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 .
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 . It mandated that 36 billion gallons of renewable fuel be blended into transportation fuels (both gasoline and diesel) by 2022 . For the ethanol industry, the policy meant that 13.2 billion gallons of ethanol had to be produced in 2012 alone .
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 . 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 .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.
- http://usnews.nbcnews.com/_news/2011/12/29/9804028-6-billion-a-year-ethanol-subsidy-dies-but-wait-theres-more?lite, 29 Dec 2011.
- http://www.epa.gov/otaq/fuels/renewablefuels/index.htm, 28 Nov 2012.
- “Assessing the Impact of U.S. Ethanol on Fossil Fuel Markets: A Structural VAR Approach,” by Lihong Lu McPhail, in Energy Economics, April 2011. http://www.ers.usda.gov/amber-waves/2011-december/us-ethanol-dampens-global-crude-oil-prices.aspx
- http://www.iea.org/newsroomandevents/news/2012/august/name,30389,en.html, 13 Aug 2012
- http://www.eia.gov/todayinenergy/detail.cfm?id=9030, 4 Dec 2012
- http://www.eia.gov/todayinenergy/detail.cfm?id=3070, 14 Sept 2011.