One Fuel That's Still A Bargain - Ethanol Price Drops to $1.20 a Gallon

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). Not all energy prices are surging. Ethanol, which is typically derived from corn and mixed with gasoline, often moves in sync with petroleum. But since the start of the year, the spot wholesale price of ethanol has fallen more than 20%, to around $1.20 a gallon, while black gold is soaring to record highs. What is going on?

Click on the image at right to view a table showing a snapshot picture of ethanol pricing (dollar per gallon) for the last two years.

More than 80% of ethanol is sold under contract to gasoline blenders, and the remainder is sold on a spot basis. Contracts are typically made for a six-month period. It can be seen above that contract prices have remained steady, but spot prices have declined. It, therefore, can be expected that in the record half of 2005, contract prices will decline to a level more in line with spot prices, which will make the price differential between ethanol and gasoline even more pronounced.

Gasoline blenders receive a tax credit of 51 cents per gallon for 100% ethanol. At a 10% content of ethanol in gasoline, the tax credit on this blended gasoline is 5.1 ¢ per gallon. This means that this blend is sold for 5.1¢ per gallon less than for unblended gasoline.

The reason for declining prices for ethanol is surplus manufacturing capacity to produce ethanol. Manufacturing capacity was 4,429 million gallons in 2004, and 689 million gallons of new capacity has been announced for 2005. This is in comparison to sales of 3,570 million gallons of ethanol in 2004.

U.S. sales of ethanol, according to the Renewable Fuels Association, fell into the following four categories in 2004, for a total of 3,570 million gallons of ethanol. 1) 1,950 million gallons of Reformulated Gasoline. Mandated to reach required oxygen content in gasoline to reduce pollution. Ethanol or MTBE can be used. MTBE is still used in many states. Growth of ethanol here depends on legislation to ban MTBE. Sales of MTBE are now 140,000 barrels per day. 2) 1,050 million gallons of conventional ethanol. Ethanol added to improve octane and other properties. Growth potential for ethanol high here, due to current price advantage of ethanol compared to gasoline. 3) 290 million gallons of Federal Winter Grade gasoline. Winter grade gasoline contains ethanol in winter months. Not a high growth area for ethanol. 4) 280 million gallons of Minnesota ethanol. Minnesota and Hawaii mandate 10% ethanol content in all gasoline sold in those states. Other states might pass similar legislation.

From the data above, firm forecasts for U.S. sales of ethanol cannot be made at this time, since sales are highly dependent on legislative action that cannot now be predicted. Gasoline sales are growing at 1.9% annually, and this would be the minimum growth in sales of ethanol.

Check out Industrialinfo.com's Ethanol Database tracking more than 97 operating plants, over 100 plants under development, and 57 active projects valued over $3 billion.

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