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Corn ethanol stumbles: Let it fall

The Wall Street Journal and The New York Times came to eerily similar conclusions over the past two days: that “the ethanol boom is running out of gas (WSJ)” as a “glut depresses price[s] (NYT)”. The dailies do a great job teasing out some the question of who might be left standing if a collapse ensues. I’m thinking more about what such a collapse could trigger as elections loom.

Whether these developments merit a surprised gasp, or a knowing nod depends on how closely you’ve been watching the ethanol frenzy unfold. Even 24 months ago, both industry insiders and their critics were pointing out that the billions of dollars and scores of new plants pouring into corn-ethanol were likely to overwhelm the nation’s capacity to distribute and consume ethanol in the near term.

And beyond such operational concerns, the litany of objects to corn ethanol has been growing longer and louder. On the environmental side, it starts with corn ethanol’s not-great environmental benefits and extends to its enormous thirst for water and tendency to increase poisonous runoff that’s deadly for downriver water life. Likewise, there’s growing frustration with Washington’s super-subsidization of corn-kernel fuel, including pre-existing price support programs for corn farmers, a 50c per gallon subsidy for finished ethanol, a growing raft of state and federal rules mandating ethanol be mixed into gas (which acts as a de facto subsidy), and not least a steep barrier to imports of much cheaper, environmentally more benign sugar-cane ethanol from Brazil (which, again, acts as a price support for US ethanol and also defies plenty of free trade doctrine).

As corn-based ethanol goes through these growing pains, watch out for calls in Congress to cushion the sector's fall. The federal subsidy was set up to help support investment. As ethanol prices fall below $1.50 per gallon, and with prices for raw material (including corn and natural gas to cook it down), distillers margins are disappearing quickly. So, despite all the favors already lavished on this space, election year politics could lead to further gifts. Imagine the confluence of farm state electoral peculiarities (where small populations elect tens of Senators) with lobbyist-rich agri-businesses stoking anxieties about the need for energy security, and more of what we've seen seems an easy reach.

Further subsidization on corn-ethanol would be bad news in many ways. The resulting kerfuffle among voters, irritated with rising gas prices intermixed with millionaire corn farmers, could lead to a gross backlash against biofuels. If nothing else, extra monies for corn-ethanol would co-opt attention from and muddy discussions on how best to support superior forms of renewable bio-energy, such as cellulosic ethanol (including from corn), bio-oils from algae and other engineered organisms, and the development of an all-electric fleet. As this unfolds, keep in mind corn-based ethanol isn't the long term answer. It's a stepping stone to much better options.

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