50 Billion Reasons to Support Ethanol

The mandated blending of ethanol in motor fuel -- specifically when produced from corn -- is a highly controversial issue. Is it really corrosive to engines at concentrations of just 10%? What about 15% blends? Does it really cost drivers at the pump? If so, how much? While ethanol does, in fact ,have a lower energy density than gasoline (thereby shortening each trip you make), the arguments surrounding the fuel are often rife with misinformation from both sides.

It doesn't have to be so complicated. Controversy aside, there is one calculation that can bring everyone together to support ethanol. The calculation is so simple that you can do it on the back of a napkin. What if I told you that simply blending ethanol into motor gasoline saved the United States $50 billion in 2012? That represents the equivalent amount of crude oil displaced by ethanol. Don't believe me? Here's how it works from the first corn kernel to the last dollar.

Where does ethanol come from?
As you can imagine, most of the country's capacity is centered in Corn Country. There are also facilities as far west as Oregon and as far east as Fulton, N.Y.

Source: Renewable Fuels Association

Who's making all of this controversial stuff? There are numerous ethanol producers in the United States, but only three companies have annual production capacities exceeding 1 billion gallons. Archer Daniels Midland (NYSE: ADM  ) , Valero (NYSE: VLO  ) , and POET have a combined capacity of more than 4.5 billion gallons -- good enough for 35% of the entire domestic market. The balance comes from dozens of companies with operations of various sizes and sources as wacky as cheese and leftover beer. Investors have been hit with volatility in the ethanol market before, so this production represents a sizable revenue stream for each company.  

How much ethanol is in gasoline?
In 2012, Americans consumed 134 billion gallons of gasoline that contained approximately 13 billion gallons of ethanol (a blend rate of 9.7%), according to the Energy Information Administration. Accounting for ethanol's reduced energy content per gallon -- just 67% of a gallon of gasoline -- we can say that ethanol blending displaced 8.7 billion gallons of gasoline last year.

How much gasoline is in one barrel of crude?
Here's the key step to the entire calculation. You may know that one barrel of crude oil contains 42 gallons of dinosaur sauce. What you may not know is that one barrel of crude oil does not produce 42 gallons of gasoline. Instead, refiners such as Phillips 66 (NYSE: PSX  ) and ExxonMobil (NYSE: XOM  ) obtain just 19 gallons of gasoline from the refining process.  

Source: EIA.

Don't worry; the math is correct. One barrel of crude oil yields a total of 45 gallons of refined products.

So, blending ethanol into our motor fuels may have displaced 8.7 billion gallons of gasoline last year, but it offset a total of 458 million barrels of crude oil. By contrast, the United States imported 3.8 billion barrels of crude oil in 2012. Are you beginning to see its importance? 

While refiners often gripe about paying to subsidize ethanol production, consider the broader context. Sure, the EPA estimates that the two refiners I mentioned will pay close to $11 billion each on ethanol blending credits in 2022 -- the final year of the Renewable Fuel Standard mandate. But displacing gasoline in the American market allows more to be sold overseas, where margins are higher, thus boosting their bottom lines. Besides, I think the law will be changed before then in favor of refiners.

50 billion reasons
The final step is easy. The EIA reports that the average price of Brent crude in 2012 was $111.65 per barrel. That puts the final savings from displaced gasoline at $50,928,070,175 -- all thanks to ethanol. To put that in perspective, that's roughly the size of Apple's share-repurchase program, the financial cost of Hurricane Sandy, or the amount Russia wants to spend on its space program by 2020.

As promised, here's the back-of-the-napkin calculation:

See? It isn't that complicated after all!

Foolish bottom line
Boosting America's trade balance -- and the bottom lines of refiners -- is just one piece of the complicated jigsaw puzzle called ethanol. Why is it the default first-generation biofuel? Ethanol fermentation is a widely known and easily understood process. In addition, America has no shortage of corn (most years). I don't believe it's the best alternative fuel that we can be making from corn starch, but it is the best that we have until science bails us out with second- and third-generation fuels. Until then, we can enjoy a $50 billion-per-year discount on imported oil. Thanks, ethanol.

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Read/Post Comments (22) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2013, at 9:43 AM, Cabralta wrote:

    How does the cost of producing the ethanol factor into this calculation? Isn't refined oils, presumably, cut by ethanol, used just to harvest the corn? That has to eat away at some of those savings.

