Ethanol & Other Alternative Fuels

Managerial Economics 2

Running Head: Managerial Economics Ð'- Ethanol and other Alternative Fuels in the United States

Overview

I have discovered that the high price of gas has intensified the search for alternative fuel

resources to help lessen our dependence on fossil fuels. Methods such as carpooling, mass

transit, and hybrid cars will not, by themselves, solve the problem. As the debate goes on for

ethanol and alternative fuels, I found that President Bush has backed federal funding for

continued research and Congress is calculating the best way to implement it.

One alternative that has received a great deal of attention is ethanol. There is some debate

about the efficiency of ethanol. One side feels the energy costs to produce ethanol outweigh the

benefits. These opponents state producing and running tractors, the production costs and even the

energy consumed by workers including food, transportation and police protection raise the costs.

The worker cost is not usually figured in comparisons like this. I also found that the naysayers

also didn't take into account the added value of ethanol byproducts, which can be used in cattle

feed. The analysis was based on the technology in use at the time, which included old processing

plants. There is reason to believe ethanol production will become more efficient, possibly at a

faster rate than the mature petroleum industry. The newest plants incorporate technology to

streamline the process and save energy and money.

"There are a lot of new technologies", said Hosein Shapouri, an agricultural economist for

the U.S. Department of Agriculture. "It's going to continue to improve the yield, and also lower

Managerial Economics 3

the energy."

Besides bushels of corn, researchers are looking for other energy efficient methods to

produce ethanol. They're researching sugar cane and switchgrass. There are three more

challenges they have to face because the fuel has yet to prove its market viability for cars without

subsidies; the high price of natural gas may force some plants to switch to coal, harming their

environmental profile; and the cost to revamp fuel stations for ethanol blends are steep.

I will pursue the rest of my paper by doing a deep dive into the impact of Ethanol as alternative

fuel, What it Is, and What it could mean to consumers.

Impact of Ethanol

Ethanol is a high-octane, anhydrous (water-free) alcohol produced by fermenting converted

starch from corn with yeast. Ethanol can help reduce global warming because less carbon

dioxide is released into the atmosphere than with conventional gasoline. Because it is an

environmentally friendly source of high-octane fuel, it is widely used as a blending ingredient in

gasolineÐ'--more than four billion gallons per year.

Today, all car manufacturers approve the use of ethanol in their warranties. Ford Motor

Company, General Motors and DaimlerChrysler recommend its use for environmental reasons.

A growing number of cars and trucks designated as Flex Fuel Vehicles can use ethanol blended

up to 85 percent with gasoline. The availability of Flex Fuel Vehicles continues to improve on a

yearly basis. There are currently more than two dozen different models of FFVs available from

various auto manufacturers and an estimated six million FFVs on the road in the United States.

Some car owners are unaware that they even own a vehicle that can operate on E85 - a blend of

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85% ethanol and 15% gasoline. Between 2001 and 2007, U.S. fuel ethanol production capacity grew 220% from 1.9 billion to 6.1 billion gallons. Much of this growth was made possible by government regulation and legislation that actively supports the ethanol industry by creating mandatory ethanol demand and financially attractive investment opportunities in ethanol production capacity. The market is becoming mature with an increasing number of IPO's, M&A activity and large R&D investments. Although the U.S. have become the largest fuel ethanol producer in the world, specific market characteristics such as the geographic distribution of production versus consumption, the lack of infrastructural development for fuel ethanol distribution and transportation, types of ownership and the limited production capacity of corn, will all have a significant impact on future development.

The U.S. ethanol industry became more competitive in 2007, a new report from the Federal Trade Commission (FTC) details. According to the report, "The ethanol production industry is not concentrated, and has become even more unconcentrated over the last year."

"The highly competitive nature of the U.S. ethanol industry is helping to accelerate the continued evolution of this rapidly expanding domestic renewable fuels industry," said Renewable Fuels Association President Bob Dinneen. "Ethanol producers across the nation are investing resources

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