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Ethanol Remains a Bargain

January 10, 2012


The end of the Volumetric Ethanol Excise Tax Credit (VEETC) was a non-event for America's ethanol industry.  Domestic ethanol producers and marketers had long been preparing for the end of this tax incentive that in today's market is no longer as necessary as it once was. Unfortunately, the same kind of misinformation and uninformed bloviating that characterized opposition to the tax incentive is coming to dominate discussions about what the end of VEETC truly means.  In recent weeks, many headlines have trumpeted the argument that gas prices will be higher as a result of expiration of the VEETC. As is often the case, a quick review of the facts tells the story. The VEETC was an incentive for blenders of ethanol into gasoline.  It allowed these companies to take a $0.45 tax credit for each gallon of ethanol they blended.  Each gallon of gasoline these companies produce is subject to an 18.4 cent federal excise tax against which they could apply VEETC.  As such, an ethanol blender benefited from a 4.5 cent tax reduction for each gallon of E10 sold, effectively lowering the tax on gasoline producers and consumers.  When the tax credit still existed, some critics argued that the 4.5 cent benefit was kept in the pocket of the blender and not allowed to trickle downstream to consumers at the pump; ironically, some of those same critics are now saying expiration of the tax credit will directly lead to a 4.5-cent increase in pump prices for consumers. In any case, with VEETC gone, taxes on blends of ethanol across the board have gone up and gasoline blenders and oil companies will likely pass the increased tax burden on to consumers at the pump. Critics of ethanol and reporters unfamiliar with how gasoline is priced have been quick to jump on this and point the finger of blame at ethanol for raising gas prices.  While taxes on ethanol blends have been raised, ethanol remains at a significant discount to gasoline. As the chart below shows, ethanol has traded at an average discount to gasoline of 25 cents per gallon at the wholesale level for the past four years.  At times, such as the spring of 2010, ethanol has been close to $1/gallon cheaper than gasoline. In recent weeks, ethanol prices have been 60 cents per gallon lower than gasoline. As such, E10 ethanol blends have been 6 cents per gallon cheaper than old-fashioned 100% gasoline—even without the tax credit. Additionally, ethanol's ability to significantly extend oil supplies exerts downward pressure on oil and gasoline prices.  Fully 10% of America's gasoline supply is now coming from a less expensive, domestic source that is beyond the reach of Mahmoud Ahmadinejad and other tyrannical petro-dictators, meaning oil and gasoline prices are being kept in check by ethanol. A study by noted economists from Iowa State University and the University of Wisconsin concluded that ethanol's presence in the market in 2010 lowered gasoline prices by $0.89 per gallon from where they would have been and an average of $0.25 per gallon in the past decade.  Moreover, the study found that removing ethanol would likely result in a 41-92% increase in the price of gasoline.  That means if consumers woke up tomorrow morning and ethanol was gone—which is precisely the aim of some of the industry's critics—gas prices would rise to $5-$6.75 per gallon. Ouch. VEETC was a highly successful initiative that accomplished what all subsidies and incentives should:  help build an industry, get it to stand on its own two feet, and then expire.   This model stands in stark contrast to the hundreds of billions of dollars in direct, indirect, and hidden support the oil industry receives courtesy of the American tax payer that keep us addict to foreign oil and disguise the true cost of that addiction. In fact, a recent report from a Yale University economist and DBL Investors shows that subsidies for oil & gas averaged $4.86 billion per year from 1918 to 2009—that's a total of nearly $450 billion! In contrast, the authors say biofuels subsidies—which are now gone—averaged $1.08 billion from 1980 to 2009 for a total of about $31 billion. Remember, every time you pull up to the pump, you are most likely filling up with 10 percent ethanol.  Keep in mind the domestic ethanol you are using is likely cheaper than the gasoline in the gallon and does not require the protection of America's 5th Naval Fleet to make it to the pump.