  • Report this Comment On May 19, 2013, at 1:10 PM, stan87 wrote:

    With the droughts and population growth we should not use farm land for fuel. With new oil and gas drilling, the US has plenty of energy. For example, new methods for making fuel-grade ethanol from hydrocarbons like natural gas, an abundant U.S. resource( celanese tcx - benefits-cleaner,safer and cheaper than Bio-ethanol ) should be used until better energy options are feasible . The current RFS does not include hydrocarbons on its list of approved ethanol sources, stifling competition and giving the advantage to a small sliver of industries.When Congress picked corn as the winner in 2007, it did not account for the advances in technology that would occur, enabling the cost-effective production of ethanol on a mass scale from new sources. It should be amended to make room for new ethanol sources in the marketplace. Excluding them because of the RFS program inhibits the growth of our domestic energy economy. And for the carbon and global warming problem we need to fast track new, safe nuclear energy,( Terra Power,) The biosynthetic process,at ( Proterro ) And maybe ( Air Fuel Synthesis )

  • Report this Comment On May 19, 2013, at 3:07 PM, RationallyYours wrote:

    Ethanol from sugar cane, primarily from evil, terrorist state, Brazil, has been available for a long time, and it's a far more efficiently produced than our sad corn-derived product.

  • Report this Comment On May 20, 2013, at 12:35 PM, ejazz2095 wrote:

    How does it save me money when I spend several hundred dollars to fix problems with my car caused by ethanol?

  • Report this Comment On May 20, 2013, at 12:41 PM, DB967 wrote:

    Good article. It's also important to know that ethanol's high octane content displaces much more expensive and toxic octane components derived from petroleum. This significantly reduces the price of gas at the pump and is safer for our health and environment. Ethanol has also helped reduce the need for farm subsidies in America, generates billions in federal tax revenues, and supports over 400,000 domestic jobs. Since ethanol creates a much needed market for corn in the U.S., other countries are now seeing a resurgence in farming because profitable agriculture is much more sustainable than subsidized agriculture. Last year's drought should have proven to everyone that it's as dangerous for developing nations to depend solely on the U.S. for grain as it is for the U.S. to depend on the Middle East for oil.

  • Report this Comment On May 20, 2013, at 12:42 PM, ejazz2095 wrote:

    Also, it really does it save anything. If I need to go 100 miles, I need some kind of fuel to get me where I'm going. Whether it's gasoline, ethanol or some combination of the 2 I'm still going to have to spend money on fuel to get me to my destination. There is no real saving of money. There might be a slight difference in fuel price, but I'm still spending money. The only way to "save" is to not drive anywhere!

  • Report this Comment On May 20, 2013, at 12:43 PM, ejazz2095 wrote:

    DB967 works for the corn lobby.

  • Report this Comment On May 20, 2013, at 12:53 PM, w2willy wrote:

    50 billion, really? You mean the refiners do not get any return on the other 26 gallons of refined products that come out of that crude barrel?

  • Report this Comment On May 20, 2013, at 1:24 PM, Raphael1990 wrote:

    South America burning down their rain forests in order to produce more food to export to the US because the US cant grow their own food anymore since they are too focused on producing ethanol. Cool story.

  • Report this Comment On May 20, 2013, at 1:48 PM, dragonmonkey wrote:

    Possibly the worst article I've ever read on MF. According to you, if I buy one product instead of another, I've SAVED all the money I didn't spend on the other product. Without talking about inefficiencies inherent in the subsidy system, without talking about quality of the fuel, without talking about increase food costs, the argument presented is just plain dumb. Wow...I need to go read the Economist and try to save some of the brain cells this article killed off.

  • Report this Comment On May 20, 2013, at 2:32 PM, XXF wrote:

    Um. What kind of Mickey Mouse nonsense is this? Starting an article by calling out "both sides" for misinformation does not negate your article taking a side and then spewing misinformation.

    Deduct from the $50B the revenue from the 11,908MM (458MM barrels times 26 gallons of other products) gallons of refined oil product that you ignore and then we'll only be one step from finished.

    After you've deducted that take your new much smaller number and deduct from it... wait for it...

    THE COST OF THE ETHANOL.

    Seriously guys, based on this analysis you consider all Ethanol to be *FREE*?!? Jeepers.

  • Report this Comment On May 20, 2013, at 2:36 PM, FoolishLonghorn wrote:

    Agree with dragonmonkey and Cabralta. Your analysis assumes that ethanol is free.

  • Report this Comment On May 20, 2013, at 3:02 PM, miteycasey wrote:

    What about the raising meat prices because corn is the main feed for for cattle, pigs, and chicken?

    What about raising milk prices?

    According to the research from Cornell, you need about 140 gallons (530 liters) of fossil fuel to plant, grow and harvest an acre of corn. So, even before the corn is converted to ethanol, you're spending about $1.05 per gallon.

    It takes 26.1 pounds of corn to make a gallon of ethanol. That's a lot of cornflakes!!!

    http://auto.howstuffworks.com/fuel-efficiency/alternative-fu...

