The price of ethanol is affected by factors such as agricultural commodity prices, production and transportation costs, taxes and subsidies. Growing conditions and supply and demand also impact commodity prices. Transportation costs increase ethanol prices, but subsidies and tax breaks can offset this. Tariffs and taxes on foreign ethanol can drive up prices and protect the domestic industry.
Ethanol prices can be affected by a number of different factors. This fuel depends on an agricultural commodity, usually corn or sugar, so the price of these commodities can make a huge difference when it comes to determining the cost of ethanol fuel. Other factors affecting the price of ethanol include production costs, transportation costs, taxes or tariffs, and subsidies. Some of these create upward pressure on prices, while others work to drive prices down.
To understand the major role that agricultural commodity prices play in the price of ethanol gas, it helps to know what affects agricultural commodity prices. Growing conditions such as disease, weather, and soil conditions all have a significant impact on price. The law of supply and demand teaches that if demand stays the same or increases and supply decreases, the cost increases. Therefore, when conditions decrease yields, the price increases. In good years, ethanol prices may actually go down.
While the price of these basic building blocks of ethanol is important, it’s not as volatile as many might 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 with large swings in the commodity market. When new contracts are negotiated, ethanol prices are more likely to change due to updated feedstock prices.
Another important factor in determining ethanol prices is transportation costs. Ethanol has to be transported in tanks on trains and trucks because it is so corrosive. There are very few pipelines designed to transport such a material. Therefore, ethanol has an inherent cost increase over regular gasoline and oil.
The cost of transportation is offset somewhat by the fact that, in many places, there are subsidies and tax breaks for ethanol. These incentives exist because some governments want to encourage the use of ethanol as a cleaner fuel. This helps bring down ethanol prices, albeit artificially.
However, this artificial price control can work either way. Tariffs and other taxes on ethanol are also artificial price influences and help drive up the price, especially when it comes to foreign sources of ethanol. For example, Brazilian ethanol would be much cheaper to buy in the US except there is a tariff on its import. This makes the price of Brazilian ethanol on par with, or even more expensive than, domestic ethanol. This may not be beneficial to consumers, but it helps protect the national industry.
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