Necessary Roughness

The International Herald Tribune reports that the lack of distribution capacity for ethanol has caused a glut at the newly built distilleries. Ethanol is already down 30 percent since May. The article is an interesting study in market self-correction as supply and demand are unnaturally shifted.

The author makes a statement that just grates:

While generous government support is expected to keep the output of ethanol fuel growing, the poorly planned overexpansion of the industry raises questions about its ability to fulfill the hopes of President George W. Bush and other policy makers to serve as a serious antidote to the nation’s heavy reliance on foreign oil.

Poorly planned overexpansion? Is this guy from Russia too? If there is money to be made from transporting ethanol more efficiently than the normal methods, someone will find it. They will make a killing, as it should be. Market inefficency is synonymous with profit opportunity.

Nobody forced anyone to build plants. They saw a forecasted increase in demand and chose to risk their money thinking that ethanol plants would make them more money. Either they will arrange for their ethanol to get to market, or they’ll close up shop. The market may not be overexpanded at all, but merely waiting for the construction of more watertight ethanol trucks and rail cars.

“Overexpansion” in the market is a judgement call akin to “fairness”; there’s no place for it. Both take the value judgements of hundreds of thousands of people and reduce it down to one. It can’t be done without force. In this case, there has already been force to grow this industry.

Of course, government is stepping on the accelerator and the brake at the same time:

Gasoline wholesale marketers have been slow to gear up ethanol blending terminals, in part because they had to invest simultaneously in equipment to manage low sulfur diesel and tougher product specifications.

(skipping)

Stiff blending regulations in some southern states like Florida have also been an impediment to ethanol. And so far, only about 1,000 of the 179,000 pumps at gasoline stations around the country offer E-85, a fuel that is 85 percent ethanol and 15 percent gasoline, intended for the five million flex-fuel vehicles on the road that can run on high ethanol blends.