Dicker: Ethanol Is the Enemy

NEW YORK (TheStreet) -- Last week, I had a discussion with Jim Cramer about ethanol prices causing a spike in gas prices this summer.

That story got a lot of discussion and interest. This week, the story has seemed to die a fast death, having lost the interest of the public. But this story isn't going anywhere. In fact, it can only get worse.

That's because the Environmental Protection Agency's Renewable Fuel Standard, or RFS, program continues to mandate more blended ethanol and other renewable fuels into less and less gasoline. That requirement assures that the credit market for renewable fuels and the price of those credits will inexorably go up, pushing gas prices inexorably higher with it.

On Monday, we heard complaints by the CEO of refiner HollyFrontier (HFC) that the market for these credits is now being traded by hedge funds and other speculators, turning the gas market price into even more of a casino.

This can't end well. But it does provide several immediate lessons.

First, it shows how government programs can become entrenched and grow unmanageably large and untouchable, even when it can no longer achieve its stated goals.

Since the RFS schedule was updated in 2007, an ever-increasing subsidy for ethanol production and other biofuels has its advocates in Washington, supported for reelection by the Renewable Fuels Association advocacy group. Even worse, that subsidy is more often leaving the U.S., subsidizing Brazilian sugar cane growers, whose sugar ethanol meets the tougher EPA biofuel standards while US-made corn ethanol cannot.

So even if you did favor this government program, the benefits are more and more often accruing to non-U.S. businesses.

Almost all of the studies are consistent: Ethanol production isn't very carbon-efficient, helps to boost corn prices and increase food inflation, delivers worse gas mileage and will invalidate your manufacturers' warranty if you use it in too high a blend in your car engine. There's very little to recommend this program and its Frankenstein-like growth.

But stopping it, or at least reforming it, will take an act of Congress -- and only a great scream of outrage from the public will drive such reform. But I think that's coming. A government program run amok causing spiking gas prices is the perfect issue for a Republican senator looking to make a case for government programs that hurt Americans (although that senator will most likely not be from the grains-growing Plains states).

How long will be before the public realizes rising gas prices are being helped up by a self-inflicted EPA policy? That's the only question left to be answered.

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This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 25 years of oil trading experience. He is a licensed commodities trade adviser.

Dan is currently President of MercBloc LLC, a wealth management firm and is the author of "Oil's Endless Bid," published in March of 2011 by John Wiley and Sons.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts on CNBC, Bloomberg US and UK and CNNfn.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.