Not profitable — 02/14/09

America’s love affair with ethanol as a major alternative fuel seems to be wavering. That’s what happens when Congress and state legislatures base their energy decisions more on appeasing farmers than on technology. Ethanol has always been more about creating a new market for corn than on reducing America’s dependence on fossil fuels.

Ethanol is hardly a new technology, but it has never caught on as an alternative fuel because it has always cost much more to produce ethanol from a bushel of corn than gasoline from a barrel of oil. But that began to change in 2007, when the price of crude oil soared to $145 a barrel. Ethanol suddenly looked like a viable alternative fuel, and Congress encouraged its production by mandating its use. Dozens of companies began building plants to produce ethanol — and most of them received tax incentives to do so. The future did indeed look bright.

But the price of crude oil began to sink dramatically, making ethanol again less economical to produce. In fact, while oil prices dropped, corn prices soared. And the severe economic recession has caused Americans to reduce their consumption of gasoline.

As a result, Reuters has reported than more than a fifth of U.S. ethanol production capacity had been shut down because of weak demand. VeraSun Energy, one of the largest producers, has filed for bankruptcy and shut down 12 of its 16 plants. Several other producers have also sought bankruptcy protection. Companies are mothballing or closing plants. (This community is way ahead of the game here. Because it was never profitable, South Point Ethanol ceased operations years before the renewed interest in ethanol.)

All the current turmoil in ethanol production comes at a time when the federal government continues to mandate the use of ethanol. Uncle Sam has ordered refiners to blend 10.5 billion gallons of ethanol with their gasoline this year, rising to 15 billion gallons in 2015.

Some believe we can extract alternative fuels from switch grass, crop stubble, wood chips and yard waste. In fact, Congress has ordained the production of 100 million gallons of fuel from these and other sources by next year.

What the federal government and some states have tried to do with ethanol and other alternative fuels is rewrite the laws of economics. It doesn’t work that way. Consumer demand creates real markets for products, not laws mandating their use. Congress should remember that in economics and technology “demand” is always a better motivator than “command.”