A Vicious Circle
Posted by Robert Rapier on March 12, 2008 - 7:04pm
Topic: Policy/Politics
Tags: corn prices, environment, ethanol subsidies, Food Prices, mandates, subsidies [list all tags]
A few days ago, someone here posted a link to a story about skyrocketing farmland prices in the Midwest. It really made me angry to think about the inflationary chain reaction and the vicious chain of events our politicians have set into motion with these ethanol mandates. It made me even angrier to think that the few who benefit from these policies defend their right to siphon money from the rest of us and into their pockets. (I will be the first to say that surging energy prices are a big component of surging inflation, but with the ethanol mandates we are throwing jet fuel on an already raging fire).
This all started out innocently enough. Oil prices were climbing. Our energy production was shifting to an ever greater extent to countries that are hostile to the U.S.
So, Step 1 in the chain is to propose a solution:
1. The government should subsidize ethanol production to encourage production of home-grown fuels, which will enhance energy security and create jobs in the Midwest.
However, subsidies didn’t work as expected. It was still too expensive to produce ethanol. People continued to choose gasoline over more expensive ethanol. We had to move to Step 2.
2. The government should mandate ethanol usage.
When the mandate was added to the equation, things change. Now, the fuel doesn’t have to be economically priced. It is going into the fuel supply regardless of the price. This mandate generates an immediate market for ethanol, and kicks off a massive expansion of ethanol capacity.
But it isn’t long before we notice that too many people are building ethanol plants. This is causing a glut of ethanol, and putting downward pressure on the price of ethanol. On the other side, it is raising the price of corn. This lowers the margins for ethanol producers, and some producers start to go bankrupt. Projects are delayed or cancelled. The solution? Proceed to Step 3, which is entirely predictable:
3. We need to increase the mandate for ethanol usage.
Unfortunately this leads to more of the problems that arose from the original mandate. Corn prices go even higher. Land prices continue to climb. Land is shifted to corn production, forcing commodity prices up in other areas. Very few segments of the population are experiencing true benefits. The arms race continues, and we find ethanol producers will once again call for higher mandates. It is an entirely predictable consequence of the current policies we have in place.
Who Benefits
The primary beneficiaries are commercial corn (and other commodity) farmers who purchased their land prior to the mandates. They are truly experiencing a windfall from these policies, and thus will fight the hardest to continue down this ill-advised road. A lot of millionaires have been made in Iowa as farmland prices quadrupled.
Secondary beneficiaries are lobbyists who defend the practice, those who are willing to write papers (commissioned by the National Corn Growers Association) that shift the blame, and pandering politicians with constituents that benefit from the current policies.
Who Doesn't
The ethanol producer isn’t even consistently benefiting (unless they are also corn farmers). Ethanol producers are starting to realize that the energy business is often low margin (and cyclical), and not as lucrative as they once thought. When an overbuilding cycle occurs, prices crash. When prices crash, the call for more mandates is raised by ethanol producers who are facing financial trouble. Wash, rinse, repeat. After all, we must bail those out who make poor financial decisions. This is national security, for God's sake! If we don't bail them out with more mandates, the terrorists win. More mandates are certainly needed to rectify this.
The cattle rancher (like my Dad) and pig and poultry farmers get hurt from higher feed prices that cut into already razor-thin (or negative) margins. For our corn farming friends who love to defend these mandates, I would really appreciate it if you would explain to me why it’s OK for you to pull money out of my Dad’s pocket and put it into yours. I know your argument is that you deserve to make a good living. Well, so does he (don't we all!), but your profits are at his expense. But hey, you are getting yours, so you will defend the practice. Just don't expect me to keep quiet about the impacts.
The person trying to buy farmland is hurt by land prices that have exploded as a result of the mandates (unless they inherit family land).
The environment suffers as the mandated corn production means more herbicide, pesticide, and fertilizer usage, some of which ends up in our waterways.
The person who eats is hurt because higher commodity prices ripple through their food budgets, already stretched because of increasing energy costs.
Money for Everyone - and It's Good for the Environment
So what's the solution to this mess that has been made? I think it is simple, really. We all need to become either corn lobbyists or corn farmers. That way we all profit and we can afford to pay the financial consequences of spiralling inflation resulting from these mandates. (I suppose we will need to be subsidized for our farm purchase, since farms have gotten pretty expensive).
