Earlier today, Cliff May posted a column in National Review Online (NRO) advocating federal subsidies for flex-fuel vehicles and bio-fuel dispensaries, largly on national security grounds. This naturally provoked several responses on NRO’s Planet Gore Blog from free-market types, including yours truly. I reproduce below the lively exchange, current as of 5:30 p.m.
Thursday, January 31, 2008
Zubrin’s argument is illogical. [Marlo Lewis]
Robert Zubrin encapsulates the core of Cliff May’s argument:
Right now there is no constraint on the price of oil, because gasoline is the only game in town. They’ve raised the price of oil to $100/bbl. Unless there is fuel choice, they can raise it to $200/bbl, and are already talking about doing so.
By mandating flex-fuel vehicles, we make the fuel market competitive. This will put a permanent constraint on the price of oil. We need to do that to defend our economy and that of our allies.
So, according to Zubrin, (1) oil could reach $200/bbl, yet consumers won’t demand, and automakers won’t produce, flex-fuel vehicles, but (2) if politicians just compel auto companies to spend an extra hundred bucks per vehicle to make all cars flex-fuel, then the Kingdom of Saud will come a-tumblin’ down. This is illogical.
If (1) is the case, it means there is no profit in making flex-fuel vehicles regardless of how costly oil becomes, in which case flex-fuel technology has no economic merit. But if (2) is the case, then auto companies only have to spend trivial sums to abolish pain at the pump and make billions from grateful customers, in which case no mandate is necessary.
Gasoline’s market dominance is the result of competition. [Marlo Lewis]
I admire Cliff May and enjoyed the few occasions when our paths crossed. Nonetheless, when it comes to the suite of issues pertaining to oil, ethanol, and national security, I think he-like many otherwise clear-sighted conservatives-is confused.
Cliff starts out fine, poking fun at politicians who rush to “do something” to help the economy, only to make things worse. But then he asks us to suspend disbelief and back his brand of intervention, which, by the by, is shared by many of those lefty politicos Cliff just dissed.
Cliff argues that the problem with gasoline is there is no competition in the motor fuel market. When you go to the pump, you can choose between gasoline and gasoline, and when you buy a car, you can choose between one that runs on gasoline and another that runs on gasoline.
Cute, but what Cliff is describing is not the absence of competition but the results of competition. Ethanol as a motor fuel has been around as long as petroleum-based gasoline. In fact, back in the 1920s, Henry Ford supposedly predicted that ethanol would be the “fuel of the future.” The marketplace proved him wrong, and for what turns out, in hindsight, to be fairly obvious reasons. None of the alternatives to gasoline perform as well in terms of cost, portability, and energy density.
Biofuels already get billions in subsidies, tax breaks, and mandates-an estimated $92 billion during 2006-2012. Were it not for the 51-cent per gallon tax break refiners get to blend ethanol in the nation’s motor fuel mix, a national market for ethanol would not even exist. Gasoline continues to dominate the motor fuel market because it still blows away the competition. I’m afraid that what Cliff laments as lack of competition is simply a competitive outcome he wishes were otherwise.
There is no chicken-and-egg problem preventing the motor fuel market from evolving into something better. Installing E-85 pumps costs $11,000 to $55,000, by one estimate. That’s not cheap if you are a small independent, service station, but it’s also not prohibitive if consumers really want ethanol. So far, however, demand for ethanol is underwhelming. And that is because ethanol isn’t really a great buy. For example, last July, during summer driving season, the AAA estimated that E-85 (motor fuel blended with 85 percent ethanol) cost more than gasoline once you take into account the fact that ethanol contains about 25 percent less energy by volume than gasoline.
Cliff opines that giving auto companies and consumers tax breaks to build and buy flex-fuel cars will start an economic chain reaction, and before long entrepreneurs will revolutionize the transport sector and make “billions” in the process.
But Cliff, automakers already have the biggest possible incentive to start a revolution. Nobody likes pain at the pump. With oil selling near $100 a barrel, any automaker that figures out how to produce an affordable, roomy, safe, high-performance vehicle that gets 100 mpg-or better still, runs entirely on rechargeable batteries or fuel cells-will RULE THE WORLD!
Keep gomn’t out of the picture; it will only make things worse!
Ethanol: Drink it, Don’t Drive it [Ken Green]
One has to applaud Cliff May for his NRO column flacking for ethanol. He has managed to encapsulate nearly every myth about this so-called miracle fuel in a single column, along with violating most tenets of energy economics. Bravo! Let’s deconstruct:
May: “But what if lawmakers could guarantee that the price you pay to fill your car’s tank will go down, not up, in the years ahead?”
