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U.S. Energy Situation, Ethanol,
and Energy Policy
Wally Tyner
Slide 1
U.S. Share of World
25
23.6
20
17.5
%
15
10
5
4.6
0
Population
Energy Production
Energy Consumption
Slide 2
Total Energy Consumption - 2003
120
Quadrillion BTU
100
80
60
40
20
0
United States
Western
Europe
China
Japan
Former USSR
Africa
Slide 3
Per Capita Energy Consumption - 2003
400
350
Million BTUs
300
250
200
150
100
50
0
United States
Western
Europe
China
Japan
Former USSR
Africa
Slide 4
Energy Cons./GDP - 2003
100000
90000
80000
BTU/$
70000
60000
50000
40000
30000
20000
10000
0
United States
Germany
China
Japan
Russia
Mali
Slide 5
U.S. Energy Consumption 2003
3% 3%
8%
23%
Coal
Nat. gas
Oil
Nuclear
Hydro
40%
23%
Renewable
Slide 6
Slide 7
Crude Oil Imports by Country or Region, 2004
17%
16%
Mexico
Venezuela
13%
11%
Persian Gulf
Canada
North Sea
4%
Nigeria
Other
16%
23%
Slide 8
Unleaded Regular Gasoline, U.S. City Average
Retail Price
350
March 1981 - $3.20
Sept. 2005 - $2.94
250
200
150
March 1981 - $1.42
100
50
0
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Cents per Gallon
300
Nominal gasoline price
Real gasoline price
Slide 9
Energy and National Security


A common perception in the US is that
there is a national security cost of
imported oil that makes the real cost of
oil products much higher than the cost
consumers pay
Economists commonly advocate
internalizing the cost of such an
externality
Slide 10
Demand and supply side options



On the demand side, the major options are a
fuel tax and stronger fuel economy standards
– for the moment, these options have been
rejected in the political process
On the supply side, government support of
domestic alternatives to oil can take many
forms
The key is risk reduction for private
investments
Slide 11
Slide 12
U.S. Energy and Ethanol




U.S. is the world’s largest energy
consumer (in total and per capita)
U.S. imports over 60% of our oil
40% of our energy consumption is oil
Ethanol is now about 3% of our
gasoline consumption
Slide 13
Bio-fuels: Ethanol


Ethanol – ethyl alcohol, produced through
fermentation of starch and sugars. In the
U.S., about 90% comes from corn.
Ethanol is used as a gasoline extender,
octane enhancer, and oxygenate,
– Extender – just an addition to fuel supply
– Octane enhancer – increases gasoline octane
– Oxygenate – adds oxygen to make gasoline
burn cleaner
Slide 14
Additional Information




Ethanol has higher octane than gasoline, but it
has lower energy content.
Ethanol blends get slightly less mileage than
equivalent gasoline.
Ethanol blends burn cleaner than standard
gasoline because of the increased oxygen, but
may increase evaporative emissions
MTBE will not be used much in the US after May
8, so in the short-run, ethanol demand is very
high
Slide 15
Key Legislation

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Energy Tax Act of 1978, provided a 54 cent per
gallon subsidy for ethanol ($0.14/l).
Clean Air Act of 1990 mandated more oxygen in
fuels (ethanol has more oxygen than standard
gasoline).
American Jobs Creation Act of 2004 extended
the 0.51/gal. (0.135/l.) federal subsidy through
2010 and changed the subsidy mechanism so it
no longer comes from the gasoline tax.
Energy Policy Act of 2005 – renewable fuels
standard and eliminated oxygen requirement
Slide 16
Energy Policy Act of 2005





Energy Policy Act of 2005 – renewable
fuels standard that starts at 4 bil. gal. in
2006 and goes to 7.5 bil. in 2012
Standard encompasses both ethanol and
bio-diesel
Will not reduce gasoline prices
Will not stimulate energy conservation
Does provide some funding for research
(authorized but not appropriated)
Slide 17
Slide 18
Ethanol Economics



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
Until very recently, ethanol has not been
economic without a government subsidy.
However, with $70 oil and $2.25 corn, ethanol is
profitable with no subsidy.
In addition, some states provide subsidies as
well
Under current conditions, ethanol is very
profitable with market conditions plus subsidies
Renewable fuel standard should provide an
assured market for the product
Slide 19
Corn Use for Ethanol



