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The economics of ethanol

U.S. Secretary of Agriculture Tom Vilsack has a letter to the editor in today’s Wall Street Journal supporting biofuels and describing the U.S. oil and gas industry as receiving “billions of dollars in tax breaks.”  He must be holding the balance sheets upside down.  In reality, ethanol is already the most heavily subsidized fuel – and the oil and gas industry already pays among the highest taxes in the private sector.

The chart below from the U.S. Energy Information Administration (EIA) says it all.  As you can see, in fiscal year 2007, ethanol and biofuels received a subsidy of $5.72 per million British thermal units (Btu) of energy – more than double the subsidy for solar (the nearest competitor) and more than 190 times more than oil and gas.

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In absolute terms, American taxpayers have already spent $41.2 billion since 1980 on tax-based subsidies for ethanol, according to the Senate Energy Committee. And in fiscal year 2009, biofuels received federal subsidies of about $6 billion via tax credits, according to the Congressional Budget Office. If existing federal policies continue, taxpayers’ support for corn-based ethanol biofuels will reach about $6.75 billion per year by 2015 – or more than $30 billion in the next five years.

The “per million Btu” measure in the EIA chart is important because ethanol is a relatively inefficient source of energy.  According to the Congressional Budget Office, it takes 1.48 gallons of ethanol to provide as much energy as a gallon of gasoline. Because of ethanol’s lower energy content, cars using blended fuels get fewer miles per gallon – and the higher the ethanol blend, the lower the fuel economy. The American Automobile Association (AAA), in its Daily Fuel Gauge Report, factors this lower fuel economy into its average price for E85, a high-ethanol fuel.  So while the current national average price of “regular” unleaded gasoline is about $2.80 a gallon, a consumer using E85 would generally need to fill up more frequently and pay about $3.15 a gallon for enough E85 to be able to drive the same distance you get from a gallon of gasoline.

How do supposed oil and gas industry “tax breaks” compare?  As I made clear in my July 13 post, according to the EIA, the oil and gas industry’s 2008 income tax expenses (as a share of net income before income taxes) averaged 53.2 percent, compared to the average of 32.2 percent for the S&P Industrial companies.  Some tax break.

I share these facts not because I am against ethanol per se, but because it is important to consider all the costs and consequences of energy subsidies.  I hope we can have a more informed debate when the U.S. Congress takes up the issue of extending ethanol subsidies.  But we don’t have to wait until then to discuss the issue.  In your view, should American taxpayers continue to subsidize ethanol at current levels?

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