Monday, July 16, 2007

Trivia question: What costs more, a gallon of gasoline or a gallon of milk? If you’ve been to the grocery store recently then you already know the answer to that. Soaring gas prices have people howling, yet the price of milk is at an all-time high and climbing. Ever wonder why?

Amidst the ongoing hysteria of global warming and all the hot air coming from Al Gore, the US Senate put together the Energy Policy Act of 2005. Not to be outdone by Gore and the enviro-Nazis, our brave Senators decided to tackle global warming by nearly doubling the government mandate for renewable fuel. In 2006, that mandate was 4 billion gallons. The Government now says that by 2012, it MUST be 7.5 billion gallons. In other words, Big Brother says we have to use ethanol, no matter what the free market says. Not only that, but Big Brother is also handing out money to our ethanol industry in order to “support” it, and keep it from flopping under the pressure of the free market. It has only been a year since this requirement kicked in, and already our economy is feeling the effects, mainly in the form of high corn prices.

The effect has indeed been profound, especially in industries that require corn as a basic cost. You see, the new government mandates have caused the price of corn to skyrocket, artificially of course since this has nothing to do with the free market and everything to do with governmental manipulation of the industry. And that leaves dairy farmers who depend on corn to feed their herd with higher costs which are, of course, passed on to the consumer. The same effect is seen in the pork market, as well as in just about any corn-based food industry. How much does a can of Jolly Green Giant Niblets cost?

But the corn growers are doing better, right? Wrong. It turns out the corn industry is not much different than the oil industry, yet you won’t hear the same “evil” comments about it from the Left. But consider: about three-fourths of the ethanol plants being constructed in 2005 were not farmer owned, and several large companies, including Archer Daniels Midland of Illinois, have announced plans to increase their capacity dramatically by building larger facilities. ADM, which controls nearly half of the ethanol industry, is also a large campaign contributor—since 1990, it has contributed over $7.7 million to both political parties, but I’m sure that had nothing to do with these government mandates. Corporate agricultural industry giants like ADM, Ethanol Products, and the Renewable Products Marketing Group control two-thirds of all ethanol production; more than 90 percent of all ethanol is controlled by just eight firms. So why the big outcry about government subsidies to “big oil” when it seems the same is happening to “big corn”? This is benefiting the corporate world with little impact on the average American farmer, except for higher fuel prices.

But ethanol is renewable, and thus cheaper, right? Wrong again. We are charged a 51 cent per gallon excise tax that goes to those who meet this new standard. Again, this is because the free market would eliminate any firm that tried to use corn fuel in competition with gasoline (it’s less efficient than gasoline – why would a consumer put something in their car that gave them 2/3 the gas mileage while paying the same per gallon, unless the government made them do it). These subsidy taxes amount to about $3.6 billion dollars more paid at the pump, and some estimates say that will increase up to $8.7 billion by 2012. And we can’t import ethanol due to a 54 cent/gallon tariff, even though Brazilian ethanol is cheaper than US ethanol (costing 24 cents/gallon less to produce while yielding 190 more gallons per acre). Not only that, but ethanol is inefficient. It produces 2/3 the energy of gasoline. So, cars that run on this fuel get worse gas mileage. Ethanol also costs more to produce, resulting in a NET ENERGY LOSS! Yes, our brilliant government has found a way to subsidize an industry that burns more energy than it produces. Ethanol contains about 76K BTUs/gallon but it requires 98K BTUs to produce a gallon of ethanol from corn. Meanwhile, gasoline contains 122K BTUs while only requiring 22K to produce. Naturally, in the free market this kind of inefficiency would never sell, which is why the government has to mandate its use.

But it’s better for the environment, right? Wrong. Ethanol does burn cleaner than gasoline, but less efficient. This causes the consumer to purchase more fuel than they would otherwise require. Not only that, but since there is more energy used in creating this fuel, the impact on the environment is hardly favorable. The latest estimate is that the ethanol mandate has reduced the emission of US greenhouse gases by a whopping 1/19 of 1%, at a cost of Billions to the US taxpayer.

But we’re becoming more energy independent, and giving less money to the Arabs, right? Wrong. While it’s true that ethanol is a home grown product, we have only become 1.1% more energy independent with these mandates. And if we convert our entire corn industry to ethanol, the best we can do is 2.4%, that’s it. And we’ll have to forget about pork and dairy forever. The oil barrens are shaking in their boots.

This is what happens when the government meddles where it doesn’t belong. The corn industry gives millions to political campaigns, and we are reaping the spoils. Yes, the same is happening in the oil industry, but somehow no one wants to put corn and oil in the same category. The fact is, the government has no business manipulating the free market. Politicians are padding their pockets along with the corn barrens and we are stuck paying the bill, all in the name of a cleaner environment and energy independence. The joke’s on us. Think about that the next time you’re standing in a voting booth, or at a dairy counter. And remember, this is the same government that now wants to “fix” our healthcare problem. No thanks.


Dan Trabue said...

I agree that ethanol is no great solution. Nor are fossil fuels.

Living within our means, THAT is a better solution. Personal and societal responsibilty will be the only thing that might help matters, but a totally free market doesn't exactly encourage either.

John Washburn said...

I agree that living within our means is a better solution, however I don't see that as a practical solution.

But, if it's gonna happen it will happen via the free market. People will not scale back their consumption of fossil fuels until it becomes financially prudent to do so, which will come by way of the free market.

I'm all for doing away with fossil fuels, and I'm certainly for eliminating subsidies for corporations. Let the free market work and we'll find things like this work themselves out.

Dan Trabue said...

No. There is no incentive to live responsibly within the free market.

Although, it would be better if oil and gas prices weren't subsidized and people had to pay true costs. The actual cost of gasoline has been estimated to be between $5-15/gallon (and that was back when gas was under $2/gallon, so imagine it'd be higher now).

IF we were paying actual costs, then the free market would work better.

But the actual costs include things like environmental damage, time lost due to pollution, money lost due to pollution (fewer people fishing because the streams aren't safe, for instance), and there's nothing in an unregulated free market to include those costs.

Dan Trabue said...

I'm pretty sure we've done this before, but just in case...

An analogy would be if my neighbor were doing some major construction and he has all this building material to get rid of. Now the responsible thing would be to haul it to an appropriate dump, but it'd be a whole lot cheaper if he just threw it over in my yard.

People can't get away (usually) with that because solid waste is more visible than water or air pollution. But it's the same thing. If people had to pay to clean up after themselves, gas would cost a great deal more than it does but there are no incentives in the free market to do so.

So, PERHAPS the free market would work (and probably work pretty well) IF the free market demanded actual costs. It doesn't.