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This is my effort to share my thoughts with readers about concerns facing our country today.  I believe there is a good chance my grandchildren may be the first generation in the history of this great country not to have a better standard of living than their parents. If so, our generation is to blame. The clock is running out for damage control. .

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Friday
Apr172009

How the Government Manages Alternative Fuels

Regular readers may think this is another rant about one of my favorite subjects, ethanol. The fuel that has a net BTU loss and drives up corn prices and provides billions of your tax dollars to support ethanol producers. Well, it is, and, it isn't. I thought it was impossible for my government to make a bigger mess than they have made with ethanol. Hard to believe, but they have.

In 2005 Congress(for you, Chris Johnson, that means the House and the Senate) passed the highway bill. That bill provided a 50 cent a gallon subsidy for blending alternative fuels with fossil fuels. Paid for by your tax dollars. They amended the bill in 2007 to include off road blending. 

Not much thought went into that bill. The paper industry now gets subsidy for a process they have always used that is call the Kraft process. That process produces a by product called black liquor. Black liquor, which has been produced for years is considered a renewable fuel. But, to get the 50 cents a gallon subsidy the product must be mixed with a fossil fuel. So, the paper producers now blend it with diesel fuel just to qualify. Remember, the scare supply of diesel fuel last year?

In 2007 congress estimated that this would cost an additional $333 million. This is now estimated by Wall Street to be as much as $6 billion. Plus, environmentalists are up in arms over the use of diesel fuel. And, foreign paper producers say this gives domestic producers a huge advantage paid for by we taxpayers. Nice. No one is happy except the people in government who represent big paper producing interests and the paper producers who have found a windfall. 

Not mad enough yet? There is bill being introduced in congress to mandate the ethanol blends go from 10% to 15%. This is the power of Archer Daniels Midland. I have written repeatedly in this blog that ADM has government in their pocket. Politicians favoring this bill say it is necessary to maintain corn prices. The car manufacturers say it might violate the warranty. So, in addition to the projected $3-6 billion in your tax dollars(government's estimate and Wall Street's estimates), you may get to pay another $2-3 billion in tax money to the ethanol producers and corn growers. 

If you still buy the idea that Obama can make renewable energy work, just ponder how well these efforts have worked. 

Whenever the government has gotten involved in the energy business, the results have been disastrous. Jimmy Carter's energy programs created artificial shortages, high prices, and unscrupulous people daisy chaining allocations to profit. When Reagan stopped it, all of this went away. Lines at retail outlets, high prices, and profiteering.

Now, we have the paper industry, the corn growers, and the ethanol producers picking our pockets to the tune of billions of dollars. 

And you wonder why there were Tea Parties.   

Reader Comments (6)

Thanks for the shout-out. I passed the Constitution test in high school.

You did forget to include one important word in the sentence in which my name appeared: "Republican". That would be as in "In 2005 the REPUBLICAN Congress(for you, Chris Johnson, that means the House and the Senate) passed the highway bill." You might have also mentioned that that bill was signed into law by George W. Bush - R (Texas).

Finally.... you wrote "mad enough yet?". How about this.... does this make you mad?
Goldman Sachs announced a huge quarterly profit this week... $1.8B! Wow... great you say! Maybe we are turning the corner after all! And then you remember that they have 10B of our dollars because Hank Paulson (you remember him.... Treasury Sec for George W. Bush - R (Texas)) handed it to them. You know, Hank Paulson, former CEO of Goldman Sachs. Oh and by the way, Goldman got paid back dollar for dollar on bets they'd made with AIG.... yes, that AIG... the one that's gotten $180B or so from the taxpayers. Hmmmm..... who runs AIG? Oh... that would be Edward Liddy... appointed by who? Oh yeah... Hank Paulson, Treasury Sec for George W. Bush - R (Texas). Mad enough yet?

So, Hank Paulson (Treasury Sec for George W. Bush - R (Texas)) hands out $350B of our money to banks in the 1st half of TARP. He claims that we "won't lose anything". But according to the Congressional Oversight Panel, for every $100 "invested" by Hank, taxpayers got stock and warrents worth about $66. So, in effect, Hank gave away $78B of our money!!! And they can't even account for it all! Mad enough yet?

