Ethanol Economics
Mike Carnall
30 October 2007
Hopes

Increased Use of Ethanol Will:



Reduce dependence on imported oil
Reduce gasoline prices
Reduce long term GHG emissions
Fears & Doubts

Increased Ethanol Production Will:

Dramatically increase food prices



Do little to reduce the price of fuel/energy



Capacity is small compared with fuel usage
Net energy gain from ethanol is small
Result in little net decline in carbon emissions


Corn will be diverted from food to ethanol
Cropland will be diverted from food crops to corn
Energy yield of corn based ethanol is low
Increasing cropland and crop intensity will have
adverse environmental effects
Some Facts

2006 US Corn Acreage:


2006 US Ethanol Production:


4.89 Billion Gallons (20.0 percent of the corn crop)
US Gasoline Consumption


78.3 million acres planted in 2006
140 Billion Gallons
Ethanol as Percent of US Motor Gasoline Usage:


3.5% volumetric
2.3% energy basis


Ethanol has 66% of energy content of gasoline
1.4% net energy saved

Energy replaced less energy required to produce ethanol
Energy Balance




Total Energy Required to Produce 1 Gallon
of Ethanol (btu): 45,802
Ethanol Energy Content (btu/gal): 75,700
Net: 30,528
Ratio: 1.666


Shapouri, USDA, 2004 - Includes credit for by
products
This is a Controversial Number
Inputs & Outputs
0.74 Billion Btu
+
29 Acres
1.0 Billion Btu Ethanol
13,210 Gal
0.61 BBtu
0.13 BBtu
1.23 Billion Btu
-
0.23 BBtu
1.0 Billion Btu Gasoline
Processing
etc.
8,696 Gal
Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006
Replacing a Gasoline Btu
with an Ethanol Btu

Reduces:

Fossil Energy Use by 40%


(1.23 btu/btu – 0.74 btu/btu) / 1.23 btu/btu
Petroleum Energy Use by 89%

(1.23 btu/btu – 0.13 btu/btu) / 1.23 btu/btu
Current Consumption

Gasoline


Corn Acres Required to Replace Gasoline Energy
with Ethanol




140 Billion Gallons Per Year
10% - 48 million acres
85% - 405 million acres
100% - 476 million acres
Current Cropland Usage


93 million acres of corn planted in 2007
437 million acres total US arable land
Million Acres Required to Replace:


10% of Gasoline – 48
Planted in 2007 - 93

25% of Gasoline – 119

85% of Gasoline – 405

US Arable Land - 437
Energy based percentages
19
8
19 0
8
19 1
8
19 2
8
19 3
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
07
Million Acres
US Grain Crop Planting
Planted Acreage
300
250
200
50
Soybeans
150
Wheat
100
Oats
Barley
Year
Corn
0
Where to From Here?




How
How
How
How
Much Ethanol Will be Produced?
High Will Corn Prices Go?
Will Food Prices Be Affected?
Will Gasoline Prices Be Affected?
Relationships
Ethanol - Gasoline Relationship

Complement



Lack of Flexible Fuel Vehicles (FFVs) may limit ethanol
to 10% blend
With FFV bottleneck ethanol & gasoline are
complements
Supplement




(volumes move together)
(volumes move in opposite directions)
Below 10% blend ethanol will supplement
As more FFVs are sold ethanol will supplement rather
than complement gasoline
FFVs will be more attractive where ethanol is plentiful,
i.e. midwest
FFVs will use up to 85% ethanol blend
Economic Factors

Effect of Policies

Mandated quantity


Level of subsidy


Higher mandate, more ethanol
Higher subsidy, more ethanol
Effect of Energy Prices

Petroleum



Gasoline: higher price, more ethanol (if FFVs available)
Diesel: higher price, less ethanol (soybeans replace corn)
Other (fertilizer, pesticides)

Higher price less ethanol
Current Ethanol Policy

Mandated production

Renewable Fuels Standard (RFS) requires 4.0 Billion
gallons by 2006, 7.5 Billion gallons by 2012


Subsidized prices



California 9% in 2012, 11% in 2017, 26% in 2022
$0.51 per gallon “blenders credit”
Some states provide additional subsidies
Tariff protection


Ad valorem tariff of 2.5%
Import duty of 54¢ per gallon (some CBERA
exemptions)
Corn – Energy Relationship

