Ethanol: Indictment for Violation of the Laws of Physics & Economics

Author:James Day
Position:Professor at American University

Facts. Issues. Guilty on Both Counts. Miscellaneous Felonies and Misdemeanors. Verdict.


    James Day is a professor at American University. He teaches Advanced Oil and Gas Law, The Regulation of Energy, and International Petroleum Transactions. He is also the author of several books relating to the subjects and a graduate of the Washington College.

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Henry Ford’s 1908 Model T ran on 100% ethanol. In 1925, Ford proclaimed ethanol the “fuel of the future.” Ethanol distilled from corn was used for illumination in America before the Civil War. It was replaced by kerosene in lamps because it was more expensive and could not be refined in sufficient quantities. (The same was true of “coal oil,” which is also currently subsidized, but that must be the subject of another indictment.) Ethanol was displaced by gasoline because it was cheaper and, more plentiful and a far superior fuel.

In the 1970s, ethanol arose like a phoenix from the ashes as “Gasohol,” particularly in Iowa and the rest of the Corn Belt after the Arab oil embargo caused oil prices to skyrocket. Ethanol received research and development grants in the mid-1970s, and the Energy Tax Act of 1978 endowed it with a $0.40 per gallon subsidy and mandated that gasoline contain 10% ethanol or other oxygenates.

Methyl tertiary butyl ether (“MTBE”), a combination of methanol derived from natural gas and isobutane made from natural gas or crude oil, was a cheaper oxygenate, more effective as a fuel, and easier to handle by the oil companies, but earned it no subsidies because it was a fossil fuel. However, MTBE’s high solubility contaminated groundwater from leaks in underground storage tanks at gasoline stations, resulting in it being banned from use in twenty-five states. When the Energy Policy Act of 2005 did not protect the refiners from water contamination lawsuits, it was the MTBE’s death knell.

The Energy Security Act of 1980 granted loans to small ethanol producers. The same year, Congress levied a $0.54 tariff on imported ethanol to stop the flow of the more efficiently produced and cheaper sugar-based ethanol from Brazil.

The Surface Transportation Assistance Act of 1983 increased the subsidy to $0.50 per gallon. When that was not enough, Congress raised it to $0.60 under the Tax Reform Act of 1984.

In his 2007 State of the Union Address, President George W. Bush announced that ethanol production must reach 17 billion gallons by 2017. Congress doubled his request in the Energy Independence and Security Act of 2007 and mandated 36 billion gallons be used to bolster the gasoline supply by 2022. The next year there was an election and the first state to test the candidates was Iowa. Senators Barack Obama, John McCain and Hillary Clinton, all of whom had opposed ethanol in the past, jumped on the ethanol bandwagon.

After gasoline prices hit over $4.00 per gallon in July 2008 and our economy fell to its lowest depths since the Great Depression, Americans started driving cars less often.

The ethanol industry, crippled by high commodity prices in 2008, when the price of corn doubled to $4.00 a bushel, has its hand out for another mandate. Retired general and former presidential candidate, Wesley Clark, now a representative for “Growth Energy,” is lobbying for an increase in the use of ethanol from its current 10% as a gasoline blend to 15% or even 20 %.3 Corn is still hovering a few cents below $4.00 a bushel, forcing up food prices during a recession.


Neither the President nor Congress can alter the basic laws of physics or economics or rely on technological breakthroughs by mandating “change.” After the 1973 Arab embargo, President Richard M. Nixon proclaimed “Energy Independence,” and asked the nation, “Let us set...

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