Ethanol Links Ag and Energy
Posted: February 18, 2008
Increased ethanol production from corn has tightly linked the agriculture and energy sectors in an unprecedented fashion, according to researchers at Purdue University, who have developed a model that shows how economic policies may impact costs and production.
“We are living through a revolution in American agriculture,” said Wally Tyner, a Purdue professor of agricultural economics, who presented the results of his model last week at the annual meeting of the American Association for the Advancement of Science in Boston. Tyner said the prices of corn and crude oil, which prior to 2007 fluctuated almost independent of one another, have become more closely linked as the use of corn to make ethanol has grown.
According to Tyner, the fixed 51-cent per gallon subsidy paid to ethanol producers will become increasingly expensive for the federal government as oil prices and levels of ethanol production continue to rise.
Tyner analyzed four policy options - the current 51-cent fixed subsidy, the variable subsidy, no subsidy and a renewable fuel standard - at oil prices ranging from $40 per barrel to $120 per barrel. The renewable fuel standard contained in the 2007 Energy Act mandates that energy companies purchase 35 billion gallons of ethanol by 2022, with a maximum of 15 billion gallons coming from corn.
“Regardless of the policy, results become similar at high crude oil prices where the market dominates,” Tyner said. “At low oil prices, however, government policies have huge effects, and all the results are enormously different. The policy choices we make will be critical.”