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Corn and oil don’t make a solution

Chris Farrell Nov 1, 2007

Corn and oil don’t make a solution

Chris Farrell Nov 1, 2007


Scott Jagow: So, oil’s at $96 a barrel this morning. Got me wondering what’s happening to the price of ethanol, the corn-based biofuel. The government is forcing refineries to mix ethanol with their gasoline to reduce our dependence on oil. It’s a controversial policy for a number of reasons.

Our economics correspondent, Chris Farrell, joins us now. Chris, first of all, what is the price of ethanol doing?

Chris Farrell: Well, the price of ethanol has been climbing. It’s around $1.79, $1.80 a gallon. And just to put that in context, ethanol is trading about 54 cents below gasoline. So when distributors mix gasoline and ethanol, they’re gonna make a profit of around a little over a buck a gallon — increasing incentive for distributors to do a little blending, a little mixing, in order to fatten their profit margins.

Jagow: Well, there is a government mandate, that’s one incentive to do that.

Farrell: That’s a big incentive!

Jagow: But I would imagine that now that the price of oil has gotten to where it is that there’s a price incentive as well.

Farrell: Well, there is a price incentive, and there’s no doubt about that. And by the way: None of this changes the fact that our ethanol policy is — simply put — nuts.

Jagow: All right, let’s hear it: Why is our ethanol policy a bad idea?

Farrell: Ugh, there’s so many reasons. First of all, you know, let’s just use a cliche — but you know, sometimes cliches, there’s a little bit of truth in them. The government should not be picking winners. We have the price of oil getting close to $100 a barrel. It’s an enormous incentive for technology mavens in Silicon Valley, for all kinds of people around the world, to come up with alternative energy, alternative fuels. But what is the government doing? It’s saying hey, we think corn-based ethanol is the way to go. So, what we’re gonna do is give a $7-$8 billion subsidy a year. And by the way, now there is this cheap ethanol, now it’s from Brazil. OK, so we’re gonna put high tariffs up, and prevent Brazil and other foreign producers from competing with our farmers and producers.

Jagow: All right, that’s a fair argument, I can buy your argument here. But just to play devil’s advocate, ethanol seems to be a viable alternative. So why can’t we do this for the time being until we come up with something better?

Farrell: Well, I would agree with you. I mean right now, the fact that we have ethanol and we can blend in the gasoline does give us a little bit of relief on the price front, there’s absolutely no question. But it’s a fairly expensive relief on the price front if you start adding in the subsidies. That’s why we’re seeing higher prices of food. Food probably will grow, in real terms in the United States this year, by about 5 percent — which actually is a pretty big increase for food prices in the United States. And a major impetus behind that is corn and ethanol.

Jagow: Yeah, that’s a true catch-22 right there.

Farrell: Exactly.

Jagow: All right, Chris Farrell, our economics correspondent. Thanks.

Farrell: Thanks a lot.

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