Fueling America Through Renewable Resources
BioEnergy
Purdue extension
economics of ethanol
Chris Hurt, Wally Tyner, and Otto Doering
Department of Agricultural Economics
Purdue University
ID-339
Farming for fuel is a relatively new concept
for U.S. agriculture. Biofuels include both
ethanol (corn) and biodiesel (soybean oil),
but ethanol is far in the lead. Production
capacity across the country is expected to
exceed 8.0 billion gallons by early 2008 and
substitute for approximately 5% of U.S. gasoline
consumption. Some hope that biofuel pro-
duction can eventually substitute for as much
as 25% of the country’s gasoline over the next
20 to 30 years. The ultimate importance of
biofuels will be determined by events that
are still to unfold. The drivers are expected to
be found in energy prices, state and fed-
eral energy policy (Doering, 2006), and in
technology, particularly the improvement of
the process to produce ethanol from cellulose
(plant material) (Mosier, 2006).
Why is there such startling interest in fuels
from farms? The nearly “gold rush” status is
driven by powerful profitability, especially for
ethanol. The federal subsidy of $0.51 per gallon
of ethanol was established when crude oil
was less than $30 per barrel. At that price of
crude oil, the subsidy was necessary to make
ethanol profitable. However, with
crude oil much higher, ethanol has
shifted from being just profitable
to being highly profitable, and thus
major investment in the sector has
been stimulated. The value of etha-
nol can be thought of as coming
from three components:
1. The energy value as a replacement for
gasoline
2. The value of subsidies and policy incen-
tives provided to ethanol,
3. The value of ethanol as an additive that is
primarily an oxygenate (to produce cleaner
burning fuel) and octane enhancer for
gasoline.
Energy Value
The energy value in a gallon of ethanol is
less than in a gallon of gasoline. While exact
difference in gas mileage will probably vary
somewhat, it is expected that