Ethanol Politics

I never cease to be amazed at the turns of American politics.

The US government has received a great deal of criticism since 2005 for mandating ethanol use in fuel for automobiles while the price of corn, the base stock for the ethanol fermentation process, continues to rise.

The Energy Policy act of 2005 called for the following use of ethanol:

4 billion gallons by 2006

6.1 billion gallons by 2009

7.5 billion gallons by 2012

The cap is a 10% blend.

The additional demand for corn to support ethanol production caused corn prices to spike from around $2 - $3 per bushel (2002 - 2006) to over $7 per bushel in 2008. Since corn is the primary feed component for meat production, food prices began to spike. Folks did not notice much because the American economy was still strong.

The following WSJ editorial notes that the EPA has increased the cap for ethanol usage to 15% from 10% so that even more of the biofuel is consumed. Long-term, the upper limit for ethanol usage will increase to 36 billion gallons by 2022.

Editorial, Review & Outlook, 2010. The ethanol Bailout. The Wall Street Journal, Oct. 18.

This move might have a dramatic effect on corn prices. The smaller than expected size of the US crop and the prospect of Quantitative Easing II (widely believed to increase the future price of commodities), along with higher demand for ethanol should drive corn prices upward. Overseas crop shortages will make matters worse.

According to the WSJ editorial, the reason for the EPA's move is political, namely to reduce an oversupply of ethanol and to win votes in the Midwest corn producing states.

This statement in the Editorial sums up the situation

"Mr. Dinneen was displeased by the EPA's ruling, even though it is an opening wedge for his larger demands. In a statement, he complained that 'ethanol producers are hitting an artificial blend wall today.' You've got to love that 'artificial'—for a fuel that is more expensive than gas, gets worse mileage than gas, increases carbon emissions more than gas does, and that few consumers would willingly buy unless required by law." italics added

I think there are some good opportunities for biofuels, especially using sorghum, however, it is better when the market accepts these products based on real value rather than a government mandate that has no basis in demand or value to the consumer.

I understand that perhaps some alternative energy industries need help to get started. When financial help is in exchange for votes it is hard to believe that this is the correct and most economic way.