The Auto Channel Fights for the Truth about Ethanol Versus Gasoline -Continued

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At best, this is just another example of your naïve understanding of commerce and any market. But since you are “among the most widely cited and influential critics of federal energy and environmental policy in the nation,” I must conclude that it is really just another dishonest attack upon ethanol.

Why, and how could fueling stations sell anything but the product that is provided to them, and for which they have customers? You make it sound as if station owners can control the marketplace. Perhaps in 1915 an abundance of fueling stations with a particular affinity for one fuel over another could have influenced which vehicles their local neighbors might buy, but those days are long gone.

Gasoline companies no longer need to own filling stations to control the market. They’ve done it by buying politicians and car company CEOs. Real competition between gasoline brands has been eliminated through mergers and mandated gasoline formulas: there is virtually no difference between them. Service stations no longer offer free drinking glasses, dishes or trading stamps because they no longer have to compete for business.

5. You wrote, “The EIA calculates that federal oil and gas subsidies outside the electricity sector total $30,000 per million British thermal units (BTUs). Biofuel subsidies outside the electricity sector, however, ($3 billion of the $3.2 billion of which are directed at ethanol via the blenders’ tax credit), work out to $5.72 million per million BTU (EIA, 2008, Table 36). Using EIA figures for oil and gas subsidies and estimates of the cost of the blender’s tax credit from Koplow (2007), economist Douglas Tiffany (2008) calculates that oil subsidies in 2007 were slightly less than $0.15 per gallon of gasoline while ethanol subsidies totaled $0.588 per gallon. Whether we embrace a narrow or broad definition of subsidy, the conclusion is the same; oil subsidies are relatively trivial while ethanol subsidies are relatively substantial.”

The 2007 gasoline subsidy that you cite most likely did not include the cost of fighting a war in Iraq and a war in Afghanistan. It probably also did not include the cost of stationing air force units in Saudi Arabia, Kuwait and other oil producing nations. The subsidy probably also did not include the cost of our navy protecting and escorting oil tankers (even those not registered to the U.S.). I’d be surprised to learn that the subsidy included the cost of beefing up the protection of American embassies around the world. And the 2007 subsidy definitely did not take into account the cost of the lives of the U.S. servicemen who died while fighting these wars and protecting the oil/gasoline assets. Protection subsidies like these have been paid by our government every year since at least the First World War.

There is nothing trivial about the subsidies that have been and are given to gasoline. Your estimation of them as “relatively trivial” is merely an indication of your moral depravity.

6. You wrote, “Proponents of ethanol subsidies argue that if the price of oil included the cost of our “oil mission” in the Middle East, the wars that the U.S. military engages there to protect oil supplies, the costs associated with our need to “kiss the ring” of Middle Eastern oil producers, the economic damage by terrorists from the flow of petrodollars into their coffers, and the harm done to U.S. interests by oilrich states like Iran, Venezuela, and Russia, then oil consumption would be far less than it is now. Alas, it is believed that those national security externalities are not embedded in gasoline prices and, as a result, gasoline consumption is heavily subsidized. Ethanol consumption is thus suboptimal and ethanol subsidies are an appropriate remedy. Economists, however, are far less worried about the national security costs of America’s reliance on oil (foreign or otherwise) (Bohi and Toman, 1996) and with good reason: Economists understand oil markets far better than do foreign policy elites. The alleged national security externalities associated with gasoline consumption are for the most part a figment of an imagination unmoored from a good understanding of market reality.”

In addition to my response to Point #2 above, if the cost of the wars and military actions were covered in the price of gasoline and/or the Federal taxes placed on gasoline our debt would not have risen so high since Operations Desert Shield and Storm began. This is proof that the cost of gasoline is heavily subsidized by the government.

Also, economists are worried about national security costs. Whether they understand anything better than anyone else is debatable, but for you to in any way say that it is not a concern to them is outright nonsense. Moreover, the news reports and video clips that we have seen on an almost minute-by-minute basis since Iraq first attacked Kuwait, right up to the latest reports on CNN or FOX News, are not a figment of anyone’s imagination. American forces were and are fighting to protect the Saudi royal family’s oil assets.

