Monday, January 29, 2007

Ethanol

The President made a big push for renewable sources of energy in the State of the Union address, including ethanol. Jerry Taylor and Peter Van Doren at the Cato Institute take a look at the claims the President made for ethanol.

http://www.cato.org/pub_display.php?pub_id=7308+

For ethanol to completely displace gasoline consumption in the U.S., we would need to plant every cultivated acre in corn plus bring 20% more into cultivation. The USDA estimates that it costs $2.53 per gallon to produce ethanol. It would not be competitive without the $1.05-$1.38 per gallon subsidy it receives. Basing the eventual success of ethanol on switchgrass is also risky given that a switchgrass industry does not exist yet.

Combining this with the fact that it takes 1.25 gallons of petroleum to produce 1 gallon of corn based ethanol (other grains are even worse) makes corn ethanol an energy and environmental non starter. Making ethanol out of sugar cane is economically viable and a net energy winner and Brazil has a thriving sugar based ethanol market. However, given import restrictions on sugar and ethanol, we can't import sugar based ethanol into the U.S.

Right now, I don't see ethanol being the energy savior that the President hopes for and farmers crave. If it wasn't for the subsidies, ethanol in the U.S. wouldn't even exist in any significant quantities. The subsidies and associated increased demand for corn are also causing some unintended consequences.
http://cafehayek.typepad.com/hayek/
Go down to January 19 and read about the price of tortillas in Mexico. Although I do benefit some from high corn prices, I predict that eventually the ethanol bubble will burst.

1 comment:

Ashley said...

Who cares if it bursts eventually? I just want to profit from the short term increase in the price of corn. :)