Political Liquor's Economic Hangover Just Beginning

Political Liquor's Economic Hangover Just Beginning
By Dr. Henry I. Miller : 11 Jul 2007



From pre-school to planning funerals, green is in. Very in. But green policies and decisions need to be based on more than a vague desire to save the planet. The principles of the natural sciences and economics must play an essential role -- a part of policy-making that often eludes politicians. The latest examples are the federal government's efforts to reduce the United States's dependence on imported oil (now more than 60 percent) by shifting a big share of the nation's largest crop, corn, to the production of ethanol for fueling automobiles.

Good goal, bad policy. In fact, in the short- and medium-term, ethanol can do little to reduce the vast amount of oil that is imported, and the ethanol policy will have widespread and profound ripple effects on other commodity markets. Corn farmers and ethanol refiners are ecstatic about the ethanol boom, of course, and are enjoying the windfall of artificially enhanced demand. But it is already proving to be an expensive and dangerous experiment for the rest of us.

The U.S. Senate is debating new legislation that would further expand corn ethanol production. A 2005 law already mandates production of 7.5 billion gallons by 2012, about 5 percent of the projected gasoline use at that time. These biofuel goals are propped up by a generous federal subsidy -- via tax credits -- of 51 cents a gallon for blending ethanol into gasoline, and a tariff of 54 cents a gallon on most imported ethanol, to keep out cheap imports from Brazil. This latest bill is a prime example of the government's throwing good money after a bad idea, of ignoring science and economics in favor of politics, and of disdain for free markets.

President Bush has set a target of replacing 15 percent of domestic gasoline use with biofuels (ethanol and biodiesel) over the next 10 years, which would require almost a five-fold increase in mandatory biofuel use to about 35 billion gallons. With current technology, almost all of this biofuel would have to come from corn because there is no other feasible, proven alternative. However, it is unlikely that American farmers will be able to meet such demands: Achieving the 15 percent goal would require the entire current U.S. corn crop, which represents a whopping 40 percent of the world's corn supply. This would do more than create mere market distortions; the irresistible pressure to divert corn from food to fuel would create unprecedented turmoil.

Thus, it is no surprise that the price of corn has doubled in the past year — from $2 to $4 per bushel. We are already seeing upward pressure on food prices as the demand for ethanol boosts the demand for corn: Nationally, food prices were up 3.9 percent in April, compared to the same month a year earlier. Until the recent ethanol boom, more than 60 percent of the annual U.S. corn harvest was fed domestically to cattle, hogs and chickens, or used in food or beverages. Thousands of food items contain corn or corn byproducts. A spokesman for one of California's largest cattle ranches and feedlots noted that since the end of 2005, the company has experienced a 36 percent increase in the cost of feed, "which translates to an additional expense of $101 per head raised." Reflecting these trends, the National Cattlemen's Beef Association has demanded an end both to government subsidies for ethanol and to the import tariff on foreign ethanol.

The poultry industry is also squawking. The National Chicken Council is demanding remedies from senators who represent the big southern poultry states, and the National Turkey Federation estimates that its feed costs have gone up nearly $600 million annually.

The law of unintended consequences strikes again.

These effects may be only a hint of things to come. Any sort of shock to corn yields, such as drought, unseasonably hot weather, pests or disease in the next few years could send food prices into the stratosphere. Even Gregory Page, the CEO of agribusiness giant Cargill, a major beneficiary of the ethanol boom, shares these fears, "We just have to be sure that the more-is-better mindset [regarding ethanol] doesn't get way out ahead of the capacity of the land to provide the fuel . . . What we would like to see is some thoughtfulness about what we will do if we have a weather calamity." Such concerns are more than theoretical: In 1970, a widespread outbreak of a fungus called southern corn leaf blight destroyed 15 percent of the U.S. corn crop, and in 1988, drought reduced U.S. corn yields by almost 30 percent.

Politicians like to say that ethanol is environmentally friendly, but these claims must be put into perspective. Although corn is a renewable resource, it has a far lower energy yield relative to the energy used to produce it -- what policy wonks call "net energy balance" -- than either biodiesel (such as soybean oil) or ethanol from many other plants.

Moreover, ethanol yields about 30 percent less energy per gallon than gasoline, so mileage per gallon in internal combustion engines drops off significantly. Finally, adding ethanol raises the price of blended fuel because it is more expensive to transport and handle. Lower-cost biomass ethanol — for example, from rice straw (a byproduct of harvesting rice) switchgrass, or other sources — would make far more economic sense.

Even in the most favorable of scenarios, large volumes of ethanol from biomass will not be commercially viable for many years, but we should not delay production unnecessarily by government policies that, by means of corn subsidies, discriminate in favor of corn-based ethanol. Government policies should stimulate innovation as broadly as possible, and let the marketplace determine winners and losers.

Recent issues of the journals Nature Biotechnology and Nature describe precisely the kinds of advances that should be permitted to compete with corn-derived ethanol on a level playing field. Researchers at the Samuel Roberts Noble Foundation in Oklahoma report in the former journal the genetic engineering of a new variety of alfalfa that contains less lignin, the substance that imparts mechanical strength to plant stems and woody tissue, than conventional alfalfa and that is, therefore, a better crop for ethanol production. Because the new variant is defective in biosynthesis of lignin, it is more susceptible to digestion by the enzymes used to convert plant material into the sugars from which ethanol is produced; some of the engineered varieties of alfalfa yield almost double the amount of sugar that is available from conventional alfalfa. This approach has dual advantages: It promises to reduce the costs and increase the yield of ethanol production from alfalfa, as well as to reduce the need for environmentally damaging acid in the biofuel refining process.

A research team at the University of Wisconsin described a catalytic process that converts the simple sugar fructose -- which can be obtained directly from biomass or derived from glucose, another simple sugar -- into 2,5-dimethylfuran. The advantage therein is that compared with ethanol, the only renewable liquid fuel currently produced in large quantities, 2,5-dimethylfuran has an energy density -- the amount of energy stored per unit mass -- 40 percent higher and is also less volatile; and because it is insoluble in water, it is easier to obtain in pure form.

American legislators and policymakers seem oblivious to the scientific and economic realities of ethanol production. Brazil and other major sugarcane-producing nations enjoy significant advantages over the U.S. in producing ethanol, including ample agricultural land, warm climates amenable to vast sugarcane plantations, and on-site distilleries that can process cane immediately after harvest. At current world prices for sugar and corn, Brazilian ethanol production would remain competitive even if oil prices were to drop below $30 per barrel, but U.S. corn-based ethanol plants would be losing money at forty-dollar oil, even with the subsidy. Thus, in the absence of cost-effective, domestically available sources for producing ethanol, rather than using corn it would make far more sense to import ethanol from Brazil and other countries that can produce it efficiently — and also to remove the 54 cents-per-gallon tariff on Brazilian ethanol imports.

Another important strategy would be to encourage a more prominent role for nuclear power, which consumes no fossil fuels and emits no greenhouse gases. Good news on that front is that with electricity demand projected to soar more than 40 percent by 2030 -- not including the potential demand from greater availability of plug-in hybrids and other forms of electric cars -- the Nuclear Regulatory Commission expects applications for as many as 11 new units this year, and for as many as 28 by the end of 2009.

Our politicians may be drunk with the prospect of corn-derived ethanol, but if we don't adopt policies based on science and sound economics, it is consumers around the world who will suffer from the hangover.

Henry I. Miller, a physician and fellow at Stanford University's Hoover Institution, was an FDA official from 1979 to 1994; his most recent book is "The Frankenfood Myth." Colin A. Carter is a professor of agricultural and resource economics at the University of California at Davis.