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Two concerns have prompted recent interest in the federal government's establishing a strategic alcohol reserve designed along the lines of the strategic petroleum reserve (SPR):

• A desire to reduce the amount of surplus grain now held by the federal government by using such grain as an ethanol feedstock; and
  
  
• An attempt to find an alternative fuel that, like crude oil, can be stockpiled, but at less cost than the current SPR.

No specific alcohol reserve program has been proposed. Nevertheless, the Congressional Budget Office's analysis of the general economic aspects of alcohol fuels suggests several conclusions:

• Fuel-grade ethanol can be produced from excess corn stocks and stored for long periods using currently available technology. The most remunerative fuel use of this ethanol is to combine it with gasoline in a nine-to-one gasoline-to-ethanol blend to make the high-octane fuel mixture, gasohol. A commercial gasohol industry is already highly profitable, due largely to favorable federal and state tax provisions for gasohol producers.
  
  
• For the government to produce ethanol using Commodity Credit Corporation (CCC) reserves would cost more than maintaining the current price-support system. The government now acquires corn through the CCC, which obtains most of its corn as forfeited collateral used in federal price support loans, and disposes of it through commercial sales, overseas concessional sales, and donations. Producing ethanol from CCC corn stocks to make a gasohol equal in price to gasoline would cost approximately $3.60 per bushel of corn; the current price-support system now costs the government approximately $2.20 per bushel in storage and acquisition costs and lost interest charges.¹
  
  
• Using oil from the SPR to produce pure gasoline is more cost effective than producing ethanol from CCC corn stocks for use in making gasohol. The cost of producing gasohol from CCC corn-derived ethanol totals approximately 88 cents per gallon, after adjusting for energy content; the cost of simply producing pure gasoline totals approximately 82 cents per gallon.
  
  
• Withdrawing 95 million bushels of corn a year from the CCC reserve (roughly 20 percent of the reserve's current content) through an alcohol reserve program would require almost twice the current ethanol fermentation capacity, adding an estimated 722 jobs to the economy. However, the cost to the government of selling CCC grain to ethanol producers, as opposed to disposing of it through the current system, would equal $265,000 per job per year. This cost is substantially higher than past federal jobs or public works programs, which typically have run between $11,000 and $52,000 per job per year.

This study was undertaken at the request of Representative Philip Sharp, Chairman of the Subcommittee on Fossil and Synthetic Fuels, House Committee on Energy and Commerce. It was prepared by John Thomasian of CBO's Division of Natural Resources and Commerce, under the direction of David Bodde.

This document is available in its entirety in PDF.

1. Unless otherwise noted, all dollar values in this paper are reported as 1982 dollars.