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Behind the Ethanol Scandal

NEW YORK (TheStreet) -- Something about this decade's economic assumptions has never made sense to me.

The idea that you can anticipate a high and rising price for fuel, regardless of demand, never made sense to me.

What I was taught in economics class was that demand encouraged supply, and at some point the two would balance.

That's what seems to be happening. Shale oil, shale gas, and new strikes around the world are dramatically increasing gas supplies and proven reserves, to the point where one-third of natural gas being pumped in North Dakota's Bakken is being flared, burned away, $100 million in gas a month.

North Dakota's Department of Mineral Resources explained this happens only when the oil flow from a well is being tested. Or, if a producer determines it "is not economically feasible" to connect the gas in a well to a pipeline, they may "seek relief" from paying taxes and royalties on it.

If something is not "economically feasible," doesn't that mean the market has cleared at a price below the cost to bring on production? At its current price of $3.67/MCF, according to the latest report on Investing.com, it's still not economically feasible.

Prices below production costs have long been the problem with ethanol. The Renewable Fuel Standard was created to bridge this gap, enabling production. The idea that traders may be exploiting this program is separate from the question of supply and demand. You wanted supply and you got it. Genetic engineering is coming to the rescue of fuel prices.

A bumper corn harvest, driven by genetically engineered seeds, is driving ethanol prices below those for unblended gasoline. This pressure is going to increase next year.

Ethanol Producer writes that cellulosic alcohol projects, which don't require food crops as fuel, are starting to come on-stream.

Science & Enterprise writes that non-fuel crops like castor beans, genetically engineered to be used as fuel, are also heading to market.

Venture-funded start-ups like Midori Renewables are preparing new catalysts that get even more fuel sugar from existing feedstocks.

So the only recourse left to oil advocates is to attack the the Renewable Fuel Standard that created all this abundance. Take away the bridge, chop off ethanol supplies at the source, and the price pressure on refiners and oil producers may abate.

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