Economists project impact of lower gas prices on ethanol profits

By Susanne Retka Schill | December 12, 2014

With oil prices dropping dramatically, the possible impact on ethanol profitability was examined by University of Illinois ag economists Scott Irwin and Darrel Good in a recent FarmDocDaily post, “Prospects for Ethanol Production Profits Dim as Gasoline Prices Plummet.” Running multiple scenarios at the current price of corn, only the highest crude oil price and highest ratio of ethanol to gasoline imply returns above estimated variable and fixed costs of production, they write. “Consequently, we expect the curtain to come down on the current period of exceptional ethanol production profits fairly quickly.”

With the considerable uncertainty surrounding price forecasts, they examined three scenarios: a low scenario of $55 per barrel of crude, a base price scenario of $60 and a high scenario of $70 per barrel of crude. Using historical price ratios, those crude prices translate to Chicago wholesale CBOB prices of $1.49, $1.62 and $1.89 per gallon. The economists also factored in a low, medium and high scenario for the ethanol/gasoline price ratios, and applied those price ranges to a representative Iowa plant model used to track ethanol production profitability.

“In the scenarios we consider, the calculated price of Chicago wholesale ethanol ranges from $1.12 per gallon to $1.70 per gallon, all well below the current spot price of about $2.05 per gallon. At the current price of corn ($3.65 per bushel), these ethanol prices imply returns below estimated variable and fixed costs of production except for the highest crude oil price and the highest ratio of ethanol to gasoline prices considered.” In the five negative profit scenarios, losses above variable costs in the economic model range from minus 6 cents to minus 30 cents per gallon of ethanol. Two assumptions are made in the ethanol profitability model, first, that the ethanol/gasoline ratio will return to historic levels, and the price of corn stays where it’s at.

“It is also important to recognize that it is highly unlikely that ethanol prices would actually decline to levels that would not be sufficient to cover at least variable costs of production,” they write. “Domestic blending requirements under the RFS imply that large quantities of ethanol will continue to be required so that ethanol prices will have to remain sufficiently high to keep most plants in operation.” A recent article by the economists suggest there are growing indications that U.S. EPA rulemaking will be at or near RFS statutory levels.