7a. You wrote, “Many believe that reliance on foreign oil requires the United States to militarily defend friendly exporting states and to ensure the safety of oil supply facilities and shipping lanes. Those marching under banners declaring “No Blood for Oil” seem to believe that is the case, as do most mainstream foreign policy analysts. Delucchi and Murphy (2008) offer a rigorous attempt to quantify the public dollars associated with the “oil mission.” They suggest that if motor vehicles in the United States did not consume Persian Gulf oil, the U.S. Congress would have likely reduced military expenditures by $13.4 to $47 billion in 2004 (one of the two years examined in the analysis). “

The U.S. sent no troops to fight in the long Iran/Iraq war, even though both countries produce and export oil. Our non-involvement had virtually no effect on our way of life and there doesn’t appear to have been any ill-effects to freedom for first-world countries. Not participating didn’t cause us to spend extra billions to defend and prop up one or the other country. From 1980 (the start of the Iran/Iraq war to 1988 (the end of the war), the price of gasoline didn’t change (it actually fell slightly). In the effort to defend the Saudi family and Kuwait (in other words, subsidize them) we experienced skyrocketing gasoline prices as well as an exploding national debt. The only reason we went to the aid of Saudi Arabia and Kuwait, and then back into Iraq in the recent seven years, is to protect their oil assets. It’s very possible that if we did not engage in the first and second Gulf Wars that prices of gasoline might not have gone to the levels that it has and we wouldn’t have spent trillions on the fight. We also would not have lost thousands of servicemen.

As far as I know, from 1980 to the present day, the United States has lost no servicemen in the effort to protect and defend ethanol production.

7b. You wrote: “If U.S. motor vehicles did not consume any oil at all, military expenditures would have, oddly enough, gone down by far less: by $5.8 to $25.4 billion in 2004. The “best guess” of this analysis is that, if U.S. gasoline consumers were forced to pay for the U.S. oil mission, gasoline prices would increase by $0.03 to $0.15 per gallon. Simple economics, however, suggests that the oil mission—however large it may be—is unnecessary, regardless of what Congress may think. Oil producers will provide for their own security needs as long as the cost of doing so results in greater profits than equivalent investments could yield.”

If the oil producers are so capable of providing their own security why was it necessary to stage Operation Desert Shield and then Operation Desert Storm? Why has the United States and other countries not been reimbursed 100% by the Saudi and Kuwait governments? Since we acted as a mercenary force, why haven’t we also received a profit in doing so?

For you to say that oil producers are willing and able to provide for their own security, after what has gone on, you would have to be absolutely insane.

7c. You wrote: ”Because Middle Eastern governments typically have little of value to trade except oil—oil revenues, for instance, are 40 to 50 percent of Iranian government revenues and 70 to 80 percent of Saudi government revenues—they must secure and sell oil to remain viable (EIA, 2006). Given that their economies are so heavily dependent on oil revenues, Middle Eastern governments have even more incentive than do consuming states to worry about the security of oil production facilities, ports, and shipping lanes (West, 2005). In short, whatever security our military presence provides (and many analysts think that our presence actually reduces security; see Jervis, 2005) would be provided by incumbent producers were the United States to withdraw. That Saudi Arabia and Kuwait paid for 55 percent of the cost of Operation Desert Storm suggests that keeping the Strait of Hormuz free of trouble is certainly within their means. The same argument applies to al Qaeda threats to oil production facilities. Producer states have such strong incentives to protect their oil infrastructure that additional Western assistance to do the same is probably unnecessary. Although terrorists do indeed plot to disrupt oil production in Saudi Arabia and elsewhere, there is no evidence to suggest that producer-state security investments are insufficient to protect their interests. The U.S. oil mission is thus best considered a taxpayer-financed gift to oil regimes (and, perhaps, the Israeli government) that has little, if any, effect on the security of oil production facilities or, correspondingly, the price of oil. One may support or oppose such a gift, but our military expenditures in the Middle East are not necessary to remedy a market failure.”

My response in 7b answers all this. But in addition, if all of our efforts and expenditures were unnecessary, as you set forth, that doesn’t mean that we didn’t spend billions/trillions on this particular oil and gasoline subsidy, it just means that it was another ill-advised subsidy going to the oil/gasoline industry.

