Surprise: Government Mandates Behind Ethanol ‘Bubble’

Leave it to the foreign press to explain one of the major problems with American over-regulation and subsidies.

The Financial Times published a series Oct. 22 and 23 examining a subject the U.S. media have largely ignored: the effect ethanol mandates and subsidies have had on the ethanol market, investors, and food prices. Here's a hint: the effects are not good.

The first report  highlighted the billions of dollars in losses investors have suffered after fluctuations influenced by legislation. Congress passed a mandate in 2005 requiring 7.5 billion gallons be mixed into the gasoline supply by 2012. They doubled that goal in an energy bill in 2007, requiring 36 billion gallons by 2022.

"Congress and the president created a multi-billion dollar market for corn-based ethanol virtually overnight," the report said, leading to a surge of investment culminating in late 2006. But as more ethanol plants came online and the price of the fuel dropped, the companies' values started declining even as the price of corn continued to rise.

"Yet such is the enormous political and corporate weight behind the industry that only a brave gambler would bet on it fading away soon," the second report said, illustrating the political support that has kept the failing fuel afloat.

But the report missed on culprit in the push to keep ethanol on artificial life support: the U.S. media. Outright praise for ethanol has subsided. Some reports have even linked the increased use to ethanol to rising food prices and global hunger crises. But the U.S. media have largely failed to connect the increased demand for ethanol to government mandates - essentially artificial manipulation of the market.

The mandates "absolutely" lead to higher corn prices, which lead to higher prices for food, even contributing to global hunger crises in poor nations, according to George Mason University professor and Business & Media adviser Don Boudreaux.

Boudreaux addressed ethanol in "America 2012," BMI's new Special Report on economic issues in the presidential campaign.  

"Farmers, especially corn farmers, made out like bandits because now there's this artificial market enhancement for their product and so they're receiving higher returns causing the price of corn products to rise, the price of foods that are close substitutes for corn to rise, and of course it's ... one element in the rise of the price of gasoline."

Ethanol as an alternative source of energy is one of the major issues in the presidential campaign. Democratic presidential candidate Sen. Barack Obama has supported ethanol, calling it "only the beginning." His GOP opponent, Sen. John McCain, has criticized ethanol subsidies.