Arnold Kling  

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Alan Reynolds writes,


Ethanol already gets an indefensible tax break at the pump of 51 to 71 cents a gallon, but Congress now wants to compel everyone to add it to their tanks. But doing so would leave us with less fuel at higher prices. Why? Because there is much less energy in eight gallons of ethanol than in the seven gallons of gasoline it takes to produce it.

...Check the official mileage estimates at www.fueleconomy.gov. A Dodge Stratus gets 20 miles to the gallon in city driving on gasoline, but that drops to 15 mpg on E85 (the 85 percent ethanol fuel) -- and highway mileage drops from 28 mpg to 20 mpg.


2-1/2 years ago, in Oil Econ 101, I wrote,

the worst refuge of scoundrels, in my opinion, is the line that "we need to reduce our dependence on foreign oil in order to fight terrorism." When I hear that, my baloney-sandwich detector really starts vibrating. I am ready to reject whatever is on offer, whether it be oil drilling in Alaska, regulations on SUV's, or some new synthetic fuels program.

Here is everything you need to know about energy policy:

Energy doesn't come from pork.


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    Arnold Kling, scary-smart co-proprietor of Econlog, tells you all you need to know about the bloated "energy bill" that passed... [Tracked on June 30, 2005 10:08 AM]
COMMENTS (12 to date)
Danno writes:

What about reducing our dependency on oil in general? Isn't it a good thing to be looking for alternative sources of really cheap energy on a long term plan?

I don't think we're going to hit peak tomorrow or anything but I highly doubt that there are going to be many more significant resevoirs that will be possible to drill. I'd like to have my hydrogen car powered by nuclear energy or windmills or hydropower or geothermal or clean coal or whatever other powersource the area I'm living in has by the time we do run out.

Danno writes:

Oh, err, also, isn't the plan with Ethanol that you can make it out of corn or something?

I just looked at the Wikipedia article on http://en.wikipedia.org/wiki/Alcohol_fuel#Net_fuel_energy_balance and it seems like the argument is more complicated than 7 gallons of gasoline = 8 gallons of ethanol.

Mark Horn writes:
I'd like to have my hydrogen car powered by nuclear energy or windmills or hydropower or geothermal or clean coal or whatever other powersource the area I'm living in has by the time we do run out.

We're never going to run out of oil. As the supply of oil gradually decreases it's cost will gradually increase. As that happens the demand for alternative energy supplies will increase. At some point the cost of those alternative energy sources will be less than the (ever rising) cost of oil. Which is when people will switch. At that point, there will still be oil left that will be too expensive to get - i.e. we'll never run out of oil.

IMHO, the market will sort out exactly when we need to start thinking about alternative energy sources. And if you don't believe me, consider the existence and popularity of hybrid automobiles in the wake of gas @ $2/gal.

DISCLAIMER: I'm not an economist and I don't play one on TV. I just like thinking about this stuff. Constructive criticism is encouraged.

Phil writes:

Danno, I don't think that, contrary to popular opinion, that the US is dependent on foreign oil. Instead, we use foreign oil, primarily from the middle east, because it is the easiest to refine and, hence, is the cheapest oil available. But as oil prices rise, it becomes profitable to use oil from other sources, such as the tar sands of Canada (which require more intensive refining) or urban Houston (which entails drilling in people's front yards... with their permission, of course. I had a post at my blog on the drilling in Houston. It's available here

http://marketpower.typepad.com/market_power/2005/04/will_we_ever_ru.html

And as Mark Horn writes, investors begin searching for other forms of energy. In other words, the "dependence on foreign oil" is really a current choice amongst alternatives.

Here's some info on oil derived from tar sands.

http://ffden-2.phys.uaf.edu/102spring2002_Web_projects/M.Sexton/

Neal Phenes writes:

Reynolds also advises us that ethanol gets roughly 25% less mileage than gas. While the price of ethanol is subsidized at the pump (and who pays for that?), people will have to buy ethanol more often. More trips to the pump. How does that help poor people get to work?

Using government money, excuse me, our money, to subsidize Archer Daniels Midland and corn farmers for an uneconomic, inefficient product is wasteful and redirects capital from private industry where the real creativity always occurs. That is another way of saying the government is taking our money from us while charging us more for something we do not want!

simon writes:

Phil, excellent point ... Alternatively who cares that we are import a great deal of oil. There is no real risk factor that differs from any other supply shock. A bad corn crop is as likely as an embargo. Let's quit fighting our shadow.

aaron writes:

I'd like to see the corn used to feed more cows.

