True North

Interesting piece in today’s NY Times about the glut in the ethanol market. Of course, ethanol has been a rallying cry for Mac-Grove environmentalists, the DFL, and our own RINO governor, Tim Pawlenty, for several years. It’s hard to find a Midwest politician – Democrat or (pseudo) Republican alike –who hasn’t uttered the words “Saudi Arabia of the Midwest” at one point or another.

Ethanol, we were told, was going to end our “foreign dependence” on oil and make us all rich. In reality, if we planted corn on every arable acre in the U.S., the resulting ethanol would only replace 10% of the oil we use.

The bigger lesson here, of course, is that you can’t cheat the market. It always finds a way to exert Adam Smith’s invisible (and inevitable) hand. Just read the first few graphs of the Times story tell a different story:

Ethanol’s Boom Stalling as Glut Depresses Price
By CLIFFORD KRAUSS
Published: September 30, 2007
NEVADA, Iowa, Sept. 24 — The ethanol boom of recent years — which spurred a frenzy of distillery construction, record corn prices, rising food prices and hopes of a new future for rural America — may be fading.

Only last year, farmers here spoke of a biofuel gold rush, and they rejoiced as prices for ethanol and the corn used to produce it set records.

But companies and farm cooperatives have built so many distilleries so quickly that the ethanol market is suddenly plagued by a glut, in part because the means to distribute it have not kept pace. The average national ethanol price on the spot market has plunged 30 percent since May, with the decline escalating sharply in the last few weeks.

“The end of the ethanol boom is possibly in sight and may already be here,” said Neil E. Harl, an economics professor emeritus at Iowa State University who lectures on ethanol and is a consultant for producers. “This is a dangerous time for people who are making investments.”

Unfortunately, even though prices are down 30% on average ($2.42 a gallon on the East Coast and $1.77 in Iowa), there is no discussion whatsoever of a corresponding reduction in the government subsidies for ethanol. If you were hoping for that, lay down on the couch for 15 minutes. Your fever will pass.

The laugh-out-loud quote of the piece was this:

“We don’t know what, ultimately, the marketplace will price ethanol at,” said Rick Brehm, president and chief executive of Lincolnway Energy, a midsize distillery here. “It could go lower.”

If Mr. Brehm really thinks “the market” is pricing ethanol, he must have taken MacroEcon 101 at the U with C. Ford Runge.