Biofuel economics and the fallacy of composition
A few years back, when corn was trading for less that $2/bushel, ethanol started to make sense to a lot of people, and it wasn't just politics. I remember meeting young policy wonks in bars in Washington, DC and they would enthusiastically tell me how things had changed, that corn was cheap, that they could get more ethanol from each bushel of corn, that it was a good substitute for MTBE to boost octane and make the fuel burn cleaner, and oil prices were expected to rise. It really did make sense, they told me, and there was support on all sides. All of this was true. They were sincere. What a long strange trip its been since then. I was skeptical from the beginning for the following reason: the stylized facts told me the demand for corn was very steep. I was pretty sure corn supply was steep, too. That meant the price of corn would go up a lot if ethanol production increased to any significant fraction of the fuel market. The problem was that these non-economist policy type