US ethanol prices have fallen to its lowest level in 17 years, according to a video from QuickTake by Bloomberg on ‘US Ethanol Producers See Prices Fall to Record Low as Demand Plummets’. S&P Global Platts reported that ethanol trading on Chicago’s Argo Terminal reportedly closed at USD 0.99 per gallon on March 17, the lowest price for the corn-based ethanol since 2003 and the first time its assessed value has dropped below USD 1 per gallon. Ongoing trade disputes, shrinking demand due to COVID-19 and low crude oil prices have diminished the global demand for fuel, putting ethanol industry at risk.
What Is Ethanol?
Ethanol is derived from plant materials such as corn and sugarcane that can be used in motor vehicles as an alternative to fossil fuel based petroleum. US and Brazil led the industrial production of ethanol, together accounting for about 85% of the world’s production. In US, the ethanol biofuel industry is corn-based where the ethanol is blended at a 10% rate in each gallon of gasoline (E10). Ethanol in Brazil uses sugarcane as the main feedstock. Vehicles do not need any modifications to use ethanol fuel.
Differences Between Ethanol and Biodiesel
In simple words, ethanol is produced mainly from corn and sugarcane and used as an additive in petroleum while biodiesel is derived from vegetable oils such as soybean oil or palm oil. Both ethanol fuel and biodiesel fuel are produced using biomass energy therefore are categorized as biofuels.
Biofuels Policies in US
Biofuels in US is mandated under Renewable Fuels Standard (RFS) where its blending requirements is set by Environmental Protection Agency (EPA). For the year of 2020, EPA has proposed to increase the annual volume of biofuels that refiners must blend into their fuel to 20.04 billion gallons, up from 19.92 billion gallons in 2019. Subsidies are also provided in terms of tax credit which is the amount that can be deducted from tax liability. Under the latest biodiesel tax credit valid from 2018 until 2022, qualified biodiesel producers or blenders are eligible for tax exemption of USD 1 per gallon of biodiesel used in the blending process. The ethanol tax credit; Volumetric Ethanol Excise Tax Credit (VTEEC), was set at USD 0.45 per gallon of blended ethanol before it expired in 2011 and was not renewed since then.
Effects on Biodiesel – Personal View
Drop in US ethanol price would usually contribute to low ethanol fuel price thereby rising demand. However with the recent Brent crude oil price crash, all types of biofuels are becoming less appealing because consumers will shift to the cheaper crude oil. Demand on biodiesel and its feedstocks as such palm oil will also be affected by the declining crude oil price. Palm oil price range is pressured to follow the downfall pattern of crude oil price and this will result in cheaper biodiesel. However as market demand for biodiesel decreases, there will be a point when the cost of producing and blending biodiesel cannot be compensated. Under that scenario, biodiesel mandated countries such as Malaysia, Indonesia and the EU will have to reconsider their strategies.
Sources : QuickTake by Bloomberg (https://www.youtube.com/watch?v=wlI8GpRHP-I), S&P Global Platts,US Department of Energy, TransportPolicy, Reuters
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