May 2006


Expanding ethanol production adds $18 billion to United States gross domestic product
by Brian R. Hook

Ethanol production is expanding by record amounts across the country thanks to the construction of new plants and the addition of new capacity at existing plants.

There are currently 97 ethanol plants across the country. The plants have a production capacity of 4.5 billion gallons a year, according to the Renewable Fuels Association (RFA) in Washington D.C. The RFA reports that there are 33 plants and 9 expansions underway with a combined annual capacity of more than 2 billion gallons.

Matt Hartwig, RFA communications director, said this new capacity would go a long way to meeting current demand for ethanol. He said more plants are needed.

“The President’s State of the Union Address and his call to break America’s addiction to oil has heightened awareness,” Hartwig said. “Americans are realizing the dangers of our heavy reliance on oil, particularly foreign sources of oil.”

The ethanol industry created more than 153,000 new jobs in 2005. The industry added nearly $18 billion to the gross domestic product of the United States. It also increased the country’s household income by more than $40 billion, according to the RFA. “Ethanol is a tremendous economic engine for America,” Hartwig said.

Spending for annual operations and capital spending will add nearly $46 billion to the country’s gross domestic product by 2015, according to a study for the RFA by John Urbanchuck, director of LECG LLC, a consulting firm in Wayne, Pennsylvania.

Ethanol production may surpass the federal targets implemented by the Renewable Fuels Standards, said Rick Tolman, chief executive officer of the National Corn Growers Association in Chesterfield, Missouri, a suburb of St. Louis. The standards are part of the Energy Policy Act of 2005 that provide incentives for renewable fuels. It requires a minimum of 7.5 billion gallons of renewable fuels to be used by 2012.

“We will probably pass the 2012 target by the end of 2007,” Tolman said. “There is so much new capacity coming online for ethanol, there is concern that in 2008 and 2009 that we may have a surplus.” He said that would cause the ethanol price to drop.

Tolman said ethanol is economically competitive when oil is over $40 a barrel. He said the ethanol industry was caught off guard in the 1980s when oil prices dropped. Tolman said that he thinks this time will be different and the industry will make a long-term commitment. “I think this time, in addition to the cost differential, there is a lot of concern driving it on climate change issues and also national security,” he said.

Tolman said many of the plants were originally built around areas with surplus corn. Ethanol was then shipped throughout the country. “Now we’re seeing a trend where some plants are being built along transportation routes,” he said. “It’s kind of a new wave. There are plants being built in New York, Texas, Washington, Oregon and Arizona.”

Despite all the expansion currently underway across the country, Tolman said there is a need for more ethanol plants. He said that ethanol is currently in short supply. “We’re only supplying about four percent of our transportation fuel right now.”

While large agricultural processors like Decatur, Illinois-based Archer Daniels Midland, Co. are constructing many of ethanol plants, Tolman said about half the plants are owned by farmers who have gotten together to raise the money to construct the plants.

“It allows them to be more than just price takers in a commodity market,” he said. “Now as an owner, they also have the opportunity to make money on the other end as an equity investor.” He said it also helps farmers to move up the value chain.

Vern Pierce, associate professor in the department of Agriculture Economics at the University of Missouri-Columbia recently conducted a study to look at the impact of the current projected expansion plans for the Missouri ethanol industry.

There are currently three plants in Missouri in operation with one currently under construction. Their capacity is 115 gallons per year presently with an estimated capacity of 156 million gallons of ethanol production with the completion of the fourth plant. These plants use about 55 million bushels of corn from Missouri. It accounts for about 15 percent of the Missouri corn production.

Pierce said the current annual economic impact on the state is $373 million. There are expansion plans at the current four plants, plus plans for additional two plants. He said when those plants are fully operational, the state will have about 350 million gallon per year production capacity. The annual economic impact will jump to $726 million.

The Energy Information Administration, the statistical agency for the U.S. Department of Energy reported that ethanol industry set a new monthly production record of 288,000 barrels per day in January. The production represents an 8,000 barrel-per-day increase over December 2005 and a 47,000 barrel-per-day increase from the same month last year. For all of 2005, the EIA reports that the ethanol industry set annual records, producing just under 4 billion gallons and averaging nearly 255,000 barrels per day.

Fred Mayes, chief of the renewable information team at the EIA, said the main reason for the increases in ethanol is that the gasoline industry continues to phase out methyl tertiary butyl ether or MTBE as an additive from the nation’s fuel supply.

Mayes said he does not expect ethanol to become a big part of the transportation fuel. The EIA reports that ethanol accounted for .32 quadrillion British thermal units in 2005. The EIA expects ethanol to nearly triple to .92 Btu’s by 2030. “That sounds like a lot. That’s a growth rate of 4.6 percent a year,” Mayes said. “But on the other hand if you look at total transportation consumption by comparison, it really isn’t very much.”

EIA is projecting the consumption of petroleum products in 2030 of 53 quadrillion Btu’s, meaning less than two percent of the total usage going into ethanol.



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