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Ethanol: A Tale of Two Candidates

2:40 PM, May 26, 2011 • By DAVE JUDAY
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In a moment of candor after his political career had ended, former vice president Al Gore averred that his support of ethanol was in part driven by “a certain fondness for the farmers in the state of Iowa because I was about to run for president.” Gore, it should be noted, cast the tie-breaking vote in the Senate when he was vice president in 1994 to pass the first statute to mandate the use of ethanol as an additive to certain reformulated gasoline blends. 

Gingrich Newt

Ethanol fever is far from being a partisan affliction, though. The latest diagnosed case is Republican presidential hopeful Newt Gingrich. In his most recent speech in Iowa, Gingrich declared his commitment to make America energy self sufficient, in part through ethanol. The applause line/press lead of his speech: “if my choice is Iran, or Iowa, I prefer the money in Iowa. If my choice is Saudi Arabia, or South Dakota, I prefer the money in South Dakota." 

Another GOP hopeful, however, has evidently been inoculated against ethanol fever. Tim Pawlenty, former governor of neighboring Minnesota where ethanol is also a big deal–indeed, Minnesota has been making direct payments to ethanol mills since 1987–has dared to take up the cause against federal ethanol subsidies. In his most recent speech, Pawlenty said that federal subsidies for ethanol “have to be phased out.” He continued, “even in Minnesota, when faced with fiscal challenges, we reduced ethanol subsidies. That's where we are now in Washington, but on a much, much larger scale.”

Pawlenty’s position is predicated on the state of the federal budget and the U.S. economy. America can’t afford more subsidies; he’s campaigning to weed out virtually all federal subsidies. And he’s right when he goes on to point out that mandates and subsidies distort the economy and create unintended consequences–case in point, the federal preferences for ethanol have left us with food price volatility by diverting much of the U.S. corn crop away from livestock feed to vehicle fuel. In April of this year, ground beef prices were up 20 percent over April 2009, bacon prices were up 30 percent over the same period according to USDA data.

Gingrich, on the other hand, is pandering. His comments about choosing between sending money to Iowa and Iran or Saudi Arabia and South Dakota should win his speechwriter some kudos for clever juxtaposition and alliteration, but the premise is a straw man. The two biggest foreign oil suppliers to the United States in 2010 and so far in 2011, according to the Department of Energy, are our two NAFTA trading partners, Canada and Mexico. Gingrich, as House minority leader, was instrumental in securing passage of NAFTA—an achievement he should take credit for. NAFTA has certainly helped wean U.S. reliance on Middle Eastern oil.

As for high gas prices? That’s about money—not where we send it, but rather about fiscal and monetary policy. It is not coincidental that the dollar has depreciated against both the Canadian dollar and the Mexican peso while prices at the gas pump rose. Stimulus bills, loose monetary policy, and the Federal Reserve’s quantitative easing program have all flooded the economy with cheap dollars. Cheap dollars buy less. Curbing domestic inflation and stabilizing the dollar on global markets is a subject more worthy of Gingrich’s intellect.

Despite Gingrich’s claims, biofuels won’t make this country energy independent. There just isn’t an adequate feedstock supply in the United States to make enough ethanol to meet our fuel demand. Current ethanol production uses 40 percent of the corn crop and yet supplies only 9 percent of our fuel supply. Where do we go from here? Cellulosic ethanol—the long promised second generation of ethanol? It isn’t economically viable yet.

Even if cellulosic technology were cost effective, we’re back to the feedstock issue—and the unintended environmental consequences. Consider that one 60-foot tall softwood tree produces about 6 gallons of ethanol. It takes 20-30 years to grow that size. So a one-time fill up of a 20 gallon fuel tank on an SUV would represent between 60 and 90 years of tree growth. On a broader scale, harvesting every tree in New Hampshire over 5 inches in diameter could supply about 18 percent of the U.S. motor fuel needs for one year. Will that factoid make it into Gingrich’s stump speech in the Granite State?

Pawlenty and Gingrich have defined the boundaries of the ethanol debate in the GOP presidential primary. It will be interesting to see which message connects with Iowa voters, which message has more traction outside of Iowa, and where the other candidates will fall along the Gingrich-Pawlenty ethanol gamut. 

Dave Juday is a commodity market analyst.

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