Ethanol subsidies: data & easy caculation

, and several smaller federal ones. We also over-value ethanol's high octane. The result is a substantial underestimate of corn-ethanol subsidies.

$0.9 B of federal corn subsidy for corn used for ethanol
$2.5 B of federal blenders credit for ethanol
+ $3.6 B of indirect price subsidy, e.g. ethanol usage requirements
$7.0 B Total

The corn subsidy as reported on by the chief economist of the USDA.
A: 20% = percent of corn for ethanol

. (PDF)
B: $4.5 B = Federal subsidy in 2006

.
C: $0.9 B = Subsidy to corn for ethanol. C = A x B

The blenders credit is paid to ethanol blenders, for using ethanol in gasoline.
D: 51¢ = payment per gallon of ethanol. US DOE

E: 4.855 B = gallons of ethanol produced

for fuel in 2006.
F: $2.5 B = dollars of federal subsidy for fuel ethanol. F = D x E

The price subsidy is ethanol's price premium not caused by intrinsic value.
G: $2.07 = effective wholesale price of ethanol (after subsidy).
H: $1.32 = the value of ethanol (energy value + octane value*).
J: $0.75 = indirect price subsidy per gallon of ethano. J = G – H.
K: $3.6 B = dollars of indirect price subsidy for ethanol. K = J x E

------ How to find G: the effective wholesale price of ethanol
L: $2.58 = wholesale (rack) price of ethanol in 2006. USDA

cites Nebraska

G = $2.07 = L – D

------ How to find H: the value of ethanol
M: $1.94 = rack price of gasoline in 2006. Nebraska

N: 0.655 = gallons of gasoline with energy of 1 gallon of ethanol.
P: $1.27 = rack price of .655 gallons of gasoline. P = M x N
Q: $0.05 = The ethanol premium in 2006, an upper limit* on the octane value.
R: $1.32 = Over estimate of non-energy net value of ethanol. R = P + Q.

More on ethanol's price subsidy

* Non-energy value. Ethanol has extra value compared with gasoline due to its high octane number. But it value is reduced by its affinity for water, and its effect on vapor pressure. The net result is that in the Midwest octane market, where all of these come into play, it has traditionally sold ethanol for exactly the price of gasoline--it receives no premium. From 1982 to 2006 it averaged on 3¢/gallon more than gasoline. In 2006, ethanol sold for 13¢ more than gasoline. According to Nebraska

this was caused by the "MTBE phaseout and the switch to ethanol as an [oxygenate] additive." So, most of the 13¢ was a regulatory premium. To given ethanol the benefit if the doubt, zFacts has assigned it a 5¢ net premium for its octane value and disadantages combined.

Volume vs. Energy, the main subsidy. The main source of ethanol's price subsidy is its volumetric pricing. It gets the same price per gallon as gasoline even though it has only 2/3 the energy. A gallon of gas containing ethanol sells for the same price as normal gasoline of the same octane. Gas pumps only measure volume and customers are only aware of volume, not energy content, so they pay for volume.

The result is we pay too much, and ethanol producers keep the profits from this overpayment, just as with any other subsidy. Mainly this is an accident of ethanol's low energy, though if ethanol were not normally sold as a regulated additive, and there was some truth in labeling, this subsidy would disappear just as the chief economist of the USDA expects may soon happen.

As ethanol production expands beyond regulated markets, such as reformulated gasoline, and beyond the market for ethanol as an octane enhancer, the long-standing price premium of ethanol over gasoline is likely to decline toward ethanol’s energy equivalent with gasoline. —Keith Collins

http://zfacts.com/p/807.html | 01/18/12 07:22 GMT
Modified: Wed, 14 Oct 2009 17:27:23 GMT