Rising food and fuel prices have prompted many to reconsider America’s bipartisan campaign to ram corn ethanol down the market’s throat via ham-handed consumption orders and subsidies galore.  This is all to the good; little thought has been given to the unintended consequences of a policy explicitly designed to raise corn prices for farmers and to mandate a fuel so expensive that refiners would not willingly use it in large quantities absent government intervention.

The suspicion that the corn ethanol program has increased food prices is pretty well founded.  In 2005, when the ethanol jihad began in earnest, corn was selling for a bit less than $2.00 a bushel.  Today, it’s selling for almost $6.00, and the impact of that price spiral ripples through a number of commodity and food markets.  Endogenous increases in demand have of course played a role in that price hike thanks to global economic growth, and high production costs stemming from rising energy costs have likewise been a factor.  But to maintain that the massive increase in the demand for corn to meet fuel needs has been a non-factor is risible.  Cornell economists Harry de Gorter and David Just calculate that elimination of the federal corn ethanol program would reduce corn prices by $1.88 a bushel.

The belief that ethanol subsidies reduce fuel prices is problematic.  After adjusting for the differential in energy content, E100 as selling in wholesale spot markets at $4.07 per gallon of gasoline equivalent as of May 22.  Conventional 87 Octane, by comparison, was selling at $3.08 per gallon on those same markets.  How does mandating more expensive ethanol reduce fuel prices?

The story told by the ethanol lobby is that the ethanol program reduces the demand for – and thus, the price of – oil, and given the steep demand elasticities that characterize petroleum markets, the oil price reduction reductions that follow more than offset the increased cost of ethanol.  There is some truth to this.  The aforementioned de Gorter and Just (who have easily performed the most concrete analysis on this matter) calculate that eliminating the ethanol program would likely raise fuel prices by 15 cents per gallon, but that’s a static analysis that assumes oil producers do not adjust their behavior to accommodate ethanol’s contribution to transportation fuel markets.  There is good circumstantial evidence, however, to suggest that ethanol mandates have led some oil producers to cut back on oil production and investments in future production.  If so, the oil price declines that follow from the ethanol program are being offset by declines in oil supply (and corresponding oil price increases) that likewise follow from the ethanol program.

Regardless, the observation that the ethanol program may reduce gasoline prices by a modest amount is not a good argument for the program.  After all, farm programs lower the price of corn, wheat, and soybeans to consumers but do far more harm than good by gouging taxpayers and creating tremendous inefficiencies in agricultural markets.  The observed retail price “savings” are swamped by the unobserved wealth losses.

The widespread belief that ethanol is a more reliable source of energy that reduces price volatility in fuel markets is assertion masquerading as analysis.  An analysis of U.S. corn production data from 1960-2005 finds that corn yields varied almost twice as much as did oil imports over that period.  Displacing gasoline with ethanol thus exchanges geopolitical risk with yield risk and history suggests that the latter is about twice as great as the former.  

            Buying ethanol rather than oil will of course keep more money in the United States than might otherwise have been the case, which leads many to suggest that ethanol likewise keeps money out of the hands of international “bad actors” like Iran and Islamic terrorists.  That may be, but there is no evidence at all to suggest that this makes much difference.  A regression analysis of cross-border Islamic terrorism and oil prices (a good indicator of oil profits) finds absolutely no correlation between the two.  That’s probably because most analysts believe that the limiting factor to terrorism isn’t money; it is manpower and technical expertise.  Likewise, there is no obvious correlation between oil prices (and profits) and “bad behavior” from oil producing regimes that we don’t like.

            Finally, the environmental costs associated with ethanol production greatly outweigh the benefits.   And that’s the case whether we’re talking about conventional air pollution or greenhouse gas emissions – to say nothing about ethanol’s impact on groundwater resources, or ecosystem health.

While it’s true that ethanol reduces carbon monoxide emissions, there are no areas in the United States today that violate federal air quality standards for carbon monoxide.  When evaporative emissions

are taken into account, however, ethanol increases emissions of hydrocarbons, nitrogen oxides, non-methane organic compounds, and air toxic emissions (particularly acetaldehyde, formaldehyde, ethylene, and methanol) relative to conventional gasoline.  Those emissions contribute significantly to low level ozone (summer time urban smog). 

Scientists are now almost uniformly of the opinion that the total greenhouse gas contribution of corn ethanol throughout its fuel cycle is far greater than the greenhouse gas contribution of gasoline through the same.  There are two reasons for there shift of opinion on this matter.  First, earlier studies that reported modest greenhouse gas emission reductions from ethanol were found to underestimate the nitrous oxide emissions produced by biofuels.  Nitrous oxide is a potent greenhouse gas, and Nobel Prize-winning scientist Paul Crutzen and others report that these recently discovered nitrous oxide emissions offset 90-150 percent of the relative cooling associated with the C0₂ emission reductions from corn ethanol consumption.  Second, previous studies on greenhouse gas emissions from ethanol had assumed that growing corn and other biofuels removes carbon dioxide from the atmosphere, an assumption that, once plugged into the models, served to offset the larger energy inputs associated with biofuel production vis-à-vis gasoline production.  Yet those studies ignored the carbon emissions that occur as farmers worldwide respond to higher crop prices and convert forest and grassland to new cropland to replace the grains diverted to biofuel production.

There is simply no reason for the federal government to rig the market to favor ethanol investments.  If ethanol has economic merit, no government support is necessary.  If it doesn’t, then no amount of government support will change that fact.  The alleged “social benefits” of ethanol are phantasms marshaled by supporters to keep the money flowing to corn growers and ethanol producers.  

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Jerry Taylor is a senior fellow at the Cato Institute in Washington, DC.