NCPA - National Center for Policy Analysis


May 25, 2007

The current shortages of fuel could become a long-term problem, leading to stubbornly higher prices at the pump.  Oil industry officials point to a surprising culprit: uncertainty created by the government's push to increase the supply of biofuels like ethanol in coming years, says Jad Mouawad in the New York Times.

The biofuel push -- encouraged by federal subsidies and grants - has led to plans for dozens of ethanol distilleries.  But given farmland constraints, problems exist:

  • Only 6 billion gallons of ethanol can currently be produced annually; this is as much ethanol as can possibly be produced from corn, according to the ethanol industry's own calculations.
  • Given the new investments the industry should increase the annual production from corn to 15 billion gallons by 2012.
  • Nonetheless, ethanol producers recognize that it is not clear how an additional 20 billion gallons of ethanol -- the amount President Bush has called for by 2017 -- will be produced.

Lawrence Goldstein, an energy analyst at the Energy Policy Research Foundation, says this uncertainty will be the culprit of higher prices.   He has been warning for nearly a year that the government's twin goals of encouraging refiners to increase production and promoting increased supplies of biofuels work against each other.

"If we get a bad corn crop, we will end up paying for it at the pump and on the food shelves," says Goldstein. "We are not buying security. We are increasing volatility."

Source: Jad Mouawad, "Oil Industry Says Biofuel Push May Hurt at Pump," New York Times, May 24, 2007.

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