Is There Any Situation Where Setting a Maximum or Minimum Price Works Long-Term for the Economy?
Price controls are generally disagreed upon by economists and policymakers due to their myriad drawbacks. However, in certain specific cases, price mandates can be beneficial. This article will explore one such situation involving the utilization and development of cellulosic ethanol.
The Case for a Minimum Price on Cellulosic Ethanol
During the early 2000s, the Bush administration made a concerted effort to reduce the United States' reliance on imported oil. Cellulosic ethanol emerged as a promising alternative to traditional corn-based ethanol. While corn-derived ethanol has no significant environmental benefits, cellulosic ethanol, derived from cellulose, holds tremendous potential in reducing our carbon footprint and fostering energy independence.
Challenges in the Commercialization of Cellulosic Ethanol
Despite its potential, cellulosic ethanol faces significant economic hurdles. According to the Department of Energy, the technology to produce cellulosic ethanol at a commercially viable price point is still widely unattainable. The cost is currently around $4.50 per gallon of gasoline equivalent, which is more than the typical gasoline price in the U.S. Even with advancements in technology reducing this cost to $3 per gallon, the market's reliance on oil prices poses a substantial challenge.
How Oil Prices Influence the Market
The viability of cellulosic ethanol hinges on the price of oil. Currently, oil prices are below $80 per barrel, making cellulosic ethanol uncompetitive. However, the Department of Energy predicts that oil prices will consistently remain above $80 per barrel, starting in 2025. While this seems promising, the volatility of oil prices is a potential deterrent. An ethanol plant remains a substantial investment, requiring a loan that must be paid off over 30 years. Any significant dip in gasoline prices could jeopardize the producers' ability to make their loan payments, leading to bankruptcy.
The Necessity for Price Guarantees
To address this issue, a minimum price guarantee for cellulosic ethanol could ensure the long-term sustainability of the industry. Specifically, a guaranteed price of $3 per gallon would provide producers with the necessary stability to offset the risks associated with oil price volatility and ensure a steady flow of investment. This price guarantee would make cellulosic ethanol commercially viable in times when oil prices are volatile but remain above $80 per barrel.
Legislative Hurdles and Implementation Challenges
Despite the clear advantages, the efforts to implement such a policy have faced significant challenges. The Renewable Fuel Standard (RFS), aimed at promoting cellulosic ethanol, saw the EPA undermining the legislation's intent by not providing a robust price guarantee. Instead, the EPA offered a negligible price guarantee, which does not align with the aspirational production targets outlined in the RFS.
Conclusion and Future Implications
In conclusion, while price controls are generally detrimental, there may be situations where a minimum price guarantee serves a larger economic and environmental purpose, such as the development of cellulosic ethanol. However, this approach must be carefully considered and revised in light of technological advancements. If cellulosic ethanol can be produced more cheaply, the price guarantee may no longer be necessary, and the market can self-regulate.
Keywords: price controls, cellulosic ethanol, renewable fuel standard