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Wednesday, May 30, 2007

There Ain't No Such Thing as a Free Fuel

The ethanol mandate will have long-lasting unintended consequences as the impact of a potentially permanent increase in the price of corn ripples through the economy, particularly the agricultural sector. I have commented before that a) it is not a good idea for the government to "pick a winner" and b) the ethanol mandate will make a lot of food products more expensive (although by how much is an empirical question).

This paper titled "Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets" tries to take a crack at preliminary forecasted impacts of the ethanol mandate. I haven't had a chance to read the entire paper, however if the abstract is an accurate portrayal of what's in the body of the paper, here's what the authors found:
If sufficient demand for E-85 from flex-fuel vehicles is
available, corn-based ethanol production is projected to increase to over 30 billion gallons per year with the higher oil prices. U.S. corn acreage would increase to more than 110 million acres, largely at the expense of soybean and wheat acres. Equilibrium corn prices would rise to more than $4.40 per bushel. The direct effect of higher feed costs is that U.S. food prices would increase by more than 1.1% over baseline levels. Beef,

Comments:
I wonder how an increase of $4.40 per bushel of corn would affect E-10 fuel prices. I skimmed the paper, but did not see any prediction of how much the increase in corn prices would increase fuel prices.
 
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