners to add “oxygenates” to gasoline in an effort to reduce greenhouse gas emissions in car exhaust.  Ethanol is one such oxygenate, but it was not economically competitive with other alternatives.  To make up its economic disadvantage, Congress enacted a $0.45 per gallon tax credit—a dollar-for-dollar subsidy—for blenders to use ethanol.  But even then, refiners often chose other additives because of issues with ethanol’s regional availability (ethanol has to be shipped by truck or rail, and thus was only practically available to refineries located relatively close to ethanol plants, which not surprisingly are concentrated in the corn-producing states of the Midwest) and effectiveness.  The Congressional response was to enact renewable fuel mandates starting in 2005 to require refiners to use minimum quantities of ethanol.

So here’s what we have with ethanol.  We have a product consumers did not want to buy; there was no popular clamor to put ethanol in gasoline, and had there been the demand would have supported prices that did not require a federal subsidy.  We have a product that as late as the late 1990s auto makers were warning consumers not to use at all (ethanol was corrosive to engine seals and other components at the time), and even today they are warning against the use of high concentration 85% ethanol blends (“E85”) for the same reason.  And we have a product that manufacturers did not want to sell.  There was literally no market for fuel ethanol until the government created one by force, requiring sellers to sell it and requiring buyers to buy it.

This is what the market of the future is increasingly going to look like.  It will matter less and less whether you can create a good that people want, or whether you can innovate a way to produce an existing good more efficiently so that it is cheaper to make and thus cheaper for the consumer to buy.  That is how the free market works, but it’s going to be ever less important to make a better mousetrap and more important to buy, goad, or guilt enough people in government to force people to buy your product whether they want to or not.

Of course, it always helps if you can ally yourself with the environmental zealots, which is what the ethanol lobby has done so successfully.  No one wants your product?  No problem.  Just talk to the Sierra Club and convince them that there’s an impending environmental catastrophe that only your product can avert.  The comic irony with ethanol is that in the final analysis—a place the environmental extremists never manage to visit—ethanol may prove to have been counter-productive from an environmental standpoint.  It’s easy to sell it to the uninformed—read:  both Bushes—as magic corn juice; a panacea you just have to squeeze from the cob.  In truth, the distillation of fuel ethanol requires an expensive chemical process that consumes enormous amounts of water, and results in a fuel substitute that arguably provides less energy than it took to produce it.  And growing the corn feedstock on that kind of industrial scale results in a vast increase in artificial fertilizer runoff, yet more water consumption, and over time depletes farmland.  Then, of course, there’s the sticky ethical issue of diverting corn and the resources used to grow it from producing food.

But rather than accomplishing its environmental objectives by stating an emissions standard and then letting the market and manufacturers find the most efficient allocation of resources to achieve that standard, government elected to dictate a recipe and thus create a market where one did not exist.  All at the behest of the ethanol lobby, in cahoots with its new enviro-Nazi buddies.

Here’s where it gets funny.

Having succeeded in enlisting the government to create a market for their product by force, it seems the ethanol industry is now shocked to discover that there are other interested concerns seeking to avail themselves of that market.  The major producer of ethanol other than the U.S. is Brazil.  Well, the Renewable Fuels Association—the U.S.’s largest ethanol lobby—is now whining that the Brazilians are trying to hone in on their business.  In a letter to U.S. Trade Representative Ron Kirk, the RFA complains that:

“The impacts of Brazil’s trade-distorting policies are becoming ever more harmful as U.S. ethanol producers endure devastatingly bad economics exacerbated by a lack of markets.”

Wow.  “Trade-distorting.”  “Lack of markets.”  Sounds bad.  So what was Brazil’s crime?

Reducing its required percentage of ethanol in gasoline from 25% to 18%.

Yup, the heinous economic action coming out of Sao Paolo is that the Brazilian government is force-feeding less ethanol to its citizens, thus freeing additional supply to be exported to the U.S.  Apparently it wasn’t enough for the U.S. ethanol industry for the U.S. government to make U.S. citizens buy their product, they believe they’re entitled to have foreign governments do likewise.  Worse, they not only want the government to create an artificial market for their product, they then want to be protected against competition in that market.

This kind of perverted economic thinking is dangerous.  If allowed to function, the free market will allow voluntary transactions to determine the most efficient allocation of capital; good ideas survive, bad ideas don’t, and everyone benefits in the long run.  Yes, survival requires work and actually competing in the marketplace.  But the real “trade-distorting” policies are those that create markets out of thin air by force.  Manipulation always has consequences, and they’re not always what the manipulator intends.  Artificial markets do not reward those who create “good,” but those who wield influence.  And when the balance tips such that it is more profitable to cultivate political pull than it is to win in the marketplace by making a better mousetrap, we all lose.

One thought on “The Artificial Ethanol Market

  1. Pingback: Fantasy Island | Chasing Jefferson

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