Flex-Fuel Nonsense

Over at National Review Online today, Clifford May asks:

What if lawmakers could guarantee that the price you pay to fill your car’s tank will go down, not up, in the years ahead? What if they could launch a new industry that creates more jobs for more Americans? What if this would produce environmental benefits, too? Would that not send a message to the markets? And would that not represent the kind of change so many politicians have been promising?

All of this would come true, Mr. May believes, if the federal government would force auto makers to ensure that every new car sold in the United States could run on gasoline OR high blends of ethanol OR methanol OR fill-in-the-blank. After all, it would only cost about $100 up-front during the manufacturing process to make such “flex-fueled” cars a reality, a modest investment that would give motorists a ready-made ability to run their cars on whatever strikes their fancy.

Well, to answer Mr. May’s questions in the order they are posed, they can’t, they won’t, it wouldn’t, it would, and it wouldn’t.

Congress can no more guarantee that fuel prices will go down from now until the end of time than it can guarantee a robust sex life for fat, balding, middle-aged men. Fuel prices are subject to supply and demand curves that do not answer to Congress — particularly in global energy markets.

The conceit that government can create jobs by creating industries out of whole cloth glosses over the fact that the money needed to create those industries and those jobs starves other industries of cash that will, in turn, eliminate other jobs. While it’s not inconceivable that government could on balance create more jobs than it destroys in this manner (that is, that the industry created is more labor-intensive than the industries harmed), that’s still not a good reason to go forward. After all, one might on balance increase employment in the United States by banning modern farm machinery and food imports, which would put a lot of people into the fields. But no sane person would endorse such a thing on economic grounds. Economic growth occurs when we increase productivity, and we don’t necessarily do that by biasing investment toward labor-intensive activities.

Promoting alternative fuels is not necessarily good for the environment. Ethanol, for instance, increases urban smog without any corresponding reduction in greenhouse gas emissions. It drains already depleting groundwater reserves and pollutes those that remain. It puts millions of additional acres of land under the plow, which in turn kills ecosystems and further pollutes navigable waterways. In short, gasoline looks positively “Green” compared to many of the fuels Mr. May hopes to champion.

Mr. May is correct, however, about the fact a mandate like this would send a message to the markets. The message would be “Congress is not a serious legislative body.” But to be fair, it’s not as if the market hasn’t heard that message before.

Mr. May is wrong, however, to think that a flex-fuel mandate would represent the kind of “change” that most politicians are promising. Congress has told Detroit how to build its cars for decades now. Nothing new there.

The main reason that this sales pitch is hollow, however, has to do with the fact that, at present, there is no cheap alternative to gasoline. The problem isn’t that cars can’t use the fuel. The problem is the cost of the fuel. For instance, on wholesale spot markets as of Jan. 24, 87 octane was selling at $2.32 per gallon. Compare that to the price for alternative fuels (in the same spot wholesale markets) once you adjust for the differences in energy content:

• E100 ethanol — $3.53 per gallon
• B100 biodiesel — $3.97 per gallon
• Methanol — $4.22 per gallon

In short, there’s a good reason why auto companies aren’t popping flex-fuel capabilities into every engine sold: consumers don’t seem willing to spend the $100 extra for that extra. Well, to be precise, most consumers don’t seem that interested. Some are in fact buying flex-fueled vehicles right now — 4 million such vehicles are thought to be on the road at present and dozens of models are on sale right now. But some of us aren’t willing to fork over the extra money for the option to use those fuels over the lifetime of our new car.

Should Congress override consumer preferences in that regard? No. Given the high cost of alternatives, consumers are not acting irrationally when they say “no thanks” to flex-fueled vehicles.

Would auto companies be advantaged by a flex-fuel mandate? Mr. May thinks so, but auto executives tend to disagree. My guess is that Mr. May knows less about their business than they do.

If and when alternative fuels are cheaper than gasoline, you can rest assured that consumers will increase their demand for flex-fueled vehicles and that auto makers will supply them out of simple interest in profit. Government mandates are not necessary.