This article explains why we are experiencing a boom in ethanol and other biofuels, the current status of biofuels, and prospects for the future under different policy regimes. I argue that today's boom is in a sense an unintended consequence of a fixed ethanol subsidy that was keyed to $20-per-barrel crude oil, combined with a surge in crude oil prices—initially to $60 per barrel, and later doubling to $120 per barrel. Future prospects for corn ethanol depend on the crude oil price, the price of corn and distillers' grains, the market value of ethanol, plant capital and operating costs, and federal ethanol and biofuels policies. I examine the impacts of a wide range of policies for subsidies and renewable fuels standards. Policy choices will be absolutely critical in determining the extent to which biofuels targets are achieved and at what cost. However, if the price of oil remains above $100 per barrel, biofuels will continue to be produced even without government interventions.
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Vol. 58 • No. 7