Now some may suggest that this would negatively impact the environment. I have a solution for this. We can simply commission a study to show that there is in fact no negative impact on the environment. Problem solved. I suppose I also need to commission a study that shows that aquifers are actually depleting because people are drinking a lot more water than they used to.
For those who support the mandates, why don't we create more wealth by mandating that everyone buy a new computer or a new Ford every 3 or 4 years? Wouldn't that create jobs? Heck, maybe we can make everyone wealthy and create jobs for all with more mandates. Unless of course, there is a downside to these mandates that I am missing….
RR - I am visiting friends in Western WI right now, who have farming families. They tell me land around here is renting for $250 an acre and is $300 an acre not too far west or south from here. Hay to feed animals is a problem, and some people I talked with are selling off animals because it costs too much to feed them (I would assume these impacts would eventually result in higher meat prices as well). As energy prices increase due to peak oil, rents on non-energy inputs will also increase as we will draw from the periphery to keep the status quo going. I would hate to be a corn or cattle farmer who didn't own the land - diesel, farm inputs and land rent going up mighty fast.
Robert and Nate
The complaint about policy that twists innovation and land values is valid.
Here is an option to find sustainable options.
Problem: Mobilizing for World War I infrastructures of power generation, communications and transportation were monopolizing to control threats.
De-monopolization of communications in 1984 broke this pattern. In 1984 we still had substantial numbers or rotary telephones. Now nearly every teenager walks around with a "shoe-phone" whose integrated computer would have cost more than $134,000 in 1984.
Monopolization has continued in power generation, inefficiency of 69%.
Monopolization has continued in transportation, inefficiency of 80%. CSX Railroad currently runs an ad showing how they move a ton 423 miles on a gallon of fuel. Ships and railroads are radically more efficient than cars. In congested urban transport, about 4 billion of the 8 billion miles Americans drive daily, efficiency is about 4%; the other 96% goes to drive climate change.
We do not have an energy problem, we have a regulatory problem. De-monopolize power generation (i.e. Germany's Feed-in Tariffs) and transportation (such as Personal Rapid Transit) and we can increase efficiency to live within a solar budget.
But even here at TOD discussion of Personal Rapid Transit is censored. If we want more creative answers we have to tolerate the flakes and innovators.
Bill,
I object to your assertion that PRT is censored on TOD. I don't know too much about it other than the closed loop systems around airports and the like. Perhaps you could do a post on PRT to get the discussion going.
I can understand why censorship is objectionable. It seems silly to me to excluded ideas. Ask Leanan why my posts on PRT keep getting censored. Currently urban transport is about 4% efficient. PRT can increase efficiency to about 70%.
I would post more about PRT but the post keep getting cut. Ask for an open discussion on this subject.
Cut?
Elaborate.
PRT is not a panacea. It has a niche benefits. But in that niche it can provide efficiency improvement from 4% to 70%. How big that niche will become will be clear over time.
Our approach is pretty simple, it costs less to move less. In highly repetitive travel, why are we moving a ton to move a person? Every stop start requires applying power to re-build kinetic energy.
I amended this Livermore Labs graphic to illustrate the vast percent of waste in power generation and transportation.
The "Potential Profit" is dumpster diving, the harvesting of waste into profit. It is hard work. It requires many niche solutions.
If we allow innovative solutions to attack waste, we will not have an energy problem. My education is in nuke engineering. I have no trouble with nukes, but distributed generation from solar is likely our best long term option.
If we use power where it is generated, you can substantially decrease transmission loses in power generation. Transmission loses are about 30%. That is what Germany's Feed-In Tariffs are accomplishing.
If we appropriately apply PRT, we can achieve rail efficiencies in urban transport. In our effort, we integrate distributed power generation to power a distributed need for power in transportation.
"Censored" is a far different animal than "dismissed by commentators". Every PRT system I"ve been introduced to was either wildly optimistic, didn't solve any problems better than competing transit solutions, was far too expensive, or some combination thereof. I've seen quite a few, and almost all were introduced on this site.
We've got trillions of present-day dollars and millions of miles of right of way in our current road system - that's the biggest block to PRT right at the beginning - we already built an all-encompassing system, our of asphalt.
