By
Bryan Bezold
RCGA Director of Research and Chief Economist
The rising price of oil has driven gasoline prices up over the
last two years, and raised interest in alternative and renewable
fuels. Ethanol has attracted a lot of attention, as it is already
produced in the U.S. and can be made from a variety of renewable
sources. There are, however, some barriers to the use of ethanol
as a large-scale substitute for gas. If those barriers are overcome,
however, it’s possible it will be because of research conducted
here in the St. Louis region.
Ethanol has been around for a many years. Today it is primarily
used as an additive to gasoline so that it meets the requirements
of the Clean Air Act amendments of 1990. When added to gasoline,
ethanol makes automobile tailpipe emissions less prone to contribute
to ground-level ozone formation. Most of us have been burning
ethanol in our cars’ gas tanks during the summer for years,
but as an additive to, rather than a replacement for, gasoline
refined from crude oil. The use of ethanol to meet environmental
regulations has increased recently because its primary competitor
in the additive market, MTBE, has been found in groundwater
and is being phased out.
Federal law now encourages increased use of ethanol. The Energy
Policy Act of 2005 dictates that the level of renewable fuels—which
includes ethanol and bio-diesel—must rise from four billion
gallons in 2004 to 7.5 billion gallons in 2012.1
Federal law also provides an economic incentive to produce ethanol
in the form of a tax credit. Producers of ethanol are eligible
for a refundable tax credit against the federal gas tax equal
to 51 cents for every gallon of ethanol blended into gasoline.
With a federal gas tax of 18.4 cents, a ten percent blend of
ethanol would receive a tax subsidy from the federal government
that would effectively reduce the tax per gallon to just over
13 cents. So diluting gas with 10 percent ethanol reduces the
effective tax on a gallon of fuel by roughly 27 percent.
Almost every car and truck in the U.S. can run on a blend of
90 percent gasoline and 10 percent ethanol, a fuel commonly
referred to as E10. Some newer, modified automobile and truck
engines can burn E85, a fuel blend that is 85 percent ethanol
and just 15 percent gasoline. At this level, we move toward
ethanol use as a real substitute for gasoline. But currently
only a small number of gas stations sell E85, and its adoption
by consumers is limited.
The small number of E85 gas stations is due to the fact that
the fuel is not yet priced competitively with respect to gasoline.
Initially this seems surprising, since ethanol is made from
renewable corn, and gasoline is made from non-renewable oil,
which has grown very expensive over the last two years. Part
of the problem has to do with the fact that a gallon of ethanol
contains less energy than a gallon of gasoline. That means that
when gasoline and ethanol are blended together, the miles a
car can drive on a gallon of fuel decline. In order for a consumer
to get the same value, ethanol blended fuels must cost less
than regular gasoline. That explains the federal tax subsidy
for ethanol; the federal government is using the subsidy to
encourage the market place to provide consumers with ethanol-based
fuel because without economic incentives it wouldn’t make sense
for consumers to buy the fuel.
Unfortunately, however, even with crude oil at $61 a barrel,
the wholesale price of a gallon of ethanol is still slightly
higher than the wholesale price of a gallon of gasoline.2 Given
that ethanol has less energy per gallon than gas, the market
is not pricing ethanol at a level where it is logical for the
consumer to substitute ethanol for gasoline.
In the long term, ethanol will only become a substitute for
gasoline if either the government increases its subsidy of ethanol,
or if technological developments lower the cost of ethanol production.
An increase in the subsidy would do the trick, but that subsidy
is effectively a cost spread over all U.S. taxpayers. Improved
technology is a much more efficient solution. Two separate efforts
to advance the technology of ethanol production are underway
in the St. Louis region.
The National Corn to Ethanol Research Center (www.ethanolresearch.com)
was established on the campus of Southern Illinois University
Edwardsville in 2004. Researchers at the center are working
on new technologies to improve the efficiency of the process
by which corn is converted to ethanol with an emphasis on moving
that technology into the marketplace in the near term.
In October the Center for Evergreen Energy was chartered with
the goal of making the St. Louis region the nation’s premier
center for biofuels research. The center’s research mission
is broader than seeking improvements to corn-to-ethanol technology,
and includes bio-diesel research and technologies that may allow
for the production of cellulosic ethanol, which is ethanol made
from plant biomass other than corn.
If the researchers at the National Corn to Ethanol Research
Center and the Center for Evergreen Energy are successful, then
one day we might all be filling our tanks with a cheaper, greener,
and locally produced fuel.
1 Unless otherwise specified, policy and pricing data in
this story are from the U.S. Energy Information Administration’s
2007 Annual Energy Outlook. That document may be retrieved at
http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2007).pdf.
2 Based on futures prices for ethanol and gasoline taken from
page C6 of the April 11, 2007 edition of the Wall Street Journal.
