Alan Reynolds

That law, plus threats of lawsuits about a previously mandated gasoline additive, compelled the addition of ethanol to gasoline at a technically arduous pace. That is now causing big problems for those who have to stir some ethanol into numerous state-mandated varieties of gasoline, while refiners make the seasonal switch from heating oil to gasoline.

It takes a lot of petroleum in the form of diesel fuel, fertilizer, plastic and pesticides to produce and distribute corn and turn it into moonshine -- about 7 barrels of oil to produce 8 barrels of corn-based ethanol. Making ethanol from sugar would be worse because formidable U.S. trade barriers push the cost of sugar far above the world price (making Brazil's ethanol industry irrelevant). Making ethanol from waste is hypothetical for now, as is the uncertain cost. Because ethanol can't flow through pipelines, it is twice as expensive as oil to transport -- by fuel-burning truck or rail.

Unfortunately, there is much less energy in 8 gallons of ethanol than in the 7 gallons of gasoline-equivalent needed to produce it. The Energy Department estimates the highway mileage of a Nissan Titan drops from 18 mpg to 13 mpg by switching to E85 (85 percent ethanol). That is why lavish subsidies to auto companies to produce flexible fuel vehicles are useless -- a disguised bailout at best.

A few more thoughts on these matters:

-- Threatening oil producers because world fuel prices are up makes no more sense than threatening big ethanol producers. The price of ethanol went up just as much as the price of gasoline and is expected to climb higher.

-- Oil company profits account for a very small portion of the retail price -- much smaller than taxes. Oil producers and refiners could not reduce their profits by charging less than the market price. Retailers and distributors would just pocket the difference, or they would quickly run out of fuel if they didn't.

-- Suspending gas taxes for two months would be unwise because it would artificially stimulate demand at a very inopportune time.

-- The millions that oil company executives earned from exercising stock options were entirely financed by other stockholders. Stock-based compensation has nothing to do with what the companies charge for products (which cannot be more or less than the market price) or what they pay employees.

-- Subsidies to consumers who buy hybrids are useless. The highway mileage of large or sporty V-6 and V-8 hybrids is much worse than it is with small 4-cylinder cars.

-- CAFE fuel standards are useless. Most vehicles on the road are used, not new, and fleet-average mileage standards for domestic producers have no effect on anyone's choice of a new car. Prices, on the other hand, have a big effect.

The price system has important work to do. The House of Representatives, evidently, does not. If anything needs investigating, it's the Congress. Cheap politics cannot produce cheap oil.


Alan Reynolds

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