From New Scientist:

Ethanol fuel made from corn may be being “dangerously oversold” as a green energy solution according to a new review of biofuels.

The report concludes that the rapidly growing and heavily subsidised [they're Brits - what do they know about spelling!] corn ethanol industry in the US will cause significant environmental damage without significantly reducing the country’s dependence on fossil fuels.

Here’s a novel idea: maybe the government should just stop meddling in the energy market and let consumers decide.

Or, as they say, even a blind squirrel can find a nut every now and then.

From the BBC (back in March):

Cuban President Fidel Castro has strongly criticised [They're Brits, what do they know about spelling!?] the use of biofuels by the US, in his first article since undergoing surgery last year.

He said George W Bush’s support for the use of food crops in fuel production would cause 3bn deaths from hunger.

I don’t know about total deaths, but I’ve been saying for a while that subsidizing the biofuel market is causing food prices to rise and is going to cause people to go hungry.  Trust me; it’s not often that Fidel and I are on the same side of an issue.

But it isn’t just me and Fidel who hold this view.  The magazine The Economist as well as the U.N. (boy, I’m keeping some sordid company on this one) have suggested much the same.

From the Washington Post:

As President Bush and congressional leaders rally support for their ambitious biofuel proposals, one ingredient is often left unstated: the cost.

Bush and members of Congress stress energy independence and environmental benefits of federal requirements for a massive increase in the use of biofuels in motor vehicles. But so far they have muted discussion of the prosaic details of how to pay for the subsidies and other incentives seen as crucial for meeting the new biofuels targets.

If the current tax credits, grants and loan guarantees are extended, the package would cost taxpayers $140 billion more over the next 15 years. New proposals under consideration in Congress could raise that tab to $205 billion.

As John Stossel points out, “If ethanol’s so good, why does it need government subsidies?”  By the way, you REALLY should read the Stossel column - especially if you think ethanol is great.

From the AP:

Dairy market forecasters are warning that consumers can expect a sharp increase in dairy prices this summer. By June, the milk futures market predicts, the price paid to farmers will have increased 50 percent this year - driven by higher costs of transporting milk to market and increased demand for corn to produce ethanol.

U.S. retail milk prices have increased about 3 percent, or roughly a dime a gallon, this year, according to the U.S. Department of Agriculture.

But University of Illinois dairy specialist Michael Hutjens forecasts further increases of up to 40 cents a gallon for milk over the next few months, and up to 60 cents for a pound of cheese.

That would drive the cost of a gallon of whole milk around the country to an average of $3.78, based on the USDA’s monthly survey of milk prices in 30 metro areas.

If Hutjens’ prophecy holds true that will mean that milk prices will have increased 15% just this year by the end of summer.  Clearly this is a price gouging conspiracy by a cabal of profiteering cattle farmers.  I demand that Congress investigate!

Seriously, there is no reason to investigate milk prices just as there is no reason to investigate gas prices.  Both are set by the market.  What would Congress find if they did investigate the increase in the price of milk?  At the bottom of the price increase they would find that they deserve a great deal of blame.

The government in this country has become obsessed with subsidizing and generally giving favor to biofuels.  This has disrupted the market prices for food commodities like corn.  It all goes back to supply and demand.  The government has dramatically increased the demand for corn, but they can’t do the same with supply since there is a finite amount of arable land for crop production.  The end result is that the price of corn and other crops increases as a portion of the finite supply is diverted from consumption to energy production.

Exacerbating the problem is that ethanol containing fuels, like the much touted E-85, cost more than regular gasoline and offer inferior performance.

E85 is made up of 85 percent ethanol made from grain and 15 percent conventional pump gasoline. Throughout the country the price of E85 is higher than gasoline even though the corn-based fuel contains only 72% of the energy in a gallon of gasoline.

The market place isn’t driving the demand for E-85, the government is doing that.  As the previous article states, “many Midwestern drivers are passing up E85 even though the corn based fuel is better for the environment and their local economy.”

But government mandated/encouraged biofuels are also indirectly driving up the cost of regular gasoline.  As oil companies see Congress set mandatory increased biofuel usage requirements they have less incentive to make long term investments into increasing refining capacity.  Would you spend billions of dollars to expand production if you were sure the government was going to undermine your investment by mandating that consumers purchase a competitor’s product?  That uncertainty about the future is driving up current prices (just like it does in any market).

Ethanol itself may not be the environmental panacea that most advocates claim.  The artificially created price increases for corn will cause more farmers to produce more corn.  That will mean less crop rotation, which is environmentally harmful because it leads to increased usage of pesticides and fertilizer.

The government’s increased intrusion into the energy market has wrought numerous negative consequences.  The price of milk is just the latest victim.  I wish the politicians would open their eyes and recognize their blunder.

Bud Cramer joined two other Alabama congressmen in voting for an anti gasoline ”price gouging” bill.  Such legislation is nothing more than counterproductive demagoguery that ensures gasoline supplies will be quickly depleted during a crisis due to artificially low prices.  Supposedly Bush will veto the bill.  Even a blind squirrel can find a nut.

Just to prove that Congress is more interested in stoking undue anti-petro sentiment than it is in keeping prices low for consumers they did not include wording that would temporarily suspend federal gas taxes during a crisis.  It deserves being mentioned that the federal tax on gasoline is 18.4 cents per gallon.  States add an average of 20.8 cents per gallon in taxes.  So even at $3 per gallon just over 13% of the price you pay goes to the government.  By comparison most oil companies earn profit margins in the 10% range, which (if their gas business is just as productive as the whole company) means that about 10% of the price of a gallon of gas is profit for the oil companies.  It’s pretty clear that the government is the one gouging consumers.