We do not have an energy problem, we have a regulatory problem.
OH really?
Here *I* was thinking all this time 'we' had was a economic model based on growth, underpriced cheap energy, and strong arguments that the world is suffering from overpopulation.
If it is simply "too much government" - hows that 'less government' thing working out in the US of A? Ya know - under the rule of the party who says they are gonna shrink the government.
But let me get to why I opted to login and respond:
Now say - how does your PRIVATE transport system exist without the governments power to confincate land for public use?
(Odds are this query will go unanswered, the same way how pointing out bicycles 'weight less and therefore are an even BETTER deal' or how 'why move people when their daily personal transport options can be moved via worker dorms or telecommuting')
But even here at TOD discussion of Personal Rapid Transit is censored.
If that is the way *YOU* see it, that is your problem. *I* see it as some guy who wants to pimp his own idea that would line his own pocket with money who is being told 'no , this is not a vector for you to line his pocket'
You want to make a profit on your idea? Fine. But why are you so bent outta shape when you can not use a resource you are not paying for to spread your for-profit message?
Regulatory monopolies in power generation and transportation are terribly inefficient. Innovation is barred by regulations.
The biofuels effort is an attempt by current transportation regulators to find a way to sustain the car/road network. If we challenged our fundamental assumptions, we can invent better for some niches.
In the niche I understand (congested, repetitive transport), efficiency can be increased from 4% to 70%. If we do that, we can live within domestic US oil production. We can live within a solar budget.
"Waste not, want not."
Innovation is barred by regulations.
No.
Show how this is the case.
Sorry to say, I cannot quote the facts here.
bill, here is what i think of what you thought
1. Germany Energy is primarily a monopoly. Please read about a firm called EON. The government mandated the changes you are on about.
2. In the united states de monopolisation has led to price rises in the energy sector. As it has in UK too.
3. Monopolization has continued in transportation, inefficiency of 80% -> you need to read the history of californian trams/electric buses, note period after WWII when GM et al bought them up and slowly closed them down. A similar story happened with UK canals when railways came along. Lack of regulation, lack of checks and balances on democratic processes that allowed companies to make these monopolies. Thus never need to change their ways.
4. I praise the break up of AT&T, but what happened since, Bell south has managed to remake AT&T nearly. Microsoft has taken the IT market, though the EU are trying to stop that. In the US they legeslated to help Microsoft, upshot is that your software patent laws are a nightmare for small and middle sized businesses, they can barely compete. I admire the states for break up of monopolies like standard oil and AT&T, but they are one off examples.
My thoughts are while you could have non monopolies running these utilities, they are utilities in the end, and have become just too important to allow free market reign. in our democracies the is inherent bias to well funded lobby groups as the people who could regulate often need to make quick decisions that they may not have time to answer well. In these situations, these poeple, if fed something convincing from 'friends' without other opinions fall for the lobby group opinion.
You can guess I am european, I think the is a need for a shake up in how Anglo saxon countries view regulation. We need more transperancy and ability to lock up politicians who are corrupt, or indeed so stupid they fall for lobby group gambits. We need much stronger corridors for lobby from populace.
de-monopolization does not seem to work.
alex
"In the united states de monopolisation has led to price rises"
No, liberalization without sufficient demonopolisation led to price rises. There must be sufficient competition for liberalisation to be effective.
In California deregulation allow customers to choose who would bill them for power.
De-monopolization, allows anyone to sell power to the grid. This allows small business to find profitable niches.
There is a huge difference.
And yet, the people who make claims like yours do not:
1) Set up court watchers.
2) Complain when it is illegal to set up doctor rating systems.
3) Complain when Creekside Beef is treated the way it was.
(there are more, but these are just a simple sample)
But here is the money shot:
"must be sufficient competition"
So, you gonna support the government breaking up GE/WalMart/Boeing/Lockeed-Martin/(blah blah blah)?
How about breaking up AT&T
Strange tie-in but in general, I think there are anti-trust laws for good reason.
If you want innovation, let people bet their own money.
That is the whole problem with ethanol. It is growing because of subsidies, not market demand.
If you want innovation, let people bet their own money.
Then why complain about when people who are using there own money (to set up this place) opt to choose where the discussion goes?
