Others

Subsidy Soapbox

By, 07/10/2007

Next time you notice a dismaying lack of hand soap at a public restroom, your local congressperson just might be to blame.

Follow this trail of unintended consequences from yet another government subsidy. The fine minds in Congress have required ethanol quotas to supplement petroleum-based energy. Increased demand for ethanol has spiked corn prices. (A MarketMinder columnist imagined just such a scenario—see "Gap Schmap.") Animal feed prices have risen as a result—causing feed producers to stretch supply by blending animal fats into feed corn, such as relatively cheap beef tallow.

Adding to beef tallow supply pressures, a new subsidy rewards turning animal fat into a diesel additive—a whopping $1 tax credit per gallon produced. Tyson, in partnership with ConocoPhillips, plans on cashing in (who can blame them?) by producing 175 million gallons a year of beefy smelling oil. Demand for beef tallow has skyrocketed, and prices have followed. Read more about it here:

Fuel Rules Soak Soap Makers

By John J. Fialka, The Wall Street Journal (*site requires registration)

http://online.wsj.com/article/SB118402258820661409.html?mod=economy_lead_story_lsc

But who cares? When's the last time you used beef tallow? Probably not too long ago (we hope). Beef tallow is a major ingredient in soaps and detergents. (Yikes—someone alert PETA!) Sanitation fans beware—already, price and availability of beef tallow are driving soap makers to look to alternatives, like more expensive palm oil.

This is a problem destined only to get worse. Global demand for energy is growing, caused by a growing global economy:

Rise in World Oil Use and a Possible Shortage of Supplies are Seen in the Next 5 Years
By James Kanter, The New York Times
http://www.nytimes.com/2007/07/10/business/worldbusiness/10oil.html

Emerging nations are beginning to snap up the same Western comforts we take for granted—cars, low-priced airline travel, electronic goodies—and good for them! It's hard for rational folks to find anything negative in increasing global wealth—but increasing wealth means more energy demand.

Meanwhile, new refineries are not likely to fall out of the sky, and America's own refining infrastructure is aging. Given the supply-demand pressures at play, we at MarketMinder, being inherent believers in free markets, are supremely confident the market will respond by innovating a replacement, if given the opportunity. We managed to come through the transition from horse-powered buggies to combustion engines with relatively few scars. We'd wager the next transition will be similarly pain-free. Just imagine all the productivity gains folks at the turn of the 20th century couldn't fathom! What life-improving, wealth-increasing innovations await us in this century?

We doubt any that will make soap obsolete. A Treasury Department spokesperson defends this spiral of unintended consequences by claiming it's all in the interest of goading development of alternative energy. What about the interest of sanitation? Petroleum is already, by its very essence, a finite commodity. Any replacement for it should be driven by market pressures and only market pressures—not foolhardy governmental mandates.

What other unintended consequences lurk behind this ill-fated subsidy? Greater demand for beef tallow could lead to clever ranchers increasing their cattle supply. But aren't cattle a major source of so-called "greenhouse" gases? Aren't we simply reallocating pollution from our tailpipes to cows' tails?

Subsidies interrupt free markets resulting in higher prices, lower productivity, and dirty hands. Politicians should allow market demand to drive energy innovation and stop being fearful of a clean, safe energy alternative the French have been using in abundance for years—the third rail known as "nuclear." As a nation, we should be mortified the French have figured this one out. Anything the French can do, we can do better—and cheaper! And safer!

No doubt, this latest foray into manhandling free markets will leave our politicians with egg on their faces and not enough soap to remedy the situation. The lesson to be learned? Subsidies are a dirty business.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:


1 Ratings:

5/5 Stars

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.