Current State of U.S. Ethanol

Report
Current State of U.S. Ethanol
Bruce Babcock
Iowa State University
-10
-20
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
US cents per liter
Returns over operating costs for a corn ethanol plant
60
50
40
30
20
10
0
US Ethanol Production
16,000
Down 1.8% in 2012
14,000
million gallons
12,000
10,000
8,000
6,000
4,000
2,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
US Finished Motor Fuel Consumption
145
140
135
Billion Gallons
130
125
120
115
110
105
100
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
US Gasoline Consumption Has Declined
Substantially More than Fuel Consumption
145
140
Billion Gallons
135
130
125
120
115
110
105
100
2002
2003
2004
2005
2006
Finished Motor Gasoline
2007
2008
Gasoline
2009
2010
2011
Value Offered by Ethanol
• Source of energy to drive autos
– Ethanol has 2/3rds the energy as gasoline
• Source of octane
– Ethanol is a high octane (rating = 110) fuel
• Source of oxygenate
– Allows fuel to burn more completely, thereby
reducing emissions
Willingness to Pay for Ethanol
• Source of energy?
– 70% of the price of gasoline
• Source of octane?
– Toulene costs $4.00 per gallon
– Production of toulene is 4 billion liters versus 50
billion liters of ethanol
Willingness to Pay for Ethanol
• Ethanol is a high octane fuel (octane = 110)
• 90% blend of 84.4 octane gasoline plus 10%
ethanol = “regular” US gasoline (87 octane)
Cap on Corn Ethanol,
Floor on Conventional Biofuels
60
50
billion liters
40
30
20
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Willingness to Pay for Corn by Ethanol Plants
500
450
400
$100 per ton arbitrage profit
$ per ton
350
300
WTP for corn at
ethanol’s energy value
250
200
Price of corn in 2006
150
100
Energy value of ethanol at
today’s crude oil prices
50
0
0
20
40
60
US Cents per liter
80
100
120
Willingness to Pay for Corn by Ethanol Plants
500
450
400
Current US price
for corn
$ per ton
350
300
250
Current US price
for ethanol
200
150
100
50
0
0
20
40
60
US Cents per liter
80
100
120
Impacts of Drought on Corn Supplies
• Expected 2012 Production
– 360 million tons
• USDA August 10th Projections
– 275 million tons of corn (down 24%)
The Problem
• US corn use was 317 million tons in 2011
– 127 million for ethanol
– 117 million for feed
– 40 million for exports
– 36 million for food and seed
• With total supplies of 285 million tons and
2011 use of 317, U.S. is “short” 32 million tons
of corn
6/21/2012
7/21/2012
4/21/2012
5/21/2012
2/21/2012
3/21/2012
1/21/2012
11/21/2011
12/21/2011
9/21/2011
10/21/2011
8/21/2011
6/21/2011
7/21/2011
4/21/2011
5/21/2011
2/21/2011
3/21/2011
1/21/2011
11/21/2010
12/21/2010
9/21/2010
10/21/2010
8/21/2010
7/21/2010
$ per bushel
Price Movement
9.00
8.00
7.00
6.00
5.00
4.00
3.00
Some elasticity arithmetic
• Supply contracted by about 25%
• Price increased by about 50%
• Implied total demand elasticity = -0.5
• But price likely would have fallen in the
summer without a drought
– Price elasticity lower than -0.5 because demand
for ethanol is likely quite price inelastic
Jul-2012
May-2012
Mar-2012
Jan-2012
Nov-2011
Sep-2011
Jul-2011
May-2011
Mar-2011
Jan-2011
Nov-2010
Sep-2010
Jul-2010
May-2010
Mar-2010
Jan-2010
Nov-2009
Sep-2009
Jul-2009
May-2009
Mar-2009
Jan-2009
Ratio of US Ethanol Consumption to Gasoline
Consumption since 2009
0.105
0.100
0.095
0.090
0.085
0.080
0.075
0.070
0.065
0.060
US Mandate Has Not Been Binding Until
Perhaps This Year
60,000
50,000
40,000
30,000
20,000
10,000
0
2007
2008
2009
Mandated Consumption
2010
2011
US Ethanol Consumption
2012 (6
months
Mandated versus Actual Consumption of
Ethanol
0.105
0.100
0.095
0.090
0.085
0.080
Actual Consumption
0.075
Mandated Consumption
0.070
0.065
Jul-2012
Apr-2012
Jan-2012
Oct-2011
Jul-2011
Apr-2011
Jan-2011
Oct-2010
Jul-2010
Apr-2010
Jan-2010
Oct-2009
Jul-2009
Apr-2009
Jan-2009
0.060
Current Situation
• Two U.S. governors at the behest of livestock
industries have asked for a mandate waiver
• U.S. will be short of feed.
• Will waiver reduce ethanol consumption?
What is Demand Elasticity for Ethanol?
• Is ethanol a close substitute for gasoline?
– In Brazil, yes if FFVs are using ethanol
– In US, yes if ethanol is being used for its energy value
as a fuel
• Or is ethanol a complement to gasoline?
– Yes if Brazilian FFVS are running on gasoline and there
is a 20% blend mandate
– Yes if refineries are configured to need octane to
produce 87 octane gasoline
– Yes if oil companies are mandated to use ethanol
Will Refineries Switch from Ethanol?
• If switching costs are greater than the cost of
using ethanol, refineries will not switch
• If waiver lasts 12 months, refineries will need
to switch back in the fall of 2013.
• If price of ethanol < price of gasoline, no
benefit from switching
• Some price of ethanol above price of gasoline
will result in a benefit to switching
Switching Costs
• Fuel attributes regulated by EPA
• Different methods of meeting fuel standards,
but costs of switching from one method to
another are significant.
• Difficult for a non-insider to estimate
P
$3.40/gal = $380/ton = $10.00 futures
Price of ethanol where switching
makes sense
$2.90/gal = $320/ton = $8.60 futures
Price of gasoline
Quantity at
10% Blend
Q
Observations
• Importance of reality of short-run inelasticities
often overlooked by market-oriented economists
• Degree of long-run flexibility underestimated by
industry-following economists
• Prediction:
– Some low-cost, reversible flexibilities will be found by
refineries if a waiver is granted so prices will not
increase to $10.00
– But price of corn is too low now to induce switching.
Price will have to rise
Lessons Learned
• Thought that corn use for ethanol could be
turned off if supplies are short was misguided.
– High price of crude oil combined with short-run
inflexibilities limit the ability to switch from corn to
crude
• Idea of a flexible mandate makes no sense if
crude is high and switching costs are important
• Better to be like Brazil and to be in the elastic
portion of ethanol demand
• US is not ready to embrace biofuels to the extent
that demand will be elastic

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