Economics of Ethanol Production.

Ethanol was introduced as a transportation fuel in the early 1980s.  During the 1980s and 1990s, the price of gasoline was significantly lower than that of ethanol.  Government incentives such as subsidies, import tariffs, and mandates were introduced to support the industry.   Ethanol was initially blended with gasoline to increase its octane level. Enactment of the Clean Air Act (1990) shifted support for ethanol to its role as an oxygenate.

In the United States, ethanol has been used as a blend with gasoline and viewed as a fuel additive.  However, with the increase in oil and gasoline prices, the economics of ethanol production changed dramatically: ethanol cost less than gasoline, and, consequently, could compete with gasoline (as a fuel) without federal support. Ethanol contains fewer BTUs than gasoline on volume basis, but since it is used as an additive, the lower BTUs have not been an issue.  However, at high volume blends of ethanol and gasoline, E-85 and E-95, a price discount relative to gasoline should be reflected.

Advances in technology over the last 25 years have resulted in tremendous improvements in farming and processing. Improvements in agriculture productivity, transportation, and processing of corn to ethanol have made the sector much more cost and energy efficient.  Use of new technologies like genetically modified seeds, slow release fertilizers, global positing system and yield mapping, energy efficient farm machinery, and irrigation systems offers further potential.  In response, average corn yield per acre increased from 100 bushels in 1980 to over 150 bushels in 2007. 

Improvements in plant efficiency have increased the ethanol yield per bushel from less than 2.5 to 2.8 gallons and reduced energy use from 100,000 BTUs to about 30,000 BTUs.   The trend of improving technology is expected to continue.