Popular Delusions and the Madness of Government

In 1841 Charles MacKay wrote Extraordinary Popular Delusions and the Madness of Crowds.  It is often cited as one of the best books ever written about market psychology.  One recent reviewer commented “historic episodes confirm that greed and fear have always been driving forces of financial markets …and being sensible and clever is no defense against the mesmeric allure of popular craze with the wind behind it.”  That observation is not limited to financial markets; it accurately describes the forces behind the folly of biofuels and the insanity of the approach adopted by EPA.

In the 2006 State of Union, President Bush committed to a cellulosic fuels policy that would power cars by 2012.  In 2007, Congress passed the Energy Independence and Security Act (EISA) which included specific targets and timetables for the use of cellulosic ethanol—100 million gallons in 2010 growing to 16 billion gallons in 2022.

The mandate in EISA as well as the commitment in the 2006 State of the Union address reflect breadth taking ignorance and hubris.  The notion that government thought that it could mandate specific targets and timetables when no facility and no technology existed to achieve any of the mandate goals is incomprehensible.  Indeed, a few years before all of this took place a technology assessment by the Department of Agriculture concluded that commercially viable cellulosic ethanol technology was probably two decades from reality.

Obviously, federal government mandarins had little interest in technological facts or reality.  They subscribed, and still do, to a “Field of Dreams” like philosophy.  Instead of build it and they will come, it is mandate it and they will make it happen, especially if it is subsidized.

The initial 2010 goal of 100 million gallons was not achieved and the CEO of one company that was to be the first commercial cellulosic plant admitted that nobody had figured out to commercially produce cellulosic ethanol.

As the mandated production increased from 100 million gallons to this year’s 1 billion gallons, refiners were confronted with the challenge of figuring out how to use a product that did not exist and on one knew how make on a commercial scale.  To make matters worse, EPA has required refiners to purchase “waiver credits” for not using what does not exist.  In 2010, these credits cost refiners $10 million.   Since then their price has escalated and some refiners are citing costs in the hundreds of millions dollars.

In 2011, the National Academy of Sciences concluded that “without major technological breakthroughs the 16 billon gallon mandate is unlikely to be met”.  It further stated, “ the major barriers to cellulosic biofuel production are the high cost of production and the uncertainty regarding future markets.  Nonetheless, the Obama Administration continues to throw money and subsidies at the cellulosic ethanol illusion.  If a private sector company acted that way it would rapidly go into Chapter 11.  The time is long past when the entire ethanol boondoggle should be shut down.

This article appeared on the FuelFix weblog at http://fuelfix.com/blog/2013/09/28/popular-delusions-and-the-madness-of-government/

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