Addicted to Oil? Or to Political Favors?

With crude oil prices high and likely to go up, and custodians of much of the remaining supply (Venezuela, Nigeria, Russia, et al.) unpredictable, unstable, or politically unsavory, American politicians have increasingly touted ethanol as a savior.

Frequently touted as a cure for America's "addiction to oil," ethanol can be made from a variety of crops, but by far, cane sugar is currently the most efficient for turning carbohydrates into hydrocarbons.

Ethanol from sugarcane supplies eight times the energy required to make it; corn ethanol provides just 1.34 times the energy that has gone into it. Also, an acre of sugarcane yields roughly double the amount of ethanol one can get from an acre of corn.

So you'd expect news of a coming sugar supply glut would be welcome. The Wall Street Journal reports that raw-sugar futures dropping to two-year lows and Brazil harvesting record cane crops.

With this surfeit of cheap sugar, ethanol use could become even more economically feasible, and we could be happily importing this more environmentally friendly fuel from our South American ally.

At least we could be were it not for Big Corn.

Though the president has recently called for expanded ethanol use, with bills making their way to the Senate floor to mandate it, http://online.wsj.com/article/SB117916165429902126-search.html the U.S. maintains tariffs on ethanol imports, subjecting foreign ethanol to a 54 cents-per-gallon tariff and a 2.5 percent duty.

These restrictions protect the domestic market for corn ethanol, even as farmers have scrambled to meet refineries' increased demand for corn. (Ethanol's supplanting the water-supply-poisoning MTBE as a fuel additive has contributed to this.)

As a result, corn prices are nearly the highest they have been in decades--sending inflationary ripples throughout the food chain, raising the cost of livestock feed (which makes meat costlier) and creating a climate in which opportunistic grocers can use the corn crunch as an excuse to raise prices across the board.

Also, as farmers rush to grow more corn, they plant fewer acres of soybeans and wheat, driving the prices of these crops up as well.

This is all swell if you are in agribusiness in Iowa--or if you are a politician seeking the votes of such folks in the 2008 presidential caucuses there.

But those hoping for a truly global market in ethanol to develop that could promote the most efficient means of producing and distributing it will have to stick to sweet dreams as the sugar piles up.

by Rob Horning

Photograph of harvested corn by Layne Kennedy/Corbis