Ethanol cure worse than oil disease

Today's Wall St. Journal reports that markets are starting to doubt our country's ethanol subsidies:

A recent study by the Organization for Economic Cooperation and Development concluded that biofuels "offer a cure [for oil dependence] that is worse than the disease." A National Academy of Sciences study said corn-based ethanol could strain water supplies. The American Lung Association expressed concern about a form of air pollution from burning ethanol in gasoline. Political cartoonists have taken to skewering the fuel for raising the price of food to the world's poor.

Hopefully, this will cause Congress to re-think our ethanol policies, including our $0.54 tarriff on imported ethanol, which the New Yorker called "absurd even by Washington standards."

Because of the ethanol tariffs, we’re imposing taxes on fuel from countries that are friendly to the U.S., but no tax at all on fuel from countries that are among our most vehement opponents. Congressmen justify the barriers to foreign ethanol with talk of “energy security.” But how is the U.S. more secure when it has to import oil from Venezuela rather than ethanol from Brazil? These tariffs are bad economic policy, bad energy policy, and bad foreign policy. Talk about your Domino effect.

But with the presidential primary season underway, this is unlikely to happen (Fortune),

Iowa, home to the first-in-the-nation presidential caucus, is the biggest corn-growing state in the country, and in Iowa ethanol isn't just another campaign issue. It's the cash cow, the golden goose and the fountain of economic youth all wrapped up in one.

Stossel takes on the ethanol myth:

oops

Vice President Gore now thinks corn ethanol subsidies were a mistake:

"First generation ethanol I think was a mistake. The energy conversion ratios are at best very small. ...

He explained his own support for the original programme on his presidential ambitions.

"One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president."

If he had only read this blog.  Now can Senator Gore get President Obama to give up his addiction to ethanol?

---------------POST FROM TWO YEARS AGO-----------------------------

Tuesday, February 26, 2008

A tale of two senators

In this blog, we have attacked ethanol subsidies for their perverse effects (they encourage energy consumption--not conservation--and are worse for the environment), yet we have them because supporting them is the easiest way to win the Iowa caucuses. This is the traditional route that Senator Obama took through the primaries. Senator McCain took the road less traveled. From David Brooks column, "The Real McCain"

In 2000, McCain ran for president and reiterated his longstanding opposition to ethanol subsidies. Though it crippled his chances in Iowa, he argued that ethanol was a wasteful giveaway. A recent study in the journal Science has shown that when you take all impacts into consideration, ethanol consumption increases greenhouse gas emissions compared with regular gasoline. Unlike, say, Barack Obama, McCain still opposes ethanol subsidies.

DISCLOSURE: I am supporting McCain

A tale of two senators

In this blog, we have attacked ethanol subsidies for their perverse effects (they encourage energy consumption--not conservation--and are worse for the environment), yet we have them because supporting them is the easiest way to win the Iowa caucuses. This is the traditional route that Senator Obama took through the primaries. Senator McCain took the road less traveled. From David Brooks column, "The Real McCain"

In 2000, McCain ran for president and reiterated his longstanding opposition to ethanol subsidies. Though it crippled his chances in Iowa, he argued that ethanol was a wasteful giveaway. A recent study in the journal Science has shown that when you take all impacts into consideration, ethanol consumption increases greenhouse gas emissions compared with regular gasoline. Unlike, say, Barack Obama, McCain still opposes ethanol subsidies.

DISCLOSURE: I am supporting McCain

Pawlenty vs. Romney: Round one is a knockout

Iowa leads the nation in the production of corn, a main input into the production of ethanol. It also holds the first presidential caucus, and is very influential. What do you think a politician would say to Iowans?

ROMNEY: “I support the subsidy of ethanol,” he told an Iowa voter. “I believe ethanol is an important part of our energy solution for this country.”

PAWLENTY: the federal government’s subsidies of ethanol were bad policy that we can no longer afford.

Search this blog for unslanted opnions on ethanol subsidies:

More bad news about ethanol

American Enterprise Institute and Brookings weigh in:

If annual production increases by three billion gallons in 2012 -- a plausibly modest number when the EPA made its own calculations -- we estimate that the costs will exceed the benefits by about $1 billion a year. If domestic production reaches the more "optimistic" Energy Department projection for that year, net economic costs would likely top $2 billion annually.

