What is in this article?:
- What Price of Crude Oil Makes Ethanol Production Profitable?
- Caveats and conclusions
Caveats and conclusions
There are a couple important caveats to the present analysis. First, actual linkages between crude oil, gasoline and ethanol prices are highly variable. The linkages assumed here are representative of long-term averages but they can change substantially over time. Second, some of the extreme combinations of crude oil and corn prices shown in Figure 1 would be unlikely to occur in reality. Consider a corn price of $4 and a crude oil price of $120. If this combination were to occur it would likely be short lived, as upward pressure would be applied to corn prices due to the relatively high value of ethanol. The market would equilibrate these relationships such that prices do not get too far "out of line." In this light, the present analysis is best thought of as a "what if" game with corn prices fixed.
The level of energy prices plays a central role in determining the long-run profitability of ethanol production in the U.S. This analysis shows that crude oil prices above $60/barrel will provide support for corn prices at or above $4/bushel. If crude oil prices are higher, as many analysts expect, this is likely to further pressure corn prices upward. This has important implications for other users of corn, such as the livestock industry, that now compete with the transportation fuel use of corn. It also points towards the importance of continued public and private investment in technologies to increase the efficiency of corn production.