Officials prepare to rescue ethanol from new crisis

Bob Tippee
Editor

As fuel ethanol approaches a new crisis, the federal government busily fashions another rescue.

Ethanol had its heyday in 2006 after the Energy Policy Act of 2005 imposed rising annual mandates for the gasoline additive and exposed makers of a competitive oxygenate, methyl tertiary butyl ether, to unbearable legal risk.

Ethanol plant construction boomed. While new ethanol supply gushed into the market, however, corn prices zoomed. By 2007, distillation economics had turned sour. Congress responded by expanding the mandate to shore up demand.

That rescue didn't help. Corn prices have eased, but so have ethanol prices. Plant operators are going bankrupt.

Now gasoline consumption and prices, which the ethanol price tends to follow, have slumped.

The next crisis relates to the annual renewable fuel standard by which the Environmental Protection Agency enforces the ethanol mandate. It's the share of sales by each gasoline supplier that must come from renewable sources.

EPA calculates the standard from the statutory mandate level and expected gasoline consumption, with adjustments for unaffected states and an exemption for small refiners. For the next year's gasoline consumption, EPA uses the Energy Information Administration's October Short Term Energy Outlook.

With an ethanol mandate of 10.5 billion gal and gasoline use forecast at only 9.05 million b/d, the renewable fuel standard next year looks to be about 9.6%.

That means virtually all gasoline sold in the US must contain ethanol near the 10% maximum concentration now applicable to all but flexible-fuel vehicles.

Distributing ethanol to the whole US gasoline market will be difficult. Then there's 2010, when the grain-ethanol mandate rises to 12 billion gal and gasoline demand might come up short again.

Flex-fuel vehicles, which can burn 85% ethanol blends, might absorb some of the problem—but only if E85 is cheap enough to coax motorists who can use it to endure the mileage penalty.

Meanwhile, officials at the agriculture and energy departments are working on the ethanol industry's next rescue: studies showing that 15% or 20% ethanol concentrations in gasoline might not, after all, be as troublesome for engines as everyone once thought.

(Online Oct. 24, 2008; author's e-mail: bobt@ogjonline.com)

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