Ethanol market dynamics and trends

Ethanol Market

Ethanol is a substance often used in the renewable energy industry, and specifically in fuels. As such, ethanol is seen as part of the answer to the energy crisis the world currently faces. Economic issues such as escalating oil prices, along with environmental problems such as global warming can potentially be addressed by the ethanol market. There are however those that stand in opposition to this source of energy for a variety of reasons. While renewable energy in general is mostly seen as a necessary addition to the world's resources, ethanol specifically is somewhat more controversial in the light of both economic, political and environmental issues.

According to Eckhart, there are three main drivers for the general renewable energy market, and for the ethanol market specifically. These include environmental concerns, economic factors, and national energy consumption trends. In terms of the environment, air, land and water pollution is fast becoming a crisis. According to environmentalists, no time can be wasted to research renewable energy sources. The environmental driver is likely to become increasingly urgent over the next decades, increasing the need for renewable and cleaner energy sources.

In terms of economics and politics, projections for the future of the oil market shows the U.S. consumption of oil increasing beyond the domestic ability to produce the energy source. The increasing pressure to therefore import oil from foreign markets is responsible for projected increases in prices. The drives the search for alternative sources of fuel sources such as ethanol, which can be produced at lower costs domestically. Both economic and political drivers are likely to increase their intensity and urgency in the future. This is especially the case, as the main oil producing countries are in a state of extreme economic and political instability. Increasing imports from these countries will therefore necessarily mean increasing prices to both suppliers and consumers. Specifically, developing countries such as China and India have increased the strain on the world oil market. This problem is also likely to worsen over time, as demonstrated by the rise in oil prices: in mid-June 2006, oil was priced at $70 per barrel as opposed to $30 not many years ago.

The market for a cheaper, domestically produced alternative is therefore favorable (Eckhart).

Currently maize-based ethanol is one of the biggest investment markets within the renewable energy sector in the United States over the next few years. According to Eckhart, recent studies have disproved that the energy-intensive production of maize-based ethanol negates any environmental benefits. Less petroleum is required for ethanol production, and 15 to 20% less greenhouse gases are emitted with the use of such fuel.

This is good news for the market, as methyl tertiary-butyl ether, used in gasoline, has been banned in 22 American states. This ban has increased the demand for the ethanol alternative. It is projected that more than 4.7 billion gallons of ethanol will be produced. According to Eckhart, a new processing capacity of 2 billion gallons of ethanol is currently under construction in the United States. This growth has attracted the attention of major industry leaders such as General Electric and Cascade Investment LLC, which has invested $84 million into Pacific Ethanol.

Despite the favorable outlook and the generally accepted need for renewable energy sources, there are those who are opposed to the source for several reasons. According to Lewis, for example, even while the growing ethanol market may be providing an increase in job opportunities, income is taken away from working families within the oil industry. Obviously therefore, the oil industry and its affiliates will be in opposition to the growing use and mandates for ethanol. Furthermore, the claim is that the ethanol market is dominated by a few giant producers such as Archer Daniels Midland. This is neither a fair distribution of the income from the new market, nor a fair distribution of jobs. The argument related to this is that the existing fuel industry wealth is transferred from honest, hardworking smaller businesses to a number of huge producers, rather than increased.

In terms of economics, federal opposition to the market claims that, while the overall production cost of fuel is lowered by ethanol, there is nonetheless an increase in gas tax, which affects the consumer unfavorably. Projected gas prices will then increase by 9.6, 7.1 and 4.0 cents per gallon in California, New York and the Midwest states, respectively. Another opposing claim is that the marketplace is distorted by the Government's $10 million subsidy for ethanol. Feed grain and consequently the chicken and pork markets are specifically affected, as less grain is available for feed.

Proponents of the ethanol industry include mostly environmentalists and scientists searching for new sources of renewable energy. Groschen is for example positive regarding the future of the market and its effects not only on the state of air pollution, but also on the general job market. Specifically, Groschen addresses the Minnesota ethanol program, and thereby refutes the argument that wealth is transferred from several small businesses only large producers. In Minnesota, the focus is specifically on the farming community and its role in producing ethanol.