I may be crazy, but our nation’s headlong plunge into ethanol seems like little more than foolish hope laced with subsidies-a-plenty.

If our goal as a nation is to lessen our dependence on oil from unsavory sources, not necessarily become energy independent, then we are going about it the wrong way.  The most effective way would be to place a high levy on all petroleum based products, not just gasoline.  The tax increase should be offset with an equal reduction in other taxes in order to be revenue neutral.  Let the free market work.

You’ll notice one thing I left out and that is government funded research.  First of all, any innovative company will tell you that venture capital investments yield much greater returns per dollar than government grants.  Worse yet, the government seems to be hitching our proverbial wagon to a single star - a star that just happens to be politically advantageous to use.

The Senate has long had a rural slant with every state, regardless of population, having equal representation.  The Senate’s rules also enable small bands of Senators, or even individuals, to hold up legislation.  The nexus of those two realities is the reason for outlandish agricultural subsidies that keep the rural Senators placated.  I wasn’t the only one who noticed Iowa’s Sen. Grassley almost wet his pants in excitement when Bush mentioned more ethanol funding (i.e. subsidies!) in his SOTU address.

Our government has been subsidizing ethanol research and production for decades and the net result is a fuel that is less efficient than gas, incompatible with our existing infrastructure, and physically impossible to obtain in supplies that would satisfy our country’s demand.  In addition to subsidizing farmers to the tune of 51-cents a gallon, the government has imposed a 54-cent per gallon tariff on imports from countries far more friendly than the oil rich ones we aim to avoid.

High oil prices without a government anointed (and funded) replacement would energize the innovative American spirit.  The eventual solution might be ethanol or it might be something we haven’t thought ot yet.  The problem is that new technologies can’t just go straight into mass production. They come out slowly and the first generation is almost always prohibitively expensive; sometimes so expensive that the existing, inferior technology wins the battle.  If the upstart can gain traction in the market and expand production the price may eventually fall to below that of the previous technology.  A petroleum tax would enable more of the upstarts to have a chance.

The downside to raising the price of petroleum in America is that it would severely hamper our economy until a replacement can be found, which may take decades.  In the mean time other countries would continue to purchase oil at the market price sans taxes and would likely absorb many industries looking for a lower cost climate to stay competitive.  Such is the problem of government interference in the free market.

The fruits of government meddling in the market are already being felt south of the border.  It was first reported a couple of weeks ago that the price of tortillas was rising sharply in Mexico due to increased usage of corn for ethanol production.  Carson Sasser summed up the situation quite nicely:

So, here in the US our government is encouraging the production of ethanol as an alternative to gasoline, which uses corn that otherwise might be used to produce tortillas, which drives up the cost of tortillas in Mexico, which potentially causes a lot more Mexicans to come to the US so they can make enough money to buy tortillas. Central planning never works as intended; the variables are too numerous and too complex for mere humans to comprehend.

Now Drudge is linking to this story with the same observation.  The Wall Street Journal ran a good editorial describing the situation and included this graphic showing the futures price of corn over the last couple of years.

The bottom line is this: I’m all for finding an alternative to oil for lots of reasons, but the right way to go about it is not by letting the government call the shots.

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This entry was posted by Brian on Sunday, January 28th, 2007 at 4:31 pm and is filed under Energy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Please note the copyright policy.