The Sorrows of Ethanol

In 2000, I began to realize what a monster ethanol was becoming. Bill Bradley was seeking the Democratic nomination for president. Although I disagreed with Bradley on many things, I had always admired his principled stands on issues. As a senator, he had always opposed subsidies for ethanol. Shortly into the primary season, he “revaluated” his ethanol stand and decided he was in favor of ethanol subsidies—so much for Bradley being a man of principle.

One of the major beneficiaries of ethanol subsidies has been Archer Daniels Midland (ADM). They receive billions of dollars of government subsidies a year. The Cato Institute has called ADM one the biggest recipient of corporate welfare. To insure that their welfare keeps flowing, ADM gives generously to political candidates of both political parties. All three remaining candidates—John McCain, Barack Obama, and Hillary Clinton—support the continuation of these subsidies. For that alone, all three are unqualified to be president.

All three value their political future more than the environment, the food supply, and the health and welfare of billions of individuals. If you think that is hyperbole read on.

In previous posts, I have covered some of the more harmful environmental effects of ethanol, such as its effects on aquifers. In another post, I observed that ethanol is a creation of a complex set of subsidies, and—like nuclear power—it would not thrive on a free-market. This subsidization drains away capital from entrepreneurs who are seeking to discover new, viable forms of alternative energy.

Astonishingly, ethanol is being produced by ADM in coal fired plants that produce significant amounts of pollution. According to many, including UC Berkeley geo-engineering professor Tad Patzek, making ethanol uses up to six times more energy than the finished fuel itself generates—for a net loss of energy. This is precisely why ethanol would not exist on a free-market.

OK, so what do we have so far: we have a fuel that wastes energy, helps to destroy the environment, draws investment funds away from the discovery of real alternative fuels, costs the taxpayer billions, and corrupts many politicians. Is there anything else? Unfortunately, yes. Ethanol, along with the current housing crisis, is threatening to push food prices beyond the reach of billions.

Before we go any further, you may be scratching your head over how our current housing crisis is inflating food prices. Every time the Fed bailouts a Bears Stearns, it monetizes private securities and increases the money supply. The money has to go somewhere, and one of the places it is going is to hedge funds that are helping to create a commodities bubble.

Of course, perhaps the major culprit in the commodities bubble is ethanol. According to The Economist in 2007:

Biofuels (took) a third of America’s (record) maize harvest. That affects food markets directly: fill up an SUV’s fuel tank with ethanol and you have used enough maize to feed a person for a year. And it affects them indirectly, as farmers switch to maize from other crops. The 30m tons of extra maize going to ethanol this year amounts to half the fall in the world’s overall grain stocks.

Rice and wheat prices have at least doubled in the past year. The Economist‘s food-price index has jumped in real terms by 75% since 2005. Rising food prices have led to riots in recent weeks in Haiti, Indonesia, and Africa. In Haiti, many have been reduced to eating cookies made from mud.

My wife came home today and told me she paid $5.29 a pound for kale. Green vegetables are a staple in my family’s diet, and we will cut back on other spending before we reduce our consumption of vegetables. Others are not as fortunate, they will fill their bellies with cheaper, processed food. In that way, subsidies toward ethanol will also contribute to rising health care costs.

McCain, Obama, and Clinton argue over who is the real elitist. They can all proudly wear that title. While they enjoy a standard of living that few who have ever walked this earth have enjoyed, they support policies that make many go hungry and sicken others.

What is a voter to do? Hug your children, walk in the woods, read a good book, help a neighbor or a colleague. These three candidates don’t deserve your time, attention, or energy. All you need to know about the three of them is that they all support continued subsidies for ethanol. How sad that our great country faces a choice like this.

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15 Responses to The Sorrows of Ethanol

  1. Kevin says:

    Dr. Brownstein,

    Great Post. I remember thinking a few years back we would one day be choosing between food and gasoline; Its seem that day is here. I’ve never jumped on the bandwagon of global warming activism as I’ve always viewed it as a ploy and cover for political coffers, alternative motives, etc.., but I wholeheartedly agree we are inefficiently using our resources and destroying our environment in the process (coal to produce ethanol). Why do we continue to be duped by politicians? Back in the primaries I campaigned for Ron Paul and many called me crazy for supporting a “whacko” like Ron Paul. Even though I don’t agree with everything he supported, I believe he is the medicine America needs. The current three candidates are certain to lead us in the wrong direction.

