OPEC vs.ETHANOL Ralph J. Brown Professor Economics USD 4/28/04 TERMS ETHANOL (ethyl alcohol) is produced by distillation of fermented simple sugars in grains and other plant materials, called biomass. In U.S. about 90% of ethanol produced from corn. Used as gasoline extender, octane enhancer and oxygenate. GASOHOL – Gasoline extender made of 90% gasoline and 10% ethanol. Ethanol has higher octane content. Gasohol 89 vs 87 unleaded gasoline Ethanol has lower energy content Gasohol 3% lower mileage SUBSIDIES TO ETHANOL FUEL TAX EXEMPTION GASOHOL 10% ETHANOL 90% GASOLINE FEDERAL FUEL TAX EXEMPTION 5.2 cents per gallon of GASOHOL 52 cents per gallon of ETHANOL SOUTH DAKOTA FUEL TAX EXEMPTION 2 cents per gallon of GASOHOL 20 cents per gallon of ETHANOL PRODUCER SUBSIDY (SOUTH DAKOTA) 20 cents per gallon of Ethanol (NOT FULLY FUNDED) $7 million per year starting 2007. Price Comparison Ethanol Price = $1.85/gallon 4/22/04 Yankton Unleaded Gasohol Rack Price $1.26 $1.32 SD Tax $0.22 $0.20 Tank Fee $0.02 $0.02 Federal Tax $0.184 $0.132 Wholesale P $1.684 $1.672 Difference (U-G) $0.012 Is Ethanol More Costly? Ethanol Price = $1.85 Ethanol Price w/Full Tax = $2.274 Unleaded Gasoline Price = $1.26 Unleaded Gasoline Price w/Full Tax = $1.684 Ethanol Made Cheaper by Taxpayer Subsidies Historical Ethanol vs Unleaded Gas Prices-FOB Omaha 1982-2003 COST TO TAXPAYER Ethanol Subsidy 2003 2004 2005 Millions Fuel Tax Exemption SD $0.20 gallon $4.7 $4.6 US $0.52 gallon $12.8 $12.3 Producer Subsidy $3.5 $4.5 $5.5 Total $21.1 $21.5 COST OVER LIFE OF PROGRAM (1979-2004) Fuel Tax Exemption (South Dakota only) SD $55 million $68 million (2000$s) US $141 million $171 million (2000$s) Producer Subsidy ? Fuel Tax Exemption (US) (estimated) $12.8 bil $16.2 bil (2000$s) Why Ethanol Subsidies? Higher Corn Prices Increased Security From OPEC power Improve Balance of Trade More jobs in Rural America Environmental Benefits HIGHER CORN PRICES More ethanol, more corn demand, higher corn prices Also higher soybean prices (acreage & substitutes) Higher prices for corn & soybean farmers means higher cost for corn & soybean buyers. a. livestock feeders b. other consumers Net Benefits?? Probably a Wash ENERGY SECURITY In 2003 2.81 bil gallons ethanol 125 bil gallons gasoline Ethanol 2.1% of gasoline By 2012 5.0 bil gallons ethanol 147 bil gallons gasoline Ethanol 3.4% of gasoline ENERGY SECURITY Price shocks caused by OPEC cutbacks. Would we be less susceptible if we imported less? Domestic price set by world price not by import share. Crude Oil Prices Independent of Import Share 4/16/04 OPEC $31.33 Import Share Non-OPEC $31.12 Does Not Total World $31.21 Determine Price US $31.05 China $32.52 Importers Norway $33.58 Exporters UK $33.45 Canada $30.90 Energy Independence Mexico $30.46 Does Not Mean Price Russia $30.06 Independence Prices vary by grade and location ENERGY SECURITY Oil embargo reduces world supply of oil for all countries not just US. Even if we eliminated all imports, we are still subject to same oil price shocks. It would require ethanol production of 18 times. More than triple corn prodn from 10 bil bushels to 34 bil bushels. Corn would 83% of harvested acres. Ethanol buys no increase in energy security. IMPROVES BALANCE OF TRADE Using more ethanol and importing less oil does not alter the balance of trade. Ethanol↑ Oil Imports↓ Supply $↓ Value of $↑ Exports↓ Trade Balance → Ethanol use does not change balance of trade. JOBS IN RURAL AMERICA Ethanol plants provide jobs in rural America. SDDOL 9/2003 300 jobs in ethanol plants Less motor fuel tax revenue reduces jobs in highway construction and maintenance. 14 Road construction jobs per $1 million revenue 2003 Lost revenue $21.1 million 295 jobs Probably no net jobs created by ethanol subsidies. ENVIRONMENTAL IMPACT In certain Metro areas oxygenated gasoline (MTBE or ETBE) required during winter. To Reduce: CO emissions VOCs (volatile organic compounds) In summer ETBE can lead to NOx. Ground level ozone. Probably slight postive environmental impact. BEST STRATEGY TO REDUCE OIL DEPENDENCY & IMPROVE ENVIRONMENT 1. Carbon taxes & broad-based oil taxes 2. Other efficiency & growth-inducing taxes cuts can be made to offset revenue. 3. Eliminate ethanol subsidies - not needed with higher gas taxes. 4. Don’t need CAFÉ standards as they provide wrong incentives – drive more, more congestion, more accidents, more pollution. The End ARGUMENTS FOR ETHANOL 1970s ENERGY INDEPENDENCE 1980s HELP FARMERS 1990s IMPROVE THE ENVIRONMENT 2000s ENERGY INDEPENDENCE KEY LEGISLATION - ETHANOL ENERGY TAX ACT OF 1978 Defined gasohol Enacted fuel tax exemption 5.4 cents and then gradual reduction to 5.1 cents by 2008 CLEAN AIR ACT AMENDMENTS (1990) New role as clean-air additive Certain metropolitan areas (nonattainment areas) CO in winter and ground-level ozone Oxygenated fuels (reformulated gasoline) MTBE or ETBE ENERGY POLICY ACT OF 2003 Provisions to mandate ethanol increasing use from 2.7 billion gallons to 5.0 billion gallons by 2012.