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ETHANOL
ECONOMICS
Factors
Affecting Ethanol Price
Ethanol is sold into the gasoline blending market where it competes
with other oxygenates and octane components, as well as with gasoline
itself. Historically, ethanol prices have been highly correlated with
the price of gasoline and gasoline blending components. However in 2005,
the prices of ethanol and gasoline began a significant divergence, with
ethanol selling for much less than gasoline at the wholesale level.
Beginning in 2005, ethanol began to be traded as a commodity on the
Chicago Board of Trade.
The price of corn
has very little to do with the price of ethanol. That’s why low
corn prices do not always indicate low ethanol prices—and why
high corn prices do not always lead to high ethanol prices.
The greatest effect
on the price of ethanol is the supply and demand for ethanol in specific
markets. As MTBE is phased out due to its threat to groundwater quality,
the demand for ethanol has increased.
Prices also vary
according to location and the time of year. Many consumers have noticed
the difference between the prices of winter and summertime gasoline.
This is because summertime gasoline is controlled for evaporative emissions.
Thus, summertime gasoline is more expensive to produce than winter gasoline.
Ethanol blends are no different.
Additionally, blending
economics can vary from one region of the country to another, creating
significant difference in the pump price even though ethanol prices
are similar in each region.
Ethanol’s
Effect on Gasoline Supply and Price
The United States is the world’s largest energy consumer—and
our appetite for fuel continues to grow. At the same time, developing
nations such as China and India are putting additional pressure on world
supplies of oil and gasoline.
The petroleum industry
has consistently pointed to shortages in supply as the primary reasons
for price increases at the pump. The use of renewable fuels such as
ethanol serves to increase the volume of gasoline in the United States.
Simple economic principles say that increased supplies tend to push
prices down, not up.
A May 2005 report
by the Consumer Federation of America stated that Americans everywhere
could be saving up to eight cents per gallon at the pump if petroleum
marketers would simply blend more ethanol into the nation’s fuel
supply instead of purchasing additional supplies of expensive imported
oil.
Ethanol’s
Effect on Corn Prices
Any market that uses a large amount of the nation’s corn supply
is bound to have a positive effect on the price of corn.
Studies have shown
that corn prices in markets near ethanol plants will increase between
five and eight cents per bushel. Ethanol production makes huge amounts
of the nation’s corn disappear—some 1.4 billion bushels
went into ethanol production in 2004—and that affects overall
corn supply and helps shore up corn prices nationwide.
According to the
U.S. Department of Agriculture, ethanol production adds 30 cents to
the value of a bushel of corn. The Renewable Fuels Association notes
that ethanol production adds $4.5 billion to U.S. farm income annually.
Ethanol
Tax Incentives
Present law provides for a partial federal excise tax exemption of 51
cents per gallon for of ethanol blended into gasoline. For example,
fuel blended with 10 percent ethanol receives a tax credit of 5.1 cents
per gallon. E-85, which is 85 percent ethanol by volume, receives a
43-cent-per-gallon credit. Petroleum blenders – not corn farmers
– receive this tax credit. The Volumetric Ethanol Excise Tax Credit
(VEETC) legislation passed in 2004 extends the effective date of the
tax credit through 2010.
A recent study by
the U.S. General Accounting Office found that, since 1968, the oil industry
has received approximately $150 billion in tax incentives. By contrast,
the ethanol industry has received $11.2 billion through a partial exemption
of the federal excise tax and $200 million in income tax credits.
According to Citizen
Action, “U.S. taxpayers are providing at least $5 billion a year
in tax breaks in the form of foreign tax credits to provide U.S. multinational
oil companies with an incentive to invest billions of dollars to find
and produce oil overseas so that it can then be exported to the United
States.”
A 1997 editorial
in the New York Times put the real cost of gasoline – including
military expenditures to protect oil interests – at $5 per gallon.
Therefore, on balance, ethanol receives fewer tax incentives than other
forms of energy.
The VEETC provides
other benefits. Because it is assessed on a volume basis, refiners will
no longer be limited to the 5.7/7.7/10-percent blend levels dictated
by the Clean Air Act's oxygen content provisions that may be made obsolete
by RFS legislation anyway. The Internal Revenue Service (IRS), which
was involved in the drafting of this provision, also believes the VEETC
will greatly reduce the opportunity for fraud that existed with the
old excise tax exemption system.
Ethanol
and Our Balance of Trade
Petroleum imports account for approximately 35 percent of America’s
current trade deficit. Some projections suggest that petroleum imports
will rise to over 60 percent to 70 percent of the U.S. trade deficit
in the next 10 to 20 years.
In 2002, the U.S.
spent just under $110 billion on foreign oil—that’s an incredible
transfer of U.S. wealth to foreign nations. And with the recent increase
in oil prices, that total is certain to be significantly higher this
year.
Ethanol helps improve
the U.S. balance of trade by displacing imported petroleum. According
to a 1997 study by the Kellogg School of Management, ethanol production
improved the trade balance by approximately $2 billion that year alone—and
increased ethanol production and displacement of imported oil can only
improve that figure.
Additionally, a
large volume of the coproducts of ethanol production (corn gluten, distillers
dried grains, corn oil and carbon dioxide) is exported, helping further
reduce the trade deficit in the United States.
The
Economics of Refining With Ethanol
When oxygenates began to be added to gasoline, refiners had two primary
choices: petroleum-based MTBE and biomass-based ethanol. MTBE became
the primary choice in spite of the fact that ethanol contains twice
as much oxygen per gallon.
The reason: transportation.
MTBE is more easily
transported via pipelines. Ethanol absorbs moisture. That’s a
benefit when ethanol is present in your car’s fuel system, but
it causes problems during pipeline transport. Pipelines contain moisture
and deposits that are absorbed by ethanol, thus changing its state during
transport.
To this point, the
volume of ethanol has not been large enough to justify change in the
pipeline infrastructure that would eliminate those deposits. However,
as MTBE is phased out and more ethanol is used, such improvements may
occur.
Food
vs. Fuel
The production of ethanol does not translate into less grain available
for food, since farmers do not grow more or less corn based on ethanol
production.
Ethanol production
uses field corn—most of which is fed to livestock, not humans.
In fact, only the starch portion of the corn kernel is used to produce
ethanol. The vitamins, minerals, proteins and fiber are converted to
other products including sweeteners, corn oil and high-value livestock
feed—feed which helps livestock producers add to the overall food
supply.
Last
reviewed June 10, 2005
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