There is supply. And then there is demand.
It’s not that difficult. If there is a demand for a product, then the market will supply it, and the quantity of the supply helps dictate the price.
Now, the government doesn’t believe in supply and demand. It thinks that if they create the supply and force it on the market, a demand will somehow be created.
For example:
Two years ago, Congress ordered the nation’s gasoline refiners to do something that is turning out to be mathematically impossible.
To please the farm lobby and to help wean the nation off oil, Congress mandated that refiners blend a rising volume of ethanol and other biofuels into gasoline. They are supposed to use at least 15 billion gallons of biofuels by 2012, up from less than seven billion gallons in 2007.
But nobody at the time counted on fuel demand falling in the United States, which is what has happened during the recession. And that decline could well continue, as cars become more efficient under other recent government mandates.
This is the setup. The government orders the market to use ethanol. The market says, “Um, forget that. We’re cutting back on the use of gasoline. Sup now?”
The government says, “Huh. Well, no reason to stop making ethanol. Let’s just increase the percentage of ethanol mixed with gasoline. That’ll fix it.”
Yeah, not so much:
One possibility is to raise the maximum proportion of ethanol in gasoline to 15 or 20 percent.
But that idea is opposed by some carmakers and pollution experts. They contend that high ethanol blends can cause damage to cars, including making catalytic converters run hotter.
The Alliance of Automobile Manufacturers says it believes this could cause the converters, components that help control pollution, to fail at around 50,000 miles. They are supposed to last for 120,000 to 150,000 miles. “We are sensitive to the issues facing the ethanol industry, but the government must make decisions based on sound science,” said Dave McCurdy, president and chief executive of the alliance, in a letter to the E.P.A.
Sound science? As long as that science isn’t economics.
Here’s another problem. Ethanol isn’t as fuel efficient as straight gasoline. So, mixing more ethanol in with gas effectively reduces the fuel efficiency of America’s cars. That makes little sense to begin with, less when you consider the same bill that ordered an increase in ethanol also ordered an increase in fuel economy.
So why don’t they just waive the ethanol standards? Politics, silly:
Another possibility is that the agency could waive the mandates requiring use of a large volume of biofuels. But that would anger farmers, who sell a great deal of corn to ethanol factories, and the members of Congress who represent them. It might also undermine the efforts of companies that are investing millions in factories to make ethanol from waste materials, like corncobs, straw and garbage.
They didn’t mention what that would do to the corn market. If there is suddenly a drop in the demand for corn, but the supply doesn’t change, the price of corn drops,
There is no easy way out of this. Government should not have been messing in the market to start with. If ethanol were the salvation of American motorists, it wouldn’t need government subsidies. But the farm lobby wanted it and they got it. Now, we have a glut of product on the market and no easy way out:
A return of $4 gasoline might change things, by making E85 a relative bargain and spurring wider use. So would an unexpected spurt in total fuel demand. Otherwise, it is not at all clear how the nation’s coming surplus of ethanol can be absorbed.
That’s a cheerful thought.
Hat Tip: Say Anything
