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Ethanol and Biodiesel Corn Ethanol and Biodiesel. While the growth in U.S. ethanol production has been impressive in recent years, ethanol still accounts for only a small portion of U.S. gasoline use—just 3 percent of total annual consumption. However, ethanol’s economic importance to agriculture is quite significant. About 14 percent of the U.S. corn crop was used for ethanol in 2005/06 and USDA projects nearly 20 percent of U.S. corn production will be converted into ethanol in 2006/07. Clearly, the supply of corn is relatively small compared with U.S. gasoline demand, so other domestic sources of renewable energy must be developed to replace oil if the United States is to greatly reduce its dependence on imported oil. Biodiesel, which has grown more rapidly than ethanol in recent years, can extend the U.S. supply of diesel fuel, but the supply of oil crops, animal fats, and other biodiesel feedstocks are also relatively small compared to the size of the overall diesel fuel market. There is optimism that research may provide technological breakthroughs that lead to a significant expansion in ethanol produced from alternative biomass feedstocks. Ethanol’s feedstock base could expand significantly with the advancement of technologies that economically convert switchgrass and other low-valued biomass into cellulosic ethanol. The Current Ethanol Market. In 2000, about 1.6 billion gallons of ethanol was produced in the United States. By 2005, about 4 billion gallons of ethanol was produced, a 150 percent increase in 5 years. In 2006, nearly 5 billion gallons of ethanol is expected to be produced, a one-year increase of 20 percent. There are now 101 ethanol plants with total capacity of 4.8 billion gallons operating in 20 states. The Renewable Fuels Association reports that there are 39 ethanol plants under construction and another 7 facilities expanding with total capacity of 2.6 billion gallons per year. When that construction and expansion is completed, ethanol capacity in the United States will be 7.4 billion gallons per year. A number of factors have contributed to the rapid increase in production, including the 51 cent per gallon tax credit provided to blenders, high and volatile oil prices, low corn prices, the Renewable Fuels Standard (RFS) under the Energy Policy Act of 2005, and the elimination of ethanol’s main oxygenate competitor, methyl tertiary butyl ether (MTBE). Another factor supporting ethanol expansion has been generally improving production economics. Ethanol production costs declined between 1980 and 1998. Technology improved over this period leading to: (1) a higher yield of ethanol per bushel of corn, (2) a lower cost of enzymes required for conversion, and (3) production automation which lowered labor costs. Energy input costs also fell over this period. Department of Agriculture (USDA) surveys indicate that between 1998 and 2002 the average cost of producing ethanol (excluding capital costs) remained unchanged at about 95 cents per gallon. In 2002, higher energy costs were offset by lower labor and enzymes costs. Since 2002, the cost of production has increased by 10 to 15 cents per gallon due to the increased cost of energy (electricity and natural gas). Hence, USDA estimates that the current average cost of ethanol production is about $1.10 per gallon. |