    The only renewable fuel source from cars will need to come from a waste stream, like algae. Or a new technology like hydrogen engine.

  • Report this Comment On May 20, 2013, at 3:21 PM, TMFBlacknGold wrote:

    American ethanol is the cheapest biofuel in the world. Additionally, most of the corn used in ethanol production is returned as cattle feed once starch is extracted for fermentation. While my analysis did not take into account the cost of producing ethanol, it is a profitable business for larger producers even without subsidies.

    Take the $50 billion in displaced petroleum savings, divide it by 13 billion gallons of ethanol blended into gasoline in 2012, and you'll get $3.85 per gallon of ethanol to begin deducting costs associated with its production. Note that this number does not account for profits from market conditions or animal feed.

    Even the EIA maintains that biofuel production is a major driving force in the country's reduced crude oil imports:

    "The economic downturn after the financial crisis of 2008, improvements in efficiency, changes in consumer behavior, and patterns of economic growth all contributed to the decline in petroleum consumption. At the same time, increased use of domestic biofuels (ethanol and biodiesel), and strong gains in domestic production of crude oil and natural gas plant liquids expanded domestic supplies and reduced the need for imports."

    http://www.eia.gov/energy_in_brief/article/foreign_oil_depen...

    Highly controversial, but there is good to be had.

    --Maxxwell

  • Report this Comment On May 20, 2013, at 3:55 PM, damilkman wrote:

    I do not understand this article. If something is the cheapest biofuel in the world and actually saves us money, how come there is a subsidy? There is no consideration for the extra cost in increased fertilizer which is oil based, increased cost in food prices, and increased loss of soil. I would rather pay the higher energy cost up front rather then subsidize something that I have to pay on the back end. After all that is the definition of a subsidy.

    The other arguments are just plain silly. The reason why farmers like to feed their herds corn is because they can fatten them up faster. If the sugar and starch are removed whatever advantage one had is gone. I personally believe in free range meat as I believe I should eat animals who eat what they naturally eat. But that is another topic. The end result is cellulose fed herds are going to be worth much less then grain fed. This is fabulous. The publics steak goes from free range, to corn & soybeans to garbage fed.

    I also do not understand the argument that export markets benefit by oil companies exporting gasoline. The point of the subsidy was to benefit consumers. But if gasoline is a world comodity and oil companies can make more money exporting gasoline out of the United States, such that domestic gas goes up anyway, what is the point of the subsidy.

    Great!!! Corn farmers make more money. Distillers make more money. Refiners make more money. Yet the cost of the pump is the same. With one exception which is all the money made by the former was subsidized by our taxes.

  • Report this Comment On May 20, 2013, at 4:01 PM, RationallyYours wrote:

    Maxx,

    Sugar cane ethanol produced in Brazil yields roughly twice as much per measure of land than does American corn ethanol. Add to that, the heat and electricity generated from the bagasse (cane waste), and I'm betting that this is more efficient.

  • Report this Comment On May 20, 2013, at 4:14 PM, TMFBlacknGold wrote:

    @damilkman

    I've written before than the subsidies surrounding ethanol are not based on much fact:

    http://www.fool.com/investing/general/2013/05/11/this-bill-w...

    Also, dried distiller grains with solubles (DDGS) is the byproduct of ethanol production. It is no different than DDGS from traditional means.

    @RationallyYours

    You're right. Brazil's process is incredibly efficient with many waste streams being fed back into the process. But sugarcane ethanol still isn't cheaper than corn ethanol. Additionally, they have the same debate between using sugarcane to supply the world's sugar (commodity name "Sugar No. 11") or to fuel their cars. First-generation ethanol, no matter the source, is just not the long-term answer.

    --Maxxwell

  • Report this Comment On May 20, 2013, at 5:46 PM, DB967 wrote:

    For damilkman; US ethanol is no longer subsidized.

    For Raffael1990; United States’ role among the four major corn exporting nations has fallen from 76.7% in 2005 to 28.1% last year. Meanwhile the other three countries – Argentina, Brazil and the Ukraine – have adopted larger roles in the export market. This was possible thanks to increased corn production outside the U.S., and it is the natural result of fair market prices for agricultural commodities.

    For decades, U.S. crop support programs contributed to depressed corn prices below the cost of production. While U.S. farmers were able to survive thanks to government support, many foreign countries could not afford to supplement farm incomes. Farm land worldwide went idle, and the rest of the world became dependent on grain primarily from the U.S.

    According to Stanford University research, more than a billion acres of agricultural land has gone idle worldwide in the last century. With recent price improvements, previously idled land is coming back into production, allowing countries to become more self-sufficient.

