One of the sacred cow subsidies of American politics is ethanol. The fuel additive is produced in by farmers in the political bellwether state of Iowa. That fact alone makes it difficult for politicians, even staunch free-market conservatives, to summon the intestinal fortitude to call for cuts to federal ethanol mandates.
In 2016, Senator Ted Cruz (R-Texas) became one of the few politicians to stand in opposition to the Big Corn ethanol lobby. Cruz’s opposition almost certainly cost him support in the Iowa caucuses that year, but he still eked out a three-point victory over Donald Trump, who read the political winds and called for more ethanol in gasoline.
Make no mistake, political support for ethanol is an example of crony capitalism, the you-scratch-my-back-I’ll-scratch-yours way of doing business that free-market conservatives and Drain-the-Swampers are supposed to abhor. However, that doesn’t stop presidential candidates from singing the praises of the corn-based concoction as they swing through the Hawkeye State.
That was the case today when President Trump announced an initiative to allow the year-round sales of gasoline with 15 percent ethanol. The E15 blend is typically banned for use during summer because it produces more smog. Gasoline is typically sold with a blend of 10 percent ethanol.
Some may assume that removing federal restrictions on ethanol is a free market move, but, in reality, the ethanol market is largely a creation of federal mandates. The renewable fuel standard was created by the Energy Policy Act of 2005 and expanded in 2007 by the Energy Independence and Security Act. The federal goal was to reduce dependence on foreign oil as well as cutting greenhouse gas emissions. Today, thanks to the fracking boom, the US has almost broken its addiction to foreign oil, but states like Iowa are still dependent on income from ethanol.
As with federal intervention in the market, there are many competing interests. The most obvious is the farmers who grow and sell the corn that is used to make ethanol. These farmers are championed by Sen. Chuck Grassley (R-Iowa), who was last seen presiding over the Senate Judiciary Committee during the confirmation hearings for Brett Kavanaugh. Grassley is a strong backer of the ethanol industry and was part of a group of senators that announced a tentative agreement with the Trump Administration last May to allow year-round sales of E15.
Gas stations also benefit from selling ethanol. Marketwatch notes that gasoline retailers earn credits called renewable identification numbers for selling ethanol-blended fuels. These credits can be traded or sold to gasoline refiners that manufacture fuels without enough ethanol to meet federal mandates. In other words, gas station owners make money on both the front end, selling gas to consumers, and the back end, selling credits to refiners.
Losers in the deal include oil refiners, who lose market share to companies that sell ethanol, and consumers, who are pushed by the government to buy an inferior product. Cars using ethanol-based fuels get lower gas mileage than those using unblended gasoline. Worse, engines in cars manufactured before 2001 may be damaged by ethanol-based fuels.
The timing of Trump’s ethanol announcement is overtly political. Neither of Iowa’s senators is up for reelection this year, but three of its four congressmen are Republicans and they are all in tight races, as is the state’s Republican governor. Iowa’s first district, represented by represented by Republican Rod Blum looks likely to turn blue while David Young in the third district is in a tossup race. Rep. Steve King in the fourth district is holding onto a single-digit lead.
Some of the Republican difficulties can be blamed on President Trump’s trade war. Tariffs have hurt the state’s farmers to the tune of $2.2 billion. This summer, President Trump and the Republicans promised farmers a $550 million bailout to stem the losses. President Trump’s expansion of the ethanol market could be viewed as an additional aid package to farm voters.
Trump’s move could also disrupt farm markets by incentivizing farmers to drop other crops to grow corn. The Wall Street Journal reports that over a third of US corn is already being used for fuel rather than food. Increasing the ethanol market could cause food prices in other crops to rise as demand for corn increases and farmers shift production to take advantage of higher corn prices.
President Trump’s move to expand ethanol-based fuels is an example of the big government interfering in the marketplace. As is normally the case when the government meddles in the markets, the results benefit favored industries in exchange for higher prices for consumers. Rather than draining the swamp, that sounds like business as usual.