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Ken Glozer’s New Book on Corn Ethanol (Hoover University Press)

[Ken Glozer's new book, Corn Ethanol: Who Pays, Who Benefits?, sponsored and published by Hoover University Press, will be released this month. Mr. Glozer is president of OMB Professionals, a Washington, D. C. based energy consulting firm. He was a senior executive service career professional with the White House Office of Management and Budget in the energy, environment, and agriculture area for 26 years.]

“Clearly, reducing petroleum imports with the current ethanol policy is a costly ineffective policy. The nation and its taxpayers and consumers would be far better off if the federal government adopted a competitive market-reliance policy for ethanol and thereby avoided the very substantial costs that current ethanol policy has imposed on the nation’s consumers and taxpayers. The current corn ethanol policies should be phased out over a year or two.”

My new book provides detailed a political history of how the United States ended up with current federal corn ethanol policy.

Part I relates the significant external events that have driven the politics that in turn has driven the policy since 1977. I address important questions about when the policy started, how it evolved, what were the major political and market forces that drove it, and, most important, who were the key officials that formed and shaped the policy.

Part II of the book contains an in-depth objective evaluation of the major claims made by those who have advocated the ethanol policies during the past thirty years. I probe how well the ethanol policy has worked compared to the claims made by two presidents, three federal agencies, and the corn, soybean growers, and ethanol producers.

The book evaluates the Renewal Fuels Standard (RFS), which was first enacted in 1975 then doubled, to a mandatory 15 billion gallons of corn ethanol blended into the nation’s gasoline supplies. The surprising finding—that federal ethanol policy has little to do with energy and everything to do with wealth transfer—is particularly compelling because, after three decades of federal subsidies, trade protection and most recently mandated ethanol blending, ethanol remains uneconomical.

According to the Department of Energy’s Energy Information Administration, ethanol never has and never will have a significant impact on petroleum imports compared to what could be achieved under a competitive market policy. Thus my sober conclusion: taxpayers and consumers are the victims of the current policy in that they have no choice but to pay and pay.

From the Preface

In recent years, the powerful U.S. economy has stumbled, and its economic core and wealth have diminished. It is therefore essential that American political leadership recognize the importance of designing and implementing cost-effective and environmentally sound policies and programs that complement and promote the market-based economy that has given Americans a high level of prosperity since the end of World War II. Competitive markets have served this nation well during this period, and competitive market policies should be supplanted only when more effective ones are found and proved.

But in the first decade of the twenty-first century, the George W. Bush administration, the Obama administration, and Congress have become enamored with a federal mandate, subsidy, and trade protection policy for corn ethanol. Federal energy subsidies for petroleum date back to the early 1900s, but as documented by two Department of Energy/Energy Information Administration reports, the rate of growth of federal energy subsidies spending is alarming.

Further, these massive and deep subsidies (grants, spending, tax credits, etc.) have been coupled with quantitative, fuel-specific mandates—the Renewal Fuels Standard (RFS) for gasoline—enacted in 2005, then doubled in 2007. This policy is a major federal-market intervention that seriously compromises and impairs a competitive market—much like the ill-fated federal-petroleum allocation and price controls of the 1970s first imposed by the Nixon administration and extended by Presidents Ford and Carter.

The RFS policy is not based on any objective empirical evidence that it works and that it is more effective than a competitive market policy in achieving either energy security or environmental goals.

It is therefore important to have access to the best, most objective information on whether this subsidies/mandate/trade protection policy works. The RFS has existed for more than three years, and there is now enough information to evaluate whether the policy in fact meets the claims made by its advocates.…

From the Conclusion

After completing a comprehensive review of the most important claims made by the advocates for federal ethanol policy, in this author’s view the policy has little to do with energy and a lot to do with wealth transfer. Only one of the claims was found to be true: the policy does create jobs in rural areas, mainly the top ten producing states.

All other claims investigated were found to be questionable or not correct. The evidence used by the responsible federal agencies (Department of Energy, Department of Agriculture, Environmental Protection Agency) to justify the policy was found to be flawed. Even though the policy in its current form is nearly four years old (dating from the Energy Policy Act of 2005), the agencies continue to use these flawed claims to support it. The lone exception: the recently published EPA proposed regulation for the Renewable Fuels Standard.

The facts and reasons supporting the author’s conclusion were presented in Chapters 3 and 4.

First and foremost, current policy does not, based on EIA’s forecast, significantly increase domestic transportation-fuel supplies over the quantity that would be developed by a competitive market policy. You can get two-thirds the level of ethanol use in the United States without a RFS mandate, a 45 cent-per-gallon tax subsidy, corn and soybean subsidies, and an import fee on ethanol imports.

Second, current policy already has made, and will continue to make, massive wealth transfers from federal taxpayers, gasoline consumers, and food consumers to corn and soybean farmers and ethanol producers. Over $500 billion dollars in costs, it is estimated, have been or will be incurred from 2008 to 2017. The primary beneficiaries are the owners and/or operators of an estimated 270,000 corn and soybean farms located in ten Midwestern states.

Third, the large corn/soybean farms, farmers in these states reap the majority of the benefits. Large farm owners and operators in Iowa, for example, took in or will take in on average an estimated $4.3 million from 2008 to 2017.

Fourth, there is no end game for the policy. Even after thirty years of ethanol subsidies (more than seventy years for corn), the wealth transfer continues year in and year out. The policy gives every appearance of being permanent, despite the fact that it has never—and will never—produce the claimed benefits except for the increases in rural employment.