Believe me, I understand your anger. It is just so misdirected.

April 18, 2009 | Unregistered CommenterChris Johnson

I take it you think the paper industry should get the money?


Bill

April 18, 2009 | Unregistered CommenterBill Robertson

I think it is important to point out that AIG is an insurance company and the insurance policies they provide are contractual obligations. Each insured has the same right to payment. You can’t just decide that it is ok to pay life insurance policies dollar for dollar but credit derivative policies will take a haircut. AIG was a major counterparty to banks, investment banks, insurance companies, large corporations, and individual policy holders. Allowing AIG to fail would have caused a systemic shock to the financial system that would have put us in a worse situation than we are in now. The government had no choice but to bail them out. Let’s also remember that the banks and investment banks were required to take the TARP money. Without the bailout, it would have been an obligation of the other insurance companies in America to pay for AIG’s mess. It also would have crippled the banks and investment banks that were under financial attack by hedge funds at the time.

Is it fair to call Goldman’s trading with AIG betting? I am not so sure. It depends on whether Goldman had an insurable interest. In some cases they were probably insuring risk that they were actually exposed to, in other cases they were buying hedges against systemic risk, and in some cases they were merely speculating for profit. Is life insurance a bet? If you buy it on yourself to protect your family, probably not. How about when a corporation buys insurance on its employees as a way to fund employee benefit costs. To me that is more like managing your systemic risk or even speculating.

AIG did a horrendous job of managing their exposures. I doubt they really understood the risks they were insuring. A large amount of their losses came from insuring events that they believed would never happen. I view that as a fundamentally flawed business model. To me it was similar to selling people insurance against an attack by aliens from outer space. You can collect premiums for a long time but if it ever happened there is no chance you could ever pay. You also have no idea if it could ever happen. Even life insurance is not exactly what it appears to be. I doubt the life insurance industry could survive a large scale pandemic or plague outbreak. Does that make it a wager?

Goldman understood the businesses they were in and they took steps to manage their exposures. For that they should be given credit. At the same time I wonder how much of their success was predatory. My anger with the crisis goes beyond anything partisan. There are people and organizations that had access to better information than the average American and they used it to profit at the expense of the whole society. They believed that the housing bubble was unsustainable and chose to bet against it or in some cases to make it worse. They made billions. Who knows, maybe they tried to solve the underlying problems and nobody would listen.

So, Chris I don’t always agree with you and I don’t always agree with Bill but I read the blog ever day. I give Bill credit because he has a view on the energy industry that was formed from spending years in the industry at a senior level. He is trying to convince others of his view because he believes things are going to be very bad in the future. There is a good chance he is right so I am willing to listen. He could be running around to hedge funds with a powerpoint presentation telling them how they could make money based on his knowledge of the industry. Instead he is trying to get people to pay attention (rather than pay him some money).

April 18, 2009 | Unregistered CommenterPete

Thanks Pete. This blog started because I though 5 years ago that our country was headed down a bad path on energy. Five years later, it's worse. Zero progress in that time. The economy is saving us now, but if it starts to turn and world demand for energy turns, we will be back where we were when this all started. Remember, the energy problem preceded the housing problem.

BIll

April 18, 2009 | Unregistered CommenterBill Robertson

What do all the states that are really in trouble have in common, they all have extreme liberals in charge. New York, California, New Jersey, Michigan, Mass, Nevada, Maryland and Connecticut. They all have very liberal state governments. What are we doing as a country, we are trying to adapt there ideas to the whole country. Who we should be trying to copy, is what Texas, Oklahoma, Kansas, and Nebraska are doing, the ones in the least amount of trouble, and have not overspent and over taxed. This is what the Tea Parties are all about.

April 19, 2009 | Unregistered CommenterErvin Pietsch

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Nike is a famous brand;it includes Nike jerseys, Nike shoes, etc. Our company mainly wholesales Nike Shox NZ, Nike Air Max shoes, etc.There are Nike shoes for women, for men, for children, etc. So, Nike shox shoes are consistent of women’s shox shoes, men’s shox shoes, etc. Different shoes prices of Nike could meet all kinds of humans'tastes. Cheap air max is for the common, and dear max is for the wealthy men.

July 21, 2010 | Unregistered Commentersportshoes007.com

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