Ethanol presents the world with the best alternative and renewable source of energy. It is also used in Octane and oxygenating components. Further, ethanol is blended in gasoline for use in spark-ignited engines. To meet all these demands, there has to be mass production of the product. Ethanol is produced by fermenting starch or sugar, extracted from various crops but is also produced from petroleum products by catalytic hydration. The principle component during this process is ethylene ad sulfuric acid is used as a catalyst. This accounts for approximately 5 percent of ethanol produced world wide.
In 2007, 16. 9 billion barrels of ethanol were produced world wide. The energy needs catered for by this amount reduced the crude oil demands per day by 1. 9 million barrels. This would have resulted in price increase of crude oil prices (Urbanchuk, 2008). Considering that most ethanol producers depend mainly on corn to produce ethanol, there have been increments in both corn production and corn prices. In 1997, for example, corn production went up went up by 0. 42 billion bushels while the prices went up by $ 0. 45 per bushel. These two factors stabilized the price elasticity of ethanol.
This is because the increased production catered for the increased demand for the commodity. Although the increased price of corn was invariably passed on to the consumers of ethanol, the effect was average because the increased production cushioned the industry from drastic increased prices (Evans, M. , 2000). In recent times when oil prices seemed to skyrocket, cheaper ethanol cushioned the ordinary gasoline consumer from the high prices they would have otherwise had to endure. In January 2008 alone, refiners used 20 percent more ethanol than they used to blend in gasoline in January 2007 (Ball, J.
, 2008). While this created an increased demand for ethanol, the prices of the product did not go up, as it would have otherwise occurred in other products trading in the free market. Without ethanol however, gas prices would have shot up, and gasoline would have even been scarcer. One of the major reason why the prices of ethanol remain inelastic even though the demand may increase or decrease depending on the crude oil prices, is the fact that ethanol can only be blended with gasoline to a particular percentage (Ball, J. , 2008).
The recommended blend spark-ignited gasoline engines are 1 portion of ethanol to 9 portions of gasoline. The fact that gasoline laced with ethanol does not cover as much distance as pure gasoline would make the price constant. The production of ethanol leads to increased gasoline quantities. This is emphasized by the fact that ethanol is low in energy content, which makes it impossible for it to act as a gasoline substitute (Urbanchuk, 2008). However, the fact that ethanol helps avert the use of 320 barrels of gasoline annually while blended with gasoline makes it even more necessary for the sustainability of the energy sector.
Just like oil, the demand and supply of ethanol is inelastic in the short-term. This is because it takes large price hikes in the crude oil industry for ethanol demands to increase, and even then, the ethanol prices do not respond, as one would expect. The supply elasticity of ethanol in most developed countries is mainly affected by the price crude oil. An increase in crude oil prices, invariably leads to increased demand for ethanol as refiners try to offset the prices and slightly cushion the consumers from fuel shortage amid biting prices.
Given the choice between cheaper ethanol-laced gasoline and costlier unblended gasoline, the consumers usually prefer the cheaper substitute. Ethanol is a necessity to the consumers and refiners at a time when crude supply is low. The positive and negative externalities in the ethanol industry Subsidizing the ethanol industry in the United States has attracted mixed reactions since it was put in place in 1978. The move by the government was intended to encourage more farmers to grow more corn thus providing the industry with more crops from which to extract the renewable energy.
The supporters of the subsidy argue that the exemption from paying taxes leads to lower green houses gases, stimulates economic development, ensures that the country’s energy resources are secure, lowers the cost of gasoline and improves the overall air quality. On public health, the idea is that ethanol blended oil reduces smog, air toxins and carcinogens and therefore amounts to less costs in healthcare. On the economy, the subsidy would increase investment in the corn field, and increased economic activities.
This would in turn lead to more jobs, increased wealth generation (Sneller, T. , 2007). Opponents on the other hand argue that ethanol’s demand is artificial and pegged on the government subsidy (Vedenov, D and Wetzstein, M. , 2006). The overall effect of the subsidy however indicates that it has led to lowered prices in blended fuels, which in turn increases their demand. The increased use of the fuels on the other hand mitigates some of the benefits of blended fuels. Such include reduced air pollution and the fuel security is no longer an assurance (Vedenov, D and Wetzstein, M. , 2006).