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ARGUMENTS FOR ETHANOL

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ARGUMENTS FOR ETHANOL Powered By Docstoc
					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.

				
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