Members of the farm lobby loves ethanol mandates because mandates creates a new market for farmers' output. Polticians like them because they ensure a steadier flow of campaign funds from the members of the farm lobby. Some uninformed citizens like them because they make "us" less dependent on foreign energy sources. But ethanol mandates make many economists cringe.
Gasoline prices will be unusually high and shortages might occur this summer, because the U.S. ethanol industry can't keep up with the demand for fuel-grade alcohol to mix with gasoline, the head of the U.S. Energy Information Administration told a Senate committee Wednesday.
Granted, this summer's potential shortage should be a short-run problem. High prices should direct ethanol producers to increase capacity and work other bugs out of the production process. But there are longer-term issues:
Ethanol mainly is made in the Midwest. But demand should be heaviest in the Northeast and Texas because of special clean-air fuel requirements there. Shipping alcohol costs more and takes longer because ethanol attaches to any moisture present and could contaminate petroleum pipelines - the cheap, fast way to ship.
Ethanol mandates:
1. Limit what businesses can sell
2. Implicitly prohibit some international exchanges
3. Make US consumers and businesses more susceptible to supply shocks in the ethanol industry (including shocks such as droughts that reduce the corn supply)
4. (if the mandated ratio of ethanol to petroleum is high enough) force consumers to either have cars that have specially tuned engines to burn high ethanol concentrations or it forces them to drive cars with engines that aren't specially tuned and that get mucked up by the ethanol.