8. You wrote: “Does Western reliance on oil put money in the pocket of Islamic terrorists? To some degree, yes. Does that harm Western security? Probably not - at least, probably not very much. Before we go on, it is worth noting that only 15.5 percent of the oil in the world market is produced from nation-states accused of funding terrorism (Lundberg Survey, 2006). Hence, the vast majority of the dollars we spend on gasoline do not end up on this purported economic conveyer belt to terrorist bank accounts. Regardless, terrorism is a relatively low-cost endeavor and oil revenues are unnecessary for terrorist activity. That a few hundred thousand dollars paid for the 9/11 attacks suggests that the limiting factors for terrorism are expertise and manpower, not money. This observation is strengthened by the fact that there is no correlation between oil profits and Islamic terrorism. In Taylor and Van Doren (2007), we estimated two regressions using annual data from 1983 to 2005: the first between fatalities resulting from Islamic terrorist attacks and Saudi oil prices and the second between the number of Islamic terrorist incidents and Saudi oil prices. In neither regression was the estimated coefficient on oil prices at all close to being significantly different from zero. During the 1990s, inflation-adjusted oil prices and profits were low. But the 1990s also witnessed the worldwide spread of Wahhabi fundamentalism, the buildup of Hezbollah, and the coming of age of al Qaeda. Note too that al Qaeda terrorists in the 1990s relied on help from state sponsors such as Sudan and Afghanistan—nations that are not particularly known for their oil wealth or robust economies. Producer states do use oil revenues to fund ideological extremism. Saudi financing of madrassas and Iranian financing of Hezbollah are good examples. But given the importance of those undertakings to the Saudi and Iranian governments, it is unlikely that they would cease and desist these activities simply because oil profits were down. They certainly were not deterred by meager oil profits in the 1990s.”

Oh my, but you are insane. You start by writing that even if Western reliance on Middle East oil does put money in the hands of terrorists, it’s not very much, like saying “It doesn’t mean anything.” But then you point out that the attacks on September 11, 2001 only cost a few hundred thousand dollars – hardly enough to even mention. To a sane person this means that any money given to terrorists is too much. A sane person would say “Let’s not do business at all with an oil producing regime that sponsors terrorists.” A person with a working brain would say “We must do everything to reduce our dependence on the product that keeps these murderers in business. We must become energy independent.”

But not you; no, in the Stossel interview you arrogantly declare that we will never be energy independent, and that domestic alt-fuel sources will never solve the problem. You may be ultimately correct, if you and others are allowed to continue to lie and misrepresent the facts regarding ethanol and other alternative fuels.

9. You wrote, Regardless, ethanol production cannot displace significant amounts of gasoline consumption (Akinci et al., 2008). Even if the entire U.S. corn harvest were dedicated to ethanol production, only 3.5 percent of current gasoline consumption would be displaced (Eaves and Eaves, 2007). All available cropland in the United States would have to be dedicated to corn production if all U.S. vehicles were powered by fuel composed of E85 ethanol. By 2036, all rangeland and pastureland would have to be added to that total to maintain adequate production. By 2048, all land outside of urban centers would be required for corn production (Dias de Oliveira, Vaughan, and Rykiel, 2005). Thus, no matter one’s opinions about the dangers of oil dependence (foreign or otherwise), corn ethanol cannot displace enough oil to matter.”

Ethanol can be produced in sufficient quantity to displace not just foreign oil, but all oil. After the period of time that it will take to transition away from the use of gasoline, which should be mandated to be not more than five years, petroleum oil in America should be used exclusively to make non-fuel products that require it as a chemical ingredient. About two years ago I wrote a paper on this topic, titled “No New Gasoline-Powered Vehicles By 2014…Can It Be Done?” It can be found by CLICKING HERE.

In closing, I remain appalled by your ignorance, your lack of morale fiber and that any person or entities would seriously take advice from you. You should be ashamed at yourself and the Cato Institute should be embarrassed to have to as an associate.

Cordially,

Marc J. Rauch Exec. Vice President/ Co-Publisher THE AUTO CHANNEL

EDITOR'S NOTE: How prevalent is the problem of the spreading of lies and misconceptions about ethanol? Here’s three more examples:

• Detroit News Story Goes Overboard in Slamming Ethanol
• Not Satisfied with Gluttonous Profits and Environmental Catastrophe, the Oil Industry Works Overtime to Malign Alternative Fuels
• Ethanol Opponents Begin Ad Campaign

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