Consumers lose; agriculture, government win with ethanol bill

It’s so typical: when governmental elites in Louisiana proclaim the state is or is poised to become a “leader,” almost always that’s not because of people’s free choices in some area of activity, but because of state fiat that usually proves to be counterproductive and leaves the state worse off than before.

That’s the way HB 685 seems to be headed, ready for the signature of Gov. Kathleen Blanco with her expressed intent to provide it. The bill would require that once state refiners produce at least 50 million gallons of ethanol or 10 million gallons of biodiesel, henceforth the amount of ethanol produced would equal at least 2 percent of the fuel sold in the state.

The problem is, this is a sure ticket to artificially higher prices at the pump for consumers. Presently, just the ethanol production component costs roughly $3 a gallon to make. This is why where it’s done, chiefly in the midwest because of federal air pollution requirements that also force the use of expensive additive MBTE to gasoline, the federal government subsidizes the process anywhere from 70 to 90 cents a gallon. Further, it will create chaos in the supply chain and force some providers and middlemen to take heavy losses in creating the infrastructure to deliver the product.

Proponents have attempted to make four facile arguments to justify the bill’s requirements. First, some have said it will be years before the trigger implements, leaving plenty of time to gear up for manufacture and distribution. But as state Sen. Walter Boasso, who tried to amend the bill in its Senate committee hearing to change the implementation after the pulling the trigger from six to 18 months, argued, with such a low threshold (just over 800,000 barrels at current rates), just a few test runs at refiners could hit the threshold. This is why opponents say by this time next year the bill already would be mandating the mixing of ethanol and gas.

Second, supporters claim lower prices will result. That’s hard to square with the realities of production costs, noting that the federal subsidization available in Louisiana is just 51 cents per gallon – due to expire next year in any event. And it’s hard to believe somebody who was a college professor, the bill’s House sponsor Rep. Francis Thompson, would make such a retarded argument to try to defuse this claim – comparing the previous day’s gas prices in the Midwest to around Louisiana.

Thompson’s legislative history shows he has a hard time understanding what a free marketplace is or knows anything about economics in general, and it clearly shows with this remark. A number of factors go into gasoline pricing that makes such a comparison between apples and oranges, not the least of which are the federal air quality mandates in the corridor beginning in Milwaukee, heading south to Chicago, and then branching off. Because of the peculiarities of the special blends of gasoline required, given supply vagaries prices can fluctuate 30 cents or more within a single day (believe me, I lived it).

In fact, much of the most recent increases in gas prices in the restricted air-quality areas have come from increases in ethanol, not petroleum, prices. The simple fact is (like most “environmental” measures like recycling) because the production of ethanol is so energy-intensive (a half gallon of petroleum required to make one gallon of ethanol) at this time under typical market conditions it will be more expensive than gasoline production.

This belies the third claim, that using ethanol will save substantially nonrenewable energy sources. At best, savings of oil use are just half because of the 2:1 production ratio. Technological advancements may change this, but that will be slowed if government mandates and subsidizes an inefficient process. Without these policies, the marketplace would provide greater incentives for invention of more efficient processes.

Finally, others argue introducing ethanol blends will reduce dependence on foreign energy sources. But, again, the marketplace can solve for this in a much more efficient fashion. Given the recent direction of energy prices (and forgetting for the moment that environmental restrictions on refiner expansion and new construction), this is making economical oil extraction from previously prohibitive sources, such as offshore or in the mountain west of the U.S. The major problem there is start-up costs – a tremendous capital investment that will occur only with a period of sustained high prices. Once the revenues from this kind of extraction are adequate to pay off the initial fixed costs, subsequent supply will drive world prices down – and increase the amount of oil from domestic sources.

The real impact of this bill will be to suck needlessly money out of consumers (one estimate being 67 cents a gallon’s worth) and transfer it to a small coterie of agricultural interests and the state itself, because of lower gas mileage per gallon with ethanol blends which will increase the amount of gas sold thus sales and use taxes collected. If a majority of the Legislature really cared about high gas prices and wanted to do something effective, it would reduce or eliminate its tax on gasoline, not run this confidence game on Louisianans.