Modeling Ethanol Investment Decisions

Recently the support of biofuel production has been a politically sensitive topic. Politicians have pushed for support for fuel ethanol production as an environmentally friendly alternative to imported oil, as well as a way to boost farm profits and improve rural livelihoods. Several government policies actively promote ethanol production via tax incentives and mandates, and these policies are blamed for rising food prices around the world [14]. It is important to understand the factors that have motivated the significant local investments in the ethanol industry that have been made since the mid-1990s both in the U.S. and worldwide. Fuel ethanol has been in use in the United States since the time of the Model T Ford (the original flex-fuel vehicle), and while the United States passed Brazil in ethanol production in 2005, today ethanol is mostly relegated to status as a gasoline additive. The first US ethanol boom began as a result of the oil embargoes in 1973 and 1979. The desire for more energy self-sufficiency, the resulting legislation (in the form of federal income tax credits and blender’s credits that continue today), and the phase out of leaded gasoline led to the construction of 153 new plants by 1985 [4]. These plants were tiny by today’s standards, with an average capacity of eight million gallons per year, and by 1991 only 35 were still operational due to poor business judgment and bad engineering [4, 18]. The second US ethanol boom began in the mid-1990s and hit full-stride by the early 2000s. Several factors contributed to this most recent boom. The Clean Air Act of 1990 mandated use of oxygenates in gasoline, of which ethanol is one, and the subsequent phase out and ban of MTBE as additive beginning in the late 1990s