Proposed Ethanol Handout Is a Response to Two Other Disasters

October 17, 2018  ·  Michael Fumento  ·  Real Clear Markets

With a stroke of the pen, President Donald Trump has further expanded a program that is condemned by everyone, and has cost taxpayers billions. It’s called ethanol: A blend of gasoline and alcohol usually made from corn that receives billions of dollars in federal subsidies every year -- $106 billion from 1995-2016. It’s also been called “One of the longest-running rip-offs of the American taxpayers in this country’s history.” It was the subject of one of my first two magazine cover-pieces way back in 1987.

The White House has issued a directive changing the current Renewable Fuel Standard Mandate allowing a 15% blend to be sold all year, rather than only during the summer months in most of the country. Because standardization is much easier, that restriction has kept almost all ethanol blending at the 10% level allowed year-round. A full shift to E15 would mean essentially 50% more corn soaked up by ethanol and hence that much more in subsidy payments.

Ethanol supporters have pushed for this for years. So why are they getting it just now? (Assuming no successful lawsuit against the EPA to block it.)

U.S. corn farmers (as well as many other crop growers) have been devastated by the retaliation against Trump’s tariffs, including a whopping 25% corn levy imposed by China. This has made the GOP decidedly less popular in the Midwest with mid-term elections weeks away. Even before that U.S. farm income had fallen about 50 percent since 2013 and is forecast to decline 6.7 percent this year, or to the lowest level in nominal terms since 2006, according to USDA estimates.

So Trump is seeking to placate sufferers with massive bailouts. Indeed, in August the Agricultural Department announced it would make up to $12 billion in direct payments and purchases and was currently prepared to dole out half that. That’s about $85 per taxpayer.

But huge new direct transfer payments from the many to the few (there are about two million US corn farms), as opposed to transfer payments that have been around a long time and most people don’t even know about, raises eyebrows. Especially given that a major portion of this year’s increased spending went to agricultural programs, a 7% boost. As Ag Secretary Sonny Perdue himself put it in August, farmers would prefer “trade not aid.” But in lieu of that, we get hidden aid.

The original justification for the mandates and subsidies in the 1970s was the oil shocks caused by petroleum embargos from Arab countries angry over U.S. support for Israel. But now 1) The U.S. has excellent relations with those countries, and 2) The U.S. is now producing and exporting more petroleum than ever. Justification gone. The real threat to U.S. petroleum? China has slapped a 25% counter-tariff on imports of American petroleum products.

Yet that was always a poor excuse anyway. You see, while it’s true that all energy requires energy to produce, ethanol is especially bad in this regard. It requires massive inputs in terms of sowing the crop, producing and applying fertilizer, applying pesticides, harvesting, drying, and finally distilling. With petroleum you essentially just drill or frack and drill.

Now add that a gallon of ethanol has about two-thirds the energy content of a gallon of pure motor gasoline. Some researchers have claimed you actually put more energy into producing ethanol than you get back. It depends on a lot of variables. But even more optimistic estimates are that ethanol only produces about 60% more energy than production consumes. You have to do much better than that to make a profit; hence ethanol is always produced at a loss and hence the subsidies and mandates.

Meanwhile, it’s worth reminding readers that to subsidize something is to get more of it. Ethanol supports sent corn prices a lot higher than an elephant’s eye to a point where an amazing 40% of the total crop now goes into the product. Yes, almost half the corn in the country serves an artificially-created demand. So we’ve inadvertently overstimulated the market in tremendous fashion; now with other countries undercutting post-tariff corn prices there’s just no place to store the stuff.

Hence the “need” to soak up even more with ethanol. Forty percent of corn-raising land can only partly be switched to other, less profitable, crops. And some of those, like soybeans have also been slammed by counter-tariffs. It’s a tarrif-ic nightmare. Some farmers are going to have to foreclose without an expanded ethanol market; others take severe profit losses.

Which is sad, but it’s also something called “capitalism.” Products and companies and individuals fail all the time, but only those with super lobbying power get access to the big teats. And mind you, those farmers will still have their land to sell. If Robby the Robot takes your job tomorrow, what sellable work assets will you have?

As far as impact on the country as a whole, a 2016 analysis found “As a share of the total U.S. economy, the farm contribution was less than 1 percent and the lowest level since the series was first recorded in 2007.” For corn only, of course, the figure would be even smaller. Sure, it’s a vital industry but allowing those who cannot profit at it to fail would not harm the nation.

Meanwhile the petroleum companies, which have also been socked by counter-tariffs, aren’t too happy about their prime competitor getting yet more government aid. They have indirectly expressed this by noting that E15 is harmful to many cars on the road, especially older ones, not designed to handle the corrosive effects of ethanol. But so long as gas stations post signs and car drivers are careful and E15 doesn’t almost totally dominate the market, that shouldn’t be too disastrous. Then again, E15 may come to totally dominate the market. What’s wrong with the oil industry just saying the ethanol program has always robbed taxpayers and oil company shareholders?

Meanwhile, they’ve gotten strange bedfellows with environmentalists who note that levels of ground level ozone, one of the six major EPA pollutants, must rise with increased use of E15. Ethanol “bakes” in hot weather, creating ozone. Hence the EPA warm weather ban. Yet some studies have found that E15 also increases ozone emissions at colder temperatures. Ozone aside, a ranking of nine energy sources in relation to global climate found that E85 corn-based ethanol (E85) were ranked last of nine technologies with respect to climate, air pollution, land use, wildlife damage, and chemical waste.

As the facts work against their industry, ethanol lobbyists have struck back by claiming ethanol saves us money because it’s currently less expensive than pure gasoline. Sorry; no go. That’s because of the subsidies. Americans pay in income taxes for that lower price. Moreover, because ethanol contains less energy per gallon, E10 cuts your mileage and E15 cuts it even more.

Oh, and in case you were wondering, no the ethanol lobby won’t be satisfied with a move to only E15. They’re actually already pushing E30; and why not?

So first ethanol caused tremendously harmful market distortions. Then so did tariffs. And now we’re suffering a combination of the two. President Trump is placing a finger to cover this leak, and then a toe to cover the new leak and so on. And as the world has been learning since 1917, such economic micromanagement just doesn’t work. The only solution to this Gordian knot is to slash right through it. Eliminate the tariffs that caused the current crisis. And while we’re at it, eliminate both subsidies and mandates for ethanol.

Let’s leave the effort of never-ending fixes for fixes to other governments. Like, say, Venezuela.

Michael Fumento is an attorney, author, and journalist who has been writing on ethanol for over 30 years – and having absolutely no evident impact! He has no financial interest in any energy or agricultural field. (No pun intended.)