Energy policy-making has stumbled into an attempt by farm-state politicians to hijack the US economy. Energy and farm bills in Congress contain overlapping efforts to make energy serve the agricultural welfare system.
Close to the center of both bills lurks—what else?—ethanol. There is no compelling energy or environmental reason for the government to require that gasoline contain ethanol. None. All advantages claimed on behalf of ethanol have offsetting disadvantages.
But any politician needing support from farm states—meaning any US president—must genuflect to ethanol. President George W. Bush pays his dues by supporting the unwarranted requirement for oxygen in reformulated gasoline. With the economically preferable oxygenate, methyl tertiary butyl ether, falling from favor, maintaining the requirement boosts demand for ethanol.
The drawbacks
It also imposes ethanol's drawbacks on the gasoline market for no net energy or environmental gain. Costing twice as much to produce as gasoline, fuel ethanol requires big subsidies. Last year, federal ethanol programs diverted an estimated $1.2 billion from the Highway Trust Fund. And problems with volatility, energy content, and water solubility necessitate special handling and blendstocks. Those problems raise costs to consumers and create supply bottlenecks.
Politicians don't care. And farm states won't settle for the growth of ethanol markets that would occur naturally. American Petroleum Institute estimates that without an oxygen requirement for reformulated gasoline demand for fuel ethanol would rise from 1.55 billion gal/year in 2000 to 2.8 billion gal/year in 2010. Maintaining the oxygen requirement in reformulated gasoline as MTBE phases down would further raise 2010 demand to 3.9 billion gal/year.
That and lip service have been Bush's offerings at the ethanol altar. Energy legislation proposed by Senate Democrats raises the pledge. It would drop the oxygen mandate for reformulated gasoline but require that US vehicle fuel eventually contain 5 billion gal/year of renewable substance—ethanol. A coalition of refiners, labor unions, and highway user groups this month spoke against ethanol mandates, citing the harm to consumers.
It is not as though farm states had dropped off the federal gift list. In August, Congress passed and Bush signed a $5.5 billion emergency aid package for farmers, the fourth in 4 years. Not enough. Last week, the Senate debated farm legislation similar to—and probably more expensive than—a generous bill passed by the House in October. Here, from a Heritage Foundation analysis, are the House bill's 10-year costs: subsidies and loans, $50 billion; conservation payments, $35 billion; price supports and the price consequences of conservation programs, $271 billion; and crop insurance payments, $36 billion.
"All told," writes the foundation's Brian M. Riedl, "farm policy after the Farm Security Act [the House bill] will cost Americans $190 billion in taxes and $271 billion more in inflated food prices over the next 10 years for a total cost of $461 billion." In that period, if the legislation or something like it is enacted, the federal government will provide more than $1 million in subsidies and price-support benefits to each of the 456,000 full-time farms in the US. "Paying this enormous tab will cost the average household $1,805 in taxes and $2,572 in inflated food prices for a total 10-year cost of $4,377," Riedl says.
That's not all. Can anyone guess what else the Senate version of the farm bill contains? Subsidies for production of renewable energy!
"The farm bill's energy initiative will mean more money in the pockets of farmers and less dependence by our nation on foreign oil," says Sen. Tom Harkin (D-Iowa). "If we take action now, renewable energy can become a major cash crop for rural America."
Insatiable beast
Indeed. Poor American farmers—the average household income of whom, at $64,347, exceeds the national average by 17% and the average net worth of whom, $563,600, is twice the national average—can always use another cash crop bought and paid for by everyone else in the country.
Politicians should put the insatiable American agricultural beast on a diet. And energy interests, for the sake of economic legitimacy, should stay as far away from it as possible.