Our analysis is deliberately weighted to give ethanol the benefit of a doubt. For example, we assume that, on balance, ethanol from corn reduces greenhouse emissions, even though recent science suggests that substituting ethanol for gasoline might actually have a negative impact (it increases emissions of nitrous oxide, a more potent greenhouse gas than carbon dioxide). Ethanol distilled from grasses and waste materials has a better environmental payoff, but has much higher direct production costs.

Iowa still has the first primary caucus, but...

...the election is four years away. Is it time to end the ethanol subsidy?

WASHINGTON (AP) -- President Barack Obama's commitment to take on climate change and put science over politics is about to be tested as his administration faces a politically sensitive question about the widespread use of ethanol: Does it help or hurt the fight against global warming?...

Environmentalists, citing various studies and scientific papers, say the agency must factor in more than just the direct, heat-trapping pollution from ethanol and its production. They also point to "indirect" impacts on global warming from worldwide changes in land use, including climate-threatening deforestation, as land is cleared to plant corn or other ethanol crops.

Prizes (McCain, battery) vs. subsidies (Obama, ethanol)

Senator McCain has just proposed a prize for a new battery.

“I further propose we inspire the ingenuity and resolve of the American people by offering a $300 million prize for the development of a battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars,’’

while Senator Obama re-iterates his support for ethanol subsidies:

...when it comes to domestic ethanol, almost all of which is made from corn, [Obama] also has advisers and prominent supporters with close ties to the industry ... “ultimately helps our national security, because right now we’re sending billions of dollars to some of the most hostile nations on earth.”

The Volokh Conspiracy has a nice discussion of the merits of these two policies:

Direct government subsidies are a particularly poor way to encourage innovation. Perhaps it should be possible to direct research and development funds toward the most promising and valuable technological endeavors, but this rarely happens in practice. Government subsidies tend to be dispersed on political criteria, rewarding large, politically connected incumbent firms, rather than innovative upstarts. Failing industrial dinosaurs with lobbyists on the payroll are in much better position to snatch up government goodies than revolutionary thinkers toiling in garages or private labs.

DISCLAIMER: I am supporting McCain and my co-author is not.

Ethanol, Cattle, and Steak

Thomas Landstreet is bearish on cattle and bullish on steak.  The reason:  government ethanol mandates are under political pressure.  In 2007, the head of the EPA announced a freeze on the ethanol mandate, and corn prices fell from $8 to $4.

The thing that makes this an interesting application of supply and demand is the notorious 12-year cattle cycle.  The only way to increase supply in the long run is to hold female cows off the market, thus decreasing supply in the short run, and driving up price.  With corn prices falling, farmers saw increasing profit in cattle, so they initially held female cattle off the market, driving up price and profit.  But eventually, prices (of cattle) follow costs (of corn) down.  As cattle become less profitable, farmers reduce the size of their herds by slaughtering more heifers.  This further decreases price.

It looks as if Landstreet's bet has paid off:

Just yesterday, expecting sharply lower beef costs (COGS) to benefit earnings, I bought stock in Carrol’s Restaurant Group (TAST) and it’s up 12% today. The same thing happened to Restaurant Brands International (QSR), owner of Burger King and Jack in the Box (JACK). Restaurant earnings continue this week with, Fogo de Chao reporting after the close today, Wendy’s (WEN) tomorrow morning and Shake Shak (SHAK) reporting Wednesday after the close.

And what can we expect in the future?

I expect cattle futures to suffer another leg down while next earnings season will be another good one for protein heavy restaurant stocks.

Economist looks at John McCain

The Economist thinks McCain is worth a second look.

[McCain] has also been right about some big issues. He was the first senior Republican to criticise George Bush for invading Iraq with too few troops, and the first to call for Donald Rumsfeld's sacking. He is one of the few Republicans to propose sensible policies on immigration and global warming.

I like that McCain is not campaigning in Iowa due to its absurd ethanol addiction (see Ethanol cure worse than oil disease and More bad news about ethanol)

DISCLAIMER: I am endorsing McCain for President.

Biofuel Follies

Latest column from George Will:

The environmental argument for ethanol and other biofuels is... refuted by the need to mandate and subsidize the fuels. The argument that biofuels are important for reducing our energy dependence on unreliable or dangerous Middle Eastern nations (the two largest sources of U.S. oil imports are turbulent Canada and militant Mexico) is mocked by the 54-cents-a-gallon tariff penalizing Brazilian ethanol. The theory behind that tariff is as old as American history. It is that "infant industries"—in this case, the ethanol industry that the government has ordered into existence—require protection. But protection permanently infantilizes industries.