Hi Alex
Monopolies in political terms are dictatorships, monarchs, etc... Monopolies in commerce are not much better at allowing new ideas.
The simple truth is that our current infrastructure is the cause of Peak Oil and Climate Change. We built it. We can build better.
At the time of Edison, Ford and Bell, regulatory monopolies were very weak. As the monopolies grew, we locked in inefficiencies from a century ago. Since de-monopolization of communication in 1984, communication's infrastructure has radically improved. If we want to re-tool transport and power generation, we need to allow the messy process of churn to sort breakdown from breakthrough.
If you want to adapt, you must allow churn. You cannot expect monopolies to risk their existence by allowing themselves to be superseded by better ideas.
You cannot expect monopolies to risk their existence by allowing themselves to be superseded by better ideas.
I still am looking for your whitepaper on the use of Eminent Domain to take from one party to give to another in the name of public good - and how often the new owner results in private gains.
Because the monopolies you list all had the use of Eminent Domain to set them up, and the regulation was the bargin THEY entered into to have the takings of property via Eminent Domain.
The FCC had the incredible foresight to note that networks provided for the general welfare and common defense, a Constitutional basis for granting rights of way for communications networks.
Rights of way need to be paid for, but where would we be without roads, railroads, sewers, power grids, etc....
PRT being off ground plane, will have a visual impact but consumes very little actual land. It should still pay for those uses.
You're using the FCC as a good example of providing for general welfare and common defense? That's a little problematic, seems to me. I'd use the FCC - and document my argument - to prove the failure of the regulatory state and system.
If you want people to take you seriously, do your homework. Upthread someone suggested you put together a White Paper.
cfm in Gray, ME
Rights of way need to be paid for, but where would we be without roads, railroads, sewers, power grids, etc....
But that is not the system that exists.
Land and right of ways are not treated at market rates or market terms.
PRT being off ground plane, will have a visual impact but consumes very little actual land. It should still pay for those uses.
And yet, while you say 'should', you'll be happy to on the profit end of a eminent domain taking.
Robert you are 100% right.
Food to fuel just plain evil.
Not to worry my new SUV gets 10 starving kids to the mile.
Bio fuels are a bad joke... Anyone advocating for them should have all fosil fuels taken away so they can prove energy out is greater than energy in for bio....
As a farmer I think all subsidies should be removed let the chips fall where they may without intervention....
I fully agree that ethanol is a piece of crap. But wait until the government bails out the financial greedsters by shifting the debt from the private to public sector. That's going to make ethanol look like a non-event.
Todd
Todd,
I couldn't agree more. I had wondered how it would get monetized. Add bad bank loans, etc.
The fed cannot just "print money" and give it away via helicopter Ben. It must show up on the bookkeeping/accounting ledger somewhere. It is now very very clear, bank "non performing assets" & the ethanol boondoggle will get shifted to public sector via some bailout program with alot of voter appealing lipstick.
Maybe I'm too young to realize that the sleaze has always been there at this level, this just looks like a scale or two higher or more blatant than what I remember.
D
Check out Northern Rock in the UK for insight into how it works - that is a crashed sub-prime home loan institution, still trading but taken over by the Government- the cost of this is around the same as the total Fed expansion in a much smaller economy, around £100bn.
It is still being held off budget in spite of the protestations of the independent statistical office and amounts to around 5% of Britain's GDP.
The next shoe to drop in the world financial system will be Britain, which has far worse fundamentals than the US:
http://business.timesonline.co.uk/tol/business/economics/budget_2008/art...
On the brightside, when that unwinds into currency rates, US travellers may be able to afford to go somewhere at a reasonable exchange rate after all! :-(
"the cost of this is around the same as the total Fed expansion in a much smaller economy, around £100bn."
This cost is only £100bn if you assume the underlying assets, the houses, are worth £0. House prices may fall, but they are unlikely to actually fall to zero. In reality the actual exposure the taxpayer is much smaller than this quoted figure. In may not be great times for sellers in the UK housing market, but a fall of much more than 10% is probably unlikely.
You are correct, I overstated my case.
Had they subsidised Virgin to take over the business, then the cost would likely have been of the order you mention or even less.
Instead they have decided to nationalise it and carry on trading, as the £5-10 billion would have shown clearly on their books.
