08 January 2007 21:26 [Source: ICIS news]
By Judith Taylor
HOUSTON (ICIS news)--Biofuels and renewables will hold centre stage in the US energy picture in 2007 as ethanol builds its role as the nation’s leading gasoline oxygenate and a fledgling biodiesel market gains strength, industry sources say.
A key sub-plot will be a new type of supply/demand struggle that seems poised to pit agro-interests against the energy sector in what is being called the ‘food versus fuel’ debate.
Fuel ethanol produced in the US is derived from corn, an important national food-source. High fructose corn syrup, used in all types of syrups and sweeteners, is obtained from the same starch-milk juice used by ethanol distilleries.
Corn going into any food application gained around a third in price in 2006 because of the increased demand posed by ethanol. The front-month March futures contract on the Chicago Board of Trade closed at $3.63/bushel on Monday.
Producers of non-fuel ethanol, used in beverage spirits and industrial applications, anticipate corn prices in 2007 of $4/bushel or perhaps even higher – driven by the swelling tide of fuel ethanol.
According to the Renewable Fuels Association, US fuel ethanol demand through the first 10 months of 2006 averaged more than 4bn gal/year (15bn litres/year). That represents a gain of more than 1bn gallons from the start of 2006 as a result of ethanol’s replacement of methyl tertiary butyl ether (MTBE) as the nation’s primary gasoline oxygenate.
US ethanol production is swiftly rising to meet demand, increasing about the same 1bn gal/year to form a narrow domestic supply/demand balance. With the next heavy-demand summer driving season beginning in May, the ‘food versus fuel’ controversy is unsettling to market participants in both agriculture and energy sectors.
But ethanol isn’t the only biofuel under scrutiny in the current climate of energy-consciousness in the US. Biodiesel has been long overlooked in the world's biggest consumer of transportation fuels, in the opinion of many international sources, but is now enjoying strong subsidy support from the US government.
Biodiesel is made in the US mainly from soybean oil, animal fats, and some palm oil, but other oils sources such as cottonseed oil are getting attention in cotton-growing states like Texas.
Although innovative plant sources such as jatropha have been touted in places like India, that particular bush as well as rapeseed are not likely to offer US feedstock options during 2007.
Biodiesel's impact on crop prices has been less pronounced than that of ethanol. Although refined soybean oil prices rose about 2-3 cents/lb following the November/December harvest, according to biodiesel producers, these prices appear to be moderating in January.
One reason was that biodiesel demand has not climbed as much as ethanol, some sources said. Another reason given is that soybean oil isn’t as integral a food stock in the US as is corn.
Biodiesel is currently subsidised by the federal government at $1/gal for all blends and is blended with petroleum-based diesel to various levels. Two of the most popular blends are B5 (5% biodiesel) and B20 (20% biodiesel).
However, despite generous tax incentives and improving growth, routine use of biodiesel lags substantially behind that of ethanol. Biodiesel demand was expected to be around 200m gallons in 2006.
Getting biodiesel to pumps where consumers can use the product will continue to challenge the industry in 2007, many sources said.
Logistical challenges have been attacked in some states, such as Illinois and Iowa, where state governments have added more incentives to the federal programs to get biodiesel into the mainstream fuel supply.
Other states such as Minnesota, Michigan, and Texas are taking steps to bring the budding US biodiesel industry into greater public focus. Overall, the outlook for biodiesel remains firmly in the hands of legislators, sources said.
Biofuels took off in the US with the Energy Policy Act (EPACT) signed by US President George W. Bush in August 2005. The legislation set out a Renewable Fuels Standard (RFS) to be enforced by the Environmental Protection Agency (EPA).
The EPA was given responsibility for coordinating the RFS with the US Department of Energy and the US Department of Agriculture, major stakeholders in designing and implementing a program that is the first of its kind in the US.
While all gasoline sold or dispensed during 2006 was required to have 2.78% renewable fuel content, new rules and long-term proposals for the RFS will be coming in 2007, according to the EPA.
With the installation of the newly elected 110th Congress, and its shift in the balance of power to the Democrats, biofuels are already hitting the national agenda. Initiatives just introduced in both the Senate and the House of Representatives could boost production of the ethanol and other alternative fuels.
In the Senate, the Biofuels Security Act of 2007 was introduced on 5 January, aiming to boost US consumption of ethanol and biodiesel to 60bn gal/year by 2030.
On the same date, sponsors in the House of Representatives introduced the Renewable Fuels and Energy Independence Promotion Act, seeking permanent status for existing ethanol and biodiesel tax credits and incentive programmes.
These legislative initiatives are opposed by the National Petrochemical & Refiners Association, which questions the efficiency and economics of biofuels.
Amid such controversy and with huge potential to change the structure of the massive US energy complex, biofuels should hold the spotlight in 2007 – and beyond.
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