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Looking for a Good Place to Cut the Budget?

Tuesday February 1st, 2011   •   Posted by Craig Eyermann at 8:22am PST   •  

Ethanol consumption in the United States has been rising exponentially for more than a decade. As it happens, a great deal of the credit for that belongs to the extremely generous assistance that ethanol producers have received from the U.S. federal government over that time. That assistance has come in the following forms:

  1. The government mandates that their product, ethanol, be added to the gasoline used by the overwhelming majority of motor vehicles in the United States. In 2011, the federal government will require oil companies to use over 12 billion gallons of ethanol, which will rise to 15 billion gallons in 2015 and 36 billion gallons per year in 2022.
  2. Their production costs are very generously subsidized. U.S. ethanol producers receive a tax credit of 45 cent per gallon for the fuel ethanol they produce. And that doesn’t include the subsidies received by the agricultural interests for producing the crops, such as corn, that are used in domestic ethanol production.
  3. They are protected from international competition with foreign-based ethanol producers who are capable of producing ethanol more economically than U.S. producers through tariffs imposed by the U.S. government. The tariff adds 54 cents to the cost of each gallon of fuel ethanol that is be imported to the United States and sold to U.S. consumers.

You might think that with all that special assistance and the corresponding boom in U.S. fuel ethanol consumption, U.S. ethanol producers would be enjoying booming profits. As it happens, Cole Gustafson, a biofuels economist at North Dakota State University, wondered just how profitable U.S. ethanol producers are and in doing that, he generated the following chart which estimates how profitable U.S.-based ethanol producers were throughout the years of 2008 and 2009.

Gustafson concludes that the fuel ethanol production industry is “close to operating breakeven.” Note that “close to operating breakeven” really means “nearly or occasionally profitable”.

But clearly, it isn’t. Not really. After all, it takes the federal government raising the price of the fuel ethanol produced by non-U.S. producers by 54 cents per gallon and an annual gift from taxpayers to fuel ethanol producers to the tune of 45 cents per gallon of ethanol produced to get U.S. ethanol producers “close to operating breakeven.”

We discover then that “close to operating breakeven” really means “nearly or occasionally profitable, thanks to being artificially propped up by the federal government.”

And just how much does all that special aid for ethanol producers cost?

In 2011, U.S. taxpayers will be required to give U.S. ethanol producers some 5.4 billion dollars in tax credits for the 12 billion gallons they will produce. If we assume that there are 118 million households in the U.S., that corresponds to an annual gift from each U.S. household of roughly $45.76. That for a product that could otherwise be obtained at much lower cost, if not for the special tariff on imported fuel ethanol, providing a total savings to U.S. taxpayers of $6.48 billion or $54.92 per U.S. household.

Those, of course, are all savings that could be put toward more productive uses, whether in the federal government’s annual budget or in each American’s household budget.

If only the federal government could see it that way!


Environmental Protection Agency. EPA Finalizes 2011 Renewable Fuel Standards. November 2010. Accessed 24 January 2011.

Doggett, Tom and Abbott, Charles. Senate votes to extend ethanol subsidy for 2011. Reuters. 15 December 2010.

Gustafson, Cole. New Energy Economics: Are Ethanol Producers Making Money Now?. NDSU Agriculture Communication. Accessed 24 January 2011.

Rudolf, John Collins. End Ethanol Subsidies, Senators Say. New York Times’ Green Blog. 30 November 2010.

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February 2011