Will Car Sales Ever Rebound to Meet U.S. Ethanol Targets?

Just as the fiscal crisis sweeping through the major oil-consuming nations of the world is cutting funding for green energy, one of the most expensive yet least efficient of green fuels, corn-based ethanol, has been given another year of generous taxpayer support in the US.

The promotion of corn-based ethanol has been America’s principal policy response to its growing dependence on ever more costly foreign oil. Fuelled by a federal tax credit of 45 cents per gallon and a crippling 54 cent per gallon tariff against competing Brazilian sugar-based ethanol, American ethanol production has grown exponentially over the course of the last decade to around 12 billion gallons per year in 2010. And it’s targeted to grow to as much as 36 billion gallons by 2022. Food inflation, particularly with respect to corn prices, has moved in step. Thanks in large measure to ethanol demand, US corn prices are up some 40 per cent this year.

Food inflation aside, Congress had lots of other good reasons not to extend further subsidies. The net energy content from ethanol, after allowing for all the hydrocarbon inputs (ranging from fertilizers to diesel fuel for the tractors to coal for the processing plants), is marginal at best. And its carbon footprint isn’t materially better than burning fossil fuels, given how much of the latter is embodied in its very production.

Despite a last-ditch attempt by Senator Dianne Feinstein and others to end the subsidies, the Senate decided to fork out more pork barrel funds to corn farmers and, by extension, to firms like Monsanto and Archer Daniels Midland for another year.

But don’t count on American ethanol production’s ever coming even close to reaching that lofty target of 36 billion gallons per year. If the return of fiscal sanity to Washington doesn’t undercut its life-sustaining subsidies, an aborted recovery in motor vehicle sales will soon put the kibosh on future production growth.

Car manufacturers and ethanol producers both hope that an economic recovery will return vehicle sales to their pre-recession levels. Unfortunately, the recovery they are counting on so heavily is a double-edged sword.

An economic rebound will very quickly push pump prices beyond most drivers’ reach. They’re already hovering around $3 per gallon, and with triple-digit oil prices around the corner, we’re sure to see prices of $4 per gallon or higher by next spring.

The last time we saw those prices, in the summer of 2008, scooters were outselling SUVs by a margin of three to one, and no one was keen to scoop up car-leasing firms and make acquisitions like Toronto-Dominion Bank’s recent $6.3 billion purchase of Chrysler Financial. Four-dollar gas crunched the North American vehicle market back in 2008, and it will likely do the same in 2011.

And when it does, American farmers can go back to growing corn for food and, in the process, save taxpayers some $7 billion a year in ill-conceived ethanol subsidies.

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