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Biofuel Economics – A New Series

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Cole Gustafson, NDSU Biofuels Economist Cole Gustafson, NDSU Biofuels Economist
With all of the public interest in energy and biofuels at the moment, I thought it would be useful to start with a series of news releases that discuss the various economic aspects of biofuels.

By Cole Gustafson, Biofuels Economist

NDSU Extension Service

I would like to welcome you to a new series that will discuss the economics of biofuels. The 2007 North Dakota Legislature funded two new biofuel positions at North Dakota State University. One of these positions is in economics and I was selected to fill it. While I have been at NDSU for 22 years and worked in the area of renewable energy periodically, it now will be my primary focus.

With all of the public interest in energy and biofuels at the moment, I thought it would be useful to start with a series of news releases that discuss the various economic aspects of biofuels. I would like to invite your questions and comments. In future columns, I will respond and provide answers to questions received.

A good place to start is with a quick review of the national policy that has led to the rapid growth of the biofuel industry. Commercial production of ethanol in the U.S. dates back more than 30 years. However, it was passage of the Renewable Fuel Standard (RFS) in August 2005 that really solidified the fortunes of the ethanol industry and fostered substantial expansion.

The RFS set a national goal of producing 7.5 billion gallons of ethanol a year by 2012. Three key economic incentives were provided:

  • A 51-cent-per-gallon tax credit to fuel blenders for each gallon of ethanol used
  • A 54-cent tariff on imported ethanol (originating primarily from South America)
  • A mandate that large metropolitan areas begin to use ethanol as a replacement for methyl tertiary butyl ether(MTBE)when summer air pollution regulations are in place

Combined, these three incentives created incredible profit and investment opportunities. In an era when gasoline prices already were rising, but corn prices still were hovering around $2 per bushel, newly constructed ethanol plants were so profitable that several were able to pay back all of their original debt financing in less than three years.

This high level of profitability and growth potential caught the attention of national investors. The Wall Street Journal recently reported that more than $3 billion of investment capital has flowed from national money markets to rural America to finance new ethanol plants. As of January 2007, the U.S. had 140 operating plants and nearly 70 more under construction.

The ethanol industry has grown so rapidly that it already has surpassed the orginal 7.5 billion- gallon-per-year RFS goal, which is four years ahead of schedule. This year, the U.S ethanol industry is expected to produce 8 billion to 9 billion gallons.

Consequently, biofuel advocates needed a new national production goal to strive for. In December 2007, Congress passed and President Bush signed into law the Energy Independence and Security Act of 2007. Answers to many of today’s most pressing questions, such as the impacts on farm acreage, food prices and energy independence, are outlined in this legislation and will be discussed in future columns.


NDSU Agriculture Communication

Source:Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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The news media and others may use these news releases in their entirety. If the articles are edited, the sources and NDSU must be given credit.
 

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