Unintended Consequences: Ethanol, Corn, Global Warming and Inflation

There have been several mentions in the media recently of the unintended consequences of rashly and reflexively moving from petroleum-based energy sources to those involving plants, specifically corn.

On Monday, the Wall Street Journal's Justin LaHart wrote a piece describing how the ethanol push is already driving up corn prices. Since the initial oil shock for the mid-1970s, US farm policy has induced the farm sector and the food processing industry to make heavy use of corn. According to LaHart's article, the price of corn, at the end of 2005, was "nearly 25% lower than it was 30 years earlier, even as food prices more than tripled." Corn is now a much larger component of our country's food production chain than it was in the 1970s.

This quote in the article, from Howard Simons of Bianco Research really says it all,

"If you look at cattle and hogs and chickens, what they really are, are devices for turning low-value corn into high-value meat."

So, ironically, to temper inflation from oil prices, and foreign control, we are foolishly choosing to substitute corn-based ethanol. The result is that we are now injecting a massive dose of input-sourced price inflation throughout the economy.

Could it be that, in our frantic, knee-jerk rush to wean ourselves from oil by substituting biomass-based energy sources, in the belief that it is the penultimate energy evil, we could cause ourselves significant costs far outweighing those attributable to oil, in terms of inflation, cropland usage, added greenhouse gas emissions, and distortion of resource allocations in our country in the long term?

Then there was this little item on CNBC's SquawkBox this morning, delivered by Joe Kernen. He read of the case of Indonesia switching heavily into palm oil for energy production. This resulted in the devastation of massive amounts of rain forest, to plant more palm, as well as the destruction of some environmentally-sensitive peat land. The burning of the rain forest resulted in carbon emissions that far outweighed those avoided by burning oil or coal in the first place. Finally, as a result of this, Indonesia catapulted from nowhere, to become the number three country on the list of global contributors to greenhouse gas emissions, just behind China and the US.

If that doesn't demonstrate the law of unintended consequences, what does?

Kernen went on to implore that the Congress and America, in general, seriously examine all plans for alternative energy, to more fully understand the likely (unintended) consequences of implementing such plans. Even one of the other on-air hosts of the program chimed in that he had seen reports showing that the average lifecycle energy consumption for a hybrid automobile is, in fact, greater than that for a conventional, gasoline-only vehicle.

The reason I raise this topic is to point out again, as in a recent prior post, here, that the rush of some large US companies to capitulate to unsoundly-based demands for 'green' energy 'solutions' may indeed saddle all of us, as consumers and investors, with some very nasty surprises in the coming years.