Ethanol’s Mixed Benefits and Crippling Costs

Once the energy of the future touted by politicians and American farmers, corn ethanol faces an uncertain future following years of unstable fuel and food prices. In 2007, Congress passed the Energy Independence and Security Act, which, among other things, mandated an Ethanol production minimum in the United States that would grow every year from 4.9 billion gallons in 2006 to 36 billion gallons by 2022. This legislation was intended to meet three goals: cheaper gasoline prices for motorists, reduced dependency on foreign oil imports, and significantly reduced greenhouse gas emissions.

In “US Ethanol Policy: Time to Reconsider?,” James M. Griffin from the Bush School of Government at Texas A&M University analyzes these goals and the resulting economic, energy, and environmental outcomes. He finds that this corn ethanol legislation is having minimal success in achieving its goals while contributing to massive increases in food prices in the United States and across the world.

Griffin begins by analyzing each goal individually in the context of the ethanol production mandates. In order to assess the benefits to motorists, Griffin compares the costs of inefficiency of ethanol fuel and the increased price of corn with the benefits of the United States exporting fuel and the increased global supply of fuel as a result of ethanol production. Ten percent ethanol (E10) is 2.9% more inefficient than regular fuel (E0201), which, when factored into mileage, makes the real cost of transportation 11.4 cents more expensive per gallon with E10 than with E0201.

Griffin then statistically analyzed American gasoline prices to find a 12.8-cent decrease in gasoline price per gallon when American refineries were able to cease importing foreign oil and even export surplus oil. Increased oil supply as a result of more ethanol was found to reduce gasoline prices by 3.6 cents per gallon, while the increased corn prices as a result of ethanol consumption were found to increase gasoline prices by 4.8 cents per gallon. Combining all of these effects, Griffin estimates a net savings of 0.2 cents per gallon for motorists because of the mandates. Annually, this comes to a benefit of $2.20 for a typical household.

While economic gains may be modest, economic and national security gains have often been touted as a reason for further domestic energy production. Griffin estimates that absent of the mandates, 402,000 barrels of oil per day would be displaced in the United States. Since oil prices are determined on a global market, energy security must compare domestic production to global oil output. This displaced ethanol production makes up less than 0.5% of global oil supply, and Griffin estimates displacing this ethanol could harm world security by 1.3%. This is because replacing this lost oil production would require a 1.3% increase in oil production from unstable regions. Since oil supply shocks are often short and unexpected, Griffin suggests that the Strategic Petroleum Reserve is a far superior mechanism for American energy stability than any ethanol production, because the President can tap into this 727-million-barrel reserve any time deemed necessary.

Finally, Griffin turns to analyzing the greenhouse gas emissions of corn ethanol and begins by dispelling a popular myth. Contrary to a popular narrative, corn ethanol actually produces 34% more energy than it consumes, according to a study by Argonne National Laboratory. Griffin finds that ethanol mandates save approximately 15.4 million metric tons of carbon dioxide annually, assuming no new land is developed for corn production as a result. This is equal to 0.28% of total US CO₂ emissions and 0.05% of total world CO₂ emissions. Overall, Griffin cites all of this as proof that the benefits of the ethanol mandates have been slim and relatively inconsequential.

The costs of the 2007 ethanol legislation, however, are seen as much more significant by Griffin. The drought of 2012 reduced estimated corn production by 3.9 billion bushels. With the mandated ethanol production, this entire reduction was taken from corn usually used for the food supply. Corn supply for consumption, livestock inputs, and export fell from 9.1 billion bushels in 2006-07 to 5.6 billion bushels in 2012-13. At the same time, corn prices rose from $3.04 a bushel to $7.80 a bushel even as corn acreage rose from 70.6 million acres to 87.7 million acres. While this price was affected by input inflation, drought, and increases in foreign demand, Griffin cites existing research that suggests the ethanol mandates have directly caused 25-45% of this increase in corn prices. This price increase affects US consumers, as food prices increased 17.8% on average from January 2007 to September 2012, and the most conservative estimates have the corn ethanol mandates costing consumers $44 billion over five years. In developing countries with more limited food substitution possibilities, this food price increase has been measured at 33-39% on average in the same time period.

This is increasingly relevant research as it has been suggested that rising global food prices have spurred revolution and unrest in many countries. Domestically, ethanol mandates have come under fire from many groups due to similar research, and the EPA recently proposed a rule change that would lessen the ethanol mandates for 2014 due to surprisingly weak demand for gasoline in the United States. Relaxing mandates further could have significant impacts on global food prices.

As Congress debates a new farm bill before the end of 2013, the effects of ethanol mandates will also have to be considered in constructing the benefits to farmers. Following a record 2013 crop, corn prices have fallen to as low as $4.13 a bushel, and as legislators determine the amount of support for farmers, changing or easing the mandates on ethanol production could lower prices enough to trigger further government subsidies.

All of these implications are meant to be balanced by the positive effects of increased domestic ethanol production, and farmers and industry leaders may point to research documenting the unconsidered national economic gains of domestic energy production. Griffin’s research does suggest that the benefits of these specific ethanol mandates are minimal, however, and increasingly expensive to food budgets as they grow annually.

Feature Photo: cc/(elviskennedy)