    This country continues to move towards socialism and my views continue to move away from both the Democratic and Republican parties.

    I predict one day we will be choosing between water and gasoline and that one day we will be bailing out commodity traders. Adams and Jefferson would roil in their graves if they knew!

  2. Thank you Kevin for your kind words and comments. We continue to be duped because apparently that is what we collectively desire. Just witness the endless talking head shows each night on CNN, Fox and MSNBC. When was the last time you heard one word about the truth of ethanol or for that matter anything of real value?

    I too support Ron Paul and although I never thought we were ready collectively as a nation to accept fiscal responsibility, ending bailouts etc. I have to admit I was disheartened by (given his excellent fund-raising) his meager poll results.

    We may be generations from a candidate like Paul being able to be successful. In the meantime I can only hope that whoever is elected is able to have a change of heart and exhibit statesman qualities. So far there is no indication of that.

  3. Frank v2 says:

    Dr B et al,

    I believe that part of the reason for the ethanol game is that politicians are trying to show that we are serious about weeding our country off of foreign oil by becoming energy sufficient. On the surface ethanol looks like a good idea. But as you point out, peeling back the onion shows a horse of a different color. And speaking of horses, perhaps we need to step back and get the horse out of the barn to commute to work: maybe our Mennonite friends have the right idea.:)

    However, as long as “we the people” continue to want somebody else to fix our problems (financial, energy, housing, etc) a politician like Ron Paul will never get elected. I believe that we as a society are to blame for this mess because none of us wants to step to the plate and fix our own collective issues. Most of us have over-extended ourselves financially by buying bigger houses, cars, toys, boats, etc. than we really need, all on “buy now, pay never” credit terms. The bubble has to burst. Our economy runs on oil. But as we are beginning to see this no longer applies to just our economy, but also to the rest of the industrialized world as well. It is interesting to note that despite Americans driving less at the moment (at least that is what the media is saying – I’m not sure that this is true or not), prices are continuing to rise. Why? Because China and India are buying and using cars at a huge rate, and they need gas too. They are becoming part of the industrialized world, and have the same rights to energy as we do, much to the dismay of many of my fellow American’s. So, more demand and less supply, so surprise, surprise, prices are going up. And for the record, we still have, relatively speaking, very cheap gas prices here in the US; $3.50 for a gallon here, $9.00 plus in Europe. http://www.eia.doe.gov/emeu/international/prices.html#Motor .

    And, while I’m ranting, none of us really NEEDS a pick-up truck to drive to the office, or a Hummer, or an SUV. We like them. But we don’t want to have to pay to feed them. So instead, we are going to waste energy on ethanol production, rather than get to the route cause of the problem; our own greed and love of big gas-thirsty vehicles. I say triple the prices we pay at the pump by adding taxes, and take the tax money generated to help the farmers convert their field back to edible crops, and also build a transportation system that would weed our society of the single occupant – gas- guzzling monsters. Oh, but that would be socialism. OK better idea; let prices go where ever they go by allowing supply and demand dictate markets, and eliminate all subsides. By doing so, we will all feel some pain, but the market will do what it does best: correct itself. But that would put many of our politicians out of work. And we couldn’t have that. So, I guess all that is left is for us to elect the least of the three evils and carry on, and hope that the crises doesn’t impact us too badly, just the other guy. And hopefully that guy isn’t my next door neighbor, because he will then be siphoning off my gas, and I wouldn’t want that. So let’s hope that guy is somewhere on the other side of the world so I (we) don’t have to think about the problem.

    I now return this blog to its regularly scheduled programming.
    Onward!

    Frank v2

  4. Jim D says:

    But when “we the people” finally get fed up enough to want real change, will we be able to vote it in? When the few in power continue to feed off the masses, history tells us revolution is not far off. Remember, our Founding Fathers foresaw the day when those in government no longer served the population at large, and in their documents they call us (as both a right and a duty) to change the government. Will this be the catalyst that brings revolution?