Fifth, a 2009 CBO report concluded: “It is unlikely that, on average, over the past several decades ethanol producers would have turned a profit if they had not received production subsidies.” That conclusion is compelling, if not startling, because after three decades of federal subsidies, ethanol remains uneconomic—even with the subsidies—as evidenced by the spate of ethanol-related bankruptcies and plant shutdowns in the past year.

Sixth, the safety hazards and costs of transporting the billions of gallons of ethanol produced in the Midwest to the east, gulf and west coasts mainly by rail are of major concern. Rail accidents involving ethanol tank car derailments, explosions and fires are inevitable. An event in Illinois involved tank cars of ethanol exploding and bursting into flames, killing one person and injuring several others.

Finally, under current federal ethanol policy the estimated federal budget cost for each incremental gallon of ethanol produced (on a petroleum equivalent basis) compared to a competitive market policy is $5.91 per gallon or $248.22 per barrel. At this rate to reduce U.S. petroleum imports by two million barrels per day or about 20 percent would cost over $181 billion annually just in taxpayer subsidies.

Clearly, reducing petroleum imports with the current ethanol policy is a costly ineffective policy. The nation and its taxpayers and consumers would be far better off if the federal government adopted a competitive market-reliance policy for ethanol and thereby avoided the very substantial costs that current ethanol policy has imposed on the nation’s consumers and taxpayers. The current corn ethanol policies should be phased out over a year or two.

8 comments

1 JavalinaTex { 05.09.11 at 7:09 am }

There is also the impact of the Gasoline Vapor pressure (Reid Vapor Pressure) RVP waiver for ethanol blended gasoline; which allows a 1 psi higher vapor pressure. This effectively reversed an earlier EPA lowering of gasoline RVP to reduce VOC emissions from gasoline.

Also, ethanol blends don’t burn materially cleaner and may actually burn dirtier in modern engines (those that have essentially been in the market since 1990).

Both California and Texas sought at various times to be exempt from oxygenate and ethanol requirements, in large part due to netative air quality impact; both were rebuffed by the Bush administration.

2 Energy and Environment News { 05.09.11 at 10:09 am }

[...] Corn Ethanol: Who Pays and Who Benefits? Ken Glozer, MasterResource.org, 9 May 2011 [...]

3 David Bellman { 05.09.11 at 10:59 am }

Let me first comment that I to WAS an anti-ethanol proponent. I agree with all the points of how inefficient it is and that it is somewhat of a wealth transfer.

What changed my position? FACTS:

1. The largest growth of oil demand is occuring in the Middle East and Asia.

2. These regions are heavily subsidizing the cost of oil to their people. By doing so the people do not have price response to their demand growth. In fact the US is having to pay for their growth. We are acting as the marginal price setter and paying for them to have the luxury of cheap oil. There is no free trade going on.

3. The US largest export particurlarly in terms of volume is food. We do not subsidized the pricing of our product to our consumer. However we do have wealth transfers via tax breaks and other mechanism. Ethanol indirectly increases the demand curve of corn increasing the price of corn. We are indirectly trading our FOOD for their OIL.

I have come to the conclusion I rather pay ADM than OPEC members – though the optimal is to pay all on a free trade environment. However the world is not optimal nor efficient. I think if you broaden your scope perhaps by serendipity ethanol allows the US to re-gain some of our subsidizations we have given to these producing countries. Is there a better way – sure – but until then we have to live with the ethanol.

Visit my blog http://www.epis.com/market_insights/

4 Steve C. { 05.09.11 at 12:33 pm }

Two words why this is not going to change: Iowa Caucuses

I’d be interested if anyone has any research on the impact of having fifty different types of government mandated gasoline blends. (okay a slight exaggeration).
I can see geography dictating blends based on weather, altitude etc, but for the life of me I think it’s extremely foolish of the feds to effectively create dozens of different gasoline markets (adding who knows how much complexity) when we should be able to function with one blend of gasoline with minor adjustments for local conditions.

5 Bill Batt { 05.09.11 at 2:20 pm }

There is an existing market for alcohol-free gasoline although the US government currently bans it. All small two-cycle and four-cycle engines are being slowly destroyed by ethanol. Ask your small-engine mechanic. If he will admit.

6 Bill Batt { 05.09.11 at 2:29 pm }

On the fifteen percent front my 1996 Plymouth requires (less than) ten percent ethanol in the owner’s manual.
The 1976 gasohol got dropped because it was volunteer and damaged some older cars then. Alcohol was a solvent for the gasket material. A mechanic told me the new Briggs and Stratton engines have no warranty for alcohol damage.

7 On the corn State boondoggle | JunkScience Sidebar { 05.10.11 at 1:35 am }

[...] Ken Glozer’s New Book on Corn Ethanol (Hoover University Press Ken Glozer May 9, 2011 [Ken Glozer's new book, Corn Ethanol: Who Pays, Who Benefits?, sponsored and published by Hoover University Press, will be released this month. Mr. Glozer is president of OMB Professionals, a Washington, D. C. based energy consulting firm. He was a senior executive service career professional with the White House Office of Management and Budget in the energy, environment, and agriculture area for 26 years.] [...]

8 Bob May { 09.12.11 at 9:12 am }

I would like to set up a short interview on this new book…can you have someone contact me? Bob May, GM
KDKD AM-FM/KXEA FM and Bob’s No Wake Zone Radio Show a radio and web show about boating. 660-885-6141
or bob@kdkd.net

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