The Ethanol Cure's Side Effects

Corn grown in North Dakota heads to a nearby ethanol plant. Diverting vast amounts of corn to fuel production now looks like a bad idea.
Corn grown in North Dakota heads to a nearby ethanol plant. Diverting vast amounts of corn to fuel production now looks like a bad idea. (By Michael Williamson -- The Washington Post)
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By Allan Sloan
Tuesday, April 29, 2008

Now that milk and gasoline can each cost $3.50 a gallon, filling up your grocery cart or sport-utility vehicle has become an exercise in pain. Most people just wince, pay and get along as best they can. But someone like me can't help but see these price spikes as a nasty side effect of America's ethanol program. How nasty? Think of the recent film starring Will Smith, "I Am Legend."

You might ask what the connection is between a half-baked energy policy and overdone sci-fi. Answer: the unanticipated consequences of supposed miracle cures.

Ethanol first. This corn-into-fuel program has been around for years but gained vast new impetus from President Bush's program to cure America's "addiction to oil" by using biofuels. We'll grow our way to self-sufficiency. Oh, well. Not only are oil prices at all-time highs (in dollar terms), but diverting agricultural land to energy production -- about a fourth of the U.S. corn crop is dedicated to ethanol -- is a major factor in the rise of worldwide food prices. We've had food riots in Mexico, Egypt, Haiti and about a dozen other countries. There may be worse to come.

Now to sci-fi: If you've seen any of the three versions of "I Am Legend," you know that its premise is that a cancer vaccine -- your classic miracle cure -- backfires by starting a plague that wipes out most of the human race and turns almost all the survivors into zombies.

Sure, I'm being a bit over the top here, but the parallel to the ethanol situation is obvious: If something seems too good to be true, it probably is.

Had the Bush administration and Congress exhibited the wisdom and courage to slap a big honking gasoline tax on drivers after 9/11 -- or even in 2006, when the president made his "addiction to oil" speech -- it would have been a better energy policy than the cornographic panacea they've given us. We could have reduced consumption, cut oil imports, kept low-income drivers whole by rebating their gas taxes with income tax breaks, and used the rest of the proceeds for deficit reduction or something else useful. Food would be cheaper. So would fuel, because demand would be lower and we'd probably have fewer financial speculators, who some experts think are responsible for $25 worth of oil's march from $64 a barrel last spring to nearly $120.

So in avoiding a gas tax, we have not avoided higher prices. We've also done something that should horrify anyone who cares about this country: transferred hundreds of billions of dollars of our wealth to oil-producing countries, many of which don't exactly share our society's values of tolerance and freedom. (Can you spell Russia? Saudi Arabia?)

Even with gas at $3.50 a gallon, I'd be more than willing to pay a much higher gas tax than I do now because it would knock down demand, cost less in the long run and demonstrate that the United States is willing to do painful things in the present to ensure our future prosperity. Turning biological waste like wood chips into fuel makes a lot of sense. But devoting vast acreage of America's breadbasket to fuel is a really terrible idea, as we're now seeing. Supposedly miraculous and painless cures have a nasty tendency to backfire. Both in scary movies and in the even scarier real world.

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On another front, I'd like to briefly revisit what I wrote two weeks ago about the increased limit on "conforming" mortgage loans, which is part of the economic stimulus package. At the time, I didn't realize that these loans (of up to $729,750) would carry higher interest rates than loans at the previous limit ($417,000). So my math was wrong, for which I apologize.

My point, however, is still valid. Even at rates about three-eighths to half a percentage point higher than regular conforming loans, these "conforming jumbos" are still cheaper than regular jumbos. That means that people in my home-price bracket still benefit significantly from the higher limit because we can finance our houses more cheaply or sell them at a higher price than we'd otherwise get.

Allan Sloan is Fortune magazine's senior editor at large. His e-mail address isasloan@fortunemail.com.


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