no third solution

Blogging about liberty, anarchy, economics and politics

The Road to Poverty is Paved With Unintended Consequences

June 26th, 2007

And slogans like, “Energy Independence.” I’m pretty sure I hit on this a few months ago – but I’ve been unable to find a reference. Anyways, even if I did: I’m not an oracle; but if you make predictions based on the laws of economics, you’re not usually wrong.

And the laws of economics state that when the demand for a good increases, the prices of all goods derived therefrom, will also rise. When automobiles became popular, the demand for fuel oil increased. The price of heating oil went up. Sure, that happened a long, long time ago. Things have changed, haven’t they?

In a word: No. Some think that we’ll be paying upwards of $4/gallon. For milk by the end of the summer – because of an increase in the price of corn – because of an increase in the price of petroleum.

“When you have high petroleum costs, you have high fertilizer costs, but the more predominant factor has been the run-up in the cost of corn,” he said. “That is due almost exclusively by the competition of the ethanol industry with livestock producers for a finite amount of corn.”

The kicker is that Ethanol is heavily subsidized:

Ethanol already has a 51 cents-per-gallon federal subsidy, so corn producers in Michigan and across the country are clamoring to get into the game.

The price of ethanol is upper-bound by the price of near-substitutes, like gasoline. The only reason corn is as expensive as it is, is because of the artificially induced demand for ethanol, a price that is propped up with money confiscated from you and me, in the name of energy independence. Which means that you’re being taxed in order to keep ethanol profitable to produce. Unfortunately, a necessary consequence of this policy is that the taxes you already pay are causing an increase in the price of other goods you need to buy.

What’s the point of having cheaper gasoline, if the price of everything else goes up?

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  • KipEsquire says on: June 26, 2007 at 2:20 pm

     

    And there are secondary effects too: The price of tortillas in Mexico is skyrocketing (corn is an input), and the price of beer in the U.S. is also rising modestly (farmers are switching to corn from barley, hence lower supply of barley, hence higher price of barley, hence higher price of beer).

  • trav.is says on: June 26, 2007 at 3:00 pm

     

    Kip, that last fact is truly tragic. And if higher beer prices can’t spark a 2nd American Revolution, I don’t know what can. “Boston Beer Party” sounds better than “Boston Tea Party” any way….

    If politicians and pundits really, truly wanted to talk about energy independence, instead of just paying it lip service, ethanol wouldn’t even factor in. It takes more than one gallon of petroleum to produce one gallon of ethanol.

    No. Politicians would have to get serious about drilling in ANWR and/or building new nuclear power plants. Those are really the only ways America could feasibly feed its need in the near term.

    I won’t hold my breath.

  • Ron Steenblik (Global Subsidies Initiative) says on: June 27, 2007 at 10:05 am

     

    For more information on the multitude of subsidies and other interventions supporting ethanol and biodiesel production in the United States, see our in-depth report, “Biofuels–At What Cost?”, which can be freely downloaded from our website.

  • David Z says on: June 27, 2007 at 7:05 pm

     

    Thanks for the link, Ron! There’s an awful lot of material in that report!

no third solution

Blogging about liberty, anarchy, economics and politics