Corn Production is Energy Intensive



Energy costs are≈50% of total operating cost
Cost of corn is sensitive to energy prices
Higher Gasoline Price Makes Ethanol
Production Profitable at Higher Corn Prices
Breakeven Corn Price
November 2006 (from Purdue)
$8.00
$.51 Subsidy + $.25 Additive
With $.51 Subsidy
$7.00
Energy Value
Range of Crude Prices (2006-2007)
Min $45/bbl, Max $72/bbl Ave $58/bbl
Corn: $/bushel
$6.00
$5.00
$4.00
$3.00
Range of Corn Prices (2006-2007)
Min $2.04/bsl, Max $3.96/bsls
Ave $2.93/bsl
$2.00
Corn Breakeven @ $60 Crude
Additive=$4.82/bu
Subsidy=$3.96/bu
Energy=$2.19/bu
$1.00
$0.00
$30
$40
$50
$60
$70
Crude Oil: $/barrel
Source: Hurt et al, “Economics of Ethanol”, Purdue Extension, ID-339,
$80
$90
Food – Corn – Energy Relationship

Retail food costs are dominated by
processing and transport



Only about 19% of cost is farm input [US]
Higher energy prices will result in higher
food prices even at constant corn prices
Increase in corn price from $2.00 to
almost $4.00 has had little effect on US
food prices
Corn and Beef Prices
Source: NCGA, “Understanding the Impact of Higher Corn Prices on Consumer Food Prices”.
Back to the Questions




How
How
How
How
Much Ethanol Will be Produced?
High Will Corn Prices Go?
Will Food Prices Be Affected?
Will Gasoline Prices Be Affected?
Getting Answers

Many Interactions

Oil Price
Effect on demand
 Effect on supply



Policies
Other crops
Soybeans
 Wheat


Import/Export
Modeling

Model must include:










Effect of oil price
Planting decision (corn v soybeans v wheat …)
Livestock feeding decisions (value of byproducts)
Effect of policy parameters (subsidy, tariff etc.)
Imports/exports of corn
Imports/exports of soybeans
Availability of FFVs
Investment in ethanol stills
Response to price changes
Establish equilibrium
Modeling Exercise

Determine the effect of higher oil prices



Baseline assuming current oil price forecast
Oil + $10/bbl (no FFV bottleneck)
Emerging Biofuels: Outlook of Effects on U.S.
Grain, Oilseed, and Livestock Markets

Authors:

Elobeid, Fabiosa, Hayes, Babcock, Yu, Dong, Hart,
Beghin
 Center for Agricultural and Rural Development, Iowa
State University
Forecast
(2016 long run equilibrium)
Commodity
Base
Oil
+$10
Corn Planted Acreage (million acres)
92.5
112.3
Portion used for Ethanol
34%
60%
Portion of Corn Exported
17%
5%
14,568
29,063
Subsidy/year @ $0.51/gal (billions of $)
$7.43
$14.82
Corn Price ($/bushel)
$3.10
$4.43
Ethanol Produced from corn (million gals)
Grain Plantings
2006-2016/17 (long run equilibrium)
Oil + $10
Baseline
250
250
200
Soybeans
Million Acres
Million Acres
200
150
Wheat
100
Soybeans
150
Wheat
100
Corn (Ethanol)
Corn (Ethanol)
50
Oats
Barley
50
Corn (Other)
Barley
Corn (Other)
0
0
2006
Oats
2007
2008
2009
Year
2010
2017
2006
2007
2008
2009
Year
2010
2017
Effect on Food Prices
OIL+$10
From No
Ethanol
From Base
Food at Home
+2.2%
+1.3%
Meat
+6.3%
+3.8%
Eggs
+13.5%
+8.1%
Dairy
+4.5%
+2.7%
Food Away From Home
+1.5%
+0.9%
Commodity
No Ethanol – Corn price of $1.90/bushel
Fossil Energy Savings
(2016 long run equilibrium)
Base
Oil
+$10
Percent of Gasoline Consumption (by
volume at 140 Billion gallons/yr)
10.4
20.8
Percent of Gasoline (by energy)
6.8%
13.7%
Percent of Total Gasoline Fossil Energy
Saved
2.7%
5.4%
Percent of Total Gasoline Petroleum
Energy Saved
6.13%
12.22%
Potential Effect on Gasoline
Prices?




Gasoline price is a model input
Energy provided by ethanol is a small
(<13%) portion of motor fuel energy
Higher ethanol production requires more
corn production
Absent higher subsidies, corn production
only responds to higher prices
Concluding Thoughts

Cost to consumers is high



Reduction in petroleum demand is modest



$14 Billion/yr ($47 per person) in subsidy
1.8% increase in food cost
About 12%
Environmental Effects
Effect on Less Developed Countries
End of Presentation
Estimated Net Energy Values
Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006
FAPRI Model
Food and Agricultural Policy Research Institute

System of linked models






Livestock
Domestic crops
World trade models for commodities
US policy cost model
US net farm income model
Developed and maintained jointly by:


Iowa State University, Ames
University of Missouri, Columbia
Crude Oil Price Projection
(Baseline)
Refiners’ Acquisition Cost (≈NYMEX - $6.70)
$62
$60
$58
$56
$54
$52
$50
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