  5. Frank v2 says:

    Jim,

    I concur that hardship has historically brought revolution. But I’m a dreamer, and I hope that our Republic will let the people’s voices be heard, and change will happen accordingly without the necessity of taking up arms. However, my concern is that “we the people” aren’t ready to make the kind of sacrifices that in the long run are better for our nation as a whole. We want our world fixed and corrected now, and consequently we will respond to some talking head’s rant that has no substance behind it searching for that magic pill. Down with free trade because it is evil and my job has been lost to China. Or let’s pour money into alternate energy sources, without any real analysis in terms of what that cost will be in the long run. And I will admit that my natural tendency is to follow this type of thinking as well. It is only natural. We all deep down inside want to protect what we have. It is human nature.

    However, I think that we, as one of the riches countries in the world, have gotten complacent and we seem to like things to change, just as long as it is everyone else that changes to accommodate us as individuals, and as a nation. I love this country and I’m proud to call it home. And I think overall our political system is still one of the best in terms of individual freedoms. But our governments, particularly over the last 8 years, have had an uncanny way of eroding our individual rights and freedoms, and we seem to be OK with that happening just as long as we are fed the magic pill that provides short term fixes in our lives. Like lowering interest rates when in fact they need to rise. Or bailing out homeowners that made bad economic decisions.

    What I fear from the people is not an uprising to drive change, but one that might occur to stifle it should we actually be blessed with a politician who has the “brass ones” to make the hard decisions that will inflict short term pain, which in the long run, will provide gain for all. But I don’t think we have to worry about that happening in this election. Instead we have talking heads that are listening to the short term thinking that the me-oriented people are spewing. So all is safe…. For now.

    Frank v

  6. igli1969 says:

    Regarding electing a politician who makes clicking sounds when he walks, don’t count on it. Besides, “if voting could effect change, they’d outlaw it.” The reason that most people want the quick-and-easy fix is that is what they were taught in public school, what is blared out by the mass media every day, and because it is easier to feel than to think!

    As responsible economists (gee, I think there’s one somewhere around here) have pointed out with Cassandra-like lack of success, people must look beyond the first effects of a policy or an action. The fact that few do so is why there is a Law of Unintended Consequences. Yet the collective memory of the “American public” is so ephemeral that it seems that most of the people can be fooled nearly all the time.

    BTW, Frank v2, as an individualist myself, I see nothing wrong with being me-oriented. More problems have come from thinking in terms of artificial groups of people than in providing solutions that let individuals maximize their happiness. As you mentioned, letting the market operate freely will have the effect of settling much of the gas-price issue.

    Besides, while there certainly is an increase in world-wide demand for petroleum, the greater component of the recent price increases is the fall in value of the US Dollar. You were on target about the politicians causing that with short-term policies like trying to manipulate interest rates. But price fluctuations as we have seen in the past several months are unlikely to be due to petroleum demand, as that is realtively stable in its increase, and the supply is also known (for the most part). But when the currency supply is increasing, and chasing that stable supply of goods, we get (wait for the trumpet flourish) price inflation!

    Unfortunately, the vast majority of Americans have less than zero economic knowledge; that is, they “know” some things, but they are wrong. The situation in which we find ourselves is unlikely to be solved by an armed revolution. A revolution of ideas and knowledge has a chance of success (that, IMO, was why Ron Paul ran); voting from the rooftops does not. (Meet the new boss, same as the old boss.)

    Still, keep your powder dry.

    Chris C.

  7. Frank v2 says:

    “Meet the new boss, same as the old boss”. Pete Townsend’s statement is certainly applicable here. (and I love the Who ) And I concur that no politician is ever going to ride in on a white horse and do the right thing, not because he or she can’t, but because I doubt very much that we the people will allow it to happen.