Having had considerable experience with nationalised companies over the years they have pretty well all ended up as valueless assets, although the drama might take a while to play out.
Further plays with dodgy assets would not at all surprise me, rather as a gambler tries to recover his losses.
There are likely other lenders who will need bailing also, so I don't think overall I am being too generous in allowing £100bn, but of course you are right at the present time.
RR -- thanks for the provocative post. Here in Minneapolis, MN, many people still think that there is just no downside to ethanol.
I was at the Mpls-St. Paul Auto show repping Zap MN, which sells the electric Zap Xebra.
The show was full of huge SUVs, vans, and pickup trucks with all manner of shine and sparkle.
There were all kinds of cars, but most were not fuel efficient at all.
The vehicles that weigh three tons or more no longer have to show an estimated city mileage or highway mileage -- they just put a big "XX" where the numbers should go.
GM had their big Yellow signs for their big push for ethanol fueled vehicles.
Why are we still building and selling a huge oversupply of vehicles that guzzle liquid fuels?
A person can buy, insure, and drive a Zap Xebra for the amount of money many people pend on gas for one vehicle. Yes, the Zap is limited to 40 mph and a 40 mile range on a 60-cent charge, but most of our urban trips are under 10 or 12 miles.
The ethanol boom is another terrible policy courtesy of Corporatist culture. Corporatism is fixated on fusing government and business leadership, centralizing wealth and militarism. Ethanol fits in just fine with that.
We need to reduce population and consumption. We need to educate ourselves about how to survive in an increasingly hostile, volatile climate. We need to learn to replace war with diplomacy.
We are investing all we can to out consume every other nation, to deny the possibility that this planet can limit our appetites in any way, and we are investing as much as possible in war. Ethanol fits in fine with that as well.
Everyday folks are cultivated to be willfully ignorant and resistant to change, submissive to authority, and conformist in thought and deed.
No where is this more apparent than at an auto show. Those who suck up to the Corporatist leadership get to have jobs.
When things get painful here in the USA for enough people, then the Useless Eaters will be imprisoned or killed, as will be dissidents or nonconformists or those who defy authority in any way.
RR - we love ethanol. How could it possibly be otherwise?
I am sorry, but something like a zap is a joke. Lets see, I could buy that, pay about $.50/day for electricity and have something that would absolutely useless for anything except my commute to work (assuming that I was willing to risk my life and actually get on a road in that thing). Or I can take the cost of the zap and buy a monthly pass on our trolley system for the next 12 years.
I will take the Alan approach and stick to my electric train.
The Zap Xebra I drive each day is quite useful.
I do handyperson work and house cleaning in an urban area. I think my furthest client is about 6 miles from my home.
I can carry my tools and supplies in the Xebra and get my work done for the cost it would take me to put gas in the tank of most vehicles.
I think that electric trains are the best for commuting without tools and such.
In Minneapolis, many people bike to work -- year-round, in spite of the cold winters. I did this, but the load-hauling aspect caused me to re-think the biking. Carrying a few hundred pounds of tools can be tough on the hips and knees, when done daily.
We are headed for a kind of ecological crash that requires us all to take more immediate risks for the benefit of everyone, in my view.
We are at war, but not with the evil-doers outside of ourselves. We are in a struggle to make it through the Bottleneck of the next thirty years or so with as many species intact as possible. So we might need to take some personal risks -- at least some of us.
My guess is that our species is toast, but I'm willing to assume some risks if there may be a worthwhile payoff. The Zap is a classified as a motorcycle. That's not a huge risk, in my view. And the payoff may be that I do less damage because of my choice to drive a Zap for some urban trips.
Driving most ICE vehicles is a risk I'd rather avoid. My family does own a Honda Civic Hybrid as well. I look forward to the day when we could go with just the Zap and bikes, walking, public transport.
One day, we may not even need the Zap. Just rely on walking and biking and public transport again.
Beggar;
Thanks for the detailed witness. While I feel that Alan is right Overall about Electric Trains (and Bikes) over EV's, I think it's a matter of emphasis, not an 'Either Or'..
As many times as we say we'll be pursuing lots of little BB's to try to get through this, any time you give a shout out for a good BB, you get pelted with stones because 'That one thing can't solve the WHOLE problem, and would be disastrous if they tried.'
Yikes.
