Rising Ethanol Prices Another Blow to Viability of Biofuels

April 15, 2013 By Robert Potts

Robert Potts

Ongoing drought in Midwest America is driving up the price of ethanol and threatening the long term sustainability of the biofuels industry. Heavy water shortages across the “corn belt,” the major maize producing region of the United States, have damaged the supply of corn bushels, driving up the price of ethanol fuel.

This is another blow to the biofuels industry at a time when it is facing sustained criticism from politicians and environmental groups worldwide. Many people claim that ethanol is not a long term alternative to fossil fuels due to associated rises in global food prices and changes in land use. This latest blow, however, even casts doubt over ethanol’s ability to provide a short term fuel solution.

According to the USDA, record-high corn prices are likely to continue throughout 2013, rising up to 19 per cent higher than the last two years; in some cases, farmers in Missouri have seen their annual crops fall to up to 5.5 percent of their normal yield. Nearly 10 per cent of the US’s ethanol plants have ceased production in the past year, unable to cope with rising resource costs and shrinking demand.

Government intervention and bloated supply

Only five years ago, ethanol was hoped to be the savior to the long term depletion of fossil fuels. As a wholly renewable source of energy, the fuel can be blended with traditional gasoline and sold at gas stations across America. For the last 10 years the US government has mandated that gasoline must contain at least 10 per cent biofuel. Ethanol production was subsequently supported with a tax credit of 45 cents per gallon, although this deal expired at the end of 2011, making it a lucrative trade for farmers and producers.

As a result, the number of ethanol plants has grown to hundreds in US states like Missouri, bringing huge economic gains to small towns. Farmers have been able to find a new market for their corn crops, while ethanol producers reacted by building new plants and creating thousands of new jobs.

However, recent economic conditions have since exposed weaknesses in the government’s biofuel policy. The original 10 per cent ethanol mandate assumed that overall demand for gasoline would grow over time. However, the current recession has seen overall demand for gasoline, and ethanol, shrink, exposing a bloated ethanol industry overly reliant on state subsidies.

Over supply of ethanol has now created thousands of barrels of ethanol which are sitting in storage plants across the Midwest unused; these barrels will remain idle until there is enough gasoline available to blend with them. The current supply side crisis has therefore served to compound pre-existing structural issues within the industry.

“It’s a more sombre mood,” said Todd Sneller, the administrator of the Nebraska Ethanol Board. “The growth opportunity that existed some years ago is still out there in theory, but the reality is that it’s going to take an awful lot of time, money and political battles to realise that opportunity.”

“Blend wall” creating demand side difficulties

With most cars and service stations only able to cope with a fuel blend of 10 per cent ethanol, known as the “blend wall”, demand restrictions clearly exist; the hope that demand will rise for higher percentage ethanol blends has not yet materialised.

“Flex-fuel” vehicles, which can operate on 85 per cent ethanol, are also yet to be taken up by the mass market, and technological advancement in electric vehicles will only add further pressure to the industry’s long term competitiveness.

In the EU, discussions are currently under way to limit the production of first generation biofuels, like ethanol, to half of Europe’s renewable fuel target, as a result of concerns over their long term environmental sustainability.

Underdeveloped second generation fuels

With ethanol under pressure, many hope that in the longer term, developments in second generation biofuels, synthesised from non-food sources, will provide a more viable alternative. Although cost advances are being achieved in these ‘cellulosic’ biofuels, productive capacity is still very small in comparison to ethanol. Whether these crops can be commercialized without requiring similarly high levels of water and changes in land use is open to much debate.

Whether the biofuels industry can dust off this recent blow also remains unknown. Idle plants and unused barrels could clearly be short term side effects of changes in the economic cycle, but could also be a sign of longer term decline:

“Is that going to be temporary or permanent? It’s hard to say,” said Eric Lee, Citibank commodities expert.

However, with producers hoping to produce an extra three-tenths of a gallon of ethanol per bushel of corn, technological development could yet save an industry merely bruised from a particularly tough year.

Robert Potts is owner of RPM Fuels, providers of tanks and pumps to the fuel industry. RPM Fuels supply oil tanks as well as specific equipment for biofuels and bio diesel.

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