    Oh, and for the record, I’m not against the “me” concept; in fact, I’m a big fan of it. However, being me oriented has both benefits and consequences. What I’m concerned about is how fast “me” becomes “we” when things for an individual turn bad. I make choices; some good, some bad. When I make a bad decision, I hold myself accountable and take ownership for that mistake. What I see currently happening is people want all the benefits of “me”: big house, car, plasma TV, quick profits, etc., but when something occurs in his her life and he or she can’t make the payment for something, then it becomes somebody else’s fault, and then the “government” expected to step in a bail out that individual at the taxpayers expense. I say “balderdash” to that. Why should the rest of us be held accountable to an individual’s mistake? Let the housing market collapse. Let prices fall. This is a healthy process and a function in a free economy. Like leaves falling off of the trees. The trees typically do recover again in the spring time. The economy will also. Perhaps it will take longer than a season or two, but things will change. But we need to let the economy take its natural course, and not intervene. We need to let individuals who have made bad choices, feel the pain from those choices, just as we allow them to reap the rewards when things are swinging in their favor.

    Frank v2

  8. Frank v2 says:

    Dr. B et al,
    While we are on the subject of “meet the new boss, same as the old boss”, I thought Robert Wuhl’s little ditty from HBOs “Assume the Position” parlays nicely how nothing ever changes in politics: more of the same old, same old. Enjoy!
    Frank v2

    The following clip was retrieved April 27, 2008 using the World Wide Web from You Tube.com at:

  9. igli1969 says:

    Frank – Thanks for clearing that up; the line about tree recovery is shiny, so I’ll file off the serial number . . . 😉

    When I was in the Army (mid-1970s), we learned the attitude that, if you screwed up, intentionally or not, you stood up and took the hit like a man. Then moved on. “When the ship lifts, all debts must be paid.” (Heinlein)

    And I have the button that notes, “No matter who you elect, you get a politician.” And the one that points out that “If voting was effective, they’d ban it.”

    Cynical/Realistic Regards,

    Chris C.

  10. E says:

    You’re right… I’m sad today. Crying like a baby. Because of Ethanol. Boo hoo.

    I’m kidding. We all know the deal with Ethanol (corn lobby anyone?). Thing is, it’s just one more thing in the sack of turd… subsidiaries for cheese, dairy, sugar, arms exports, etc(?) Rome is burning and this is just another temple. I’m waiting for the day they start the give-away “Business School Professors Educational” Subsidiary (for every b-school student you get, you get a voucher for $10,000 in addition to tuition and fees)…

  11. Frank v2 says:

    It really didn’t sink in that the price of many of my food staples were going up because for the most part it has been gradual. But this morning I walked into my favorite bagel shop and paid 40% more for my bagel today than I did a week ago. The bagel shop owner, who had been reluctant to raise prices, finally realized that the high raw material costs (aka – flour) needed to be passed on to the consumer.

    There was an interesting article on MSN this morning further supporting the ethanol debacle, and coincidently, talks about a bagel shop owner in Bethesda, MD. Enjoy as you savor that bagel: it will probably cost you more next week than it did this week. And not because the demand has gone up for wheat, but because wheat has gone away in favor of new ethanol producing crops. Perhaps we will have to rewrite Marie Antoine’s phrase from “let them eat cake” to “let them burn ethanol”: cake may become a thing of the past for the average Joe. At least we will be able to drive to the bagel shop, even if we will only be able to afford to smell the one bagel that will be there for sale; available to the highest bidder. Hmmm, perhaps a new marketing opportunity for eBay: bagel bidding.

    http://www.msnbc.msn.com/id/24361263

  12. Frank,

    Actually you won’t be able to drive to the bagel shop. Ethanol raises energy prices because 1. the production of ethanol consumes more energy than it produces. 2. ethanol sucks away needed capital from entrepreneurs discovering viable energy alternatives.

  13. E says:

    Hear me out Dr. B.

    I’m going to buy bagels from producers, ship them to retailers on rail, and sell them nationwide for less than what bagels shipped by gas costs. Oh wait… our railroads suck too. Oh well… back to drawing board.

  14. goodtimepolitics says:

    Obama is against off shore drilling and does he have a good reason! This will blow your mind!
    http://goodtimepolitics.com/2008/06/23/why-obama-supports-ethanol-production-over-off-shore-drilling/

  15. Obama’s ties to ethanol was covered this morning in MSNBC: http://www.msnbc.msn.com/id/25324195

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