Effects of an Oxygen Requirement for Fuel in Midwest Ethanol Markets and Local Economies

Abstract

This article examines the effects of an oxygen content requirement for fuel in several midwestern states. Ethanol could dominate the midwestern oxygenate market with federal incentives for ethanol blending or a generalized ban on MTBE; otherwise, price incentives would shift between ethanol and MTBE. Several states would share in the ethanol output expansion, but the largest increases would likely occur in Iowa and Minnesota. A benefitcost analysis of the oxygen requirement suggests that gains for consumers, producers, and local economies would more than offset lost federal tax revenues. Ethanol processing has become a substantial source of corn demand. Corn use for ethanol grew from almost nothing in 1980 to about 6% of total corn demand at the end of the 1990s. This demand expansion is good news from the viewpoint of input suppliers because it occurred while the corn export market had been stagnant. However, the ethanol industry has received intense criticism since the industry was started in the aftermath of the Arab oil embargoes. First, federal and state governments gave exemptions to gasoline excise taxes for ethanol processing, using the infant industry protection argument and citing the need for imported oil substitutes (Gill)--opposition to the subsidies motivated some of the criticism. Second, the ethanol sector provided new competition for petroleum processors and livestock producers in the feed market-unwanted competition also has motivated some of the criticism. The concerns of ethanol's opponents have evolved with the industry. When the industry started in the late 1970s, ethanol did not have a favorable energy balance, but after gaining experience with plant design, corn-ethanol processing now