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THE ECONOMICS OF ETHANOL

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The Economics of Ethanol

15. If the price of corn goes up, will ethanol become non- competitive with gasoline?

Corn and soybeans prices have historically moved in parallel with oil prices. Distillers grains and gluten feed are high-protein feeds that are the co-products remaining when the starch portion of the corn kernel is made into ethanol. Therefore, when the prices of corn and soybeans are high, a greater portion of the processors' costs can be recovered through the sale of protein feeds. Unusual market forces, such as drought, could have short-term implications for the ethanol industry.

16. Will ethanol ever be produced as cheaply as gasoline?

Yes, but ethanol should be compared with other octane components of gasoline, rather than with gasoline as a whole. Technology has reduced the cost of ethanol production by over 50% in the last ten years. We must also remember that the use of ethanol will clean up exhaust emissions from cars, and that it is a domestically produced, renewable fuel. The petroleum industry also gets subsidies in addition to the costs of air and water pollution and of our military presence in the Persian Gulf which should also be attributed to the overall cost of gasoline. In addition, the future price of gasoline is dependent upon our relationship with Saudi Arabia. All of these hidden costs that are not reflected in the price of gasoline are called "externalities".

17. How much will the use of ethanol help the price of corn?

There have been numerous studies done on this issue, and the consensus is that the price of corn will increase from 4 to 6 per bushel for every hundred million bushels of corn used. The ethanol industry uses about 400 million bushels of corn, or about 5% of our annual corn crop. Price response will vary according to crop prospects, carry-over levels and global supply and demand.

18. Shouldn't we be using our corn for food instead of fuel?

The U.S. historically has a surplus of corn, as much as five billion bushels in 1988, even with much of our cropland lying idle in govern- ment programs. World hunger is a result of politics and policies, not a shortage of food. Ethanol production could even assist in solving world hunger, as only the starch portion of the kernel is converted to ethanol. What remains is all of the vitamins, minerals, protein, and fiber, along with some of the energy. Much of the world's population suffers Tom protein and vitamin deficiencies. Many people suffer from hunger not because food is unavailable, but because there is no way to transport available food. The use of ethanol blends could increase the world's fuel supply enough that transportation to some of these isolated people could be practical.

2006 Gilles Desormeaux