Footnotes
The new Chicago MSA (metropolitan statistical area) consists of a fourteen-county, tri-state region: Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry, and Will counties in Illinois; Jasper, Lake, Newton and Porter counties in Indiana; and Kenosha County in Wisconsin. The office absorption and availability rate are 2004 & 2005 forth quarter numbers for the downtown Chicago market. Data is from CB Richard Ellis. Net Absorption is the change in available space in square feet. Availability rate is space that is currently vacant or in the process of being marketed. Consumer confidence, automobile and truck sales are U.S. numbers. The Chicago Midwest Manufacturing Index is a monthly estimate of manufacturing output in the 7th Federal Reserve district (Illinois, Indiana, Iowa, Michigan, and Wisconsin). It is a composite index of sixteen manufacturing industries that use electrical power and hours worked data to measure monthly changes in regional activity. The employment, housing, and net absorption numbers are listed in thousandths.

Ethanol: Is it time for a shift "from hydrocarbons to carbohydrates?"

No one sensible thinks we're anywhere near getting rid of gasoline. The oil superstructure is simply too efficient and too entrenched to just go away. Nor could corn ethanol generate enough fuel to run all America's cars, pickups, and SUVs. In 2005, the US consumed 140 billion gallons of gasoline. The Midwest used about 25 billion gallons and Illinois approximately 5 billion gallons. However, last year the US produced a total of 3.9 billion gallons of ethanol from 95 production plants—less than 3% of our annual gasoline consumption but 14% of the country's corn production. There are 34 ethanol plants and nine expansions under construction with a combined annual capacity of more than 2.1 billion gallons.

There are approximately 175 million gasoline powered vehicles registered in the US. There are some 5 million vehicles on America's roads that can run either on ethanol or gasoline - known as Flex-vehicles they can use a blend of 85% ethanol, 15% gas (E85). Currently, there are 170,000 service stations in the U.S. but only 587 (as of December 2005) sell E85 and most of these are located in the Midwest.

So, what has comprised the fuel ethanol market to date? Clearly it is not a prime fuel source. Refiners, for years, have used either ethanol or MTBE to help gasoline burn more cleanly and, thus, reduce smog. MTBE has side-effects that ethanol does not—the chemical has been blamed for fouling water supplies in communities across the country, spawning numerous lawsuits. Some 25 states must replace MTBE by 2008 and this fact has driven ethanol refining capacity growth in recent years. Some 2 billion gallons of MTBE were used last year. Thus the planned ethanol capacity expansion will be absorbed just in replacing MTBE.

Is it a profitable business? That depends on your viewpoint. The federal government subsidizes ethanol producers with a tax credit of 51 cents per gallon of fuel ethanol; those subsidies were about $1.4 billion in 2005. In addition, the U.S. provides about $4 billion in subsidies to farmers to produce the total corn crop. The direct subsidy of 51 cents per gallon was introduced some years ago to pump prime the construction of ethanol production facilities and compensate for the lack of economies of scale generic to such a new industry. The recent oil price hikes, lack of US refined product capacity and growing realization that world demand (especially from China and India) for oil; make it highly unlikely we will ever return to below $40-a-barrel oil. These factors have produced an unexpected bonanza for ethanol producers.

In a broadcast on 10 February, CNN's Marketwatch quoted Tom Kloza, chief oil analyst at the Oil Price Information Service, "Profits can run to $50 to $60 a barrel (42 gallons). Suppliers can get as much as $2.50 per gallon for ethanol that costs them $1.15 a gallon to make, and 10-15 cents a gallon to transport." Removing the direct subsidy ($21 per barrel) would still leave a healthy gross profit of $30-$40 per barrel.

Last year's Energy Act set a target for ethanol production of 7.5 billion gallons by 2012. President Bush endorsed the use of ethanol, especially E85, in his State of the Union speech as a major means to reduce the country's dependence on oil. Sadly, the Act did not lay out a way to get there other than leaving the direct subsidy in place and otherwise hoping the high cost of gasoline would ensure that the market would step up to the plate and invest billions in large scale production facilities.

This is disappointing. The target of producing 7.5 billion gallons could easily be reached by 2009. In my view the target needs to be much more ambitious. I believe that a sensible way forward is to encourage the expansion of large scale production facilities (i.e. 300+ million gallons per year) using a market driven approach rather than direct subsidies which have served their purpose. (I can hear the screams of outrage from producers and farmers from here!). How?

(A) Congress should mandate that from (say) 2015 every gallon of gasoline sold in the US must contain 10% ethanol. This creates a defined market of 14+ billion gallons per year. Such a defined market would greatly ease securing investment capital to build large plants. Individual States would be encouraged to implement this earlier depending on their ability to secure sufficient supplies of ethanol to meet the 10% target. If that is not an incentive to invest in larger facilities that can truly take advantage of economies of scale in feedstock contracted supply, transportation of that feedstock, improved processing efficiencies, volume savings on shipping the finished product etc, then nothing will be. A clear benefit here is that a 10% content does not require the 165 million vehicles on the road that are not Flex-vehicles to alter their engines. Nor do gas stations need additional infrastructure to service the driving public. Additional, it would save 333,000,000 barrels of oil per year (@ $40-50 per barrel = $14-16 billion per year).

(B) Direct subsidies should be withdrawn as soon as possible and certainly by 2008. With these savings, incentives should be offered to service stations to install E85 pumps and storage tanks. Most stations out there are franchisees and without some assistance the pace of installation will remain painfully slow because the cost is prohibitive. This act alone should encourage vehicle manufacturers to boost Flex-vehicle production. Until E85 pumps are widely available, the dream that we can substantially reduce our import oil bill is a pipe-dream. This would incrementally increase demand for additional supplies of ethanol.

(C) Offer incentives to improve the efficiencies in delivering ethanol to refineries via pipeline or water borne rather than the current and much more expensive use of rail, resulting in cost savings to the end consumer.

I believe the future for ethanol producers is rosy but they must grow their industry without the use of government subsidies. They need to rationalize and consolidate the production base over the next 10 years—there are too many small plants, whose owners are capital constrained, producing 50 million gallons or less and located in out of the way rural areas. I believe that, as with the oil business, geographical concentration will occur based on economies of scale and I believe the Chicago area has the potential to play a major role. We are the transportation/pipeline hub of the US, we sit in the middle of the world's most efficient corn farmers and a market of 25 million people is centered on the Great Lakes. It is in our interest to use market forces, gently prodded by a Federal mandate on ethanol usage, to develop a substantial and self sustaining new industry here.

--Rob Hoffman, Director of Business Development
World Business Chicago