The great ethanol debate

05 February 2007 00:00  [Source: ICB Americas]

Will Uncle Sam's billions of dollars in subsidies lead to overcapacity in the US ethanol market?


A serious turn to ethanol, at whatever cost, reveals a major psychological shift: the realization that no vast new natural sources of crude oil are about to be discovered - and the hope that the US can get out from under OPEC's thumb.

What might hold back ethanol more than anything else, including questions surrounding its efficiency, is the fear of overcapacity. Some are concerned that investment dollars may be lost if there's a glut (see The Big Biofuels Blog.

If you like this article, subscribe to your weekly edition via

Americans want fuel!

Analyst Paul Cohen of Zacks Research notes that the overall momentum for ethanol is strong, and will continue to be strong. "This fuel is the real deal," he says. "We've never seen the potential for growth in this industry like this before."

But the industry's strong drive could slow down in the future, UBS analyst Chris Shaw adds. Margins could be hurt if corn prices rise and if oil prices fall, and demand for alternative energy sources could drop.

"Capacity is being added at a record pace, and we foresee a doubling of capacity over the next two to three years," Shaw explains. "This rush of supply is likely to pressure ethanol pricing over the next few years."

Investment firm Friedman Billings and Ramsey expects ethanol production to increase by 1.9bn gallons in 2007, and by 4.6bn gallons in 2008.

According to Washington, D.C.-based Renewable Fuels Association (RFA), as of May 2006, roughly 4.8bn gallons of ethanol had been produced (from about 1.6bn bushels of corn), with 97 plants operating in 21 states. In 2005, about 3.9bn gallons of ethanol were produced, and in 2004, 3.4bn gallons.

The $15.7bn biofuels industry represents a relatively new opportunity for chemical companies to exploit, says Citigroup analyst P.J. Juvekar. He points out that the growth in ethanol should boost corn acres and penetration of biotech traits. Currently, about 20% of the nation's corn is used to make ethanol, but that is projected to increase to 30% by 2010.

"Ethanol plants remain profitable at ethanol prices of $2.20 per gallon, even if corn reaches $5 per bushel," says Juvekar. "So the outlook is bright."

But with so much investment in the sector, the market may be glutted as soon as in two years, warns Mark Oberle, chief financial officer of Winnebago, Minn.-based ethanol producer Corn Plus.

US ethanol demand will jump to 11.2bn gallons/year in 2012, from 4bn gallons in 2005, the US Energy Information Administration (EIA) says, and projected ethanol consumption in 2012 exceeds the 7.5bn gallon requirement of the Energy Policy Act of 2005. The EIA projects US consumption of ethanol should reach 14.6bn gallons/year by 2030, about 8% of total gasoline consumption by volume in that year.

But UBS says US ethanol demand will be greater than that, reaching 12bn gallons/year by 2009. Shaw estimates that the US can reach production capacity of 12bn gallons/year by 2008 if all planned constructions and expansions are completed.

Washington support

In early December, the Omnibus Tax bill passed - with a provision included to extend the secondary tariff offset for ethanol through Jan. 1, 2009. A secondary tariff of 54 cents/gallon has been in place for ethanol imports, a policy designed to offset the 51 cents/gallon blender's credit that is applied to ethanol no matter its country of origin.

With this, "Congress has delivered a clear and powerful message that it is in the best interest of the US to continue supporting the domestic ethanol industry," says Brian Jennings, executive vice president for the American Coalition for Ethanol.

According to the US Department of Agriculture (USDA), if the price of crude oil remains higher than $50/bbl in the future, as projected by EIA, and corn prices do not rise considerably, then ethanol would be competitive with gasoline and demand for it would exceed the minimum level in the Renewable Fuels Standards Program (RFS).

The RFS, which was set up in early September, proposes that 3.71% of all gasoline sold in the US be a renewable fuel. The RFS requires oil refiners to use 4bn gallons of renewable fuel in 2006, and increase incrementally until 2012 when 7.5bn gallons of renewable fuel will be required.

