Today’s announcement that British Petroleum would be taking crude oil production offline to make urgent repairs drove up oil prices to $77 a barrel. So what about those renewable resources we keep hearing about? We want to break the oil addiction!

Ethanol is indeed sparking renewed interest and a flurry of investment in the U.S. Most of the 3.9 billion gallons of ethanol came from corn and was used in the states where it was grown. Impressive until you realize that Brazil produces 4.8 billion gallons of sugarcane-based ethanol, providing about 40% of their annual gasoline needs.

We have been producing ethanol-based fuels in the United States for decades. Most of the Midwestern states (see charts below) that benefit from $4 billion in corn subsidies have an available 10% mix of ethanol in their gasoline. And with low corn commodity prices, high gas prices and a lack of ethanol refining in the Midwest, it has created the perfect investment storm.

Profit from Archer Daniels Midlands’ (ADM) corn bioproducts increased from $259 million to $446 million this year, and they have aggressive expansion plans. According to today’s Barron’s:

“In the past year, the difference between ethanol [prices] and corn prices has soared from less than 50 cents to about $3.10 a gallon…. That’s lifted the annual return on capital for some ethanol plants toward 50% and set off a stampede of new investment in ethanol refining.”

So it will come as no surprise that the ethanol industry has a strong lobby to protect itself. It’s a twisted relationship. The federal government’s price supports and subsidies regularly create overproduction of corn. This drives corn prices lower suppressing world prices (something the developing nation’s rightly bemoan).

Some of this surplus is used for ethanol. Why? Refineries - and consumers - are incentivized by a $.51 per gallon tax credit for 10% ethanol-based gasoline. Ethanol producers also enjoy significant trade protection in the form of a 2.5% ad valorem tariff and import duty of 54¢ per gallon of ethanol.

In August, 2006, Amani Elobeid and Simla Tokgoz from Iowa State University published a paper that analyzed the economic effects of removing these protections:

“The study finds that the removal of trade distortions induces an increase in the world price of ethanol and a decrease in the U.S. domestic ethanol price, which results in a decline in U.S. ethanol production and an increase in consumption. Consequently, U.S. net ethanol imports increase significantly….”

The Iowa State paper shows that if we were to remove trade barriers and the tax credit, we would see a 14.46% price drop in ethanol for consumers. Ethanol currently makes up 10% of our gasoline in a limited number of markets in California and the Midwest. Lifting trade barriers would allow Brazilian ethanol to more easily reach ports on the East Coast.

Yet we continue to protect ethanol refineries. ADM Chief Executive Patricia Woertz told Barron’s that “ethanol demand could triple. ‘It looks like it has room to grow to 14 billion or 15 billion [gallons per year],’ she said, ‘which is a full 10% blend in the gasoline pool in the United States.’”

Barron’s analysis of the ethanol market was about as sheltered as the heavily-protected ethanol refining industry: “Unfortunately, before ethanol refiners can reach that goal [14 billion or 15 billion gallons per year], they might reach the limits of the country’s corn supply. America’s entire corn crop would satisfy just 12% of gasoline consumption, leaving no corn to feed livestock and humans.”

No corn to feed our delicious cows? Once we remove ADM’s trade protections and give the Brazilians a new market for their ethanol, we should have plenty of corn to feed those future Big Macs. It will help our farmers counteract the predicted 1.7% drop in domestic corn prices, and it might help lift some desperate Brazilians out of poverty.

Didn’t most of us learn competitive advantage in econ 101? This may be a good time for Congress to brush up.

Sources: Statastic research; Environmental Working Group - Farm Subsidy Database

Trade model based on scenario 2 in the following paper: “Removal of U.S. Ethanol Domestic and Trade Distortions: Impact on U.S. and Brazilian Ethanol Markets,” Amani Elobeid and Simla Tokgoz, Working Paper 06-WP 427, August 2006, Center for Agricultural and Rural Development, Iowa State University

Back in the 1930s and 1940s, the Chief of the Bureau of Public Roads Thomas Harris MacDonald imagined a nationwide network of toll-free highways. His vision was largely implemented: Today only 1 out of every 16 miles on the Interstate system is toll road. All of these freeways has helped (ahem) fuel urban sprawl resulting in more cars per person, more miles driven, and arguably, increased American tubbiness.

Statasico would love to remedy this by raising the gas tax. Among other things, ncreasing the gas tax would:

1) Capture the negative externalities caused by greenhouse gas emissions and traffic

2) Create a potential pool of money for mass transit projects

3) Really upset the oil companies, and

4) Never happen with gas prices hovering around $3 per gallon.

What about mass transit? Isn’t some of that federal 14.7 cent per gallon gas tax applied toward mass transit? Yes… in spirit. Right now a whopping 1% of the price of every gallon of gas (about 2.7 cents of every gallon) goes toward the Mass Transit Account.

So I’m giving in. Let’s build more highways. And make every one of them a tollway. But don’t stop with just the new highways. We should also convert the remaining miles of the Interstate system to toll roads. I’m not advocating that states continue privatizing toll collection. That’s one role the government should not outsource.

One of the common complaints about toll roads was the inefficiency of sitting in a line of cars sputtering greenhouse gasses while someone ahead of you scrambles for change. But E-ZPass has started to change that. Unfortunately, toll collection is still slow because not all cars use the E-ZPass lanes. So the government should require every to have an electronic toll collection (ETC) technology installed as soon as a car is registered.

The government must stay actively involved because tollways are a regressive tax. Fixed tolls take a higher percentage of wages from low income workers than high income workers. Once again, technology can help remedy this. E-ZPass could be linked to a driver’s tax bracket, enabling the government to impose lower tolls for low income workers. Likewise, hybrid cars or alternative fuel cars could pay lower tolls.

Even better toll collection technology already exists across the Atlantic. Last year, Germany introduced an automatic toll system for trucks traveling along its 7500 miles of autobahn. The Toll-Collect system utilizes GPS technology, so Germany can reap about $3.2 billion annually while never requiring trucks to slow down to collect a single toll.

So what is the gas tax equivalent of tolls? Looking around the country, tolls average about $.04 per mile. With average passenger car and light truck fuel economy was 21.8 miles per gallon in 2004, those tolls are the equivalent to a gas tax of $.83 per gallon. Unlike a gas tax, tolls don’t necessarily lead consumers to buy more fuel efficient cars. But tollways make it easy for drivers to see some of the expenses associated with 46,000 miles of “free”ways. And with added toll revenue, perhaps we can beef up that Mass Transit Account and start to get people out of their cars.

*Uses the 2004 average fuel economy for cars and light trucks in the U.S. of 20.8 miles per gallon.