William Woodruff writes:

More corn to feed cows ? Cows eat grass, not corn.

I lay the fault of the energy bill purely at the feet of George Jr., a man with an advanced business degree who believes in the 'market' and calls himself a 'Free Trader.' Yet prohibits 'letting the market decide' what gasoline, sugar, grain, etc should cost.

The english language has an appropriate description of his ilk: Hypocrite.

William

William Ryan writes:

As a student at Dartmouth College, which gets pretty big government grants to develop ethanol fuel, I've been able to talk to some of the cutting edge researchers in the field. Our bioengineers are tackling the problem as we speak. While the cost of producing ethanol is more expensive now than the cost of producing gasoline, that probably won't last very long. I forget what exactly they wanted to use as biomass, but it was some type of genetically enhanced grass, that would produce FAR higher energy density than trying to get it out of corn like we do now. It's been several months since I talked to the leader of the project, and I've forgotten some details, but I know it's close (a few dollars/gallon) to becoming fuel efficient.

There are lots of alternatives to oil, and they're all being explored. I don't know whether ethanol fuel will win (but I suspect not in the long run, because of the agricultural industry lobbies), but it certainly has a shot, especially if we change the type of plant and give it an engineering boost. I personally like fuel cells better, although they are an energy storage device, not an energy generation device, really. A combination of nuclear power and fuel cells could be a winner, assuming we can overcome the barriers of both. Needless to say, whatever happens, the free market will substitute away from oil soon, and the most cost-efficient fuels will win. I'm not too worried, despite the constant hype about the situation.

You don't have to take the market solution on faith, but it helps when you understand how it works. Already the big oil companies have small, quiet alternative energy subsidiaries. It wouldn't surprise me if the big oil companies of today are the big alternative energy companies of tomorrow. Where there's profit, there will be entry. Provision of energy will always be a big business in the modern world, so we don't need to worry about running out.

Danno writes:

Okay, let me rephrase my argument: Consider the cost of energy on whole. Right now, for our purposes, it's pretty cheap largely because of cheap oil.

However, since cheap oil is not something that will last indefinitley, the price of energy will rise, assuming that there is no other cheap energy source.

What I would like to see is the development of another cheap energy source before we run out of cheap oil. The presumption that we will necessarily find a new cheap energy source *when* it becomes economical seems foolhardy to me. Scientific and Engineering progress does not directly correlate to money spent on Science and Engineering. Markets are human constructions whereas energy is a natural artifact. It might bend somewhat to the constrains that people place on it, but it will never be directly at the market's will.

Joe Kristan writes:

William Woodruff says: "Cows eat grass, not corn."

Pioneer Seeds says: "In 2003, beef cattle were fed more than 1.4 billion bushels of corn."

Silly of those folks to feed it to cows if they don't eat it...

Mark Horn writes:

Quoting Danno:

The presumption that we will necessarily find a new cheap energy source *when* it becomes economical seems foolhardy to me. Scientific and Engineering progress does not directly correlate to money spent on Science and Engineering.

The part that you're missing is that there already exist alternatives to oil. They're just more expensive than oil. As the price of oil goes up, the incentive to use those alternatives also goes up because their relative cost comes down. (E.g. right now $2/gal for gas is the cheap alternative. If the price of gas goes up to $4/gal, $3/gal of biodiesel is going to look pretty good.)

And that's assuming that we don't get more efficient about delivering those alternative energy sources. (Extending the previous example, we're assuming that the cost to produce biodiesel will remain constant even as demand for it increases.) That's probably an overly conservative assumption.

Markets are human constructions whereas energy is a natural artifact. It might bend somewhat to the constrains that people place on it, but it will never be directly at the market's will.

The purpose that the market serves is to distribute scarce resources. The resource isn't ever at the market's will. It simply is what it is. The market decides what to do with it. In fact, in a market, there's no such thing as a shortage. A scarce resource will be priced to the point that the number of buyers and sellers will exactly match.

I suspect the point that you're trying to make is that as the price of oil increases, we will also see losses associated with that price increase. In the short term, that's probably right. But over the longer term, they even out as we switch to a different energy resource. And, given that E = mc^2, it's unlikely that we'll ever completely deplete our supply of energy even if it's not an infinite supply. IMHO, the rational way to think about this is to ask how the economic losses associated with an increase in the price of oil compare with the economic losses associated with conservation. And then choose the one that causes fewer economic losses.

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