Robert Rapier explains a few ins and outs of ethanol. For example, he observes that ethanol producers like to claim that it is the oil company which blends ethanol into gasoline that is subsidized, not the ethanol producer itself (since the blender gets a credit against federal taxes — in fact, I just heard this claim at a Lubbock chamber of commerce energy program two days ago.) Not so fast, says Rapier:
The way the blender’s credit works is that gasoline blenders get a credit – recently reduced to $0.45/gal – against the federal gasoline taxes they have to pay for each gallon of ethanol blended into the gasoline pool. However, it is not true that this subsidy actually benefits the oil companies. Ethanol proponents like to make that claim, but any time there is talk of getting rid of the credit, they are the ones who scream loudly. You won’t hear oil companies lobbying to keep it. Thus, it should be clear who really benefits.
Rapier also explains one of the economic traps that bedevils corn-based ethanol – its heavy reliance on fossil fuel imputs for fertilizer and process heat. As a partial substitute for gasoline, when gasoline prices go up, ethanol prices also go up. But at gasoline prices are generally correlated with natural gas prices, ethanol producers find their costs going up at the same time, limiting the benefit they gain from higher ethanol prices.
(Natural gas supply conditions in the U.S. have pushed domestic natural gas prices to the low end of the traditional relationship between natural gas and oil prices, perhaps offering some temporary breathing space to ethanol producers.)
Also check out Rapier’s recent review of a book on the potential for algae-based biofuels.