1. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension Energy and Ethanol Situation and Outlook Matthew C. Roberts (614) 688-8686 roberts.628@osu.edu http://aede.osu.edu

2. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 2 Global Economic Growth, 1990-2005 Source: IMF China US Oil Use World

3. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 3 World Oil Consumption Growth Oil demand growth, million bbl/d World oil demand, million bbl/d

4. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 4 Crude Oil Production World OPEC Source: Energy Information Administration

5. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 5 Forecast World Oil Spare Production Capacity

6. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 6 Currency Impact on Oil Prices Source: Energy Information Agency, OANDA.com 225% 171%

7. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 7 Refining Margin Source: Energy Information Administration Oil Price Margin

8. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 8 Current Liquid Fuels Outlook: Oil Prices Increasing… –Demand remains strong in face of high prices –Very weak USD Gasoline Prices Declining –Refining Capacity Utilization Rising –Stocks Rising –Just in time for Fall shutdowns? Diesel Prices stable –US diesel surplus –Summer is weak diesel seasonal

9. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 9 NYMEX Natural Gas

10. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 10 Natural Gas Storage

11. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 11 Long-Run Natural Gas Outlook Consumption is growing ~2%/year –Peak power plants will continue to be built w/ NG –But in 2007, it appears industrial use softening somewhat –How about all that ethanol? Production is growing ~1%/year –Additional reserves in Alaska & Canada, but pipelines must be built— 5-7 years lag. –DOE projects higher imports to close the gap LNG costly to transport. Lots of NIMBY Will need to build many more import terminals. Good News: Globally, lots of extra NG. Bad News: It’s expensive to move around.

12. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension Why Biofuels? National Security Energy Self-Sufficiency –Pro Coal –Pro Nuclear –Solar, Wind, Biomass –Energy Conservation –Pro Biodiesel –Pro Ethanol of all types –Brazilian Ethanol? Environment Reduce C, SOx, NOx –Anti Coal –Nuclear? –Solar, Wind, Biomass –Energy Conservation –Pro Cellulosic Ethanol –Unsure about Corn Ethanol and Biodiesel. –Brazilian Ethanol? 12 Rural Development Economic Revival –Coal? –Pro All Biofuels –Anti Imported Biofuels Peak Oil Replace Fossil Resources

13. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 13 Ethanol Drivers: Gasoline Prices Source: Aug 6 Prices, NYMEX, CBOT

14. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension Demand Curve for Ethanol 14 Renewable Fuel Standards/Oxygenation Price Quantity

15. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension Demand Curve for Ethanol 15 Motor Fuel Use Octane Enhancement Renewable Fuel Standards/Oxygenation Price Quantity

16. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 16 EPA FFV Fuel Economy $2.25 E85 $2.65 Gasoline

17. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 17 Ethanol is 33% cheaper than unleaded Current ethanol prices are quite high to Brazilian Consumers! Ethanol Unleaded$5.61/g $3.54/g

18. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 18 Ethanol Drivers: Economic Profits Source: ‘ethanolsuccess.xls’ spreadsheet model by Doug Tiffany, available at: http://www.agmrc.org/agmrc/commodity/energy/ethanol/ethanol.htm http://www.agmrc.org/agmrc/commodity/energy/ethanol/ethanol.htm Assumptions: 75mgpy Plant $2/gpy Construction Cost 8% Interest Rate DGS =75% of Corn $8/Dtherm NG 3g denatured/bushel E85 sells for 80% of gasoline 60% equity, 40% debt

19. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 19 Chart courtesy www.NARMSinc.com

20. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 20 Ethanol Drivers: Shutdown Point Source: ‘ethanolsuccess.xls’ spreadsheet model by Doug Tiffany, available at: http://www.agmrc.org/agmrc/commodity/energy/ethanol/ethanol.htm http://www.agmrc.org/agmrc/commodity/energy/ethanol/ethanol.htm

21. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension Ethanol Production Methods 21 Alcohol Fermentation of Sugars/Starches Corn Enzymes CO2DGSAlcohol Fermentation of Sugars/Starches Dextrose (Sugar) Digestion of Cellulose Enzymes Grass/StrawStover Waste Paper CO2 Heat

22. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 22 Ethanol Outlook Last 9 months cost of construction increased 75-100% Shortage of management? Margins have collapsed. New construction halted. Biggest Dangers: –Legislative Opposition –BTU-based pricing Slowing of RFS momentum Rapid Plant Expansion –Lower oil prices Market is waiting to see what happens…

23. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension 23 Acreage Needed For Ethanol Where does the land come from? –Corn displaces soybean –Soybean displaces wheat –Corn displaces cotton –CRP to corn –Sorghum? Benign Assumptions: –China remains exporter –Non-ethanol use flat –Exports at 2bn bu/year

24. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension Food vs. Fuel? Corn prices have nearly doubled over last 12 months. Competition for acres->soybean & wheat prices also have risen. Livestock: –Beef, pork, & poultry prices up. –Dairy prices up. Causation or correlation? 24

25. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension But does Food vs. Fuel matter? Yes… Food prices will rise approximately $14- $20bn/yr. Poor are even less able to absorb higher prices. Ethanol can only meet a fraction of our gasoline demand. No… Americans spend $450- $500bn/year on food. Poor are likely to eat more highly processed foods. That’s better than nothing. 25

26. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension But does it matter? No… Livestock have been getting cheap grain for years. It’s a small price to pay for energy security. The subsidies aren’t that much… Yes… Two rights don’t make a wrong. Energy security will be largely unaffected by a 5%-10% increase in supplies. Even in DC, $4bn can go a long way… 26

27. The Ohio State UniversityAgricultural, Environmental and Development Economics Ohio State University Extension Matthew C. Roberts, AED Economics 27 Matt Roberts (614) 688-8686 roberts.628@osu.edu http://aede.osu.edu/people/roberts.628