Why It's Wrong to Agree with the Malthusians about Ethanol

There may well be hunger among the world’s poorest this year, but not because of the U.S. corn ethanol program. Rather, the threat comes from high oil prices, which at $100 per barrel will place a tax on the U.S. economy of $800 billion per year, and $3,200 billion on the world economy as a whole. This will raise the price of all goods and slow down the world economy, thereby throwing millions of people out of work and leaving them without income to buy food. According to a Merrill Lynch analysis, if not for the world’s ethanol programs (of which U.S. production represents about a third), global oil prices would be 15 percent higher than they are, thereby placing an additional $480 billion impost on the world economy.

The problem is not that we are producing too much alcohol to compete against oil, but that we are not producing enough. Corn ethanol has now replaced 8 percent of American gasoline. This is a useful contribution, but it is insufficient to save our economy from the wrecking caused by the OPEC oil cartel’s policy of limiting production to artificially drive up fuel prices. If we are to defeat this policy, we need to throw the liquid fuel market open to alternatives to petroleum on a scale that is simply not the case today.

This could be achieved by adoption of the bipartisan Open Fuel Standard bill (HR 1687) which was introduced into congress last week by Congressmen John Shimkus (R-IL), Roscoe Bartlett (R-MD), Eliot Engel (D-NY), and Steve Israel (D-NY). Under this bill, the majority of new cars sold in to the USA would be required to be fully flex fuel, able to run equally well on any combination of methanol, ethanol, or gasoline. Since foreign car makers would be impelled to conform to requirement if they wish to continue to sell in the U.S. market, this would make flex fuel capability effectively the international standard.

As methanol can cheaply be produced from such abundant sources as natural gas, coal, biomass, or trash (its current spot price is about $1.20 per gallon, without any subsidy, equivalent in energy terms to gasoline at $2.18/gallon), providing consumers with fuel choice in this way would create a permanent competitive constraint on the price of oil.

Agreeing with Lester Brown and the other Malthusians denouncing ethanol is wrong because their fundamental theory of economics is directly opposite to reality. The world economy is not threatened by corn shortages caused by an enlarged market, but by high oil prices engineered by a cartel. To protect ourselves from depression and the world’s poorest from starvation, we need more competition against the oil cartel, not less. Flex fuel is the way to go.