Ethanol Hurts Consumers in Many Ways

Politicians’ infatuation with ethanol has led federal and state governments to rip off taxpayers for decades, but now consumers are suffering the ill effects of government’s love for the grain-based fuel. Federal ethanol subsidies are driving up prices on food, fuel and land. Nonetheless, Congress is considering increasing the renewable fuel mandate that is driving this boom in demand for ethanol and the price of consumer staples [see “Legislative Lowdown,” page 10].

The subsidies and government favors for ethanol are plentiful and varied. First, ethanol blenders—gas stations or gasoline suppliers — get a 51-cent federal tax credit for every gallon of ethanol they blend. This targeted tax credit makes ethanol competitive with gasoline, by shifting a greater portion of the tax burden to everyone else.

Congress also keeps out foreign competition with a 54-cent tariff on imported ethanol. Jimmy Carter in 1980 courted the farm-state vote by rushing through $340 million in subsidized loans to build ethanol plants. In 1987, Ronald Reagan’s Department of Agriculture gave $70 million in corn to ethanol producers. Finally, the 2005 energy bill included a renewable-fuels mandate that forces gas companies, basically, to buy ethanol.
On top of these federal subsidies is a smattering of state or local subsidies to ethanol producers. The Minnesota government, for example, pays ethanol makers 20 cents for each gallon produced, up to $3 million per year. State governments also fund the construction of ethanol plants and gas stations.

Despite all of these subsidies — and in part because of the state and federal mandates — ethanol policies appear to have a net effect of driving up prices for all sorts of products that Americans need for their every day lives.

Obviously, ethanol policies have driven up the price of corn by creating immense demand for the crop, the most common source of ethanol in the United States. On U.S. commodity markets, corn futures — which typically trade between $2 and $2.50 per bushel — traded as high as $4.25 per bushel last week. More expensive corn drives up prices for consumers, with the most visible result being the tortilla riots in Mexico City in February where tens of thousands of people protested the high prices of tortillas — a staple of the Mexican diet.

The consumer’s pain is not necessarily the farmer’s gain. Some of the added cost goes to seeds. The biotech company Monsanto may be the biggest benefactor, as it has increased the price it charges farmers for corn seed by 66% and seen its profits and stock prices soar as a result, according to a June 18 article in Forbes.

And farmers who buy corn instead of just selling it also can suffer. Corn has traditionally been the best source of cattle feed, so rising corn prices apply upward pressure on prices for both beef and dairy products. Beef prices are up 3% to 9% according to the U.S. Department of Agriculture’s “Livestock, Dairy, & Poultry Outlook.”

Even your Coca-Cola could become more expensive. Because of U.S. import quotas that keep out most foreign sugar and keep U.S. sugar prices high, most soft drinks and many sweet foods here are made with high-fructose corn syrup. Rising corn prices drive up corn syrup prices, which will drive up the price of soda and sweet foods.

Most perversely, perhaps, ethanol policy has contributed to higher gasoline prices. From early April to early May, the average price of a gallon of gasoline rose 30 cents — at the same time that the federal ethanol mandate went into effect.  A shortage of ethanol drove up the price of the alternative fuel.

Also, because ethanol is one-third less powerful or efficient than gasoline (you go 50% further on a gallon of gasoline than on a gallon of ethanol), a blend containing 10% ethanol needs to be 3.4% cheaper than straight gasoline in order to save a driver money. That means that a gallon of fuel containing 10% ethanol and 90% gasoline costing $2.90 cents gets you fewer miles per dollar than a $3 gallon of regular gasoline.

Perhaps the most amazing part of the ethanol problem is that ethanol is an inherently costly fuel to make, even without the artificial demand driven by government mandates. To make ethanol, a farmer needs to plant corn, raise it, water it, fertilize it and harvest it. Then it must be ground and soaked, and then distilled into pure grain alcohol. This entire process — especially the distillation and fertilization — is very energy-intensive. Scientists Tad Patzek of Berkeley and David Pimentel of Cornell argue that the process of making ethanol and transporting it (which must be transported by truck since it cannot be shipped in pipelines like gasoline because it easily absorbs impurities) uses more energy than the end product yields.