More Evidence That It's Time to Dump Ethanol

A severe drought is raising the price of corn, and proving Washington's energy subsidies foolish.

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Like many bad ideas, it seemed like a good one at first. Unfortunately, Congress went way overboard.

About 40 percent of the corn produced in America is used to make ethanol, a gasoline additive that ends up in most Americans' gas tanks. When corn is cheap and plentiful, this is a marginally sensible idea. But when corn becomes scarce and prices rise—which is happening now, as a withering drought wrecks much of the nation's corn crop—ethanol production competes directly with the use of corn for food, causing a needless rise in food prices.

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Some experts are now calling for Washington to temporarily issue waivers from the law so that more corn can be diverted away from ethanol production and help stabilize rising food prices—which would help consumers not just in the United States, but in poorer countries as well. The problem is that subsidies doled out by Washington for years have distorted the farm economy and left many growers overdependent on a fuel that might not exist without Washington's help. So changing policies now would harm some farmers who, rightly or not, have received implicit promises from Washington to protect their livelihood.

Though it's less efficient than gasoline, corn-based ethanol began to catch on as a home-grown motor fuel during the oil shocks of the 1970s, since it seemed like a way to reduce U.S. dependence on oil from the volatile Middle East. Then it gained allure in the 1990s as a renewable fuel that helps reduce emissions. In the early 2000s, President George W. Bush approved new measures that raised the requirements for the use of renewable fuels—mainly, corn ethanol. All along, Congress, pushed by farm-state legislators, has cranked up ethanol subsidies, which now stand at about $6 billion per year.

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This has happened even though ethanol is not very appealing to consumers. The fuel economy it generates is about 25 percent lower than it is for gasoline, which is why the use of E85 (which is 85 percent ethanol and 15 percent gasoline) never really caught on, even though the Detroit automakers have produced millions of "flex-fuel" vehicles with minor modifications that allow them to run on any blend of ethanol and gas. Ethanol costs about 30 cents less per gallon than gasoline, but when you factor in the poorer mileage, the overall cost of running on E85 would be slightly higher for most drivers. So there's no natural incentive to choose it over gasoline.

Ethanol is still mixed with much of the gasoline sold at gas stations, in a blend known as E10 (10 percent ethanol) which most cars can burn without any modifications. This serves two purposes: It oxygenates the gas, which reduces harmful emissions and smog, and it pumps up sales for blenders and corn growers who benefit from the subsidies arranged by their buddies in Congress. Many drivers don't know it, but one reason they tend to get lower gas mileage than the government's own estimates is the presence of ethanol, which government mileage tests don't account for.

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Even Congress, however, has begun to acknowledge that government support for ethanol needs to end, as federal budget cutters raise the pressure to axe every wasteful dollar. Last year, the Senate voted to end the 45-cent-per-gallon federal subsidy on ethanol. The bill didn't make it out of Congress, but that was before this year's drought, which is raising the pressure to stop distorting the market for corn. Still, that could take a while, because subsidies for ethanol have helped it grow into a $42 billion industry that employs about 90,000 Americans, and Congress may think twice about jeopardizing anybody's job in such a weak economy.

Meanwhile, other developments are helping achieve the energy independence and lower emissions that were the original purposes of ethanol—with no unintended consequences for food prices or anything else so important. New technology has led to a sharp upturn in U.S. oil production, for one thing, making the nation more self-reliant. Hybrids, initially developed in Japan, have become mainstream, boosting mileage and therefore reducing the amount of gas burned, along with harmful emissions.

Tough new requirements for fuel economy have helped too, which suggests a better way to regulate energy than to subsidize one particular form of it. Presidents Bush and Obama both sharply increased MPG requirements, with the net result being average fuel economy in 2025 that will be roughly double what it is today. That has forced automakers to pursue every type of innovation they can think of to make cars more efficient, from different types of fuel to advanced under-the-hood technology. It's working.

In that case, Washington told automakers what they needed to do, but it didn't tell them how to do it. The result will assuredly be much better than if policymakers had ordered up a fleet of vehicles powered by electricity or hydrogen or natural gas. Technology and the economy change too fast these days for Washington to react in real-time. It's far better to let the markets react to changing conditions—and even to crises—than to lock in the use of any given resource indefinitely. The misallocation of corn has proven that.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.