Bush's Alternative Fuel Folly

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This column was written by Henry Payne.
With a combination of alternative fuel mandates and increased fuel-economy standards, President Bush on Tuesday night urged Congress to "build on the work we have done and reduce gasoline usage in the United States by 20 percent in the next 10 years." Build on the work we have done? With similar policies in place since 1974, American petroleum consumption has increased — not decreased — by over 20 percent.

Only in Europe, where government taxation has driven gas prices to $6 a gallon and dampened economic growth, has oil consumption declined by 15 percent. And that took 30 years, not 10.

Such draconian measures are unlikely in the U.S., meaning no decline in oil consumption — but a continued rise in wasteful, politically correct federal ethanol subsidies.

In a similar political climate in the early 1970s, Congress enacted the regulatory regime known as CAFE (Corporate Average Fuel Economy). Today passenger cars are more efficient than ever — up 114 percent since 1974. But gasoline is so cheap — despite perpetual Middle Eastern crises — that on average, Americans are driving twice as many miles as before. As a result, U.S. oil consumption has increased from 17 million barrels a day in 1976 to 21 million barrels today, and oil imports as a share of U.S. consumption have risen from 35 to 59 percent.

Ironically, the president's call echoes a more severe proposal by his 2004 campaign opponent John Kerry — a recommendation that a National Center for Policy Analysis study found would not "reduce future U.S. dependence on foreign oil."

The president's plan also proposes an expansion of the so-called Renewable Fuels Standard (RFS), which currently mandates that refineries produce 7.5 billion gallons of ethanol per year by 2012. But, as Heritage Foundation energy analyst Ben Lieberman points out, "if ethanol were a viable fuel, you wouldn't have to mandate it in the first place."

Indeed, ethanol — whether made from corn or trendy cellulosic sources like switchgrass — is simply not viable as an alternative for the fundamental reason that a gallon of ethanol only goes 75 percent as far as a gallon of gas. In its comprehensive 2005 report on biofuels, the World Bank concluded that "the technologies to produce ethanol are well understood. (Thus) major breakthroughs under current processes are not expected."

The RFS exists — not due to market demand — but to satisfy the auto and farm lobbies. For the Big Three, manufacturing "flex-fuel" vehicles (cars that run on gas and ethanol) allows them to exploit a huge loophole in the aforementioned CAFÉ laws. At minimal cost, converting vehicles to flex-fuel allows automakers to skirt the fatuous fuel rules — even though consumers only fill up the vehicles with gas.

For the farm lobby, the renewable mandate is easier to understand. It means money. Lots of money. To make ethanol price-competitive, the federal government subsidizes its production to the tune of 51 cents a gallon, costing U.S. taxpayers $4.1 billion a year. Fueled by the RFS, Big Ethanol producer Archer Daniels Midland rang up record 2006 profits that would make Big Oil blush.

Now Bush is proposing to increase the mandate to a fanciful 35 billion gallons by 2017 (whether consumers buy it or not). And as the federal honey pot grows, it is naturally attracting more flies. Investors like Sun Microsystems founder and Green activist Vinod Khosla want to invest in cellulosic ethanol sources because they are less carbon-intensive to process than corn ethanol (which some studies show burns more energy to produce than it saves as a fuel) — much like sugar-based ethanol, which has captured 40 percent of Brazil's fuel market.

Brazil's experiment has created a buzz among the alternative-fuel set — from liberal pundits like the New York Times' Thomas Friedman to the president's own brother, Jeb.

But like Europe's drastic measures to decrease fuel consumption, Brazil's heavy-handed tactics to impose biofuels have little political future here. Brazil's ethanol conversion occurred over a period of decades as its authoritarian government nationalized energy companies, mandated ethanol-fueled cars, banned diesel fuel — and provided a staggering $1.20 per gallon government tax subsidy. As the World Bank report concluded, Brazil comes closest to commercially viable biofuels, but only as long as it "maintains a large tax differential between gasoline and ethanol."

By Henry Payne
Reprinted with permission from National Review Online