Report Shows High Corn Prices Will Limit Ethanol Use, Raise Costs

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An Energy Policy Research Foundation, Inc. (EPRINC) report released on April 28, 2011 found that high and volatile corn prices will limit the success of a renewed push to expand access to ethanol via E15 and additional E85 fueling stations. The report also found that absent a mandate, blender's credit, and tariff protection ethanol would have a market of nearly 400,000 barrels per day, approximately half of today's consumption, which suggests that the real cost of the blender's credit is significantly higher than $0.45 per gallon. The study concludes that as the volumetric mandate takes ethanol blending past 10% of the gasoline pool, gasoline consumers and producers will face higher costs.

The Energy Policy Research Foundation, Inc. (EPRINC) has released a report on the Renewable Fuels Standard, a government program that provide subsidies, tax incentives, and regulatory mandates to promote the use of corn ethanol and other renewable fuels into the national gasoline pool. The study concludes that one of the major obstacles to rapid increases of corn ethanol into the gasoline pool is the rising cost of ethanol's principal feedstock, corn. Corn prices have more than doubled over the past 10 months, an increase considerably greater than the rise in crude prices over the same period. Growing mandates for blending ethanol into the gasoline pool is likely to further increase prices at the pump. The report can be downloaded for free at http://eprinc.org/pdf/EPRINC-CornLimitsEthanol.pdf .

U.S. policy requiring ever-larger volumes of ethanol blended into the gasoline pool is now running into two distinct and important cost realities, both of which are likely to contribute to price increases in gasoline above the rising acquisition cost for crude now faced by domestic refineries. The first is the rapidly rising cost of corn. Disappointing U.S. corn yields, loss of wheat crops worldwide and increasing domestic and international demand for corn has pushed prices from $3.50/bushel to over $7.50/bushel since the summer of 2010, driving up ethanol prices to levels well above the cost of gasoline when adjusted on a GGE (gallon of gasoline equivalent) energy basis. Expanding access for ethanol in the gasoline pool will not solve the cost problem because it cannot provide a cost competitive alternative to E10, the type of gasoline used by most U.S. motorists.

The Congressional debate over the deficit has highlighted concerns over the cost of ethanol subsidies, now estimated at nearly $6 billion per year to encourage its blending into the gasoline pool. Ethanol also receives other government incentives such as loan and investment guarantees. Absent volumetric mandates and blending tax credits, the U.S. would consume approximately 400,000 bbls/day (barrels per day) of ethanol, half the amount of ethanol consumed today.

The RFS and related ethanol support (mandates, subsidies, and tariff protection) have resulted in some reduction in crude and gasoline imports. However, these reductions have come at a very high cost and substantially exceed any potential energy security benefits from reduced imports. EPRINC estimates that the full cost of the $0.45/gallon ethanol subsidy is closer to $0.90/gallon as the U.S. would consume ethanol at approximately half its current volume absent a mandate or blender’s credit. By this metric the real cost of the blender’s credit is $37.80 for every barrel of incrementally blended ethanol over a subsidy and mandate free base case. Adjusted for energy content, the blenders’ credit cost is $56.70 per barrel of gasoline equivalent – a premium of $1.35 for every gallon of gasoline offset by the RFS. Estimates by CBO (Congressional Budget Office) are in the same range.

Oak Ridge National Laboratory (ORNL) released a study in 2006 that estimated the cost to the U.S. economy of every barrel of imported oil. ORNL found that the cost of imported oil to the U.S. economy is $13.58/bbl (in 2004 $) in addition to the market price. This cost includes both a monopsony component, which is the estimated effect that the U.S has on world oil prices as the world’s largest consumer of crude oil, and a cost for macroeconomic disruptions to the U.S. economy. ORNL’s calculations do not include environmental or foreign policy costs. ORNL’s study has been used by the National Highway Transportation Safety Administration (NHTSA) to provide justification for increasing corporate average fuel economy (CAFE) standards and by the EPA to promote the National Renewable Fuel Standards Program (RFS2).

In 2009 dollars, the incremental benefit of reducing oil imports by one barrel is worth $14.70 using the conclusions from ORNL. As stated previously, EPRINC calculates that the entire RFS program is reducing petroleum imports by approximately 400,000 bbls/d. Based on the ORNL study results and this estimate, the benefits of the RFS program in 2011 are not likely more than $2.5 billion. These benefits must be compared to the direct and indirect costs of the program. The blender's credit alone costs the federal government over $6 billion per year. In addition to these costs are the costs of grants, loan guarantees, loss of efficiencies in refinery and retail operations, and rising corn prices. These additional requirements further extend the costs of the program, but even without a precise calculation of these costs, the loss of tax payer revenue far exceeds the benefits from the program by nearly 3 to 1 under the most conservative assumptions.

About the Energy Policy Research Foundation, Inc.:
EPRINC researches and publishes reports on all aspects of the petroleum industry which are made available free of charge to all interested organizations and individuals. It also provides analysis for quotation and background information to the media.

http://www.eprinc.org

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