The Future of Ethanol: How the fuel subsidy’s end has affected the ethanol industry

There has long been a push by the federal government to make gasoline cleaner. One of the ways they have successfully implemented this is by giving out subsidies to oil companies who blended corn-derived ethanol into their fuel, specifically gasoline. Ethanol has been subsidized since 1979, but as of January 1, 2012, the 46-cent per gallon tax credit was not resigned into action [1].

So it would seem that with the end of the subsidy, would come the end of the ethanol boom. This is not the case. While the subsidy was still alive, the federal government passed legislation to increase ethanol production. The Renewable Fuel Standard, or RFS, was created in 2005 and later modified in 2007 [2]. It mandated that 36 billion gallons of renewable fuel be blended into transportation fuels (both gasoline and diesel) by 2022 [2]. For the ethanol industry, the policy meant that 13.2 billion gallons of ethanol had to be produced in 2012 alone [2].

Not only is ethanol (seemingly) here to stay, oil companies are now blending ethanol into their fuels without receiving the government subsidy. This tightening of profit margins is among the causes of increased gas prices to the consumer. However, because ethanol blending is still required, the price of a barrel of oil is actually expected to decrease due to the fact that gasoline will be up to 25% ethanol by 2022, reducing the demand (and price) for crude oil, see Figure 1 [3]. A decrease in oil demand here in the United States coupled with increased domestic production of oil and mandated increased production of ethanol (though production has been slightly affected by the drought in the Midwest) means that we no longer need to import as much oil, see Figures 2 and 3 [4].

Figure 1 [3]

Figure 1 [3]

Figure 2 [5]

Figure 2 [5]


Figure 3 [6]

Figure 3 [6]

So what does all of this mean? 1) Subsidies started the ethanol boom, but did not end it; 2) Ethanol as a renewable fuel is here to stay; 3) The U.S. is reducing its dependence on foreign oil, in part because of ethanol blending.


  1., 29 Dec 2011.
  2., 28 Nov 2012.
  3. “Assessing the Impact of U.S. Ethanol on Fossil Fuel Markets: A Structural VAR Approach,” by Lihong Lu McPhail, in Energy Economics, April 2011.
  4.,30389,en.html, 13 Aug 2012
  5., 4 Dec 2012
  6., 14 Sept 2011.




Filed under biofuel, energy

3 responses to “The Future of Ethanol: How the fuel subsidy’s end has affected the ethanol industry

  1. varund55

    Nice article. But just curious about the perfomance of Ethanol – gasoline mix vs the normal gasoline.Would this blend be suitable for high perfomance cars like Porsche, Ferrari The pros are that Ethanol-gasoline blend is cleaner and greener. Are there any cons like in terms of mileage,etc.

  2. I think this subject is extremely relevant and important. Definitely, the use of ethanol has been very helpful to decrease CO2 emissions caused by fossil fuels. Nonetheless, some researchers such as Dr. Mario Molina (Nobel Prize in Chemistry 1995) have pointed out that using corn to produce ethanol also generates nitrous oxide emissions (another greenhouse gas). Do you have any opinion regarding this and the use of other materials, such as sugarcane, for the production of “cleaner” ethanol?

  3. hfateh

    According to an article published in 2008, there has been a huge competition in recent times about who comes up with the best solution to produce ethanol fuel at an affordable cost and desired quantity. A startup company named Coskata had made huge promises of mass production of ethanol at a $1 cheaper than the gasoline without even using corn [2]. According to them, the process would not interfere with the food supply and since the technique apparently works anywhere with anything, it yields high energy balance. In regards to the issues posed by cgaldeano, it turns out that they can produce ethanol using any organic material including corn husk, not the corn itself, and municipal trash, etc. An important point to note is that this company was backed by General Motors.

    As varund55 mentioned, it would be very interesting to keep the good and bad aspects of ethanol in mind as we come to a conclusion that ethanol, in fact, is a better fuel source than gasoline. The two major issues regarding the use of ethanol seem to be low energy density compared to gasoline and difficulty in use at low temperatures [3].


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