March 24, 2006

Ethanol Industry Braces for Growing Pains

Even with U.S. production of ethanol trending upward at a geometric rate and flex-fuel auto technology starting to receive the attention it deserves, journalists are drafting stories about higher oil pump prices being blamed on the ethanol industry (see below).

We expect jumps to happen for any commodity when a spike in demand outstrips supply. However, this spike is the result of oil companies finally deciding to substitute ethanol as an oxygenate in place of MTBE in advance of state legislatures mandating that they do so. So who's to blame?

I think it is a good sign. To make an omelet, you have to break some eggs. We should expect that a rapid acceptance of ethanol as a renewable fuel will create infrastructure overloads and a period of adjustment for both producers and buyers - and, incidentally, the oil companies. Meanwhile the benefits of bioenergyfar outweigh the liabilities we face longterm from over-dependence on fossil fuels.


Ethanol Industry Braces for Growing Pains
AP Business Writer

WASHINGTON (AP)-The ethanol industry might not be ready to satisfy the expected summertime jump in demand. And by crimping the overall supply of motor fuel, this could contribute to a spike in gasoline pump prices at the start of the country's peak driving season.

That, at least, is the view of the Energy Department, which issued a report last month detailing the challenges midwestern ethanol producers will have in getting their fuel to key markets along the East Coast because of railroad, trucking and other distribution bottlenecks. The report also highlighted concerns about the limited output capacity of an industry still in its infancy.

The Renewable Fuels Association, a trade group representing ethanol producers such as Archer Daniels Midland Co. and Pacific Ethanol Inc., says the industry's challenges and their influence on gasoline prices are being overblown. The association sent an angry letter to the Energy Department last week, questioning the overall thoroughness of its research and accusing it of creating "unnecessary fears in the marketplace."

Now it is up to ethanol producers to bridge the gap. While U.S. ethanol producers have the capacity to produce roughly 4.3 billion gallons - or 280,000 barrels per day - in 2006, the near-term crunch means more imports will be needed from Brazil, Dinneen said. The United States imported more than 150 million gallons of ethanol in 2005.

Dinneen said part of the problem for the U.S. ethanol industry right now is that it was caught off guard by the oil industry's faster-than-expected phaseout of MTBE. "Refiners made the decision to accelerate the removal of MTBE, not ethanol producers," Dinneen said.

Perhaps the biggest issue is distribution.

Gasoline with or without MTBE can be shipped in large quantities through an extensive network of pipelines. But ethanol, which tends to corrode pipelines, must be transported on trucks, trains and barges in relatively small batches to storage terminals where it is then blended with gasoline.


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