Ethanol's Fall and the Oil Price Floor
Earlier last week, I wrote about a recent study that demonstrated how cellulosic ethanol carries fewer public costs than corn ethanol primarily because it releases fewer fine particulate emissions. In part because of its attractive emissions profile, I suggested the future of cellulosic ethanol looked rosy.
Of course, that future depends on demand for ethanol of any kind. And that appears to be very much in question.
The New York Times wrote later this week about how collapsing demand for ethanol has set off a wave of plant closings and bankruptcies in the industry:
“Bob Dinneen, president of the Renewable Fuels Association, a trade group, estimated that of the country’s 150 ethanol companies and 180 plants, 10 or more companies have shut down 24 plants over the last three months.”
When oil was at $145 a barrel, ethanol demand far outpaced the amount needed to satisfy federal mandates for ethanol blending. But now, with oil trading under $40, demand has vanished. New production mandates set by Congress just one year ago seem unattainable as well.
Senator Jeff Bingaman of New Mexico, the chairman of the Senate Energy and Natural Resources Committee, has said Congress may have to "reconsider" the mandate because oil and gas prices have plummeted and ethanol no longer looks like a go-go fuel.
What can we learn from the ethanol industry’s latest sudden turn? We have said it before; we now say it again: We simply must have prices for oil and gasoline that more closely reflect the fuels’ cost to society. All thoughtful economists, including most of the majority backing the stimulus package, agree that until oil costs are high enough, most national energy and climate policies won’t get off the ground.
The government must step in and set that higher price for oil. It can do it through a carbon cap-and-trade plan or a gas tax.
How do we prevent high gas prices having a disproportionate effect on any segment of society? The revenues of any scheme should go to ease the taxpayer burdens and to subsidize green energy technology, in that order, given the state of the economy today.
Our collective energies should go to designing the best and fairest price support under oil and other carbon-based energy sources, not rolling back biofuels mandates.
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