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Looking at Life Without an Ethanol Subsidy

Looking at Life Without an Ethanol Subsidy
Failure to renew the Volumetric Ethanol Excise Tax Credit will create a new world for the industry.

The ethanol industry is probably not caught unawares by the end of the Volumetric Ethanol Excise Tax Credit, but it's quiet expiration as 2011 winds down - under the hubbub of job creation bills and debt ceiling limit raising - will not go unnoticed by the industry.

The end of VEETC also brings along an end to the 54-cent-per-gallon tariff on imported ethanol, which may not be an issue given that Brazil is buying plenty of U.S. ethanol to burn in its cars (the country's vehicles are predominantly flex-fuel in design and they burn a lot of ethanol).

What many consumers don't realize is that the tax credit didn't go to ethanol plants, it went directly to oil companies as they splash blended ethanol into the truck to head for the local gas station. As the tax credit expires, fuel providers will raise their prices to cover, and consumers may be surprised. It doesn't mean less ethanol will be used, since the biofuel is a mandated oxygenate in many states - at the 10% level.

Corn growers have supported the end of the credit as a way to help reduce the federal deficit, but as one corn group notes the oil companies "didn't follow suit and offer up their own century-old petroleum subsidies as a budget-saving measure."

The math on oil company economics of ethanol use are pretty clear. In a press release from the Illinois Corn Growers Assocation, Jeff Scates, president, notes that for the last four years ethanol has been less expensive than gasoline so when oil companies use ethanol "they're already making a gallong of gas cheaper to produce. The VEETC was worth about 4.4 cents per gallon at the 10% blend. That's the price advantage that's lost starting January first. It's not the ethanol that might make gas prices go up, it's the loss of the VEETC."

It's the end of a 30-year ride for VEETC, and the ramifications are not completely known. Industry groups report that ethanol plants will go on, but how consumers react to a 5-cent gas price rise on Jan. 1 remains to be seen.

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