Ethanol supply on track to exceed demand, complicating price debate

By Jeff Tollefson and Catherine Richert, CQ Staff, CQ TODAY – ENERGY
March 1, 2007 

Increases in ethanol production over the past year could soon lead supply to exceed demand, the government’s chief energy analyst told a Senate panel.

“We’re looking at a relatively soft market for ethanol this driving season,” Guy Caruso, who heads the Energy Department’s Energy Information Administration, told the Energy and Natural Resources Committee on Thursday.

Refiners are blending ethanol into gasoline at levels of 10 percent or less. U.S. ethanol usage, which exceeded 5 billion gallons last year, is on track to exceed the mandate in the 2005 energy law (PL 109-58) of 7.5 billion gallons annually by 2012.

Ethanol prices may fall in the short term as supply exceeds demand, but the biofuel is likely to remain more expensive than gasoline in the long run, Caruso said. He said his agency projects biofuel production of about 12 billion gallons annually by 2017 — significantly less than the 35 billion gallons of alternative fuels that President Bush called for in his State of the Union address in January.

Democrat Jeff Bingaman of New Mexico, who chairs the Senate Energy and Natural Resources panel, seized on the numbers to raise the possibility of increasing the ethanol-usage requirements. “I have not heard anybody explain how you can get 35 billion gallons by 2017,” Bingaman said later.

Bonanza for Corn Growers

The ethanol boom has been a bonanza for corn growers, who will enjoy significantly higher prices for their crop in the coming year, the Agriculture Department said Thursday.

With the use of corn for ethanol projected to increase in the next marketing year to 3.2 billion bushels from 2.15 billion bushels this year, farmers can expect to get $334 for every acre of corn they produce, more than double what they got in 2006.

Despite the Energy Department’s projections of an easing of ethanol prices, the industry’s primary trade association predicted that ethanol producers will have no trouble selling their product even while new ethanol plants start production this year.

“The price will go up and down, but we certainly think there is room in the marketplace to absorb what is coming online,” said Matt Hartwig, a spokesman for the Renewable Fuels Association.

While the increased demand for ethanol has been good for corn growers, it is hurting beef, pork and poultry producers, who are paying more for animal feed. Food processors and nutrition groups also worry that corn-based food will become more expensive. The livestock producers, food processors and nutrition groups have vowed to fight to keep corn ethanol incentives out of the 2007 farm bill.

But Democrat Collin C. Peterson of Minnesota, who chairs the House Agriculture Committee, downplayed concerns about the impact of high corn prices and dismissed calls to lift the 54-cents-per-gallon tariff on Brazilian ethanol imports. Some energy experts have advocated lifting the tariff to ease the pressure on corn prices and help achieve Bush’s goal of reducing gasoline consumption.

“I think the whole thing has been jimmied up by [public relations] firms to get worldwide trade of ethanol going,” Peterson said Thursday, adding that there is “no hope” that Congress would lift the import tariff.

The Bush administration projects that livestock producers will enjoy increased exports and higher prices for their products, which Peterson said would mitigate some of the costs of more expensive feed.

“This fuel competition is good,” Peterson said. “We’ve been underpricing food for years. Fuels will even this out. Consumers will pay more [for food] and, in my opinion, they should.”

Alternative Sources

The growing ethanol demand has been fueled by the mandate in the 2005 energy law, a federal tax credit of 51 cents a gallon for ethanol production and a switch by refiners from a competing gasoline additive, methyl tertiary butyl ether (MTBE). Refiners largely stopped using MTBE after Congress declined to limit liability for groundwater contamination.

But to approach the levels of alternative fuel use that Bush is urging, sources of ethanol other than corn will be needed.

The Energy Department announced plans this week to spend $385 million on six “biorefineries” that will produce cellulosic ethanol from biomass sources such as corn stover, switch grass and wood chips.

Charlie Drevna, executive vice president of the National Petrochemical and Refiners Association, called the president’s goal “a great sound bite” but said it is not practical or in the consumer’s interest, since ethanol remains more expensive than gasoline.