POLICYMAKERS and legislators often fail to consider the law of unintended consequences. The latest example is their attempt to reduce the United States' dependence on imported oil by shifting a big share of the nation's largest crop, corn, to the production of ethanol for fueling automobiles.
Good goal, bad policy. In fact, ethanol will do little to reduce the large percentage of our fuel that is imported (more than 60%), and the ethanol policy will have widespread and profound ripple effects on other markets. Corn farmers and ethanol refiners are ecstatic about the ethanol boom and are enjoying the windfall of artificially enhanced demand. But it will be an expensive and dangerous experiment for the rest of us.
On Capitol Hill, the Senate is debating legislation that would further expand corn ethanol production. A 2005 law already mandates production of 7.5 billion gallons by 2012, about 5% of the projected gasoline use at that time. These biofuel goals are propped up by a generous federal subsidy of 51 cents a gallon for blending ethanol into gasoline, and a tariff of 54 cents a gallon on most imported ethanol to help keep out cheap imports from Brazil. The proposed legislation is a prime example of throwing good money after a bad idea.
President Bush has set a target of replacing 15% of domestic gasoline use with biofuels (ethanol and biodiesel) over the next 10 years, which would require almost a fivefold increase in mandatory biofuel use, to about 35 billion gallons. With current technology, almost all of this biofuel would have to come from corn because there is no feasible alternative. However, achieving the 15% goal would require the entire current U.S. corn crop, which represents a whopping 40% of the world's corn supply. This would do more than create mere market distortions; the irresistible pressure to divert corn from food to fuel would create unprecedented turmoil.
Thus, it is no surprise that the price of corn has doubled in the last year -- from $2 to $4 a bushel. We are already seeing upward pressure on food prices as the demand for ethanol boosts the demand for corn. Until the recent ethanol boom, more than 60% of the annual U.S. corn harvest was fed domestically to cattle, hogs and chickens or used in food or beverages. Thousands of food items contain corn or corn byproducts. In Mexico, where corn is a staple food, the price of tortillas has skyrocketed because U.S. corn has been diverted to ethanol production.
