President Bush and congressional Democrats have lately spoken a lot about alternative energy sources such as ethanol. According to the president, ethanol is a magical elixir that will solve every economic, environmental and foreign policy problem on the horizon. In reality, it's enormously expensive and wasteful.
Ethanol will not lead to energy independence. If all the corn produced in America in 2005 were dedicated to ethanol production (and only 14.3 percent of it was), U.S. gasoline consumption would have dropped by only 12 percent. For corn ethanol to completely displace gasoline in this country, we would need to appropriate all U.S. cropland, turn it over to ethanol production, and then find 20 percent more land on top of that.
The U.S. Energy Information Administration believes the practical limit for domestic ethanol production is about 700,000 barrels per day -- in 2030. In 23 years, that will translate into about 6 percent of the U.S. transportation fuels market.
According to a 2005 report by the U.S. Department of Agriculture, corn ethanol costs an average of $2.53 to produce -- several times what it costs to produce a gallon of gasoline. Without subsidies, costs would be higher still. A study from the International Institute for Sustainable Development last fall found that ethanol subsidies amount to $1.05 to $1.38 per gallon, or 42 to 55 percent of ethanol's wholesale market price.
Ethanol does not reduce gasoline prices. If you lived in urban areas that used reformulated gasoline last summer -- that's the environmentally "clean" gasoline required for areas with air pollution problems -- you might have paid up to 60 cents a gallon more for gasoline.
That's because the federal government required oil refineries to use 4 billion gallons of ethanol in 2006, regardless of price, and gas pump prices last summer reflected the fact that ethanol was twice as expensive as conventional gas in wholesale markets, and far more costly to deliver.
Switchgrass (cellulosic ethanol) will not set us free. Guy Caruso, who heads EIA, noted last December that the capital costs associated with cellulosic ethanol production were five times greater than those for conventional corn ethanol production. Estimates like that are a bit soft, however, because there is no cellulosic ethanol industry in existence at present.
Betting the farm on an industry that doesn't yet exist to produce a product that is known to be staggeringly expensive isn't the best use of tax dollars. Remember how nuclear power would be "too cheap to meter"? And how synthetic oil from coal would revolutionize the gasoline sector?
The truth is that if ethanol has commercial merit, it doesn't need the subsidy. And if it doesn't, no amount of subsidy will bestow it.