Currently about 1.5 bil. bu. of corn is used
for ethanol
That will at least double in the next 5 years
With more corn used for ethanol, we might
expect:
– More corn to be produced and higher prices
– Less corn to be exported
– Less corn to be fed
– Higher price volatility
Slide 20
Ethanol Impacts



Currently the ethanol subsidy costs about $2.5
billion per year.
Over the past 25 years, ethanol has been an
industry that exists solely due to government
subsidies. Today, however, it could be viable
without subsidies so long as oil prices stay high
and corn prices low.
If the subsidies and the RFS continue, corn use
for ethanol will increase beyond the 7.5 billion
gallon standard by 2012.
Slide 21
Ag and Energy Policy Links

With 15 percent or more of the corn
crop going to ethanol, there will be
upward price pressure on corn
– Costs of agricultural subsidies could fall
– Subsidizing ethanol or bio-diesel is WTO
legal, whereas coupled crop subsidies are
likely to be limited in the future
– Corn to ethanol produces DDGS, which is
a moderate protein animal feed
Slide 22
Policy Analysis

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
We are doing policy analysis on both
bio-fuels and coal liquids
Will describe here research leading to a
new subsidy mechanism for corn based
ethanol
The coal liquids risk reduction research
applies equally well to ethanol from
cellulose
Slide 23
Objectives of Ethanol Research
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Given the increasing annual cost of the
corn ethanol subsidy, is there a more
efficient way to achieve the same results?
Determine a relationship between corn and
ethanol prices and ethanol profitability
Create a variable payment ethanol subsidy
based on above relationship
Compare results of both subsidies using
historic prices
Slide 24
Monthly Corn and Gasoline Prices
$1.60
$5.00
$4.50
$1.40
$4.00
$1.00
$3.00
$0.80
$2.50
$2.00
$0.60
corn $/bu
$3.50
$1.50
$0.40
$1.00
$0.20
$0.50
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gasoline ($/gal)
$1.20
Date
Monthly Gasoline Spot Prices
Monthly Corn Prices
Slide 25
Research Methods
The research took place in 4 major steps:
1.
Estimation of profitability under a wide range of
corn and ethanol prices
2.
Use data from step 1 to quantify the
relationship between corn and ethanol prices
and ethanol profitability and use the results as
the basis for the variable subsidy
3.
Develop a variable subsidy based on gasoline
and corn rather than ethanol and corn
4.
Compare results of the variable subsidy with
the $0.51 flat rate subsidy using historic prices.
Slide 26
Government Savings

Using historical data total subsidy cost
for the time period was:
•
•
•
•
Fixed Subsidy = $17.19 billion
Variable Subsidy = $10.81 billion
Total Government Savings = $6.38 billion
Average Annual Government Savings = $642
million or 37%
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Variable Subsidy Cost
Fixed Subsidy Vs. Variable Subsidy
$0.80
$0.70
$0.60
Fixed Subsidy
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
Variable Subsidy is less than fixed subsidy
88% of the months.
Date
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Profit($/Gallon)
Producer Risk
Fixed and Variabile Subsidy Profitability
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
Time
Flat Rate Subsidy Profitability
Variable Subsidy Profitability
Slide 29
Producer Risk
Fixed Subsidy
Average Profit = $0.39
Coefficient of Variation = 0.43
Variable Subsidy
Average Profit - $0.21
Coefficient of Variation = 0.34
CV = Standard Deviation/Mean
Slide 30
Results

Over the historic period:
– Average annual government savings were
37%
– Average annual producer risk reduction
was 21%
If the variable subsidy were in effect
today, the cost for the first half of 2006
would be $0, but producers would be
protected from future oil price drops or
corn price increases
Slide 31
Results
Locus of Zero Subsidy Ethanol
and Corn Prices
2
Ethanol Price ($/gal.)
1.9
1.8
No subsidy zone
1.7
1.6
1.5
Subsidy zone
1.4
1.3
1.2
1.5
1.75
2
2.25
2.5
2.75
3
3.25
3.5
3.75
4
Corn Price ($/bu.)
Slide 32
Future Energy Policy Choices
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Need to find cost effective ways to stimulate
national production of liquid fuel alternatives
to imported oil
Today, almost anything is profitable, but that
could easily change tomorrow, so reducing
the risk from oil price drops is key
Corn ethanol will play a prominent role
Cellulose ethanol and diesel from oilseeds
and coal could also be important if we reduce
investor risk
The policy set that works for corn ethanol
may be different from policy to stimulate other
sources
Slide 33
Thanks very much!
Questions and Comments
Slide 34