Indefensible Biofuels

Indefensible Biofuels

Op-ed in The American Spectator
July 23, 2008

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.