    For example, USDA data shows that corn production in Argentina increased 61% between 2005 and 2012 (from 622 million bushels in 2005 to more than 1 billion bushels last year). Brazil improved by 81% (from 1.6 billion bushels to 2.9 billion). The Ukraine improved corn production by 190% (from 282 million bushels to 824 million), and China increased its production 49% (from 5.5 billion bushels to 8.2 billion).

    The other aspect of land use change that is often wrongly attributed to ethanol is that of deforestation in the Amazon Rainforest. The truth is that deforestation rates in the Amazon have consistently fallen since the Renewable Fuel Standard came into effect, from 7,341 square miles annually in 2005 to 1,798 square miles last year. The 2012 rate represents the lowest deforestation rate since record-keeping began in 1980. http://www.mongabay.com/brazil.html. http://www.mongabay.com/brazil-state_deforestation.html.

  • Report this Comment On May 20, 2013, at 10:12 PM, FoolishLonghorn wrote:

    DB967:

    While the ethanol subsidies ended in 2011, there is still an ethanol mandate that requires its use.

    Yes, other countries have increased their corn production. Does this mean that we should continue the ethanol mandate?

  • Report this Comment On May 21, 2013, at 10:24 AM, damilkman wrote:

    Here are my comments. If I am mandated to purchase something that is more expensive I view it still as a subsidy.

    I would really like to see some hard science links that DDGS is as good as straight corn or soybeans. There seems to be a basic science issue here. If you remove the sugar and starch to distill alcohol, the remaining celulose is not going to be as valuable. DDGS was the origin of why our herds have to be pumped full of antibiotics and milk has to be pasturized. If you consume garbage, your going to get sick. But another story.

    Lastly I am really puzzled that the rise of corn prices is a good thing. One of the basic problems with 3rd world urban populations is the cost of food. Many 3rd world governmens subsidize basic food costs to keep the urban popluations passified. Perhaps expensive corn is a boon to farmers. But it is a massive drag on these countries budgets.

    Call me a FOOL, but I have always been of the opinion that when a comodity is cheap the economy benefits. When a comodity becomes more expensive the economy is put under more strain. In summary the author is arguing that a comodity being more expensive is a good thing. With the exception of examples like water where expensive water is subsidized for agriculture. Again the evil subsidy creeps in distorting the market.

    I will give a counter example. I am in the telecom buisness which is absolutely a cut throat global market. How about we mandate an internet tax to subsidize greater bandwidth on the last mile and encourage more bits to be pushed faster. We could bundle the justification that capital improvement is lagging because the price is so cheap. Thus by mandating more money in the pipeline, ISP's will have more money to do more capital projects. You realize this is what hospitals are already doing and why it costs 20K for a doctor to put a bandaid on the cut on your knee. They just don't need a mandate because they have a monoply.

    In summary I will always hold that if the cost of something goes up, it might be good for those who produce it, but bad for everyone else. That seems pretty basic to me.

  • Report this Comment On May 21, 2013, at 11:55 AM, TMFBlacknGold wrote:

    @damilkman

    Your comments on DDGS are not really based on fact, from what I can tell. DDGS have been a common animal feed long before ethanol plants opened their doors.

    Additionally, the United States provides food aid to dozens of countries at reduced costs. High corn prices have no affect on aid.

    http://www.fas.usda.gov/food-aid.asp

    --Maxxwell

  • Report this Comment On May 22, 2013, at 9:46 AM, damilkman wrote:

    Your not responding to the assertion. I did not say that DDGS was not a common animal feed prior to ethanol production. If I did I would not have made the statement that antibiotic treatment and milk pastorization was a historical byproduct. All I stated was that I am of the opinion that free range is better then grain which is better then distilled grain. If DDGS is so good for you why is the byproduct not fed to humans?

    When I was talking about high food prices in urban areas I was not talking about food aid but the actual market that people pay for. Countries like Egypt heavily subsidize basic foodstuffs to keep the urban populations happy. Local farmers do not benefit from high agricultural prices because the government sets the price artificially low. Of course the government cannot force the low price on foodstuff exporters. Thus they must use capitial reserves to make up the difference. in the case of Egypt they are hoping to play nice so that either their debt is forgiven or aid is given to them. They have gone through several cycles of this since Nasser first broke from the Soviets in 73.

    The end result for Egypt is wheat and other grains are more expensive because American farmers are growing corn for ethanol.

    I will reiterate one more time. I am making the statement that high comodity prices are bad for an economy and ultimately only benefit the producers be it organges, gold, or gas. Worse then a high comodity is one artificially created. There is a reason why Lifesavers moved their plant out of the United States, because the cost of sugar is artificially inflated.

    Whatever benefit the American economy gains from reduced oil consumption is lost by mandated higher cost in gasoline and all services dependent on it.

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