Ethanol mandate a flop

Congress gets into trouble when in one of its periodic fits of hubris it tries to legislate technology and the laws of economics. And so it has happened with the ethanol industry.

In 2007 when Congress mandated the use of ethanol, the future looked bright for what was basically an uneconomic fuel — it would cut greenhouse gases, cut our dependence on foreign oil, create jobs in a new industry and make the farm states happy.

No one envisioned that oil prices would crater from $145 a barrel and a severe recession that cut into Americans' normally vigorous consumption of gasoline. And while oil prices were following the price of corn, the principal source of U.S. ethanol, remained relatively high.

By early this month, according to Reuters, over one-fifth of U.S. ethanol production capacity had been shut down due to weak demand. Last fall, VeraSun Energy, one of the largest producers, filed for bankruptcy and since has shuttered 12 of its 16 plants. Several other producers have also sought bankruptcy protection. Companies are mothballing or closing plants.

And that's despite mandates for ethanol use — basically a guaranteed market — and generous taxpayer subsidies. The federal government has ordered refiners to blend 10.5 billion gallons of ethanol with their gasoline this year, rising to 15 billion gallons in 2015.

Apparently having learned nothing from the 1970s, Congress envisioned the heady day when we would extract fuel from switch grass, crop stubble, wood chips and yard waste. Congress has ordained that 100 million gallons of that is to come into existence next year.

The federal government has done too many bailouts already, but the ethanol entrepreneurs and investors certainly could make a case for themselves. They did what Congress asked and are going broke because of it.

Congress should remember that in economics and technology "demand" is always a better motivator than "command."