Ethanol Counting on Campaign Promises
Ethanol counting on campaign promises
Obama pledged his support, but policy, interests may collide
By Joshua Boak
chicagotribune.com (December 12, 2008)
Record corn prices drove VeraSun Energy into bankruptcy. Shares in Aventine Renewable Energy are trading for less than 50 cents, down 99 percent from their peak. Plans for 19 ethanol refineries were recently canceled, including nine in Illinois.
And because of its lower energy content, ethanol blend E85 effectively costs drivers about 30 cents more per gallon than gasoline, hurting its acceptance as an alternative fuel.
Promises of additional government support for ethanol producers from President-elect Barack Obama might not be enough to immediately rescue a business near and dear to farmers. Ethanol is a crucial part of Obama’s pledge to limit the use of foreign oil, a policy that connects energy to national security and economic development.
Government mandates established a demand for ethanol that proved greater than what the corn harvest could provide. That drove up corn prices and slashed the profit margins of refiners. Additional government efforts to strengthen the industry could only prolong that cycle.
“If you just give them more money, it’s just going to make the price of corn higher, which is going to make the situation worse for them,” said Tom Elam, who runs the agricultural consulting firm FarmEcon. “As a result of their unbridled enthusiasm, they have built an industry bigger than the government mandate and the ability of corn growers to provide.”
E85, a blend of 85 percent ethanol and 15 percent gasoline, rings up lower at the cash register for drivers, but gasoline delivers more miles per gallon and a better value to motorists. That puts companies that spent hundreds of millions of dollars constructing ethanol refineries across the Midwest into a bind because higher prices would salvage their profit margins yet make the biofuel less competitive against gasoline.
To restore profits to stable levels, refiners must shut down to cull supplies or have legislation that expands the potential markets for ethanol. Obama ran for president as a friend to the ethanol industry, promising to keep it open for business.
“Now’s not the time to pull the rug out from under the ag policies that help you find profitability in the marketplace,” Heather Zichal, the Obama campaign’s policy director for energy, environment and agriculture, said at the ribbon-cutting of an ethanol refinery in Marion, Ohio, a week before the election.
The Obama campaign platform called for funding research for biofuels and next-generation ethanol made from switch grass and garbage, so that the country would have an annual biofuel supply of 60 billion gallons by 2030, up from roughly 10 billion gallons this year.
His platform also called for every new car in America to be “flex fuel” by 2013, which could improve the ethanol market because drivers could fill up with gasoline or an ethanol blend.
Sanjay Shrestha, an alternative-energy analyst for Lazard Capital, said Obama’s victory was an “incremental positive” for ethanol, but he cautioned, “We shouldn’t draw the conclusion that it’s going to revitalize the corn-based ethanol industry.”
The auto industry plans for half of new vehicles to be flex fuel, running on E85. Introducing flex-fuel vehicles would require installing thousands of pumps across the country to handle E85, at a cost of about $50,000 each.
And in order for motorists to have a genuine choice with flex fuel, E85 must be competitively priced, a challenge because fuel economy with the high-percentage blend is worse than gasoline. A recent study sponsored by the Energy Department and the American Coalition for Ethanol claims that fuel economy improved slightly with 30 percent blends of ethanol, which could narrow the price gap.
Most gasoline bought at filling stations contains some ethanol. The government capped the blend at 10 percent ethanol and 90 percent gasoline. Ethanol currently accounts for about 8 percent of the country’s supply of transportation gasoline, according to the Environmental Protection Agency.
Raising the cap to 15 percent or 20 percent would stimulate more demand for ethanol, restoring higher profit margins to refiners, said Jeff Broin, chief executive of Poet LLC, the South Dakota-based owner of 26 refineries that recently said it was looking for takeover targets.
That solution could give headaches to drivers though, because using an ethanol blend higher than 10 percent would void the warranties for most car engines, said Alan Adler, a spokesman for General Motors. The engines were never designed for a higher ethanol concentration.
As president, Obama will have to parse through these types of conflicting interests to arrive at a policy. That could distance him from the interests of a Corn Belt that helped the former Illinois senator win the White House.
“When you’re governing, you have to make clear choices that are unambiguous in consequences and outcomes,” said John Hofmeister, the retired president of Shell Oil Co. and founder of the non-profit Citizens for Affordable Energy. “It’s different than campaigning, when you can test ideas.”
Obama’s energy plan looks beyond ethanol. It embraces a 2015 deadline for putting a million hybrid plug-ins on the road. The cars would charge their batteries in a wall socket, making them a potential rival to flex-fuel vehicles. Cars also could be powered by hydrogen cells and compressed natural gas, fuels with well-funded advocates.
If Obama wants to truly deliver on the broader goal of reducing dependence on foreign oil, the administration will have to decide which alternative fuel to pursue, Hofmeister said.
“If we only let market forces determine the outcome, 10 years from now we’ll still be debating how many infrastructures to support,” he said.
Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol. Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program. Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline. Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.