Are U.S. Ethanol Producers Profitable?

Ethanol consumption in the United States has been rising exponentially for more than a decade. You might think then that U.S. ethanol producers are making money hand over fist. But are they?

At first glance, you would certainly think so, thanks to the especially generous assistance they've received from the U.S. federal government over that time. That assistance has come in the following forms:

1. The government mandates that their product, ethanol, be added to the gasoline used by the overwhelming majority of motor vehicles in the United States. In 2011, the federal government will require oil companies to use over 12 billion gallons of ethanol, which will rise to 15 billion gallons in 2015 and 36 billion gallons per year in 2022.
2. Their production costs are very generously subsidized. U.S. ethanol producers receive a tax credit of 45 cent per gallon for the fuel ethanol they produce. And that doesn't include the subsidies received by the agricultural interests for producing the crops, such as corn, that are used in domestic ethanol production.
3. They are protected from international competition with foreign-based ethanol producers who are capable of producing ethanol more economically than U.S. producers through tariffs imposed by the U.S. government. The tariff adds 54 cents to the cost of each gallon of fuel ethanol that is be imported to the United States and sold to U.S. consumers.

Cole Gustafson, a biofuels economist at North Dakota State University, wondered just how profitable U.S. ethanol producers are. In doing that, he generated the following chart which estimates how profitable U.S.-based ethanol producers were throughout the years of 2008 and 2009:

Gustafson concludes that the fuel ethanol production industry is "close to operating breakeven." Note that "close to operating breakeven" really means "nearly or occasionally profitable."

But clearly, it isn't. Not really. After all, it takes the federal government raising the price of the fuel ethanol produced by non-U.S. producers by 54 cents per gallon and a gift from taxpayers to the tune of 45 cents per gallon to get U.S. ethanol producers "close to operating breakeven."

In 2011, that means that U.S. taxpayers will be required to give U.S. ethanol producers some 5.4 billion dollars, or if we assume there are 118 million households in the U.S., roughly $45.76 per household.

As an alternative measure, if we assume the annual burden of federal spending is $31,000 per household, eliminating the $5.4 billion in subsidies for ethanol producers would be the equivalent of freeing 174,193 American households entirely from the burden of the federal government's spending in 2011.

But then, it gets better. Because fuel ethanol could be obtained more cheaply, if the tariff on imported fuel ethanol were also eliminated, a total savings of $6.48 billion or $54.92 per household would be the result for American consumers for the 12 billion gallons of ethanol that the EPA will require to be used in the U.S. in 2011.

Those, of course, are all savings that could then be put toward more productive uses that would only help to enhance the United States' competitiveness in the world, rather than mandating that the nation's valuable resources be mired down in wasteful activities.

Sources

Environmental Protection Agency. EPA Finalizes 2011 Renewable Fuel Standards. November 2010. Accessed 24 January 2011.

Doggett, Tom and Abbott, Charles. Senate votes to extend ethanol subsidy for 2011. Reuters. 15 December 2010.

Gustafson, Cole. New Energy Economics: Are Ethanol Producers Making Money Now?. NDSU Agriculture Communication. Accessed 24 January 2011.

Rudolf, John Collins. End Ethanol Subsidies, Senators Say. New York Times' Green Blog. 30 November 2010.