Not a fan of ethanol production, but CO2 released fermenting and burning bio fuels is carbon neutral - the CO2 was bound in the plant by photosynthesis, then released by these processes.
Not a subtle distinction as in the US, natural gas is essentially all domestic (and is starting to be exported as well). The decision to grow ethanol is geopolitical at least as much as it has anything to do about the environment (remember, serious ethanol mandates started under Bush II) as part of the effort for energy independence, so trading natural gas for gasoline through ethanol (even if we wrongly assume it's as bad as 1:1) is still desirable.
Also, gasoline (C8H18) has a carbon to hydrogen ratio of approximately 0.44, compared to 0.25 for natural gas (CH4) (and natural gas has a higher specific energy), so from a carbon emissions perspective is still superior.
Additionally, natural gas in not "just a natural cracking product of petroleum." There are other significant geological sources of natural gas, and it is produced through decay of just about any organic matter.
Wouldn't the CO2 be absorbed over a period of time, which the combustion would do it all at once, being a net positive as far as the environment is concerned?
Or perhaps I don't understand how CO2 harms the environment well.
Yes, but on a time scale of a year or more (disregarding corn reserves, which probably do exist but are probably too small to matter), we can only emit the CO2 from corn ethanol at the same speed we absorb it. This is unlike fossil fuels, which took millions of years to form but which can be used much faster.
CH4 + H2O → CO + 3H2
CO + H2O → CO2 + H2
3H2 + N2 → 2NH3