Well, big surprise, as we're in a time of extremes, so anything Moderate is going to be rallied against as Traitorous to both ends of the Spectrum..
Keep it up!
Bob
This used to be called appropriate technology. Select the technology appropriate to the task at hand which gets the job done, taking into consideration the economic, energetic, and environmental costs of that technology. My ultimate dream would be car free cities everywhere, but we still need to make provisions for the transport of things like tools, heavy equipment, and other heavy and bulky items.
I saw a picture of a solar installer in Boulder, Colorado hauling solar panels to a job site with a bicycle pulling a trailer. It was part of the company's effort to minimize the carbon footprint costs of its installation. This was a local delivery and made perfect sense, especially given the company's mission.
Life, without risk, tends to be not terribly adventurous or rewarding.
I think you should consider changing your moniker from beggar to something like "saint".
We need to bury the "one size fits all" mentality, before it buries us. What is needed is a mix of transport options. For a quick trip from the periphery to downtown, or across town, or from one end of downtown to another, mass transit in one form or another is the way to go. For shopping and other chores around one's neighborhood, NEVs are just the thing if the weather is too bad or the distance is too far or the traveler is too infirm to walk or ride a bike. Interurban trips need to be by electrified passenger rail - high speed if possible, but any speed would be better than none at all. If you need to go someplace off the beaten path not served by rail, then one could get there by ICE automobile (maybe rented); that would also be the option if one needed to haul some stuff. Cross-continental and inter-continental trips will probably still be by air.
IF we had European-quality urban and interurban rail service, and IF we had a network of car rental agencies distributed across neighborhoods rather than just clustered at airports, THEN most people probably COULD get by with just an NEV, most of the time.
Absolutely true. It will be a combination of options that will be viable - some at the personal level, some at the local level, and some at the regional and national level. The marriage of them all together is what will make a viable transportation system. Remove any of them, and the others are less useful.
re "zap is a joke" - I wonder at the hostility. Seems to confirm beggars point about our national mindset and reminds me of Cheney's "Our way life is not negotiable". I don't believe the poster intended it that way but there it is.
Many people have many different needs and short range transportation is not a joke. My typical car trips are all involving children and all less that 10 miles round trip 5 to 10 times a week. The idea of the bus or trolley or any other kind of mass transit meeting those needs is very un-realistic. I am able to substitute an electric/human hybrid tandem bike for many of these trips. It is not a joke. I also accept completely the assertion from enviro attny that electric train is best for him.
Thanks to all for encouraging remarks!
The Neighborhood Electric Vehicle is one of the best solutions we have available, IMHO.
We do need to learn to have a beginner's mind and to see our own consumption patterns in new ways. Then we need to modify our lives so as to reduce consumption as best we can.
Public transportation -- electric rail -- seems to me to be one of the best solutions out there for reducing energy waste in urban areas. Rail transport in general seems like an obvious strategy for us to invest in as much as possible.
I agree that we need many solutions, not a one-size-fits-all approach.
The way we see ourselves is crucial. I chose the user name "Beggar" because I see us all as beggars trying to find out where food and shelter and good companionship is available. This goes for rich and poor alike.
We all have to decide how to spend our time between now and whenever we die. I see us as very transient, comical and tragic creatures.
Ethanol is another one of those strange responses to a problem that make me laugh and cry.
Running out of liquid fuel? Poisoning the planet's air and water and soil?
Our ethanol "solution" is to make more and different liquid fuels -- to do more of what we were doing that got us into a fix in the first place. Where is Charlie Chaplain when you need him?
beggar, "We need to reduce population and consumption."
Consumption reduction is difficult, but how exactly do we reduce population? Fact is it's impossible. Think about it, there is no way to accomplish that. It may seem like a good idea on the surface, but it simply can't be done. The Christians run America, and they believe in having huge families and anyone disagreeing with that notion would immediately lose their political position or be character assasinated. Even in China with their one child law, it didn't work because the wealthy and party members are allowed to have more than one child, often having several. During the one child rule China's population has risen from 900 million to 1.3 billion and still rising. There's even word they have given up on the idea.
Humans, although we have in some ways distanced ourselves from the wild kingdom, are still motivated by the urge to procreate. The one constant is population increases worldwide of about 90 million a year. About one new Mexico a year.