More ethanol insanity

Even the lefties realize it

Oxfam's biofuel policy adviser Rob Bailey, criticised rich countries for using subsidies and tax breaks to encourage the use of food crops for alternative sources of energy like ethanol.

"If the fuel value for a crop exceeds its food value, then it will be used for fuel instead," he said.

"Rich countries... are making climate change worse, not better, they are stealing crops and land away from food production, and they are destroying millions of livelihoods in the process."

Is the farm bubble about to burst?

Yes, according to Nashville's own Tom Landstreet:

We’re at the beginning of a multi year retrenchment (collapse in prices) in the agriculture sector. As my clients know, I think the entire agriculture commodity complex is in a historic bubble that was single handedly driven by the corn ethanol mandate, a policy that diverted 40% of the corn crop away from the food supply. Add in the nasty 2012 drought and you have an unprecedented bubble in the sector.

Remember that a bubble is a price movement not explainable by the ordinary forces of supply and demand.  I would explain the movement in prices in the graph above by noting that the original ethanol mandates in gasoline drove up corn prices, and then prices for farm land.  If these increasing prices cause buyers and sellers to form expectations that prices will continue to rise, these expectations can become self fulfilling if buyers accelerate purchases, and sellers delay sales, to take advantage of the expected price increases.

The so called "bubble" pops when prices deviate from their long run value, and enough market participants suspect that the prices are no longer supported by fundamentals of demand and supply.

Fighting Alcoholism with Double Markups

Ben Franklin said "Beer is proof that God loves us and wants us to be happy" (or maybe not). But we also know that there are dire consequences from imbibing too much. According to Tim Hefernan's article in Washington Monthly, these consequences are in evident in much of Europe.

England has a drinking problem. Since 1990, teenage alcohol consumption has doubled. Since World War II, alcohol intake for the population as a whole has doubled, with a third of that increase occurring since just 1995. The United Kingdom has very high rates of binge and heavy drinking, with the average Brit consuming the equivalent of nearly ten liters of pure ethanol per year.

To an economist, an obvious way to discourage over-indulgence (or any indulgence) is to raise the price. Indeed, he claims these adverse consequences are the result of higher US prices. Hefernan argues that legal restrictions preventing vertical integration to eliminate double markups make the US supply chain inefficient and, thus, raise prices. But even this might be changing.

And so, for eighty years, the kind of vertical integration seen in pre-Prohibition America has not existed in the U.S. But now, that’s beginning to change. The careful balance that has governed liquor laws in the U.S. since the repeal of Prohibition is under assault in ways few Americans are remotely aware of.

I wonder if this change could be used to determine what the cost, in terms of lost consumer surplus, is per case of alcoholism avoided.

Why do Brits drink more than Yanks?

England has a drinking problem:

Since 1990, teenage alcohol consumption has doubled. Since World War II, alcohol intake for the population as a whole has doubled, with a third of that increase occurring since just 1995. The United Kingdom has very high rates of binge and heavy drinking, with the average Brit consuming the equivalent of nearly ten liters of pure ethanol per year.

It’s apparent in their hospitals, where since the 1970s rates of cirrhosis and other liver diseases among the middle-aged have increased by eightfold for men and sevenfold for women. And it’s apparent in their streets, where the carousing, violent “lager lout” is as much a symbol of modern Britain as Adele, Andy Murray, and the London Eye.

The US, is in much better (?) shape:

A third of the country does not drink, and teenage drinking is at a historic low. The rate of alcohol use among seniors in high school has fallen 25 percentage points since 1980. Glassing is something that happens in movies, not at the corner bar. 

Part of the difference is the inefficient 3-tiered distribution system in the US, which is not only much less efficient at delivering beer to consumers, but also results in so-called "triple marginalization," each stage of the vertical supply chain takes its own markup, with the result that the final price is much higher than would be charged by a vertically integrated producer-distributor-retailer.

...most states, requires that the alcohol industry be organized according to the so-called three-tier system. The idea is that brewers and distillers, the first tier, have to distribute their product through independent wholesalers, the second tier. And wholesalers, in turn, have to sell only to retailers, the third tier, and not directly to the public. By deliberately hindering economies of scale and protecting middlemen in the booze business, America’s system of regulation was designed to be willfully inefficient, thereby making the cost of producing, distributing, and retailing alcohol higher than it would otherwise be.

