Ethanol and Inflation
By Jerry Jung | May 16, 2022
Let’s overlook the devastating impact that biofuel production has on our surface and ground water. Let’s forget about the loss of tens of millions of acres of natural habitat and its calamitous impact on local and migrating biodiversity. Let’s instead focus on the economics of biofuel subsidies and how it contributes to rising food and fuel prices.
The most significant biofuel mandate applies to corn based ethanol. The EPA, no longer constrained by legislation providing guidelines, has continued to increase the number of gallons of ethanol that must be blended into our gasoline supplies. This year the EPA has mandated the production of 20,770,000,000 gallons of ethanol. A bushel of corn will make 2.75 gallons of ethanol and the average yield for corn is 177 bushels per acre. Basic arithmetic then substantiates that 41,900,000 million acres of prime farmland in this country is diverted from food production to fuel production. The USDA estimates that farmers will plant 89,500,000 acres of corn this year. Therefore, a staggering 46.8% of the corn crop is used to make fuel—close to the amount utilized for beef, poultry, corn syrup and dairy!
You don’t have to be an economist to realize that scarcity drives up prices. The exact amount that prices increase as supply decreases is a concept known as price elasticity. Rather than subject the reader to mathematical languor, I ask you to rely on my credentials. At the tender age of 22, I wrote (with E.T. Fujii) a paper titled “Price Elasticity of Demand for Air Travel.” The paper was published and helped push along the deregulation of air fares favored by Alfred Kahn. The paper is still taught at business schools and has been heavily sited. Its concepts spawned a company that trades on the NYSE with a market cap of over $1,000,000,000. So if the question is, “What is the cost impact of reducing the supply of corn for essential foods by 50%?” my EDUCATED response is that it would increase food prices a lot!
The cost impact on fuel is every bit as dramatic as is for food. As regards ethanol mandates, fuel cost drivers include both the creation of scarcity through artificial demand as well as a hidden tax on motorists. First, let’s address artificial demand. Numerous studies have been conducted regarding the energy inputs required to produce a gallon of ethanol. The consensus is that it takes as much energy to produce ethanol as it yields when you factor in the diesel fuel consumed by agricultural tractors and highway trucks as well as the natural gas consumed in the production of fertilizers and processing the corn. The 1:1 ratio of energy inputs to energy outputs is euphemistically referred to as “energy neutrality.” But wait! Energy is consumed once to make energy and then again when it is consumed in our cars. Energy consumption is doubled! The creation of this artificial demand translates into reduced supply and higher prices for other uses.
The other way the EPA increases gas prices is through the hidden tax associated with enforcement of ethanol mandates. This convoluted system revolves around “RINs” which are fines that must be paid if a refiner fails to meet the 10% ethanol mandate. This practice has the effect of adding a dollar or more to the cost of ethanol and $3 dollars or more to price of a bushel of corn.
Biofuel mandates should be eliminated. Let free markets determine the value of corn ethanol. Mandates hurt those most in need by driving up the price of energy and food, two price inelastic necessities that comprise a lion’s share of working class budgets. Farm families deserve a beefed up Conservation Reserve Program and the rest of us deserve a break on food and energy prices.