Good morning, Power Readers.
Gas prices are nearing $3.00 again (if you have not noticed). This has caused some to question oil company profits. I could go on about the trouble with the sorts of signals this would send to potential entrants into the energy industry (if you produce a product that people value, we may well take your profits. So you better think twice about entering the market in the first place). But there's another point to make: why isn't there as much of a hullaballo about a heavily-subsidized and mandated alternative energy:
Today, ethanol is booming as oil prices soar, yet Minnesota
taxpayers still are priming the pump. Taxpayers continue to be billed
$26 million a year to subsidize 11 privately owned ethanol plants that
are now profitable beyond anyone's dreams.
Purdue University economist Wally Tyner calculates that at today's
fuel prices, even an ethanol plant costing $100 million can be fully
paid off in less than a year. "They're hugely profitable. That's why so
many of them are being built," Tyner said.
Yet, Minnesotans are funding ethanol subsidies even beyond that.
Four times a year, the state sends checks to the farmers who own the 11
plants. The next payday arrives in May, when another $4.3 million will
be paid, plus another $2.3 million in IOUs the state promises to pay
later.
"The industry itself is basically drowning in profits right now,
which I'm happy for, but why would we want to send them (more
subsidies)?" said ex-farmer Alan Roebke of Chaska, Minn., a critic of
current farm policies. "It's absolutely ridiculous."
Of course, some play the "economic impact" card.
Some corn growers don't agree. Gerald Tumbleson, a Martin County
farmer who has invested in three ethanol plants, has seen benefits
sprout across rural Minnesota as ethanol plants generate sales, jobs,
energy and optimism.
And, quite possibly, tidy economic rents for Mr. Tumbleson. He finishes
"For every $30 million invested, they got back $400 million" worth
of economic activity in rural Minnesota, Tumbleson said. "It was one of
the best investments that Minnesota ever made."
No doubt there are some jobs that exist in the ethanol industry because of the subsidies. No doubt there are sales that occur because of the subsidies too. But the problem with the "sales, jobs, ... and optimism" angle is that subsidy dollars have alternative uses and many of the jobs etc. are not new jobs to the state as a whole. The money that goes to subsidies could have, for example, been given as tax breaks. People don't generally take money received from tax breaks and shred it. They spend it and that spending supports other jobs and those jobs, a component of the opportunity cost of subsidies, must be accounted for in the economic impact angle.
And you could make the same argument for the total amount of economic activity. Assuming that "$400 million worth of economic activity" figure is correct, the balancing question is "at what cost to the rest of the state?"
Lastly, it's quite possible that the subsidies have done what today's high gas prices would have done anyways - give an incentive for smart, risk-taking people to invest in producing alternative energies. Prices and profits are very powerful signals that tell people that times are good in an industry and that opportunity costs of not being in the industry are high. Any economist worth his salt will tell you that people respond to incentives.
But fat chance that ethanol subsidies and mandates are going to go away any time soon. Midwestern politicians don't want to anger the farm lobby. Claire McCaskill, Democratic candidate for the U.S. Senate from Missouri uses typical rhetoric that underscores this point:
In an interview Friday, McCaskill lashed out at the energy bill
approved last year by Congress. In particular, she complained about tax
incentives for oil and gas companies that are included in the bill,
pointing out the hefty profits posted by the companies.
Those incentives, she said, are the reason she would have voted against the bill.
"The oil companies got the steak dinner, and the ethanol industry got
the saltine crackers," she said. "And it should be the other way
around."
Update: King has more here. He links to and quotes this free column from the Wall Street Journal. A few points that students of economics should ponder impassionately (as good economists try to do):
For
the record, the FTC has an entire crew that pores over weekly average
gas prices in hundreds of cities, looking for evidence of gouging--to
no avail. Perhaps this is because no oil company controls enough of the
market to exercise enough power to raise prices. The Hastert-Frist call
for an investigation is nothing but short-attention-span political
theater.
Beyond
the ethanol fiasco, the oil markets are once again providing a tutorial
in supply and demand in a global commodity market. Strong economic
growth from the U.S. to China is driving up demand, even as political
uncertainty in oil-producing countries such as Venezuela and Iran is
leading to supply worries and some speculation. The Federal Reserve has
also played a role by flooding the market with dollar liquidity that
has produced higher prices across all commodity markets.
And if a gas station manager or an oil company official tried to "gouge" consumers in Minnesota, this website would be helpful in informing regulators and, more importantly, consumers. After all, the better the flow of information in a market, the better the market will work.