Truckers are stockpiling dirty diesel engines

In 2007, new EPA regulations that mandate cleaner diesel engines took effect. The new engines reduce particle emissions by up to 98% over the previous generation and cut Nitrogen-oxide emissions in half.

But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.

Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,

Truckers seeking to beat the price increases made 2006 a record year for truck makers. More than 373,000 big-rig trucks were built in North America, says Ken Vieth of A.C.T. Research, which follows truck sales trends. The tally easily topped the previous record of 330,000 trucks in 1999.

But next year, Vieth predicts "a production drought," with sales falling by more than 40% to 220,000 as trucking firms hold off buying to see how the new clean-diesel trucks perform. ...

The cost to truckers goes beyond new big-rig purchases, according to Moskowitz. The new fuel costs 5 cents to 10 cents more per gallon to refine and may produce lower fuel mileage. The new engines weigh more, further cutting mileage. "Over the long run, their increased costs will be passed on to the shippers and ultimately, the consumers," Moskowitz says.

Both the 2006 boom, and the 2007 bust were predictable with simple supply-demand analysis, especially since a similar regulatory change occurred in 2002.

For policy makers, this points out yet another disadvantage of a command-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.

Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.

REPOST: Truckers are stockpiling dirty diesel engines

In 2007, new EPA regulations that mandate cleaner diesel enginestook effect. The new engines reduce particle emissions by up to 98% over the previous generation and cut Nitrogen-oxide emissions in half.

But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.

Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,

Truckers seeking to beat the price increases made 2006 a record year for truck makers. More than 373,000 big-rig trucks were built in North America, says Ken Vieth of A.C.T. Research, which follows truck sales trends. The tally easily topped the previous record of 330,000 trucks in 1999.

But next year, Vieth predicts "a production drought," with sales falling by more than 40% to 220,000 as trucking firms hold off buying to see how the new clean-diesel trucks perform. ...

The cost to truckers goes beyond new big-rig purchases, according to Moskowitz. The new fuel costs 5 cents to 10 cents more per gallon to refine and may produce lower fuel mileage. The new engines weigh more, further cutting mileage. "Over the long run, their increased costs will be passed on to the shippers and ultimately, the consumers," Moskowitz says.

Both the 2006 boom, and the 2007 bust were predictable with simple supply-demand analysis, especially since a similar regulatory change occurred in 2002.

For policy makers, this points out yet another disadvantage of a command-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.

Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.

Iowa primary futures prices: Democrats

from intrade.com. To win this primary, you have to sell out to the ethanol lobby.

	DEM.IOWA.OBAMA Barack Obama to Win	40.5
	DEM.IOWA.CLINTON Hillary Clinton to Win	35.1
	DEM.IOWA.EDWARDS John Edwards to Win	23.0

Do we care about conservation?

Not if it costs us anything:

Thousands of farmers are taking their fields out of the government’s biggest conservation program, which pays them not to cultivate. They are spurning guaranteed annual payments for a chance to cash in on the boom in wheat, soybeans, corn and other crops. Last fall, they took back as many acres as are in Rhode Island and Delaware combined.

Environmental and hunting groups are warning that years of progress could soon be lost, particularly with the native prairie in the Upper Midwest. But a broad coalition of baking, poultry, snack food, ethanol and livestock groups say bigger harvests are a more important priority than habitats for waterfowl and other wildlife. They want the government to ease restrictions on the preserved land, which would encourage many more farmers to think beyond conservation.

Innovation in sailboat racing driven by contest

This is such a cool video that I needed to find a link to managerial economics so I could post it.  Here it is:  a "prize" is a better way of encouraging innovation than subsidies.  See our earlier post, Prizes (McCain, battery) vs. subsidies (Obama, ethanol)

Iowa primary futures prices: Republicans

from intrade.com. Anyone who wins this primary has likely sold out to the ethanol lobby.

	REP.IOWA.HUCKABEE Mike Huckabee to Win	50.0
	REP.IOWA.ROMNEY Mitt Romney to Win	50.0
	REP.IOWA.THOMPSON(F) Fred Thompson to Win	1.6
	REP.IOWA.MCCAIN John McCain to Win	2.0
	REP.IOWA.GIULIANI Rudy Giuliani to Win	0.1