By Darrell Delamaide
Amid rising gasoline prices and falling corn prices, ethanol may be poised for a comeback of sorts, even if only a temporary one.
Even though conventional wisdom is that crude has to reach about $100 a barrel before ethanol is economical, compared to current prices of about $80 a barrel, ample supplies of ethanol have widened the price differential between gasoline and ethanol to more than 60 cents a gallon.
When combined with the 45-cent-a-gallon excise tax credit for blending ethanol into gasoline, that creates a differential well above $1 a gallon, and has boosted recent blending volumes by some 20% on the year.
At the same time, forecasts of a bumper corn crop are pushing prices for ethanol’s main ingredient significantly lower. The Commodity Research Bureau noted in a report this week that big South American crops add further to the bearish outlook for corn prices.
One ethanol producer told Bloomberg News that margins are considerably better now and that the industry is on a “good footing” for 2010.
Ethanol, however, has had previous comebacks, only to fade again when corn prices rise and gasoline prices fall – the scenario that drove many ethanol producers out of business in 2008 and 2009.
CRB also cautions that reliance on tax incentives can be dangerous, as biodiesel producers found out when Congress failed to renew tax credits for that fuel before they lapsed at the end of 2009, forcing producers to shut down operations. Legislation to reinstate that tax credit is under consideration, but producers and consumers must realize that rollover of ethanol tax credits, due to expire at the end of this year, is not guaranteed, CRB says.
Also, corn-based ethanol remains controversial because of its impact on food prices and its relatively inefficient conversion of plant to fuel.
But major producers like Valero (NYSE:VLO) and Sunoco (NYSE:SUN) have bought ethanol plants cheaply out of bankruptcy over the past year and are poised to take advantage of the current favorable alignment for ethanol. Gasoline prices have been firm and are likely to rise as the driving season approaches, meaning that more ethanol will be getting blended into gasoline.
Just how strong the comeback will be, or how long-lasting, is difficult to gauge. The Obama administration stepped up the nation’s biofuels requirement to 36 billion gallons by 2022 from 12 billion gallons now and seems committed in its support. The country’s largest ethanol producer, POET, is looking at building an 1,800-mile ethanol pipeline for $4 billion with an 80% loan guarantee from the government – a longer-term bet on ethanol’s future.
Disclosure: No positions