But if crude oil falls below $30/bbl, Citigroup's Juvekar points out that there might not be any incentive to produce corn-based ethanol beyond the RFS level, because "ethanol would be unprofitable to produce and market as a fuel additive."

But politics and corn have been bedfellows for a while. Incoming Senate Agricultural Chairman, Senator Tom Harkin (D-Iowa), says the 2007 farm bill would dedicate more money to renewable fuels like ethanol from corn and cellulosic ethanol.

Speaker Nancy Pelosi (D-Calif.) made a renewable fuels initiative one of the first the House pursued, and on Jan. 18, the Clean Energy Act passed, "rolling back $14bn in subsidies for Big Oil...and investing that money in clean renewable energy, energy efficiency and alternative fuels," Pelosi says. This research will include alternatives to corn for the production of ethanol, the Senator's office indicates.

Meanwhile, President Bush has become the most high-profile proponent of bio-based ethanol, especially with his State of the Union (SOTU) declaration that the US must set a mandatory fuel standard to bring 35bn gallons/year of ethanol to the market by 2017.

During the SOTU, the President stated the desire to reduce US gasoline consumption by 20% over the next 10 years, and to reinforce that, the White House is promising $2bn in loans for the construction of cellulosic ethanol facilities.

But there are some who don't like the fact that Uncle Sam is in such a helpful mood towards the ethanol market.

"Many of these subsidies are poorly coordinated and targeted," says Simon Upton, director of the Geneva-based Global Subsidies Initiative (GSI) of the International Institute of Sustainable Development. "All indications are that subsidies are being piled on top of one another without policy makers having a clear idea of their potential impact on the environment and the economy The potential for waste on a grand scale and some spectacularly perverse environmental outcomes is large."

In a report released last October, the GSI estimated that subsidies to biofuels are between $5.5bn and $7.3bn a year. The GSI expects those figures to grow significantly if current policies remain in place, "as the bulk of biofuels subsidies are tied to output and output is increasing at double-digit rates of growth."

However, an opinion poll conducted in early January by the RFA indicates that 84% of Americans support subsidies for biofuels.

Beyond corn

Nearly all participants in the Great Ethanol Debate agree that the next step for greater ethanol production and penetration is the development of a feedstock beyond corn.

GSI even accepts cellulosic ethanol. The institute's October report says, "The displacement ratios for cellulosic feedstocks are markedly better than those for corn-based ethanol and many existing subsidies are justified on the grounds that they are paving the way for a cellulosic ethanol industry."

While the EIA projects cellulosic ethanol production to reach 300m gallons/year by 2030, Washington, D.C.-based Biotechnology Industry Organization (BIO) projects that production could reach 14bn gallons/year by 2015. BIO points to a report by the US Department of Energy and the USDA projecting cellulose-based ethanol production to reach 47bn gallons/year by 2030.

Ultimately, the ethanol business will convert to cellulose, says Cohen of Zacks. "The technology is not quite there at this time, but in three to four years it will be, and this will bring down the cost of manufacturing and producing ethanol."

And corn ethanol's entrenchment may be to cellulosic ethanol's benefit. "Existing ethanol plants already have the transportation infrastructure, as well as key components, such as fermentation tanks and distillation systems," says Citigroup's Juvekar. "Adding on a cellulosic ethanol train will probably be more cost-effective than building a greenfield cellulosic ethanol facility."

But current challenges keep cellulosic ethanol five to six years away from commercialization, at which point its cost should equal that of corn-based ethanol.

In addition to finding low-cost feedstocks in the range of $25-30/ton, a major hurdle is bringing down the cost of the enzymes used to break apart the chains of sugar molecules that make up cellulose.

While recent work has brought the price of these enzymes down drastically - by some estimates to one-thirtieth of the cost 10 years ago, or about 50 cents/gallon - "we now are not far away from the goal of 10 cents/gallon," says Glenn Nedwin, chief scientific officer of the Jupiter, Fla.-based genomics company Dyadic International.

You can read more at the Big Biofuels Blog at


Back to contents

AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly