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By Robert Rapier on Dec 26, 2008 with no responses

Government and Industry Incompetence

I fear that gross incompetence in our federal and state governments – as well as in some of our major industries – is going to make life much more challenging for our children and grandchildren. The list this year alone is long. The financial sector took too many risks that didn’t pay off while showering their executives with huge bonuses, so they needed bailing out. We offered up a $700 billion (and counting) package. The auto industry got caught with big inventories of the wrong kinds of cars when oil prices skyrocketed. Another bailout. Then the SEC failed to act on tips that Bernie Madoff was in the process of frittering away $50 billion – and the taxpayer is going to get stuck with part of that bill as well.

It should come as no surprise then that in this environment the ethanol industry – an industry that the government created – is looking to be bailed out as well:

An Ethanol Bailout?

The commodity bust has clobbered corn ethanol, whose energy inefficiencies require high oil prices to be competitive. The price of ethanol at the pump has fallen nearly in half in recent months to $1.60 from $2.90 per gallon due to lower commodity prices, and that lower price now barely covers production costs even after accounting for federal subsidies. Three major producers are in or near bankruptcy, including giant VeraSun Energy.

So here they go again back to the taxpayer for help. The Renewable Fuels Association, the industry lobby, is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion.

Of course, the ethanol industry wouldn’t even exist without the more than $25 billion in taxpayer handouts over the past 20 years.

I have been warning of this for quite some time. Yet there is no end to this mess, as we have created – through government support – an industry that will implode and take down entire Midwest economies without continued government support. As I pointed out back in March, when the ethanol industry finds itself in financial trouble – and it was inevitable – look for the lobbyists to start asking for an increased mandate. The lobbying is underway:

Ethanol Questions Fuel a Pushback Over Regulation Changes

The question of whether cars can safely run on higher blends is a murky one. At the moment, federal law allows gasoline used in regular cars to contain no more than 10 percent ethanol. The ethanol industry says the proportion could go higher—to 15 percent or even 20 percent—without significantly affecting how cars drive or hold up or how their emissions control systems perform. Some industry representatives are asking the Environmental Protection Agency, which has final say in these matters, to quickly approve 12 or 13 percent blends.

Here is an industry that can’t survive even with a combination of mandates and subsidies – and our government couldn’t see any of this coming. So the industry asks for more subsidies, and our kids get the bill.

So what’s the solution? I don’t favor a quick end to the mandates at this point, or the economic fallout will be pretty severe. But the escalating mandates need to stop, or the bailouts are going to keep getting larger. This would also send a message to those thinking about building more ethanol capacity to think twice about it.