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See also articles on Biofuels, Renewable Energy, and Cellulosic Ethanol
In the world of biofuels, ethanol is king--the alcohol fuel is predicted to account for a full 9% of total US fuel usage by 2018.[1] If this trend pans out, not only will ethanol production have met and surpassed Bush's proposed goal of 14 billion gal/year of ethanol (enough to replace 75% of oil imports from Middle East in 2025), it will have done so one decade ahead of plan. After the 9% benchmark, however, the future becomes more uncertain. A likely discontinuation of government ethanol subsidies will mean that ethanol's price must drop to remain competitive against gasoline (which has about 40% more energy content per gallon).[2]
Although the alcohol fuel can be produced from a number of different biomass stocks (including wheat, sugar cane, and beets), in the United States, corn-based ethanol remains the most prominent possibility. (Brazil remains the world's largest producer of ethanol, distilling it from sugarcane for use within the country.) Strong corn-growing conditions in the US breadbasket and relative familiarity with the corn-ethanol production process mean that corn is probably the most efficient and feasible staple biomass stock for the fuel. But corn ethanol is not without its challengers--recently, cellusolic ethanol has also been receiving increasing amounts of media attention (and research dollars). Bio-butanol is another up-and-comer that threatens the corn-based camp's hold on American biofuel.
The chart at left shows continuous front-month Ethanol Futures Contracts Traded on the Chicago Board of Trade (CBOT).
PricesEthanol futures contracts are traded on the Chicago Board of Trade (CBOT) under ticker symbol AK with delivery in every month of the year, while corn trades under the symbol "C". For electronic trading sessions, the symbols used are ZC for corn and ZK for ethanol.
Who wins?However, due to the aggressive expansion in ethanol plants consolidations and bankruptcies have begun across the industry. Already in the first quarter of 2009 ten ethanol production plants have filed for bankruptcy. These include plants operated by Aventine Renewable Energy Holdings (AVR) and Pacific Ethanol (PEIX). In 2008 a large player in the industry, Verasun Energy (VSE) filed for bankruptcy and sold seven plants to the crude oil company Valero Energy (VLO) for $477 million and an additional two plants to Green Plains Renewable Energy (GPRE) for $123.5 million.[3]
Who loses?
Introduction to corn ethanol
Ethanol productionCorn ethanol is produced in two different kinds of mills, dry and wet:
The energy costs of ethanol production vary depending on whether natural gas or coal is used. Mills are increasingly turning to coal in an effort to cut themselves free from fluctuating/rising natural gas prices.
With corn prices through the roof, VeraSun Energy has delayed the opening of two completed ethanol plants, citing concerns shrinking margins.[5]
Is corn ethanol a net energy loss and polluter?If you've read about ethanol, you've probably heard it before--apparently, corn ethanol's energy content is "negative," due to the amount of gasoline and other energy sources consumed in its production. But the 1995 USDA report cited [1] for this discovery has since been very decisively corrected.
The original authors of the 1995 report published in 2002 a second USDA study [2] which reversed the results, showing that even from conservative estimates (excluding energy credits from reselling CO2, for instance), ethanol was a net energy gain--for every Btu used for ethanol production, 1.34 Btu of ethanol energy is created. Furthermore, liquid fuels actually make up only 17% of the energy used to produce ethanol; for every 1 Btu of liquid fuel used, 6.34 Btu of ethanol energy is produced. The Pimental studies of ethanol as "subsidized food-burning" have been similarly disproved, with the inaccurate results attributed to data 20+ years old. [3]. Two studies published in early 2008, in Science, however, have rekindled doubts about ethanol. According to the studies, ethanol can actually drastically increase CO2 emissions, when land use is taken into account. Farmers have been clearing grass lands and rain forest in order to grow additional corn crops. In doing so they release large quantities of CO2, enough to outweigh the C02 savings of burning ethanol, by a factor of hundreds.
