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
Corn will be diverted from food to ethanol Cropland will be diverted from food crops to corn
Do little to reduce the price of fuel/energy
Capacity is small compared with fuel usage Net energy gain from ethanol is small
Energy yield of corn based ethanol is low
Result in little net decline in carbon emissions
Increasing cropland and crop intensity will have adverse environmental effects
Some Facts
2006 US Corn Acreage:
2006 US Ethanol Production:
78.3 million acres planted in 2006 4.89 Billion Gallons (20.0 percent of the corn crop)
US Gasoline Consumption
Ethanol as Percent of US Motor Gasoline Usage:
140 Billion Gallons
3.5% volumetric 2.3% energy basis
1.4% net energy saved
Ethanol has 66% of energy content of gasoline 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 0.23 BBtu Processing etc. 1.0 Billion Btu Gasoline 8,696 Gal
1.23 Billion Btu
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
140 Billion Gallons Per Year
Corn Acres Required to Replace Gasoline Energy with Ethanol
10% - 48 million acres 85% - 405 million acres 100% - 476 million acres 93 million acres of corn planted in 2007 437 million acres total US arable land
Current Cropland Usage
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
Million Acres
100 150 200 250 300 50 0 Oats Soybeans Barley Wheat
Planted Acreage
US Grain Crop Planting
Year Corn
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
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
(volumes move together)
Supplement
Lack of Flexible Fuel Vehicles (FFVs) may limit ethanol to 10% blend With FFV bottleneck ethanol & gasoline are complements
(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
Higher mandate, more ethanol Higher subsidy, more ethanol
Level of subsidy
Effect of Energy Prices
Petroleum
Gasoline: higher price, more ethanol (if FFVs available) Diesel: higher price, less ethanol (soybeans replace corn) Higher price less ethanol
Other (fertilizer, pesticides)
Current Ethanol Policy
Mandated production
Renewable Fuels Standard (RFS) requires 4.0 Billion gallons by 2006, 7.5 Billion gallons by 2012
California 9% in 2012, 11% in 2017, 26% in 2022
Subsidized prices
$0.51 per gallon “blenders credit” Some states provide additional subsidies
Ad valorem tariff of 2.5% Import duty of 54¢ per gallon (some CBERA exemptions)
Tariff protection
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
$7.00 $6.00
With $.51 Subsidy Energy Value
Range of Crude Prices (2006-2007) Min $45/bbl, Max $72/bbl Ave $58/bbl
Corn: $/bushel
$5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $30 $40 $50 $60 $70 $80 $90 Crude Oil: $/barrel
Corn Breakeven @ $60 Crude Additive=$4.82/bu Subsidy=$3.96/bu Energy=$2.19/bu Range of Corn Prices (2006-2007) Min $2.04/bsl, Max $3.96/bsls Ave $2.93/bsl
Source: Hurt et al, “Economics of Ethanol”, Purdue Extension, ID-339,
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)
Portion used for Ethanol Portion of Corn Exported Ethanol Produced from corn (million gals)
92.5
34% 17% 14,568
112.3
60% 5% 29,063
Subsidy/year @ $0.51/gal (billions of $)
Corn Price ($/bushel)
$7.43
$3.10
$14.82
$4.43
Grain Plantings
2006-2016/17 (long run equilibrium)
Baseline
250
250
Oil + $10
200
Soybeans
200
Soybeans
Million Acres
Million Acres
150
Wheat
150
Wheat
100
Corn (Ethanol)
100
Corn (Ethanol) Oats Barley Corn (Other)
50
Oats
Barley Corn (Other)
50
0 2006 2007 2008 Year 2009 2010 2017
0 2006 2007 2008 Year 2009 2010 2017
Effect on Food Prices
OIL+$10
Commodity From No Ethanol From Base
Food at Home
Meat Eggs Dairy Food Away From Home
+2.2%
+6.3% +13.5% +4.5% +1.5%
+1.3%
+3.8% +8.1% +2.7% +0.9%
No Ethanol – Corn price of $1.90/bushel
Fossil Energy Savings
(2016 long run equilibrium)
Base Oil +$10 20.8
Percent of Gasoline Consumption (by volume at 140 Billion gallons/yr) Percent of Gasoline (by energy)
Percent of Total Gasoline Fossil Energy Saved Percent of Total Gasoline Petroleum Energy Saved
10.4
6.8% 2.7%
6.13%
13.7% 5.4%
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
$14 Billion/yr ($47 per person) in subsidy 1.8% increase in food cost About 12%
Reduction in petroleum demand is modest
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
Iowa State University, Ames University of Missouri, Columbia
Developed and maintained jointly by:
Crude Oil Price Projection
(Baseline) Refiners’ Acquisition Cost (≈NYMEX - $6.70)
$62 $60 $58 $56 $54 $52 $50 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016