ETHANOL FROM CORN AND GASOLINE

Ethanol from Corn and Gasoline

Ethanol from Corn and Gasoline

An interesting question to analyze is whether the price and quantity of corn is affected by changes in the market for biofuels. One major type of biofuel is ethanol. Ethanol is a combustible fuel that can be distilled from corn and, when mixed with gasoline, used in internal combustion engines. Rising world energy prices, combined with concerns about the potential impacts of carbon emissions on global climate change, have resulted in renewed interest in ethanol as a renewable alternative fuel for automobiles. Proponents of ethanol use claim not only that ethanol is a renewable form of energy but also that blending ethanol with gasoline will also reduce the total amount of greenhouse gas emissions. That claim is supported in an April 2009 Congressional Budget Office (CBO) report titled The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions. In this report, the CBO states that research conducted by Argonne National Laboratory suggests that, in the short run, production and consumption of ethanol will create up to 20% less greenhouse gases than will the equivalent production and consumption of gasoline. The long-run impact of ethanol on greenhouse emission is not as clear. Regardless of the long-run impact on greenhouse emission, a series of legislative acts involving mandated use of biofuels have had a significant impact on the market for corn. Most recently, the Energy Independence and Security Act of 2007 expanded mandated use of biofuels through 2022 and will ultimately result in the production of 15 million gallons of corn-based ethanol

(CBO, 2009). 

Figure 1.4: Effects of a Change in Demand

The long-run impact of ethanol production on corn prices is more difficult to determine because, over time, markets respond to changing prices in a variety of ways. For example, in anticipation of higher corn prices and profits, farmers are likely to plant more acreage in corn. Seed corn companies are likely to develop varieties of corn that can be planted in regions of the nation that are not traditional corn-growing regions. Growers worldwide are likely to convert acreage, including clear cutting forest areas, which have not been traditionally planted in corn. Rising corn prices will cause ethanol producers to search for alternatives to corn to make ethanol and, consequently, decreasing demand for corn. The resulting long-term change in supply and demand for corn results in an ambiguous change in the price of corn (Estalami Hooman, 2001).

Let us begin our discussion of demand by defining three concepts: demand (D), quantity demanded (Qd ), and the law of demand. Demand is defined as the amount of a product that buyers are willing and able to purchase at all prices. A consumer is said to demand a product if he or she is both willing and able to purchase a product. A consumer who is willing to purchase a product, but is unable to do so, is not considered to be part of the market demand because he or she will not ...