A 2008 report by the University of Nebraska shows that ethanol production now has a net energy gain of 1.5-1.6 units of energy out to every unit in. Furthermore, it shows that 13 gallons of ethanol are produced for each gallon of petroleum used.[6]
Understanding fuel typesEthanol fuels are available in a number of different mixtures, but are rarely used pure. Ethanol is most commonly used as an additive (2-10%) in fuel mixtures; not only is government-subsidized ethanol cheaper than gas, but it also reduces harmful emissions when included in gas mixtures.
Pricing and DependenciesFrom 2006 to 2008 the price of ethanol fell $2.5 a gallon, enough to make it competitive with then high oil prices. Ethanol prices fell because production capabilities were ramped up, and because of government subsides, which made each gallon used by refiners for gasoline blends eligible for a $0.51 tax return. This meant that ethanol could be sold at a sizable premium to regular gasoline as long as the premium was still less than the subsidy (most ethanol sells at a $0.46 premium). However, ethanol's significantly lower energy content and thus lower miles per gallon means that consumers will be willing to pay significantly less for E85; when these lower profits are passed from gas stations to refiners and from refiners to ethanol producers, the ethanol-to-gasoline premium may narrow or even disappear. At the same time, since ethanol is highly corrosive, many cars are not equipped to run on E85, and special storage tanks and transportation systems must be built for the distribution and use of high-ethanol content fuels.
As long as ethanol remains primarily an additive fuel, its price will probably remain premium-driven and thus heavily dependent on the price of gasoline. With oil prices a third of what they were in 2008, ethanol is no longer competitive. As of February of 2009, about 20% of all ethanol production capacity is idle.[7]
Corn ethanol production also relies on having massive amounts of corn. With current corn ethanol production already pushing corn prices up, a ceilingless increase could be problematic for ethanol producers, making ethanol production less appealing for new entrants and dropping or slowing corn demand until possible price seesawing settles into sustainability.
The "corn crush" is the difference between earnings from ethanol and the price of corn. It can be measured using the equation
Corn crush = {(Price of ethanol x 2.75 ) - Price of corn}.
In June 2006, when ethanol sold for nearly $4 per gallon and corn cost $2.35 per bushel, the crush was $8.42. The crush is now around a dollar, only because ethanol prices are rising; at its lowest in the past few years, it was just $0.53.[8] The crush represents profitability; because corn is so expensive and ethanol is rather cheap, the crush is low, albeit rising.
Hedging Against Rising Corn Prices Leaves Ethanol Companies Vulnerable During Commodities Downturns Many ethanol companies, ironically, are also exposed to falling corn prices, because of hedging against price cuts. VeraSun Energy went bankrupt in October 2008 because the company placed bets on rising corn prices once they hit $8 in June 2008. During the financial crisis of 2008, however, when commodities prices fell and the value of corn dropped by half, the company was left illiquid, unable to pay off its derivatives.[9]
Weather Can Hinder Development of Corn EthanolCorn production is heavily dependent on the weather which eventually determines the price of Corn Ethanol. For example, heavy flooding after a summer storm in Iowa wiped out a tenth of the state's corn crop, sending July corn futures up nearly ten cents to $7.425/bushel and December corn futures up 11 cents to $7.76/bushel.[10]
The option of replanting corn that was damaged in May is dwindling as farmers are deciding whether they should replace their corn with a shorter growing season crop like soybeans. All ethanol producers can do now is desperately pray for sunshine as there is already a tight supply of corn available.
Government InterventionThe ethanol program is heavily subsidized by the government which mandates to taxpayers support ethanol. It isn’t a surprise that food prices are rising when more than 25 percent of the corn grown today is taken out of the food supply and instead used for subsidized ethanol production. This subsidized program has the blessings of the Bush Government, which might not last come 2009, with Obama recognizing that government support for Ethanol has contributed heavily to increase in demand for corn.
On the other hand, Congress is currently discussing raising the ethanol-to-gasoline blend rate from 10% to 12%-15%. The measure is supported by the Speaker of the House, Nancy Palosi, increasing its likelihood of being passed.[11]
At the same time, the EPA and Department of Energy are testing the effect of higher blend rates on engine performance and emissions. Their testing should be over by the end of 2009, the results of which are likely to influence any ethanol legislation being discussed in Congress.[12]
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