Classic Case of Feeding a Dog that Won’t Hunt

September 30, 2007

Sudden Surplus Arises as Threat to Ethanol Boom

NEVADA, Iowa, Sept. 24 — The ethanol boom of recent years — which spurred a frenzy of distillery construction, record corn prices, rising food prices and hopes of a new future for rural America — may be fading.
Only last year, farmers here spoke of a biofuel gold rush, and they rejoiced as prices for ethanol and the corn used to produce it set records.
But companies and farm cooperatives have built so many distilleries so quickly that the ethanol market is suddenly plagued by a glut, in part because the means to distribute it has not kept pace. The average national ethanol price on the spot market has plunged 30 percent since May, with the decline escalating sharply in the last few weeks.
“The end of the ethanol boom is possibly in sight and may already be here,” said Neil E. Harl, an economics professor emeritus at Iowa State University who lectures on ethanol and is a consultant for producers. “This is a dangerous time for people who are making investments.”
In a politically rather than market-driven ‘mandate from Congress’ to produce ethanol, who would possibly be a worse choice than farmers and new-to-the-game distillers? Farmers are the nation’s worst businessmen, reliant on more subsidies than the French farmer Europe loves to hate. In-for-the-quick-buck distillers can’t figure out how to get a product to market.
Has someone closed the railroads when I wasn’t paying attention?
Big Oil must be chuckling in its Board rooms. The flaw in Congress’s magnificent gesture was to ignore Big Oil (not a mistake Washington often makes). Big Oil might have jumped with both feet on another energy market to dominate, especially one with a subsidy.
Big Oil knows how to produce (distill in this case), transport and market. Big Oil would have given ethanol a premium location at the pumps (presuming profit was there) and allied themselves with Cargill and the other Ag Giants that dominate the corn market. Big Oil would have leveraged their oil contracts, used ethanol to leverage them further and (at their pace) eased us from our dependence on crude.
A crude solution and one that extends Big Oil’s control of the energy market, but it would have worked. If we are serious about energy independence, that’s the way it will have to play out.

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