Summer usually means higher gas prices. Conventional wisdom says that people travel more in the summer which raises the demand for gas, and everyone knows an increase in demand will drive up prices. But what if I told you that demand for gas has actually dropped significantly and that crude oil production in the United States has gone up? Believe it or not, American fuel consumption is down 16% since 2007, and for the first time since 1995, our domestic production of crude oil will be greater than the amount we import.
So here’s the million dollar question: why are we still paying record prices for gas? Why haven’t prices gone down as the law of supply and demand would suggest? There’s rarely a simple answer to a complicated question, but the short answer is: corn. Through a bizarre turn of events, corn and the bad energy policies that force us to put corn in our gas tanks are now causing us record levels of pain at the pump.
Ethanol is a grain alcohol, often fermented from corn, which can also be used as fuel. The idea of corn ethanol as a way to stretch limited amounts of crude oil has been around for a long time. Not surprisingly, some of the strongest advocates of its use have been corn farmers and the politicians who represent them. The fact that the Iowa grows a lot of corn and the Iowa Caucuses are an important pit stop for every presidential candidate means that ethanol has always had friends in high places.
But ethanol also became the darling of some environmentalists. They claimed it caused less air pollution than regular gasoline and that growing corn was more environmentally sustainable than drilling for oil. For all these reasons, in 2007, Congress began to mandate that ethanol make up a certain percentage of all gasoline sold in the United States, with the required percentage rising each year. Politically, this seemed like a win: environmentalists were happy with mandatory biofuels, corn farmers were happy with an increased demand on their product, and consumers were supposed to receive at least some relief with prices at the pump.
But last summer we had a drought. This produced the smallest corn crop in seven years, which led to fierce competition between the food industry, the livestock industry (which depends on corn for feed) and biofuel refineries. So ironically, it is now ethanol requirements—which consume five billion bushels of corn each year—that are driving up fuel costs, rather than the price of crude oil.
What’s more, with half the nation’s corn supply going to produce ethanol, global food prices are rising, leading to hunger and even food riots in other countries. (The amount of corn needed to fill just one gas tank with ethanol could feel a human being for an entire year.) Rising food and fuel prices would seem like good reasons to revisit the ethanol mandates causing the problem. But despite pleas from several states, the EPA has refused to relax or revise the requirements for the use of corn ethanol in gasoline.
I have written extensively about how rising fuel costs disproportionately hurt the poor. Inflexible requirements on ethanol fuel victimize the poor coming and going. The poor spend a much larger percentage of their income on food, energy and transportation, and rising corn prices driven by ethanol requirements make all three worse. Policies like this are the worst regressive taxes, because they make it more expensive for the poor to purchase basic necessities, while the rich hardly notice the difference.
But isn’t a clean planet worth a few extra bucks at the pump? Ironically, it is becoming clear that ethanol is by no means a slam-dunk as far as environmental benefits go. In 2009, Stanford researchers demonstrated that burning ethanol actually creates more ozone pollution than burning gasoline. Ethanol also contributes to deforestation as more land is cleared to grow corn. Yet the EPA still considers it a “clean” fuel and continues to mandate its use in our gasoline.
Then there are the lobbyists for the corn and ethanol industries. They receive huge federal subsidies and depend on the federal ethanol requirement to keep up demand for their product. However, at its core this is an issue of the government trying to predict which technological innovation will be the best path toward clean, affordable energy. This is precisely what has led to so many failed and mismanaged “green” energy companies like Solyndra and most recently LG Chem Michigan. So perhaps it is time for the government to reexamine many of its ill-conceived energy regulations and subsidies which have now been shown to do more harm than good. Let your government representatives know that Americans, especially the most economically vulnerable, deserve better.