Serious Money:George Bush revived his love affair with alcohol two years ago and this time he has turned to the hard stuff, a 200-proof grain-based alcohol called ethanol.

The president enacted an energy bill in the summer of 2005 that mandates pre-set levels of renewable fuels use, which climb to 7.5 billion gallons by 2012. The production of ethyl alcohol is expected to supply the bulk of the mandate and is viewed by many, including Bush, as a potential cure to the United States's addiction to foreign oil and a big step forward in the bid to reduce the emission of greenhouse gases.

Mr Bush is not alone in his views.

Bill Gates, co-founder of Microsoft, appears to concur as evidenced by his $84 million investment in Pacific Ethanol 18 months ago, as does Vinod Khosla, the co-founder of Sun Microsystems, who has invested significant sums in the sector. But does ethanol deserve the hype or is it simply the product of an irrational mind that envisions a pot of gold at the end of every rainbow?

The infatuation with ethanol as a motor fuel and potential replacement for gasoline is hardly new. Indeed, Henry Ford described it as the "fuel of the future" in the 1920s but his arguments fell on deaf ears, much to the delight of John D. Rockefeller, the founder of Standard Oil and the modern oil industry.

More than half a century later, President Jimmy Carter introduced the first tax subsidy to promote ethanol as an alternative fuel source, but it ended in a bust when oil prices collapsed in the 1980s.

There is every reason to believe that the current enthusiasm will lead to an even bigger hangover. Ethyl alcohol will do little to alleviate the US's dependence on oil imports from the volatile Middle East and the increasingly hostile regimes in Latin America.

Although production has exploded in recent years from less than two billion gallons five years ago to five billion gallons in 2006, this amounts to less than 4 per cent of annual gasoline consumption and, given ethanol's lower fuel efficiency, it represents little more than 2 per cent on an energy-equivalent basis.

American supply, which is predominantly corn-based, already accounts for one-fifth of the food crop's annual harvest and elementary mathematics suggest that, under the outlandish assumption that the motor fuel consumes the entire crop harvest, it would amount to just 10 per cent of annual gasoline needs.

It is clear that ethanol will not quench the US's thirst for foreign oil and, rather than improve energy security, it could actually make it even worse.

Firstly, plants of the producers of this alternative fuel are mostly powered by natural gas and, given that the US is already a net importer of that energy source, its reliance on imports will grow.More importantly, the US's corn-based ethanol is hostage to weather and threats to the annual harvest could lead to supply shortages and a surge in prices Ethanol has been described as an eco-friendly alternative to gasoline.

Unfortunately, the verdict of several studies on this matter is less than encouraging. The farming community is well aware that corn production is perhaps the most energy-intensive of the food crops.

Examining the entire production process illustrates that the amount of energy produced relative to the energy consumed is inconsequential and the demands on the environment are great.

The heavy usage of fertilisers and chemicals, combined with the demand on scarce water resources, means that ethanol is a losing proposition and that's before the inadequacies of the existing distribution infrastructure are considered.

Current energy policy is causing unintended consequences but then forensic analysis would surely conclude that the fingerprints of Enron were apparent on almost every page of Mr Bush's first attempt at energy security.

Unfortunately, the latest attempt is leading to higher food prices as corn is increasingly diverted to motor fuel and higher electricity prices as the incremental demand for natural gas pushes prices upward.

The cost to the consumer is obviously high even before the government subsidies are considered.

It should come as no surprise that the Federal Reserve remains on hold and long-term interest rates are marching upward given the obvious inflationary threat. Current energy policy in the US is naïve and the idea that one reaps what one sows has rarely seemed more apt.