Can the U.S. Ethanol Industry Compete in the Alternative Fuels' Market?
The U.S. ethanol fuel industry has experienced preferential treatment from federal and state governments ever since the Energy Tax Act of 1978 exempted 10% ethanol/gasoline blend (gasohol) from the federal excise tax. Combined with a 54¢/gal ethanol import tariff, this exemption was designed to provide incentives for the establishment and development of a U.S. ethanol industry. Despite these tax exemptions, until recently, the U.S. ethanol fuel industry was unable to expand from a limited regional market. Ethanol was dominated in the market by MTBE (methyl-tertiary-butyl ether). Only after MTBE was found to contaminate groundwater and consequently banned in many states did the demand for ethanol expand nationally. Limit pricing on the part of MTBE refiners is one hypothesis that may explain this lack of ethanol entry into the fuel-additives market. As a test of this hypothesis, a structural vector autoregression (SVAR) model of the ethanol fuel market is developed. The results support the hypothesis of limit-pricing behavior on the part of MTBE refiners, and suggest the U.S. corn-based ethanol industry is vulnerable to limit-price competition, which could recur. The dependence of corn-based ethanol price on supply determinants limits U.S. ethanol refiners' ability to price compete with sugar cane-based ethanol refiners. Without federal support, U.S. ethanol refiners may find it difficult to complete with cheaper sugar cane-refined ethanol, chiefly from Brazil.
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