January 6, 2015

Ethanol's place in low fuel prices

Everywhere motorists look, they are seeing low fuel prices.

I filled up my vehicle in Kansas over the weekend for $1.86 per gallon and was ecstatic. Today, the Nebraska state gas price average is $2.04. We haven't seen prices this low in several years.

Why are gas prices so low? We are seeing a glut of oil, both domestically and globally, that is pushing prices lower. Hydraulic fracturing in Texas, the Dakotas and Alberta, Canada, have boosted oil supplies.

So how is that affecting the corn and ethanol industries?

University of Illinois Extension ag economists Scott Irwin and Darrel Good emphasize that it's important not to look only at the price ratio between ethanol and CBOB gasoline, but "the marginal value of ethanol to blenders." Lately, that's been a bright spot in the ethanol market considering the surplus the industry's produced. As long as that remains the case moving forward, demand will likely continue to be strong.

Another scenario that could play out, Irwin and Good say, is if fuel prices fall enough to push ethanol above the breakeven point. Two things could happen in this scenario; first, if blending slows down, demand could fall, ultimately having a negative impact on the ethanol and, in turn, corn market. But, there's still the chance that the margin between the two fuel costs could widen beyond the breakeven point with no response, meaning the market would recover.

Will ethanol supply be affected? Bruce Babcock, an Iowa State University economist said that while the economy doesn't follow the ethanol plants' up-and-down profits, ethanol production helps support corn prices, jobs and communities. "When they turn plants on, they run pretty much at a constant level, whether margins are good or bad," he said. "So as long as ethanol plants are running, the jobs are there, the support and demand for corn is there, and supply of distillers grains is there." This is good for livestock producers as well who utilize the high-protein value distillers grains feed.

Even with lower fuel and corn prices, we can't forget that the ethanol industry directly generates jobs, increases Nebraska’s annual economic base and gives back in local and state tax revenues each year. It also:

  • Gives consumers a choice
  • Is renewable
  • Reduces greenhouse gases
  • And is still homegrown

Don't forget to check out our blog on the 10 reasons to use ethanol-blended fuel.

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