hr: Money

The United States Ethanol Industry benefits mainly from federal subsidies, tariffs, and production mandates. Oil refiners get a credit of 51 cents per gallon of ethanol blended with gasoline. The typical blend is 90% gasoline/10% ethanol. Due to a federal dictate, more than half the gasoline sold in the U.S. now contains ethanol, which accounts for 7% of total gasoline consumption. There is also a 54-cents-a-gallon tax on imported ethanol. The government mandates that 9 billion gallons of ethanol be used this year, rising to 10.5 billion in 2009 and 15 billion by 2015.

Critics make a valid point that ethanol producing companies are only surviving because of strong backers in the Capitol Hill. Ethanol is also widely criticized as a wasteful and inefficient way to fuel automobiles.

Oil refiners are blending ethanol on their gasoline because it makes economic sense. Ethanol now costs $2.50 per gallon — or about $2.00 a gallon to refiners after the federal subsidy. The wholesale price of gasoline is above $3.30 a gallon.

This means that refiners save about $1.30 per gallon by using ethanol rather than pure gasoline. The savings per gallon of a 90/10 blend of gas and ethanol relative to pure gasoline is about 13 cents (10% of the $1.30 differential between ethanol and gasoline). Much of that gets passed on to consumers.

Ethanol may be controversial, but it has powerful friends in Washington and is helping millions of cash-strapped Americans save money on gasoline. This suggests that the ethanol industry is here to stay.