Energy Policy

I believe we are headed for a train wreck with America's energy policy.

It's politically expedient these days to call for renewable energy. Here in Kansas that means making ethanol (and perhaps biodiesel someday) by processing corn, soybeans and other crops. We have seven ethanol plants in the state and three more are scheduled to be built. There are about 100 nationwide.

Expansion of renewable fuel capacity is driven by crude oil prices which topped-out at $78 per barrel last summer, when pundits told us $100 crude was right around the corner. "Scrap those dastardly SUV's!"

The ethanol proposition is based on competing with crude oil valued at or above $50 per barrel. Oil companies, however, structure their new businesses ventures to be competitive in the $20-30 range. There's an obvious disconnect here.

Soon crude oil will likely drop below $50, as prices generally run in 10-year cycles. Last year was the top of the price curve. Five years from now it will bottom-out in the $20-30 range or perhaps even earlier and/or lower if we stop warring in the Middle East. At that point all the shiny new ethanol plants are going to swimming in red ink crying for government support payments.

Between now and then, because of ethanol demand, hog farmers and cattlemen are facing $4-5 per bushel corn - twice their normal cost. Many will be forced to cut production or even exit the business as meat prices at Dillons surge, while fuel at Phillips plummets.

My point here is simple. Be careful with government solutions to complex commercial problems. Oil folks are making decisions based on $25 crude. That's a huge advantage over the government's $50 ethanol plan. My guess is that taxpayers are fixin' to get caught right in the middle.

First published in the Manhattan Free Press, January 31, 2007.