My Two Cents

Ethanol bubble?

Chris Farrell May 25, 2007

It has been a busy week, so I’m just catching up on some reading I had put aside. The Star Tribune last Sunday had a good story on ethanol: “Will ethanol’s flame last?”Researchers at Iowa State University see the ethanol boom going bust with increased supples, falling prices, and a lower return on investment. Kimberly Strassel of the Wall Street Journal editorial staff wrote a piece two days earlier on the growing backlash against ethanol.

Corn ethanol seemed unstoppable, but a remarkable thing happened on the road from Des Moines. Just as the smart people warned, the government’s decision to play energy market God and forcibly divert huge amounts of corn stocks into ethanol has played havoc with key sectors of the economy. Corn prices have nearly doubled, which means livestock owners can’t afford to feed their animals, and food and drink manufacturers are struggling to buy corn and corn syrup. Environmentalists are sour over new stresses on farmland; international aid groups are moaning that the U.S. is cutting back its charitable food giving, and many of these folks are taking out their anger on Congress.

The prospect of poor financial returns and a political backlash doesn’t bode well for ethanol. Instead of subsidies favoring one alternative energy source over another, let’s just raise the federal gas tax by a substantial margin.

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