Now There's An 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.

Comments

[PirateP:]

You mention 50 cents less per gallon than gasoline, but neglect to mention the price per unit of energy.

Ethanol has a much lower energy output than gasoline (about 1/3) so it would require 3 gallons of ethanol to go the same distance 1 gallon of gasoline will take you. If you then take the perspective of price per amount of energy, ethanol is almost 3 times as expensive as gasoline.

That's why the oil companies don't want to increase the percentage of ethanol in gas, it decreases the quality of gas and makes it more expensive to make your car go.

2007 Oct 03 01:59 PM

[PirateP:]

You mention 50 cents less per gallon than gasoline, but neglect to mention the price per unit of energy.

Ethanol has a much lower energy output than gasoline (about 1/3) so it would require 3 gallons of ethanol to go the same distance 1 gallon of gasoline will take you. If you then take the perspective of price per amount of energy, ethanol is almost 3 times as expensive as gasoline.

That's why the oil companies don't want to increase the percentage of ethanol in gas, it decreases the quality of gas and makes it more expensive to make your car go.

2007 Oct 03 01:59 PM

[strutzma:]

Isn't the "glut" a transportation issue? These producers are making ethanol faster than it can be moved. As far as PirateP goes, ethanol is added to gasoline to Increase the quality of the gasoline by adding oxygen, making the combustion process more efficient (Ethanol was a replacement for the former oxygen supplement MTBE). One of the most significant drawbacks of ethanol as an additive is that its absorption of water causes corrosion of storage and transportation vessels from pipelines to vehicle gas tanks, etc...
Still, Todd, I'd like you to address the issue of the "glut" in terms of transportation, if you would. I could very well be wrong, however this seems to be the greater issue with "glut".

2007 Oct 03 05:57 PM

[Marqevans:]

Great lets dilute regular gasoline with ethanol that gets about 15% less mileage per gallon, all the while raising our food prices because the cost of corn used by us and to feed cattle has skyrocketed.

2007 Oct 03 06:04 PM

[Todd Sullivan:]

saab currently has a car that get equal gas mileage with E85 and pure gas. it is easy to do with simple engine modifications

2007 Oct 03 09:40 PM

[Winston Kotzan:]

So you are relying on the government to push ethanol? Don't we have a change of administration coming up shortly? Won't be long before someone discovers ethanol is too impractical because we can't transport it by pipeline, its packs less energy, and its production is hurting everyone who eats farm-grown food.

2007 Oct 04 01:03 AM

[Tom B:]

It's production is also stupid because the conversion of ethanol to energy is more or less a zero sum game; you use about as much energy as you get out. If "W" pushed this into a renewable energy bill, one imagines it'll only last about as long as his Presidency.

The way to sensible energy policy with respect to autos lies with better plug-in hybrids, I would think, which means increased electricity generation, which means more nukes, wind, waves, and geothermal. Coal is red hot right now, but that has huge environmental negatives, ranging from carbon dioxide, to mercury, to strip mining. Common sense from the federal govt is an exception rather than the norm, but one anticipates a big improvement after '08, given that the GOP has been traditionally more "bribeable" by the coal and oil interests.

2007 Oct 04 08:50 AM

[Biofuelsimon:]

Given the considerable tax breaks for producing biofuels, how much is this glut in ethanol costing US tax payers, I wonder? Why not import cheap ethanol from outside the US and give consumers a break instead of farmers. There's more at the big bioufuels blog

2007 Oct 04 08:42 AM

[erniem:]

Anyone who thinks ethanol is the "answer" to the energy "problem" has no idea of the issues involved. As others have pointed out, ethanol produces much less energy than gas by volume and weight, and the production CURRENTLY, until the advent of workable cellulosic ethanol, is a zero sum game, with heavy government support of corn production (subsidy) and huge amounts of oil needed to produce the fertilizer and pesticides to grow the corn. It does not compute yet.

2007 Oct 04 10:21 AM

[Itsonlymoney:]

Who says "gas stations want it and the US consumer overwhelmingly is demanding it." I don't think so. E85 needs costly infrastructure investments so the station owners have little reason to want it. Food prices are going up due to ethanol so consumers actually dislike it. Burning food for fuel is so dumb only this administration could promote it.

