In what is being described as an ambush, Senator Tom Coburn (R-OK) has successfully forced a vote (next Tuesday, June 14) on legislation that would, upon July 1, terminate the ethanol tax credit and corresponding tariff. A back of the envelope calculation suggests it would save approximately $3 billion in the remainder of 2011.

According to the article, Coburn is cautiously optimistic that he has 60 votes. Politico gets it right, this is a big deal regardless if it passes:

Regardless of whether the underlining economic development legislation gets through the Senate and House and to the president’s desk, a vote on Coburn’s amendment could be a major symbolic vote.

Ethanol backers have been looking to try to stave off such moves by working behind the scenes on ways to quickly move off of the blender tax credit and transition to federal assistance for blender pumps and other infrastructure to grow the market base for ethanol and other biofuels.

Even if he gets the necessary votes in the Senate, it seems unlikely that both the House passes similar legislation that President Obama then signs. However, if this gets a significant number of votes, it could spell doom for the future of the industry. A repudiation of tax incentives for ethanol will certainly limit the industry’s ability to lobby for infrastructure assistance, which they have successfully framed as ending the subsidies. Of course, re-directing the current subsidies into money for blender pumps and ethanol pipelines is not in any form an “end” to the subsidies.

The industry, caught off guard, is angry:

The RFA statement from President and CEO Bob Dinneen is as follows:

“This is the same kind of political gamesmanship that nations like Iran and Venezuela are exercising to keep consumer energy prices artificially high and Americans addicted to oil.  If this were truly about sound policy and concerns over energy tax subsidies, then this amendment would include efforts to repeal the billions of taxpayer dollars oil and other mature energy industries receive each year while posting tens of billions of dollars in profits quarterly.  As few observers give this bill any chance of getting to the president’s desk, Sen. Coburn’s efforts are yet another example of oil-patch politics trumping sound national energy policy.  We encourage Sen. Coburn to lay down his arms and work with the ethanol industry to craft thoughtful and fiscally responsible legislation that allows for continued innovation and growth of domestic biofuel production and use without pushing the industry off a cliff.

“Ethanol is the only alternative to imported oil available today and the only technology keeping money out of bank accounts in Caracas and Tehran. Pulling the rug out from under a still maturing industry would force consumers to pay more at the pump, do nothing to mitigate impacts of rising food prices resulting from exorbitant oil prices, and jeopardize the commercialization of promising new ethanol and biofuels technologies. This is an amendment meant with an eye toward reelection, not deficit reduction.”

Despite their doom-saying, the industry will not be pushed off a cliff. Federal law still requires the production of something like 10 billion gallons of ethanol per year. It is telling that they refer to themselves as a still maturing industry, over 30 years after they began receiving subsidies, and given that they are now receiving tax credits for ethanol that is being exported to Brazil.

1. Ethanol Mandates: In an effort to further “energy independence,”* major agricultural producing countries have enacted Soviet-style production quotas for ethanol, a motor fuel distilled from food.

This year, about a third of the U.S. corn crop will be used to manufacture 13 billion gallons of ethanol. By law, that will increase to 15 billion gallons every year after 2015. The European Union mandates that ethanol distilled primarily from palm oil and wheat, constitute an increasing percentage of the fuel supply, ultimately 10% by 2020.

Global ethanol production is a new and tremendous source of demand for food that has had a significant impact on the price of grains and oilseeds. According to a report commissioned by the World Bank, global demand for fuels made from food accounted for nearly 70% of the historic price spike in wheat, rice, corn, and soy during the summer 2008.

2. Rainforest Protections: Burning rainforests is an important link in the global food supply chain. In Brazil, farmers are clearing the Amazon rainforests to meet rapidly growing global demand for soybeans. In Indonesia, they slash rainforests to harvest palm oil seeds for export to Europe.

Rainforests are an important source of food supply, but they are also revered by environmentalists as symbols of ecological diversity. In late 2009, a group of wealthy countries, including Australia, France, Japan, Norway, Britain and the United States, pledged $3.5 billion over the next three years to stop the destruction of the rainforests. It’s the first installment of a proposed $25 billion.

