Tuesday, January 29, 2008

Rampant Use of Ethanol Pushing Food Prices Upwards

Maybe. First saw this on the TV this morning and the reporter didn't sound too sure about it, though. Another great example of the law of unintended consequences.


Zachary Piso said...

Well, I think this theory is wrong...

First, it's difficult to attribute this increase in price to a decrease in supply. Most prices "at the vine" are set by government regulation, such as corn being based almost entirely on government subsidies. In my opinion, any increase in prices is better explained by the current recession, the resultant inflation, or rising prices of gas pushing up transportation costs for the retailers. Ironically, the last of these means dependent on actual petroleum is increasing the price, as opposed to introducing ethanol into the supply curve.

But that's not my point of stasis in this argument. Moreso, I think we are mislabeling the situation as "unintended". Hopefully we are all aware that the energy ratio of producing ethanol is 1:1. My bet is politicians do also! So, introducing ethanol as an alternative fuel, as a way to decrease petroleum dependence, makes no sense whatsoever. Instead, ethanol is advocated by bread basket congressmen, who are hoping to increase the pockets of their contingency. So, what is the intended consequence? Higher food prices.

But as I said before, I doubt the farmers see any of it. The price floor is likely still above the equilibrium price, and so the farmers are just seeing the subsidized price. Blame the grocers.

alexandros ferruccio said...

There's a high demand for corn in order to support both the food market and to be used in the expanding ethanol market, and what happens? Yes, the price of food goes up, and the corrective mechanism is that people start trying to fill the demand. Unfortunately, in this case the price correction actually negatively impacts the whole point of using biofuels. You see, internationally people start clearing forests and grasslands for additional food crops to compensate for US conversion of food crops to biofuel crops, and the way they do that is by burning them. Apparently it releases a tremendous amount of carbon into the air, enough that the biofuel produced from the converted crops won't begin to offset the carbon cost for upwards of several hundred years in some cases. So, extensive use of corn-based biofuels actually increases carbon emissions. The LA Times had a great article on it, actually, based on two studies from Science. There are possible alternatives to corn-based biofuels, but it all requires more research and development, and I can't see why there would be a lot of investment in it if we think we've already hit on the answer, and if as Zachary says it's pork for the politicians.

scott abbate said...

If the country's current energy path - including the ramp up of ethanol production as discussed in this blog - doesn't excite anyone, what is a better answer? Which candidate for president has the best approach to energy related issues? Which candidate's approach makes the best sense economically?

After a quick review of the candidates' postions, there are some differences. Hillary wants to focus on reducing greenhouse emissions with penalties on producers called a "cap and trade system". She will also outlaw incandescent bulbs.

Obama is also into cap and trade but makes it clear that it's a punishment on producers and an important new source of revenue for the federal government. He plans to place a big bet on biofuels. He also is going to encourage us to each plant trees.

McCain's tougher to figure out. He says he really likes the outdoors. He is the only one of the 3 candidates who links energy security and national security. Terrorists will continue to try to disrupt the oil supply and the oil supply exists in an unstable and unsympathetic part of the world. No mention of cap and trade.

scott abbate said...

Warren Buffett was on CNBC earlier this week and he agreed that ethanol isn't a particularly green alternative. He cited the amount of energy that it takes to produce a gallon of ethanol, and I think he also talked about the amount of greenhouse gas emitted in the production process.

Compared with the totality of knowledge which is continually utilized in the evolution of a dynamic civilization, the difference between the knowledge that the wisest and that which the most ignorant individual can deliberately employ is comparatively insignificant. ~Fredrich Hayek in The Constitution of Liberty