Ethanol, a renewable biofuel primarily derived from corn and other agricultural feedstocks, has long been a critical player in the energy sector. As a clean-burning fuel additive, ethanol reduces greenhouse gas emissions and enhances octane levels in gasoline, making it an integral component of modern energy strategies.1 This article examines key aspects of the ethanol industry, including:

  • Factors influencing pricing
  • Its relationship with West Texas Intermediate (WTI) oil prices
  • A forward-looking perspective on the sector’s future

Factors Influencing Ethanol Pricing

The ethanol market is influenced by a complex interplay of internal and external factors. Below are some of the primary elements shaping ethanol pricing:

Production Costs

Ethanol production costs significantly impact its market price. These include:

  • The price of feedstock (e.g., corn or sugarcane)
  • Processing costs
  • Transportation costs
  • Distribution costs

Corn prices, in particular, have a direct correlation with ethanol prices, as corn is the key feedstock for the majority of U.S. ethanol production.

Government Policies

Federal and state policies play a pivotal role in the ethanol market. The Renewable Fuel Standard (RFS), authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007, mandates blending a certain volume of renewable fuels like ethanol into the U.S. fuel supply, typically around 10% of each gallon of gasoline sold.2 Tax incentives and subsidies also impact the profitability and competitiveness of U.S. ethanol producers.

Market Demand

Ethanol demand is tied closely to the gasoline market, as ethanol is primarily used as a fuel additive. Seasonal fluctuations, consumer driving habits, and broader economic conditions influence gasoline demand and, by extension, ethanol demand. Additionally, global trends toward decarbonization and electric vehicle adoption may affect long-term demand dynamics.

External Influences

  • Agricultural Conditions: Weather patterns, crop yields, and global agricultural trade policies affect the availability and cost of feedstocks like corn
  • Oil Prices: Crude oil prices, particularly WTI, can influence ethanol pricing through their impact on gasoline prices and the competitive dynamics between fossil fuels and biofuels

Comparing Ethanol Prices with WTI Oil Prices

Ethanol and WTI oil prices share a complex, interdependent relationship. While both are energy commodities, their pricing mechanisms and market drivers differ significantly.

Historical Trends

Historically, ethanol prices have exhibited volatility independent of WTI oil prices due to agricultural market fluctuations and regulatory changes. However, periods of alignment do occur when broader energy market dynamics dominate, such as during spikes in oil prices or significant shifts in fuel demand.

As shown in the chart below, ethanol3 currently costs about half of the cost of gasoline made from oil,4 using an average conversion factor of 20 gallons of gasoline per barrel of oil. In most gasoline sold to consumers, ethanol comprises 10% of the volume of the gasoline blend sold, and gasoline made from oil comprises the other 90%.

Ethanol and WTI Oil Prices Per Gallon

Ethanol and WTI Oil Prices Per Gallon

Current Statistics for Ethanol

The market price of a gallon of ethanol can be broken down into three components:

  1. Corn costs, fermented and distilled to make ethanol
  2. Operating costs to make the ethanol
  3. Return or profit per gallon

At the current time, market forces (declining oil prices and increased ethanol costs) have combined to reduce or eliminate the profit available for ethanol producers.

In the chart below, the three lines are additive in that they stack upon each other. The distance between the top line and the second line shows the profit per gallon available to ethanol producers at current prices.  As shown in the red circle below, at the end of 2024, the market price of ethanol produced zero profits for ethanol producers, or even losses for those less efficient than others.

Ethanol Prices and Cost Components

Ethanol Prices and Cost Components

Future Outlook for Ethanol (2025)

The ethanol market is poised for significant transformation as it faces both opportunities and challenges in the coming years. Below are some key factors shaping its future:

Opportunities

  1. Decarbonization Goals: Global efforts to reduce greenhouse gas emissions may drive increased adoption of biofuels like ethanol.5 Likewise, under the upcoming Trump administration, increased oil production could reduce demand for ethanol.
  2. Technological Innovations: Advances in cellulosic ethanol production6 and other next-generation biofuels could enhance competitiveness and sustainability.

Challenges

  1. Regulatory Uncertainty: Changes to the Renewable Fuel Standard or other biofuel policies could create headwinds for the industry.7
  2. Competition from Electric Vehicles (EVs): Future sales of EV’s in the U.S. poses a potential threat to gasoline consumption and, consequently, ethanol demand.
  3. Feedstock Supply Constraints: Climate change and other geopolitical factors may affect the availability and cost of key feedstocks.

Conclusion

The ethanol market is a dynamic and multifaceted industry shaped by non-correlated production costs, government policies, market demand, and external factors like agricultural conditions and oil prices. Looking ahead, the industry’s trajectory toward 2025 presents both challenges and opportunities for investors and consumers.

WTI Strip Prices Increase

Spot prices and futures prices for the West Texas Intermediate (WTI) contract increased approximately $8.00 per barrel in the near term and increased approximately $0.50 over the longer term.

WTI Strip Prices – One Month Change

 WTI Strip Prices - One Month Change, January 2025

 

As shown, the oil price curve remains in a state of “backwardation,” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on January 14, 2025, as well as the predicted crude oil prices based on options and futures markets. Light blue lines are within one standard deviation (σ) of the mean, and dark blue lines are within two standard deviations.

WTI Crude Oil $/BBL

 WTI Crude Oil $/BBL - January 2025

 

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $64.00 and $88.00 per barrel in mid-April 2025. Likewise, there is roughly a 95% chance that prices will be between $48.00 and $117.00. By mid-June 2025, the one-standard deviation (1σ) price range is $60.00 to $90.00 per barrel, and the two-standard deviation (2σ) range is $42.50 to $125.50 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. Throughout most of 2023 and 2024, crude oil spot prices have primarily fluctuated within the range of $70 to $90 per barrel. During that time, we observed general increases in futures price volatilities as prices neared the upper bound of that range, as evidenced by the futures price ranges observed. For mid-June 2025 pricing as of January 14, 2025, the 1σ range had a spread of $29.50 per barrel, and the 2σ range had a spread of $87.50 per barrel. For comparison, in 2022 we observed 1σ and 2σ price ranges in excess of $65.00 and $150.00, respectively.


  1. "Ethanol Fuel Basics," U.S. Department of Energy.
  2. "Renewable Fuel Standard Program," United States Environmental Protection Agency. 
  3. "Historical Biofuel Operating Margins," Center for Agricultural and Rural Development, Iowa State University.
  4. "Cushing, OK WTI Spot Price FOB," Petroleum & Other Liquids, U.S. Energy Information Administration.
  5. "Carbon Accounting for Sustainable Biofuels: Executive Summary," International Energy Agency.
  6. "NREL Proves Cellulosic Ethanol Can Be Cost Competitive," National Renewable Energy Laboratory.
  7. "The Renewable Fuel Standard (RFS): An Overview," Congressional Research Service.