Reality: Ethanol is not only more expensive gallon-for-gallon than gasoline, it has less energy content. It is also the most subsidized form of transportation fuel in the United States. If you normalize for energy content, and tot up the subsidies for growing corn, making ethanol, and walling off imported ethanol, the stuff gets a taxpayer subsidy of around $1.50 per gallon. Adding ethanol to your gas makes your price go up, not down.
May: “What if they could launch a new industry that creates more jobs for more Americans?”
Reality: Frederic Bastiat, a French economist shattered this fallacy over a hundred years ago. Lawmakers do not create jobs, lawmakers take money from one productive activity, skim off their cut, and use some of the remainder to make other jobs elsewhere. On net, government actions eliminate jobs, they don’t increase them.
May: “What if this would produce environmental benefits, too?”
Reality: Even if we covered every square foot of arable land with a biofuel crop and converted it to ethanol, the reduction in carbon emissions to the atmosphere would have a trivial effect on climate change, but would significantly increase local air pollution. Using ethanol increases ozone precursor emissions significantly - even EPA acknowledges this.
May: “Would that not [increasing ethanol-fuel subsidies] send a message to the markets?”
Reality: Yes it would, a very foolish message. The basic message of ethanol is the opposite of economic rationality. Economic rationality consists of our selling what we can make more affordably than others (and making a profit), while buying what others sell for less than we could make it ourselves. Using ethanol takes our competively advantageous product (food) and converts it into an overpriced fuel, an act of profound economic silliness.
May: “And would that not represent the kind of change so many politicians have been promising?”
Reality: Yes. How do you know a politician is lying to you about ethanol? When her lips are moving.
May: “Why not a tax break, too, for anyone who buys a new Flexible Fuel Vehicle?”
Reality: Because it would be a waste of money. The vast majority of people with flex-fuel vehicles never run the things on ethanol fuel, not only because it’s not available, but because it’s more expensive per mile. And, E85 fuel pump (for 85 percent ethanol fuel) costs about $200,000 per service station. The United States has about 117,000 service stations. That’s only $23 billion. Maybe a tax break for that too?
May: “And any kind of biomass, including wild grasses, crop residues, fallen leaves and weeds that clog rivers can be used to make methanol, as can urban trash and coal - two commodities the U.S. possesses in abundance.”
Reality: Let’s talk about the implications of biomass “abundance.” According to the DoE, a ton of biomass produces about 80 gallons of ethanol. We now use about 400 million gallons of gasoline a day, and ethanol has about two-thirds the energy value of gasoline. So to replace say, half our gasoline use on a daily basis, you need to move 3.5 million tons of biomass to your ethanol plants every day. Your average log truck carries about 27 tons of biomass, so you’d need about 130 thousand trucks to move it. Diesel trucks. That’s per day, just to move the biomass to your plant. And, since you can’t put ethanol in a pipeline, you then have to move 260 million gallons of ethanol to blending stations. Tank trucks hold about 3,000 gallons, so you’ll need about 87,000 of those too. Now that is abundance.
May: “Americans are innovators and they would come up with a wealth of new ideas”
Reality: The idea here is that if only there was an incentive to use biomass for fuel, we’d have an avalanche of technological breakthroughs that would make it cheaper than dirt. Well, we already do, as do all of the high-tech countries who import most or all of their fuel. Japan imports every drop, yet their cars are only marginally more efficient than ours. Israel as well. There is already a nearly infinite incentive out there for the person who invents a genuinely less expensive fuel: it’s called profit. The person who comes up with a fuel that genuinely outperforms gasoline economically will be richer than Crassus. If that profit motive won’t kick loose a technology, having the government throw a few hundred million at grant-driven researchers isn’t going to do anything.
May: “With a variety of fuels competing, the cost of fuel - including gasoline - would go down. The OPEC cartel would no longer decide how much you pay to drive your car. A free market would make the decision - as it should.”
Reality: adding more expensive ethanol to gasoline makes the price go up, not down. OPEC never decided how much you pay to drive your car, your government did with taxes on fuel and, in the 1970s, price controls on gasoline. And a free market? May wants to mandate flex-fuels, subsidize car buyers, and force the most subsidized fuel in the world onto the market at higher levels, and he’s talking about a free market?
Perhaps he’s already gotten the message about ethanol: Drink it, Don’t Drive it.