Eight freshmen Democratic Senators are proposing a “windfall profits” tax on oil companies.

The legislation, proposed by Sen. Robert Casey, D-Pa., would impose a 50 percent tax on profits after oil prices rise above $50 a barrel. It also repeals tax “loopholes and breaks” from legislation signed into law in 2005, Casey said Thursday.

The article specifically mentions ExxonMobil’s first quarter profits of $9.28 billion.  Sounds impressive, right?  Gas prices are high and they’re raping us, right?  Wrong!  Exxon’s total first quarter revenue was $87.2 billion, which means that their profit margin was a meager 10.6%.  Yes, Exxon’s total profit sounds huge, but they incurred costs of $77.9 billion in the course of their business (including $7 billion in income taxes), which involves more than just selling gas by the way.

In the business world an 11% profit margin is not very high.  To give you a bit of perspective tech icon Google reported a first quarter profit of $1 billion on a revenue of $3.7 billion.  That gives them a profit margin of 27%.  If Sen. Casey and his compatriots increase the oil companies’ cost basis they will simply pass that cost on to you and me.

I believe that Casey et al. know that their plan is harmful to Americans, but they don’t care.  Their motive is two fold.  one, they can score some political capital with people who are economic idiots - our government schools have seen to it that there are plenty of them.  (Not the teachers fault, by the way.  It’s the curriculum that is woeful at preparing kids with the most basic business acumen.)   Casey also seeks to increase the power of government by growing tax revenue.  Repealing tax “loopholes and breaks” is the same as raising taxes on those companies.  Again, that money comes out of our pockets eventually and into government coffers where politicians like Casey use it to increase the welfare state and buy votes with pork.

Neither the article nor Casey mentioned that the national average for state and federal taxes is 45.5 cents per gallon.  This guy, who apparently favors price controls for the industry (think of gas lines), calculated that Exxon makes about 29 cents of profit on each gallon of gas.  I’m not going to check his numbers.  I think given his view on the matter its safe to say that he isn’t padding his number down.  The government is making over 1.5 times what Exxon (supposedly) makes on every gallon of gas and Casey thinks we should raise taxes.

In Germany!

[T]he price of barley, which is used to make malt, an essential ingredient in brewing, has doubled in the space of a year from 200 to 400 euros per tonne on the German market.

The march of biofuels is inexorable. Of the 12 million hectares farmed in Germany, two million are already being used for plants which can be turned into biofuel.

“Biofuels are monopolising the land,” said Manfred Weizbauer, the head of the German millers’ federation, which is calling for a cut in the subsidies granted to biofuel crops.

The impact of the biofuels is not restricted to beer, with the price of bread likely to rise by 10 percent as a result of reduced grain production, the German bakers’ federation has warned.

The biofuels policy is encouraged by the European Union, which wants vehicle fuel to contain at least 10 percent of the ‘green’ fuel by 2020.

The signs are becoming increasingly clear - biofuels are the wrong way to power our cars.  We have a finite supply of arable land in this world.  Production on this limited space is being transferred from food crops to crops earmarked for biofuels.  It doesn’t take an economist to predict what happens next.  Less supply of food, same (if not greater) demand - prices go up.

The decision by various governments to force the market’s hand via heavy subsidization will become a readily apparent folly within a decade.  I can envision the news reports now decrying how the poor can’t afford to eat because the price of staples, like corn used for tortillas, has increased so sharply as a result of increased demand for biofuels.  I’m sure the left will propose a government takeover of food production because “clearly the free market doesn’t work.”  Never mind the fact that the government meddling in the free market will cause the dramatic price inflation of food crops.

Of all the dumb laws I can think of this has to be among the dumbest and (I would think) politically unpopular.

If you think the gas prices at the new Flying J Travel Center in Dothan were too good to be true when they opened for business last month, you’re not alone.

A local oil company is suing Flying J in federal court, claiming the company sold its gas at prices lower than the law allows.

Cowarts-based Home Oil Company filed the complaint in U.S. District Court March 1, claiming Flying J violated the Alabama Motor Fuel Marketing Act, which states:

“It shall be unlawful for any person engaged in commerce in this state to sell or offer to sell motor fuel below cost … where the effect is to injure competition.”

The whole point of business is to win market share from your competition.  All this law does is make us pay more for gas.

Seriously.  Their profit margin was a respectable, but not spectacular 10.5% last year.  Politicians and anti-capitalists will decry their $39.5 billion profit as unconscionable, but keep in mind that nearly every healthy tech and pharmaceutical company turns profit margins over 10% (actually closer to 20% or 30%) every year.

Businesses are essentially investments.  The rate of return is proportional to the risk involved.  Producing and refining oil, while risky, is low risk relative to some other ventures.  One of the ways companies like Exxon mitigate the potential risks of things like under producing wells is through sheer size, which moderates both profits and losses.  Although the dollar amount of their earnings seems quite large it is only because they put a huge amount of financial capital at risk.

Their 2006 financial statement isn’t up on CNN yet, but keep in mind that they paid $23 billion in income taxes last year and earned $36 billion.  Technically, you and I paid their $23 billion in income taxes because (pay attention!) businesses don’t pay taxes!  Only people pay taxes.  Businesses simply pass all of the costs involved with making a product, including taxes, on to the consumer.

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.