Ethanol

Phil has commented on the fallacy of pursuing energy independence in several posts so I thought I might take a quick look at the relationship between ethanol and corn. Below is a graph of ethanol and corn futures prices.


From August 2007 to August 2008, corn prices increased over 66% to 549 cents per bushel from 330 cents. Prices of both ethanol and corn have moderated recently, but it's clear that corn has been a big driver in rising food costs. At least some of this has to be due to ethanol. I am not suggesting causation, but the next graph makes clear that corn is increasingly being used to produce ethanol.



This graph blew me away when I first saw it. More than 30% of all corn is now being used for ethanol production, which is way up from just a few years ago. The Economic Research Service (ERS) of the Department of Agriculture estimates this figure to increase even more in coming years. Normally we might say that this is perfectly fine and that a good should be put to its highest use. However, ethanol is heavily subsidized as well as being mandated in some places as a replacement to MTBE. Thus, the opportunity cost of using corn for ethanol is higher.

Economists generally have no problem with seeking out alternative energy sources, but using corn for ethanol fails most basic economic tests. For more on corn use see this short and informative article by the ERS (pdf). For the impacts of ethanol expansion see this report (pdf).