Congress Considers Bailing Out Its Ethanol Mistakes

From yesterday’s WSJ, here is a foretaste of what’s to come as Congress and the new administration ramp up their stimulus plans next month.

The Journal points out that the ethanol industry is on the ropes due to the collapse in the price of oil. Three of the major producers are near bankruptcy despite federal subsidies. So what does any self-respecting company do in such straits these days? You know the answer to that one. 

So here they go again back to the taxpayer for help. The Renewable Fuels Association, the industry lobby, is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion. The lobby would also like Congress to ease the 10% limit on how much ethanol can be added to gasoline for conventional cars and trucks — never mind the potential damage to engines from such an unproven mix.

Of course, the ethanol industry wouldn’t even exist without the more than $25 billion in taxpayer handouts over the past 20 years. Congress only recently passed energy and farm bills that further greased ethanol production with a 51 cent a gallon tax credit, corn subsidies, plus increasingly stringent biofuel mandates. We were told, as usual, that profitability was just around the corner.

Ponder this for a minute. Congress, having created an industry that is now failing, is considering the expenditure of an immense amount of money to perpetuate their mistake.

As if that were not enough, the entire project has turned out to be something of an unmitigated disaster. Diversion of corn to the production of ethanol has been blamed for wide spread famine in the lesser developed countries, the excessive use of water in the production process has created unintended environmental consequences and the final product is questioned as to its efficacy in lessening demand for oil and reducing carbon emissions. Even some of its strongest proponents are abandoning the industry.

The Environmental Working Group and five other environmental organizations said this week they oppose a bailout because subsidies “for corn-based ethanol have produced unintended, yet potentially catastrophic environmental consequences, with little or no return to taxpayers in energy security [or] protection from global warming.”

Don’t expect any of this to dissuade Congress from coming to the aid of the industry. This is one of those bits of pork that will be buried deep inside some larger bill, of which there are going to be many. Boone Pickens was at one time an energy advisor to Bob Dole. Pickens was and is an ardent opponent of ethanol on purely economic grounds. After ardently arguing his position with Dole, the Senator and at that time Presidential candidate explained to him that there were 22 corn producing states. Each state had two senators. Therefore, the United States was going to have an ethanol industry.

When you watch the money start flying out the door next year keep that explanation in mind. It will tell you much more about why things are being done than all of the economic and financial analysis you are likely to see bandied about.

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