Yes, we do have a free market for oil. [Edward John Craig]
Jerry Taylor writes in to respond:
Changes in the supply of or demand for oil rocket through international oil markets at lightening speed - to the great distress of many. In fact, oil markets may very well be among the freest in the world, if a market is defined as free to the extent to which price signals are accurate and reach consumers directly without distortion.Simply because OPEC has market power, does not mean the market isn’t free. If OPEC controlled oil prices, why would they have let the price fall to $10 a barrel in 1998-9? Or let it drop from $70 per barrel to $50 several months back? Were they just being nice?The argument that ethanol enhances national security is implicitly an argument that ethanol is a more reliable source of supply than foreign oil. That is false. Corn harvests vary twice as much as oil imports, as argued here.
I discuss the foreign-policy rationale for “energy independence” here. I remain unpersuaded.
What free market? [Edward John Craig]
Jerry Taylor over at the Cato Institute chimed in on Cliff’s piece earlier today here, expressing his concern over the message that flex-fuel mandates will send to the market.
Energy Victory author Robert Zubrin writes in to note that we don’t have a free market in oil; OPEC is manipulating that market, and the U.S. should manipulate it right back:
The issue is not ethanol vs. gasoline - the issue is fuel choice vs. OPEC control of the world energy supply.Right now there is no constraint on the price of oil, because gasoline is the only game in town. They’ve raised the price of oil to $100/bbl. Unless there is fuel choice, they can raise it to $200/bbl, and are already talking about doing so.
By mandating flex-fuel vehicles, we make the fuel market competitive. This will put a permanent constraint on the price of oil. We need to do that to defend our economy and that of our allies.
Methanol and ethanol are both competitive against oil at the $50/bbl range. Breaking the OPEC monopoly with an open fuel market would force fuel prices down to that level. It is true that oil can be produced for less than that. In a free market, oil producers would be forced to do so. They are not being forced to do so now.
Now, if we wanted to hurt them even more than that, we could violate the free market and introduce tax and tariff policies that favor alcohols over oil. There are pros and cons to doing that, but that is a different debate.
But certainly it is in the vital interest of Americans that we don’t have a closed fuel market controlled by our enemies. We need to open the fuel market, and making flex fuel the required vehicle standard is the only way to do that on a time scale relevant to dealing with the current crisis.
Drinks are on you, Ed. [Clifford D. May]
Ethanol makes good economic sense - and is essential for our national security.I know it’s widely believed that it takes as much energy to make corn ethanol as it produces, but that’s been disproven mathematically by energy expert Robert Zubrin, author of Energy Victory.
Also, there are many crops that require much less cultivation than corn (e.g. sugar cane, many weeds) and over time those are likely to win out in a competitive market.
Indeed, over time it should be expected that crops that grow wild or easily in tropical climates will be the cheapest fuel sources.
I’m all for nuclear plants and electrical cars, and those are coming - but not as quickly as we need in order to diminish the wealth transfer now underway to the Saudis, the Iranians, Chavez, Putin, et al.
What’s so cheap and clean about ethanol? [Edward John Craig]
I enjoy Cliff May’s work generally, but I have two large bones to pick with his column this week on ethanol-which to my mind makes little sense economically or environmentally.First off, it takes nearly as much energy to create a gallon of ethanol as you get out of it. Firing up tillers, harvesters, tractors, and trucks to first grow and then transport corn to the distillery, and then even more trucks to transport the finished product to market - ethanol has to be trucked: it’s less stable than gasoline, and can’t be pumped through pipelines - is hardly an enviro-friendly process. It may burn cleaner than gasoline, but the same can’t be said for the entire production process. Consider the fertilizers, pesticides, and the massive amounts of water required. Ethanol also evaporates far more easily than gasoline, contributing to smog.
Cellulosic ethanol may be even worse, when one pauses to consider the possible unintended environmental impact that switchgrass-dissolving enzymes could have if they become cheaply available in developing nations.
May’s piece begins with the sound proposition that government tinkering with markets doesn’t work. It’s a shame he didn’t apply the same rationale to ethanol mandates and tax breaks. If ethanol is so cheap, why does it need government interference to incentivize its production and consumption?
Ethanol makes little environmental sense. And it makes economic sense only for corn producers and processers. It makes political sense, sure - but the Iowa primary was weeks ago. I’m all for keeping petrodollars out of the hands of the Ahmedinejads and Chavezes of the world, but I’d rather do it by means of ounces of uranium than by thousands of square miles of corn stalks.
Better that automobile manufacturers concentrate on electric cars - drawing power from the grid, where corn will have to really compete with other fuels like oil, natural gas, coal, and uranium for the privilege of powering your Prius. If ethanol can win a share in the electricity-production market, I’m all for it. But it can’t today without government interference.
Ethanol has its place - aging quietly in small oak barrels after vigorous charcoal filtering. I’d love to discuss its benefits in more detail with Cliff May sometime.
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