Saturday, January 27, 2007

Government Should Stay Out of Energy Biz

I think the Wall Street Journal aptly notes that the President's proposal to lessen us from the dependency of foreign sources of petroleum by reducing our consumption by 20% in ten years is bound to be an enormous boondoggle or end in failure as long as the federal government continues to imposing things from the top down like raising CAFE standards on cars and its promoting the adoption of alternative fuels via subsidies rather than letting the free market and the people decide. Probably the most costly of these top down ventures is the current love for ethanol in D.C. In fact, here's what the WSJ has to say about President Bush's tauting of ethanol in his energy proposal:
Ostensibly, the great virtue of ethanol is that it represents a "sustainable," environmentally friendly source of energy--a source that is literally homegrown rather than imported from such unstable places as Nigeria or Iran.

That's one reason why, as Jerry Taylor and Peter Van Doren note in the Milken Institute Review, federal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there's another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it--despite recent high oil prices.

That's also why the percentage of the U.S. corn crop devoted to ethanol has risen to 20% from 3% in just five years, or about 8.6 million acres of farmland. Reaching the President's target of 35 billion gallons of renewable and alternative fuels by 2017 would, at present corn yields, require the entire U.S. corn harvest.

No wonder, then, that the price of corn rose nearly 80% in 2006 alone. Corn growers and their Congressmen love this, and naturally they are planting as much as they can. Look for a cornfield in your neighborhood soon. Yet for those of us who like our corn flakes in the morning, the higher price isn't such good news. It's even worse for cattle, poultry and hog farmers trying to adjust to suddenly exorbitant prices for feed corn--to pick just one industry example. The price of corn is making America's meat-packing industries, which are major exporters, less competitive.

In Mexico, the price of corn tortillas--the dietary staple of the country's poorest--has risen by about 30% in recent months, leading to widespread protests and price controls. In China, the government has put a halt to ethanol-plant construction for the threat it poses to the country's food security. Thus is a Beltway fad translated into Third World woes.

As for the environmental impact, well, where do we begin? As an oxygenate, ethanol increases the level of nitrous oxides in the atmosphere and thus causes smog. The scientific literature is also divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol's net energy output is a marginal improvement of only 1.3 to one. For purposes of comparison, energy outputs from gasoline exceed inputs by an estimated 10 to one.

And because corn-based ethanol is less efficient than ordinary gasoline, using it to fuel cars means you need more gas to drive the same number of miles. This is not exactly a route to "independence" from Mideast, Venezuelan or any other tainted source of oil. Ethanol also cannot be shipped using existing pipelines (being alcohol, it eats the seals), so it must be trucked or sent by barge or train to its thousand-and-one destinations, at least until separate pipelines are built.

Time and time again, this nation has always discovered that while the government is great at passing laws(Some not as good as others), collecting taxes, and fighting wars, they fail miserably at creating innovative technologies or products that the American people are willing to purchase(That they can afford) or use. So instead of offering up subsidies and placing onerous standards on industries that have already taken turns towards fuel efficiency due to market forces-see Toyota, Honda and more and more of the Big Three, the government should reduce the tons of regulations and taxes that they have on these industries and thus allow Adam Smith's famous "animal spirits" to take flight and bring about cheaper and more efficient products that free us a good bit from foreign sources of oil. Even more, this nation would also find it in its best short-run interests it the government made it much easier for our domestic industries to drill, pump and refine our own domestic sources of petroleum. All in all, the solution to our energy problems are not found in the wood paneled offices of D.C. politicians and bureaucrats but in the board rooms and R&D labs of the private industries of America.

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