As I explain here, there will be no Malthusian famine, despite these stupid, anti-human policies

There are tremendous gains in production to be made in the developing world, especially in China and Brazil. And technological advances to improve productivity, such as biotechnology, will mean greater yields-per-acre and enhanced crops that can grow in previously inhospitable regions. In the long term, the world’s farmers will meet demand.

In the short to medium term, however, the global supply chain is going to be a problem. A natural disaster in America or in any other major food-exporting country could send the market price of food spiraling upward.

The most adversely affected by these boneheaded policies are poor people in developing world capitals that are dependent on the global grains and oilseeds market. The developing world has been urbanizing for decades, resulting in unprecedented concentrations of the poor in the world’s cities. There are no sustenance farms in urban areas; Instead, many of these cities depend on international trade for food.

*So-called “Energy Independence” is empty political rhetoric, as my colleague Iain Murray demonstrates in this paper.

I’ve written before about Obama’s tortuous logic when it comes to rising gas prices, and, this week, he again laid out “solutions” that don’t make any sense. Consider,

• Yesterday, the President implored Saudi Arabia to produce more oil. That is, he told the Saudis to “drill, baby, drill.” He did the same thing a month ago in Brazil. Meanwhile, U.S. production remains stunted by the Obama administration’s de facto moratorium on new oil and gas leases and permits. Why is “drill, baby, drill” appropriate for Saudi Arabia and Brazil, but not for the U.S.?
• Last Saturday, the President called for an end to tax breaks for the oil industry. He said, “They’re making record profits and you’re paying near record prices at the pump. It has to stop.” So, the President wants to end oil “subsidies” in order to relieve Americans pain at the pump. This doesn’t make any sense, because the effect of oil industry “subsidies” is to lower the price of oil. It’s a market distortion meant to lower the cost of producing oil. By removing these “subsidies,” the price of oil would better reflect the forces of supply and demand, and it would increase.
  [N.B. To an extent, I agree with the President on this one—loopholes in the tax code are a form of corporate welfare that should be stopped. That said, these tax breaks aren’t unique to the oil industry, and singling it out only makes the tax code more complicated. A better way, as articulated by Rep. Paul Ryan, is eliminate ALL corporate welfare.]
• The President wants to take away oil industry “subsidies,” and turn them into green energy giveaways, because, he says, this will “reduce our dependence on foreign oil.” For starters, it’s unclear how investments in unreliable, expensive electricity produced by wind and solar would “reduce our dependence on foreign oil.” Moreover, in the past, Obama’s has dismissed “drill, baby, drill” on the grounds that it would take years to impact the global oil market. The President claims that expanded oil production would take too long to have an effect on the price of gas, but that increased taxpayer handouts to wind and solar would somehow “reduce our dependence on foreign oil” in a more reasonable time frame.  This is nonsensical.

In an editorial cleverly titled, “Drill, Brazil, Drill says the U.S.“The Washington Post joined in the growing public displeasure over President Obama’s public support for the Brazilian oil industry, which seems to be rising at the expense of administration support for the oil industry in the United States.

As CEI’s Myron Ebell pointed out last week:

This is the same President who has spent the last two years doing everything he can to reduce oil production in the United States.  Cancelled and delayed exploration leases on federal lands in the Rocky Mountains; the re-institution of the executive moratorium on offshore exploration in the Atlantic, the Pacific, most Alaskan waters, and the eastern Gulf of Mexico; the deepwater permitting moratorium and the de facto moratorium in the western Gulf.  The result is that domestic oil production is about to start a steep decline.

The editorial also mentions the tariff on ethanol. Trade restrictions are bad policy. However, the case for Brazilian ethanol is slightly more complicated than that. If Brazilian ethanol were imported to the U.S., it might displace some ethanol production that is occurring in the U.S. as historically Brazilian ethanol has been cheaper. This would be fine.

However, much of the consumption of ethanol in the United States is because of the Renewable Fuel Standard. Corn ethanol production will be peaking near its current level of production, because it does not satisfy the cellulosic ethanol nor the advanced biofuel requirements of the RFS. It would need to have much higher GHG emission reductions (as an aside, the ethanol industry is lobbying to change the language of the bill such that corn ethanol would qualify).

