Ethanol, The Drought And The Impact On Used Car Values

by Don Elliott on August 17, 2012

The Energy Independence and Security Act of 2007 (EISA) required fuel producers to introduce 9 billion gallons of biofuel into the nations fuel supply in 2008. The fuel producers are required to increase biofuel production each year to reach a goal of 32 billion gallons per year in 2022.

Ethanol, biodiesel and solid waste byproducts are collectively called biofuels. However, ethanol makes up the largest percentage of all biofuel products. Ethanol is refined primarily from corn, using 27.3% of corn production to meet quotas according to the National Corn Growers Association. The USDA estimate is closer to 40% of total production.

Ethanol is blended with gasoline to stretch the nations fuel supply and reduce emissions. Blend rates vary, but E15 fuel allows up to 15% of the fuel mixture used for cars that normally use gasoline. Specially equipped hybrid cars can use up to 85% ethanol, also known as E85.

In order to make ethanol competitive with gasoline, alternative energy producers lobbied for subsidies including a $.51 per gallon tax credit. The Friends of the Earth estimate that subsidization of biofuels will cost the government $400 billion between 2008-2022. At the street level, the combination of government subsidies and stretching the fuel supply helps keep prices down at the pump and increases the domestic supply of fuels for cars and trucks.

The drought of 2012 has complicated plans to ramp up ethanol productions. The U. S. Department of agriculture is calling for the lowest average corn yield in 15 years. Government mandates for ethanol production, established to meet clean air standards and highly challenged from several sides, require an increasingly larger share of the available corn supply. The Obama administration is being pressured to ease mandates during the drought to maintain corn availability for the food supply, livestock and export.

The impact on used car value  might not be immediately obvious. Fuel prices are hovering close to $4 per gallon. Disruption in the fuel supply as the result of problems at several domestic refineries is blamed for the recent rise in prices, particularly in the Midwest, hardest hit by the drought. A significant reduction in the production of ethanol will almost certainly be seen at the pump if in no other way than to keep prices at their current levels. The impact of the drought on corn production is expected to last at least two seasons even if next year is a more normal rain year.

Black Book’s Ricky Beggs reports that recent increases in fuel costs have not yet affected the price of fuel-efficient cars. In his August 13 press release, Beggs notes that used car values of cars in the fuel-efficient categories actually went down caused in part on the increased supply of these cars in the marketplace. So, when you go through the auto financing process, we recommend you pay close attention to the fuel efficiency of your next vehicle. You may have to take a great amount on your initial auto loan, but if you choose a fuel efficient vehicle, the difference in price will more than make up for itself over the lifetime of your car.

The bottom line here is that the drought will more than likely be noticed in the family’s budget in more ways than an increased water bill for watering your yard. The cost of fuel will inevitably go up as ethanol production goes down. When the cost of fuel goes up, the value of less fuel-efficient vehicles goes down. Some ethanol producers will not be able to afford reduced production at their refineries causing them to close their operations, reducing the nation’s ability to ramp up production when corn supplies return to normal.

In fact, the entire Energy Independence and Security Act of 2007 may have to be revised to account for the impact of the drought.

Google+ Comments

Previous post:

Next post: