What are the Main Factors in Ethanol Prices?
Ethanol prices can be affected by a number of different factors. This fuel is dependent upon an agricultural product, usually corn or sugar, so the price of these basic commodities can make a huge difference when it comes to determining the cost of ethanol fuel. Other factors affecting the price of ethanol include the production costs, transportation costs, taxes or tariffs, and subsidies. Some of these create upward price pressures while others work to bring prices down.
To understand the major role the prices of agricultural commodities play in the price of ethanol gas, it helps to know what affects those commodity prices. Growing conditions such as disease, weather, and soil conditions all have significant impacts on price. The law of supply and demand teaches that if demand remains the same or grows, and supply shrinks, the cost goes up. Therefore, when conditions diminish the crop yields, the price goes up. During better years, ethanol prices may actually go down.
While the price of these basic building blocks of ethanol are important, they are not as volatile as many may think. Corn and sugar are often bought on contract, thus avoiding some of the daily price changes that are sure to happen. Therefore, ethanol prices can remain relatively stable even when there are wide swings in the commodity market. When new contracts are negotiated, ethanol prices may be more likely to change because of updated commodity prices.
Another major factor in determining ethanol prices is transportation costs. Ethanol must be transported in tanks on trains and trucks because it is so corrosive. There are very few pipelines that are designed to carry such a material. Therefore, ethanol has an inherent increase in cost when compared to regular gasoline and oil.
The cost of transportation is somewhat offset by the fact that, in many places, there are subsidies and tax breaks in place for ethanol. Such incentives exist because some governments wish to encourage ethanol use as a cleaner burning fuel. This helps push down ethanol prices, albeit artificially.
This artificial control on prices can work both ways, however. Tariffs and other taxes on ethanol are also artificial price influences and help push the price upward, especially when it comes to foreign sources of ethanol. For example, Brazilian ethanol would be much cheaper to purchase in the United States, except that there is a tariff on its importation. This makes the price of Brazilian ethanol on par, or even more expensive, than domestic ethanol. This may not be beneficial for consumers, but helps protect the domestic industry.
@Terrificli -- that's why people in corn producing states absolutely love it when ethanol is promoted. There is a reason senators and congressmen from those states almost always vote for anything that will lead to more ethanol production.
Farmers love it when anything will create more demand for their products.
A major component controlling ethanol prices has to do with what kind of corn farmers are growing. Are farmers gearing up for producing corn for human consumption? Animal consumption? Corn syrup? Ethanol?
An increase in the demand for corn in any of those four areas can impact ethanol prices because you are essentially talking about four different types of corn that must be produced. It is rare to simply shift crops for other uses (in fact, trying to sell corn meant for animal grain production for human consumption can result in federal charges).
Corn is used for a variety of things and spikes in demand for one thing means that less corn will be available for another. That is precisely why the price of the commodity fluctuates so wildly.
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