Wednesday, October 3, 2007

Ethanol Glut? I Thought We Couldn't Make Enough?

Wasn't the main argument against ethanol "we can't make enough to replace gas"? So if that is true, how can we have a glut of the stuff?

In 2006 when ethanol was selling on the spot market for $4 a gallon, it was too expensive. Now that it is $1.50 a gallon (almost a full dollar cheaper than gas), it isn't "economically viable for producers". Are we just going to change the argument to fit the situation at any given moment?

The price drop has been attributed to too much product on the market (Econ 100). Oversupply is a result of investors pouring money into the sector and new plants springing up across the Midwest (more than 100 in 2007). But thanks to ongoing investments in bringing the product to market, a renewable energy bill that calls for greatly expanding ethanol's use, and a base price that's now about 50 cents less than gasoline, experts say ethanol is unlikely to remain in oversupply for long. For big producers like Archer Daniels Midland (ADM) and Verasun (VSE), the current crash in ethanol stock prices may be a opportunity to pick up extra production at rock bottom prices.

"It's cheap, and you can cheapen the price of gasoline," said Tom Kloza, an analyst at the Oil Price Information Service. "Everybody is trying to get the logistics worked out so they can have ethanol in their gasoline by 2008." Gas stations, most of which are independently owned and can make more money on already thin profit margins by using the cheaper ethanol as a blending agent in gasoline. Normal cars can run on a blend of 90 percent gasoline and 10 percent ethanol with no modifications. Using 10% ethanol rather than the 3% currently would save 4 to 10 cents a gallon at todays record high oil prices..

The ethanol industry itself points to the relatively low percentage they have of the current transportation fuels market (3%) as evidence that they have plenty of room to grow. Bob Dinneen, president of the Renewable Fuels Association says, "We're using 140 billion gallons of gasoline a year, how does 6.5 billion barrels [2007's projected ethanol production] mean a glut?"

Dinneen says refiners and others who blend gasoline like Exxon (XOM) and Chevron (CVX) are deliberately avoiding using ethanol so they could use more of their product and keep the price of gas high.

Kloza, the analyst from the Oil Price Information Service, said there's probably some truth to the ethanol industry's gripes. "If you're a refiner, you say 'well, I don't want to cede 10 percent of my production to ethanol," he said. They make more money at refineries using the lowest amount of ethanol in gas required by law.

Dinneen said that was the reason to push the federal government to increase the amount of renewable fuel gasoline companies are required to sell. Currently the mandate is 7.5 billion gallons by 2012, a level that's expected to be reached well before the end of 2008. A proposal that has the support of the president and strong backing in Congress would increase that to 36 billion gallons of renewable fuel by 2030.

Without the gov't mandate, refiners will not use all the ethanol available and the infrastructure to sell E85 does not exist yet outside the Midwest. Detroit auto makers Ford (F) and GM (GM) have gone on record saying they could produce 1/2 their new vehicles in 2008 as "flex fuel" cars capable on running on up to E85 fuel. But until there are enough stations to make it economical and practical, there is no reason to.

The ethanol is there, the car makers will make cars that will use it, gas stations want it and the US consumer overwhelmingly is demanding it. As long as congress makes the oil companies use it, we all be ok.

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