Sunday, September 30, 2007

Lange to Hayek: Laugh while you can, market boy!

It seems our latest attempt at central planning, viz. mandating the use and subsidizing domestic production of ethanol, while also putting a tariff on imported ethanol, has hit a few bumps in the road. Besides the myriad effects of the concomitant increases in corn prices, ethanol production has outstripped its distribution capacity and surpassed the government mandated 2012 required use quantity already this year.

Congress essentially legislated the industry’s expansion by requiring steadily higher quantities of ethanol as a gasoline blend, a kick-start that was further spurred by the proliferation of bans on a competing fuel additive used to help curb air pollution.

But the ethanol industry, which is also heavily subsidized by federal tax incentives, got far ahead of the requirements of the law, rapidly building scores of plants and snapping up a rising share of the corn harvest. Many of those plants have gone into operation in recent months, and many more are scheduled for completion by the end of next year.

The resulting ethanol oversupply is buffeting the market. Here in northern Iowa, deep in the corn belt, newly cautious farmers and ethanol executives are figuring out how to cut costs and weighing their options should the situation get worse.

“We don’t know what, ultimately, the marketplace will price ethanol at,” said Rick Brehm, president and chief executive of Lincolnway Energy, a midsize distillery here. “It could go lower.”

Since construction crews broke ground on the Lincolnway plant in 2005, the price of ethanol on the local market has fallen to $1.55 a gallon from about $2, Mr. Brehm said. Over the same period, the price of corn, representing 70 percent of production costs, has risen to $3.27 a bushel from $1.60. “We’re trapped between two commodities,” he said.

Of course, our modern world operates exclusively on the "hair of the dog" theory: If government intervention has caused a problem, the only way out is...... MORE GOVERNMENT INTERVENTION.

Aaron Brady, a director at the consulting firm Cambridge Energy Research Associates, said the current market problems could worsen if combined with other “unintended consequences that may be lurking” from increased ethanol production. He said pressure on corn and other food prices, water shortages, soil and fertilizer runoff could hurt political support for the industry.

“If Congress doesn’t substantially raise the renewable fuel standard,” Mr. Brady said, “then this is not just a short term problem but a long term issue, and there will be more of a shakeout in the industry.”

The Senate has approved a bill that would require gasoline producers to blend 36 billion gallons of ethanol into gasoline by 2022, an increase from the current standard of 7.5 billion gallons by 2012. The House did not include such a provision in the version it passed, and it is uncertain whether any final legislation will emerge this year and what it will say about ethanol if it does.

Ethanol proponents say a new energy law is virtually inevitable at some point, and that even if it does not pass this year, lower ethanol prices will provide an incentive for refiners to blend more ethanol into expensive gasoline. A higher renewable fuels standard would force refiners and blenders to work faster to process increased amounts.

“This is an industry that is going to continue to grow,” said Bruce Rastetter, chief executive of Hawkeye Renewables, a private company based in nearby Ames that has two distilleries and two more under construction. “Once you see an energy bill, I think you will see the industry respond again.”

I think even Lange and Lerner would agree with me when I say: Central Planning: yer doin' it wrong!

1 comment:

Shawn said...

...ya know, being new to this party, I'm really amazed at how ingrained this very 'hair of the dog' approach is. I read that article, and the unenlightened me goes "well, man...I hope they do something."

Boom. And then the emerging me goes: "what the hell are you talking about? and who is 'they'?"

That's one of the hardest things, as I talk about these things with people...they're just used to thinking that the government will/should fix things, so any point that seems to question that base assumption is completely outside their worldview, and therefore can't even be entertained.

How'd this myth get started? Was The New Deal the first instance of it? Shlaes at Econtalk was incredibly eye-opening on that topic.