According to reports from Scientific American, roughly 40 percent to today’s corn crop is used for ethanol with the next largest use, feed for cattle, pigs and chickens, using the next 36 percent.
As you can imagine this makes ethanol a big business, and that means attempting to sway policy outcomes in Washington is likely the norm.
As noted by Renewable Energy World, the American Association of Railroads, the trade association behind companies like Union Pacific and CSX Corp., is pushing back against changes in the Renewable Fuel Standard (RFS), the law that requires all transportation fuels sold to contain a minimum volume of renewable fuels.
The ethanol lobby is already hitting Scott Pruitt, new head of the EPA, hard. This is understandable considering that their business model is built off the backs of American taxpayers as a result of the government picking winners and losers -- “swamp politics” that the Trump Administration claims to renounce.
On the top of Big Ethanol’s concerns is RFS might go the way of the wayside. In fact, during Pruitt's confirmation hearings, Sen. Joni Ernst (R-IA) -- one of the RFS’ top cheerleaders -- made sure to put pressure on keeping the RFS in place, calling retaining the standard something that is “key for economic growth.”
In the coming months, Pruitt is going to have to make a decision: do what’s best for maximizing employment and economic growth, or do what’s best for special interests and political convenience. Contrary to what the ethanol lobby will tell you, the RFS has crippled American job creation and caused Americans to pay way too much at the gas pump for far too long.
The RFS is essentially a government shell game that requires transportation fuels to be sold with a minimum volume of renewable fuels. Currently, the “point of obligation” is set at 10% ethanol before Renewable Identification Numbers (RINs) are assigned to the completed blended fuel products.
Proponents of the Renewable Fuels Association like to argue that this ethanol mandate has created hundreds of thousands of jobs. This claim is absurd. It’s the equivalent of claiming that the government paying Americans for “shovel-ready” employment -- wasteful tasks like digging holes and immediately filling them back up -- is a jobs producer.
Renowned economist Joseph Salerno of the Mises Institute called the output created from the RFS mandate “a sheer waste of resources” because “on a market free of government mandates, everyone of these workers would have been employed in alternative industries” producing goods that consumers actually wanted as opposed to ones that the government wanted created.
It is a Keynesian fallacy to say that the RFS contributed anything to job growth or GDP. The artificial shifting of resources from one sector to another always distorts the labor market, raising the costs of consumer and capital goods, as well as causing a net less of jobs.
RFS hasn’t even reduced greenhouse gas emissions. According to a study in Environmental Research Letters, grassland conversions for ethanol production still generated the same the same level of carbon emissions as 28 million cars. Even the International Institute for Sustainable Development has acknowledged that ethanol production does not reduce atmospheric CO2.
When push comes to shove, RFS hasn’t helped consumers or the environment at all. It exists for the sole purpose of padding Big Ethanol’s bottom line.
Major oil companies that operate the largest gas station chains, like Exxon Mobil, BP or Royal Dutch Shell are likely fans of this mandate because it prices their smaller competitors out of the market. These big companies have the capability of blending their gasoline at around 10 to 50 cents cheaper per gallon than independent retailers. What this means is the government slyly favoring the largest companies with government-backed monopolies. Due to the regulatory capture, smaller shops are faced with the decision of either closing their doors or purchasing already-blended gasoline at higher prices from the major chains. As many a mobile virtual network operator that leased capacity from Sprint, competing with your supplier is not a winning strategy.
Since the RFS shields the major oil companies from free market competition, consumers have less options to choose from and this tends to mean higher prices for consumers.
Translation: American families lose at the expense of Big Ethanol.
Pruitt and the rest of the Trump administration need to be smart. They need to think past the wall of phony statistics that are being drummed up to death by the industry and recognize that the RFS “point of obligation” is in reality a net loss for the economy at large. As we like to say, it means going below the headline and digging into the data to understand what is really going on.
Standing up to Big Ethanol is not going to be easy from a political or public relations standpoint, but neither will any of the other laudable goals of this administration. Draining the Swamp might not be easy now, but it will pay dividends from a legacy standpoint in the future. It also might return gas prices back to a freer market and that could put more disposable income back in the pockets of consumers, which are directly and indirectly responsible for the bulk of the country’s economic growth.
Christopher (Chris) Versace is the Chief Investment Officer at Tematica Research, editor of the newsletter Tematica Investing, co-host of the Cocktail Investing Podcast and is a featured columnist to The Street.com as well as a contributor to Business Insider and Forbes.com
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