Allowing Brazilian ethanol into the U.S. would allow it to fill a steadily increasing “Advanced Biofuel Requirement” in the RFS. If this Advanced Biofuel will be produced expensively in the U.S. at all cost (or the EPA decides to allow corn ethanol to qualify), then the case for allowing cheaper foreign sources of ethanol into the U.S. is compelling. However, if the EPA will continue to cross out mandates when they are impossible to meet, the tariff might actually keep Americans from being forced to buy increasing quantities of a product that couldn’t pass the market test. This depends on the behavior of the EPA in terms of their assessment of how difficult it would be for refiners to meet the mandate.

The Washington Post is correct to push Obama on supporting more production in the U.S., especially with unemployment still so high. The case for ending ethanol is more complicated, overshadowed by government policy forcing Americans to use it while filling up their cars.

The most astonishing event this week was President Barack Obama endorsement of more oil production—in Brazil.  In a speech to a CEO Business Summit in Brasilia, the President said:

By some estimates, the oil you recently discovered off the shores of Brazil could amount to twice the reserves we have in the United States.  We want to work with you.  We want to help with technology and support to develop these oil reserves safely, and when you’re ready to start selling, we want to be one of your best customers.  At a time when we’ve been reminded how easily instability in other parts of the world can affect the price of oil, the United States could not be happier with the potential for a new, stable source of energy.

This is the same President who has spent the last two years doing everything he can to reduce oil production in the United States.  Cancelled and delayed exploration leases on federal lands in the Rocky Mountains; the re-institution of the executive moratorium on offshore exploration in the Atlantic, the Pacific, most Alaskan waters, and the eastern Gulf of Mexico; the deepwater permitting moratorium and the de facto moratorium in the western Gulf.  The result is that domestic oil production is about to start a steep decline.  An article on Red State by Steve Maley summarizes the future effects of the Obama Administration’s war against oil.

Maley quotes an authoritative summary (PDF) provided in a recent publication by the Department of Energy’s Energy Information Administration:

Off shore oil production in [the 2011 forecast] is lower than in [the 2010 forecast] throughout most of the projection period [through 2035] because of expected delays in near-term projects, in part as a result of drilling moratoria and in part due to the change in lease sales expected in the Pacific and Atlantic outer continental shelf (OCS), as well as increased uncertainty about future investment in off shore production. [page 8]

I’m all for more oil production in Brazil, but what’s good for Brazil would also be good for the United States.  Were the federal government to open some of America’s vast untapped offshore and Alaskan oil resources, it would lower our trade deficit by hundreds of billions of dollars, provide billions of dollars in royalties to the federal treasury, create hundreds of thousands of high-paying jobs not subsidized by taxpayer dollars, and contribute significantly to our long-term prosperity.  Given the economy’s current dismal long-term prospects, continuing to lock up our resources is detestable.

President Obama’s remarks in Brazil show that he understands this.  He clearly thinks prosperity is good for Brazil.  But it is something that he is working mightily to deny to Americans.  He and his administration have adopted policies that they know will reduce oil and coal production, raise energy prices, and make Americans poorer.  As the President said when gas prices reached $4 a gallon in the summer of 2008 when he was running for President, the problem wasn’t the price, but that prices had risen too suddenly. In fact, the Administration is full of senior officials who are on record supporting much higher gasoline and electricity prices, starting with Energy Secretary Steven Chu.

Victor Davis Hanson takes a stab at explaining the background assumptions that have led to the left’s insane war against energy:

The administration’s energy visions are formulated by academics and government bureaucrats who live mostly in cities with short commutes and have worked largely for public agencies. These utopians have no idea that without reasonably priced fuel and power, the self-employed farmer cannot produce food. The private plant operator cannot create plastics. And the trucker cannot bring goods to the consumer — all the basics like lettuce, iPads, and Levis that a highly educated, urbanized elite both enjoys and yet has no idea of how a distant someone else made their unbridled consumption possible.

I think that’s part of the explanation, but only scratches the surface.  At its core, the modern environmental movement (and the Obama Administration has been staffed with professional environmentalists) hates access to energy because it gives people power over nature.