Sunday, May 25, 2008

Ethanol and fundamental economics

The fact is, there is very little argument in favor of corn-based ethanol; it is expensive, its is energy consumer and, most damaging, it is not economic. I am all in favor of alternatives to fossil fuel, in fact, I believe that finding such alternatives is one of the great challenges of our times. But an “alternative” that has to be propped up by protectionist measures put in place for political purposes is no alternative at all.

Regardless of how well a government thinks in can out-wit the markets, fortunately often simple economics comes back into play to show the fallacy of ill-thought-out policies. This is no clearer than in the ethanol market today.

There are many reasons for the high price of food right now, and I’m not claiming that there is one single magical cause. But a major contributor has to be that the price of corn is shooting up because of all of the protections around corn-based ethanol.

While these protections may not be going away (they are politically valuable), they are at least being called into question. And that is having a chilling effect on the corn-ethanol industry.

"If you sell one product and the only reason there's a market for it is because the government makes a law requiring consumption - if that law goes away, obviously you're in trouble," Gilpin said.

Greenwald argues that if there are still government regulations in your favor, that could be a competitive advantage. Indeed, the corn-ethanol industry has enjoyed competitive advantage verses other ethanols (Brazilian sugarcane for example) precisely because of these regulations. However, I don’t think Greenwald or anyone else would argue that if those policies are fundamentally uneconomic, they present a long-term haven. An attack on this false safe-haven is what we are seeing now in the markets.

Ethanol Turmoil Calls for Legislative Change a Threat to Some Companies - Business - redOrbit

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