Texas and the Ethanol Dilemma

According to this article from Reuters Texas is seeking for a cutback in the amount of ethanol mandated to be produced. The purpose is to ease food prices. The problem is that the ethanol mandate is designed to push the U.S. past food derived ethanol. Cutting the amount of ethanol in mandated as suggested by the Governor of Texas would have worse effects than leaving it in place. The purpose of the mandate is to force the technology for cellulosic ethanol to be developed. It would not be cost effective to produce 7.5 billion gallons by 2012 out of corn. Do so would increase the demand for corn to unheard of levels and raise the price of corn so high it would not be worth it to make fuel.

So, the mandate should force cellulosic ethanol to replace corn-based ethanol in the long term. In the short term though it seems food prices will just keep climbing and put the pinch on lower income households. One thought that I guess did not occur to Gov. Perry is that Texas is one of the few states that can produce sugar beets year round. On top of that ethanol from sugar beets is cheaper to produce than from corn. In conclusion it appears to me that instead of attacking the ethanol mandate Texas should be using it to create jobs in sugar beet processing. This will take some of the pressure off of corn (not a complete solution to the food crisis as farmland is still being used to produce fuel) by providing alternative methods of ethanol production. So in the near-term corn prices should at least increase slower while the mandate already in place will encourage cellulosic ethanol processes in the longer term. What do you think?

A Rock and a Hard Place

The U.S. is in a tight spot these days when it comes to energy. Aside from the uncertainty over carbon limits, the economic outlook is weakening. The Federal Reserve is trying to stimulate growth but keep inflation down. Fuel price spikes are racking up costs along supply chains and biofuels intended to increase fuel supplies are raising food prices.

According to this biofuels have kept gasoline prices 15% lower than if there were no biofuels. If it is true, this proves that biofuels can make a noticeable dent in gas prices. The only problem is that food prices (particularly corn, soybeans, and wheat) are inflating from the limited amount of land for farming.

The obvious move the federal government should make is to eliminate the tariff on imported biofuels, especially ethanol from Brazil. This would alleviate prices of food and fuel for Americans in the short term while the federal mandate issued for cellulosic biofuels creates the new technology. The drawback is that importing more biofuels does nothing for energy security, but that is not entirely true. A larger fuel supply provides more buffer for rising prices. Brazil may be seen a more stable economy and a more attractive investment location compared to some middle eastern or African oil economies.

The odds are not good that Bush will approve eliminating the tariff, so it may be a long shot. What do you think?