I recently received a comment that I felt deserved a complete response.  The comment was:

“I’m just curious, have you not read any articles or studies about the efficiency of ethanol? I’m not talking about it giving you lower mpg I’m talking about how wasteful it is to produce and the fact that without government subsidies of corn and ethanol it wouldn’t be at all viable? (which I guess means that it isn’t in fact viable because government subsidies can’t be relied on forever.) Seems like a dead end to me.”

First, we should talk about what we mean by “viable”. I think that this commenter is using viable to mean that it makes economic sense to do it. Government action, like subsidies or fees, can change the equation of whether something is economically viable or not. For example, if flood insurance on the free market would cost $1000 a year for every $10,000 in property you wanted to insure, constructing homes on flood plains wouldn’t be economically viable. If the government subsidizes it so that it costs $10 a year, then it becomes viable and the government has more livable capacity for more taxpayers.

It’s true that the federal government subsidizes the cost of ethanol production. But what most people don’t understand is that the government also subsidizes the cost of oil refining and transportation – it’s just not a direct subsidy. Oil companies don’t get a big check from the government for every barrel of oil they pump – but they do get to lease public lands at rates well below what a private landowner would charge them, and they get to use the nation’s energy infrastructure, such as ports, roads, and railways, at well below what the market cost would be for such use.

So when we talk about subsidies for fuel production, we should recognize that most forms of energy are receiving a government subsidy in one fashion or another, whether it’s a tax break for a solar array, a check going to the ethanol refinery, or a huge discount on land use fees for the oil company. The government tries to make energy cheaper across the board; we can argue about whether a particular policy is a good use of our resources or not, but as a matter of historical record the US tries to make it cheap to produce and use energy of all sorts. Let’s not fool ourselves that we’re comparing unsubsidized free-market oil with so called government-boondoggle ethanol; we’re comparing two subsidized products with one another.

Additionally, subsidies are financial instruments that the government uses to stabilize (smooth) certain volatile economic conditions or situations, or tools to promote growth of newer, underdeveloped technologies that will provide a greater good to the country in the future if given a chance to mature.  (ie: energy independence)

And that leads us to why this comment’s basic premise, that ethanol/biofuels are not viable, is false. That premise assumes that crude oil has a fixed price – but it doesn’t. If crude oil was selling for $20 a barrel, then it would be crazy for us to be planting corn to produce biofuels. If crude oil was selling at $200 a barrel, then even without subsidies, ethanol would make more sense than oil. (Yet it still might make sense to create a price floor via subsidies so that other countries couldn’t flood the market with cheap oil to bankrupt an internal independent production system, only to raise prices dramatically in the future) Oil is $144 a barrel as of this writing, and it doesn’t appear to be heading downward anytime soon – and biofuel technologies are improving and making it cheaper to produce ethanol and other fuels. Saying that ethanol doesn’t make sense because other things are (at the moment) cheaper is like saying that it doesn’t make sense to send your kids to college because they could make more money right now working at McDonald’s. It’s a short-sighted approach that ignores the existence of the future.

The economics of biofuels are pretty complicated, and even very educated people can get way off track in their thinking. I can guarantee, though, that if we think about prices as being fixed, we will be way off base in the conclusions we reach.