Pop goes the market.

I’m not surprised:

President George W. Bush’s January, 2006, declaration that the U.S. is “addicted to oil” marked the beginning of a gold rush for corn growers: The government policies the comment helped spur have been a boon for the producers of corn-based ethanol, the all-American fuel that now displaces about 4% of U.S. gasoline supply. Over the past 18 months, farmers have rushed to plant more corn—and are set to produce a record crop this year—while small-time entrepreneurs and agricultural giants alike have built plants to expand capacity. A handful of initial public offerings have fed investors’ desire to get in on the action.

Government sets incentives outside of the market, so the market responds. In this case, farmers plant more (or switch to planting) corn. That’s no surprise. Nor is this:

Lurking behind ADM’s gloomy news are doubts about the future of corn ethanol. A growing number of analysts, once bullish on the product, are warning that an oversupply may be coming as soon as this year. On Apr. 27, a Lehman Brothers (LEH) report projected that production will outstrip demand in the second half of 2007, measuring the domestic thirst for corn ethanol at 420,000 barrels per day but supply at 445,000 barrels a day, mainly because the U.S. lacks the infrastructure to move the product to market.

“There’s tremendous capacity coming online, but the infrastructure isn’t there to keep up with it,” says Michael Waldron, an oil markets research analyst at Lehman Brothers who co-authored the report. “We need a nationwide system to pipe it, and until that happens, we’ll likely have an excess of product.”

Just a quick pause to speculate on who’s going to pay for that infrastructure. You know it’s coming.

Waldron says the problem isn’t a lack of demand for ethanol, which remains high, especially given that the federal Renewable Fuel Standard mandates at least 4 billion gallons, or about 3% of all U.S. transportation fuels, to come from alternative sources today, and nearly double that amount, or 7.5 billion gallons, by 2012. Lawmakers are expected to give the mandate a significant boost later this year. Rather, the problem is getting ethanol to consumers in various parts of the country. Ethanol requires a separate piping system from gasoline, and since Uncle Sam hasn’t appropriated funds to build such infrastructure, ethanol is now primarily transported by rail. But the rail system extends only to major metropolitan areas—not to mention the dual problems of its high cost and carbon dioxide emissions.

So, let’s see, we get energy dependence, if you count only needing oil for 96% of our gasoline, as well as increased carbon dioxide emissions to transport what the government mandates we buy. (We won’t need foreign oil if we choke to death? Is that the plan?) And we’re supposed to accept that this is because the government hasn’t provided the funds to build such infrastructure? I’m not buying that argument. If the demand were truly “high”, private entities would be building a pipeline without government subsidies. That those entities are waiting for the pipeline suggests some combination of insufficient profit motive from the pipeline’s cost structure and market infantilization.

Either way, it implies that ethanol is not ready for prime time, despite the grandiose wishes of politicians. I’m reminded that the facts, although interesting, are irrelevant¹, especially when politicians consider public policy.

Looking at the consequences of this, though, how much economic hardship will result for those who rushed to grow more corn to produce ethanol that can’t be shipped economically? I have little sympathy for those people because they ignored economic signals for the quick buck, but I’m sure a government bail-out will be “necessary” because “the market” doesn’t work. It’s amazing how consistently government creates problems that “prove” how necessary more government is to our well-being and survival.

¹ Was it Einstein who said this?