Slide 1 U.S. Energy Situation, Ethanol, and Energy Policy Wally Tyner.

U.S. Energy Situation, Ethanol, and Energy Policy

Wally Tyner

U.S. Share of World

4.6

17.5

23.6

0

5

10

15

20

25

Population Energy Production Energy Consumption

%

Total Energy Consumption - 2003

0

20

40

60

80

100

120

United States WesternEurope

China Japan Former USSR Africa

Qu

adri

llio

n B

TU

Per Capita Energy Consumption - 2003

0

50

100

150

200

250

300

350

400

United States WesternEurope

China Japan Former USSR Africa

Mill

ion

BT

Us

Energy Cons./GDP - 2003

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

United States Germany China Japan Russia Mali

BT

U/$

U.S. Energy Consumption 2003

23%

23%40%

8%3% 3%

Coal

Nat. gas

Oil

Nuclear

Hydro

Renewable

Crude Oil Imports by Country or Region, 2004

16%

13%

23%16%

4%

11%

17%

Mexico

Venezuela

Persian Gulf

Canada

North Sea

Nigeria

Other

Unleaded Regular Gasoline, U.S. City Average Retail Price

0

50

100

150

200

250

300

350

Cen

ts p

er G

allo

n

Nominal gasoline price Real gasoline price

March 1981 - $3.20

March 1981 - $1.42

Sept. 2005 - $2.94

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

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

Annual Gasoline Consumption

60

70

80

90

100

110

120

130

140

150

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

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

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

Key Legislation

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

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)

Ethanol Production

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1000 g

al./y

r.

Ethanol Economics 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

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

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.

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

Policy Analysis

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

Objectives of Ethanol Research 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

Monthly Corn and Gasoline Prices

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

Jun-

86

Jun-

87

Jun-

88

Jun-

89

Jun-

90

Jun-

91

Jun-

92

Jun-

93

Jun-

94

Jun-

95

Jun-

96

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Date

gas

olin

e ($

/gal

)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

corn

$/b

u

Monthly Gasoline Spot Prices Monthly Corn Prices

Research Methods

The research took place in 4 major steps:1. Estimation of profitability under a wide range of

corn and ethanol prices2. 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.

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%

Fixed Subsidy Vs. Variable Subsidy

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

Jul-9

5

Nov-9

5

Mar

-96

Jul-9

6

Nov-9

6

Mar

-97

Jul-9

7

Nov-9

7

Mar

-98

Jul-9

8

Nov-9

8

Mar

-99

Jul-9

9

Nov-9

9

Mar

-00

Jul-0

0

Nov-0

0

Mar

-01

Jul-0

1

Nov-0

1

Mar

-02

Jul-0

2

Nov-0

2

Mar

-03

Jul-0

3

Nov-0

3

Mar

-04

Jul-0

4

Nov-0

4

Mar

-05

Date

Va

riab

le S

ub

sid

y C

ost

Fixed Subsidy

Variable Subsidy is less than fixed subsidy 88% of the months.

Producer Risk

Fixed and Variabile Subsidy Profitability

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

Sep-9

5

Jan-

96

May

-96

Sep-9

6

Jan-

97

May

-97

Sep-9

7

Jan-

98

May

-98

Sep-9

8

Jan-

99

May

-99

Sep-9

9

Jan-

00

May

-00

Sep-0

0

Jan-

01

May

-01

Sep-0

1

Jan-

02

May

-02

Sep-0

2

Jan-

03

May

-03

Sep-0

3

Jan-

04

May

-04

Sep-0

4

Jan-

05

May

-05

Time

Pro

fit(

$/G

allo

n)

Flat Rate Subsidy Profitability Variable Subsidy Profitability

Producer Risk

Fixed SubsidyAverage Profit = $0.39

Coefficient of Variation = 0.43

Variable SubsidyAverage Profit - $0.21

Coefficient of Variation = 0.34

CV = Standard Deviation/Mean

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

Results

Locus of Zero Subsidy Ethanol and Corn Prices

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2

1.5 1.75 2 2.25 2.5 2.75 3 3.25 3.5 3.75 4

Corn Price ($/bu.)

Eth

ano

l Pri

ce (

$/g

al.)

Subsidy zone

No subsidy zone

Future Energy Policy Choices 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

Thanks very much!

Questions and Comments

Slide 1 U.S. Energy Situation, Ethanol, and Energy Policy Wally Tyner.

Documents

Transcript of Slide 1 U.S. Energy Situation, Ethanol, and Energy Policy Wally Tyner.