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Ethanol Economics

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

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Ethanol Economics

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  1. Ethanol Economics Mike Carnall 30 October 2007

  2. Hopes • Increased Use of Ethanol Will: • Reduce dependence on imported oil • Reduce gasoline prices • Reduce long term GHG emissions

  3. 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 • Result in little net decline in carbon emissions • Energy yield of corn based ethanol is low • Increasing cropland and crop intensity will have adverse environmental effects

  4. Some Facts • 2006 US Corn Acreage: • 78.3 million acres planted in 2006 • 2006 US Ethanol Production: • 4.89 Billion Gallons (20.0 percent of the corn crop) • US Gasoline Consumption • 140 Billion Gallons • Ethanol as Percent of US Motor Gasoline Usage: • 3.5% volumetric • 2.3% energy basis • Ethanol has 66% of energy content of gasoline • 1.4% net energy saved • Energy replaced less energy required to produce ethanol

  5. 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

  6. 0.74 Billion Btu + 29 Acres 1.0 Billion Btu Ethanol 13,210 Gal 0.61 BBtu 0.13 BBtu 1.23 Billion Btu - 0.23 BBtu Processing etc. 1.0 Billion Btu Gasoline 8,696 Gal Inputs & Outputs Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006

  7. 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

  8. 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 • Current Cropland Usage • 93 million acres of corn planted in 2007 • 437 million acres total US arable land

  9. 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 Required to Replace:

  10. US Grain Crop Planting

  11. Where to From Here? • How Much Ethanol Will be Produced? • How High Will Corn Prices Go? • How Will Food Prices Be Affected? • How Will Gasoline Prices Be Affected?

  12. Relationships

  13. Ethanol - Gasoline Relationship • Complement (volumes move together) • Lack of Flexible Fuel Vehicles (FFVs) may limit ethanol to 10% blend • With FFV bottleneck ethanol & gasoline are complements • Supplement (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

  14. Economic Factors • Effect of Policies • Mandated quantity • Higher mandate, more ethanol • Level of subsidy • Higher subsidy, more ethanol • Effect of Energy Prices • Petroleum • Gasoline: higher price, more ethanol (if FFVs available) • Diesel: higher price, less ethanol (soybeans replace corn) • Other (fertilizer, pesticides) • Higher price less ethanol

  15. 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 • Tariff protection • Ad valorem tariff of 2.5% • Import duty of 54¢ per gallon (some CBERA exemptions)

  16. 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

  17. Breakeven Corn PriceNovember 2006 (from Purdue) Range of Crude Prices (2006-2007) Min $45/bbl, Max $72/bbl Ave $58/bbl Range of Corn Prices (2006-2007) Min $2.04/bsl, Max $3.96/bsls Ave $2.93/bsl Corn Breakeven @ $60 Crude Additive=$4.82/bu Subsidy=$3.96/bu Energy=$2.19/bu Source: Hurt et al, “Economics of Ethanol”, Purdue Extension, ID-339,

  18. 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

  19. Corn and Beef Prices Source: NCGA, “Understanding the Impact of Higher Corn Prices on Consumer Food Prices”.

  20. Back to the Questions • How Much Ethanol Will be Produced? • How High Will Corn Prices Go? • How Will Food Prices Be Affected? • How Will Gasoline Prices Be Affected?

  21. Getting Answers • Many Interactions • Oil Price • Effect on demand • Effect on supply • Policies • Other crops • Soybeans • Wheat • Import/Export

  22. 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

  23. 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

  24. Forecast (2016 long run equilibrium)

  25. Grain Plantings2006-2016/17 (long run equilibrium)

  26. Effect on Food PricesOIL+$10 No Ethanol – Corn price of $1.90/bushel

  27. Fossil Energy Savings (2016 long run equilibrium)

  28. 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

  29. Concluding Thoughts • Cost to consumers is high • $14 Billion/yr ($47 per person) in subsidy • 1.8% increase in food cost • Reduction in petroleum demand is modest • About 12% • Environmental Effects • Effect on Less Developed Countries

  30. End of Presentation

  31. Estimated Net Energy Values Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006

  32. FAPRI ModelFood 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 • Developed and maintained jointly by: • Iowa State University, Ames • University of Missouri, Columbia

  33. Crude Oil Price Projection(Baseline)Refiners’ Acquisition Cost (≈NYMEX - $6.70)

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