2007 Oct 04 01:48 PM

[Tom B:]

In Douglas Adam's "HitchHiker's Guide to the Universe" (sci-fi) Earth's first colonists -- our ancestors-- at one point declare that leaves could be used as currency-- which lead to massive inflation AND deforestation.

I used to think it was hilarious, before I saw how utterly alcoholic a person can be and still become President (perhaps with help from Diebold...).

2007 Oct 04 02:50 PM

[Ottnott:]

Steven Hurwitz has it exactly right, there is zero evidence that "gas stations want it and the US consumer overwhelmingly is demanding it".

The truth is that even consumers with flex-fuel (E85-compatible) vehicles rarely fill the tanks with E85.

Ethanol increases food prices, increases fuel costs (when you include the cost of the agriculture subsidies and ethanol subsidies), decreases vehicle driving range, and has almost zero impact (or even negative impact, depending on which studies you use) on net emissions of greenhouse gas.

In short, the ethanol fuel industry in the United States is little more than an agricultural subsidy being advertised as a pro-environment, pro-energy-independenc... activity.

We could replace ALL of the benefits of ethanol production at 1/10th the cost and with none of the negative effects by simply raising fuel economy standards by a few percentage points.

2007 Oct 05 05:25 PM

[Ottnott:]

Steven Hurwitz has it exactly right, there is zero evidence that "gas stations want it and the US consumer overwhelmingly is demanding it".

The truth is that even consumers with flex-fuel (E85-compatible) vehicles rarely fill the tanks with E85.

Ethanol increases food prices, increases fuel costs (when you include the cost of the agriculture subsidies and ethanol subsidies), decreases vehicle driving range, and has almost zero impact (or even negative impact, depending on which studies you use) on net emissions of greenhouse gas.

In short, the ethanol fuel industry in the United States is little more than an agricultural subsidy being advertised as a pro-environment, pro-energy-independenc... activity.

We could replace ALL of the benefits of ethanol production at 1/10th the cost and with none of the negative effects by simply raising fuel economy standards by a few percentage points.

2007 Oct 05 05:25 PM

[Shakybarnes:]

I'm not sure if Ethanol is ultimately good or bad, but this article quotes some pretty infantile thinking, such as Bob Dinneen's comment. Yes there is a glut, and Ethanol is spotting below cost because a) a lot is being produced, but b) it cannot be distributed fast enough, as distribution relies on trucks and trains instead of the big pipelines that can transport gasoline, and c) very few gas stations are capable of carrying E85. So you see, it's kind of like the "last mile bottleneck".

Why would an independent gas station owner spend $200,000 to upgrade the pumps and plumbing to handle E85? Are they ever going to recoup that investment? I dunno, but that might be one very good reason few stations supply E85.

2007 Oct 05 11:52 PM

[Sr. Pessimist:]

Tesla Coils Hydrogen Fuel Cells.

2007 Oct 06 12:55 AM

[Sr. Pessimist:]

2030 may happen for Americans but it won't happen for USD America.

2007 Oct 06 12:57 AM

[sellhigh:]

I agree with Charlie Munger...running automobiles on corn is about the stupidest thing I have ever heard of.

2007 Oct 10 11:03 PM

[rc7j:]

The problem with this administration is 'W' is giving in to the environmentalists who are pushing ethanol instead of fighting them and drilling for oil in Alaska and off our coasts. (China is drilling for oil off Florida now) We are paying a huge price for meeting the demands of the environmentalists. All these comments about President Bush should be directed at the liberals who think they can achieve a utopian society, a perfect world. It is not going to happen. Meanwhile we are shipping boatloads of money to the people who want to kill us. Thank you liberals.

2008 Jun 07 11:15 AM

[OxyMaven:]

Oil companies cry all the way to the bank when they use ethanol. They can sell it for the same price as gasoline, but they buy it at a large discount. Bob Dinneen Of RFA is soooooo wrong when he accuses his customers of purposely not buying ethanol. The real issue is Dinneen's own group who convinced Congress last November that it made sense to suddenly increase the federal mandate for ethanol use to 9 billion gallons this year. Only about 6.5 billion gallons were produced in the US last year, so how do you expect the infrastructure for distributing, storing and blending another 2.5 billion gallons to suddenly appear within a few months. It just can't happen that fast. That sudden rapid increase in the mandated consumption of ethanol is also a main reason for the spike in corn prices that is also contributing to overall food price increases.

2008 Jun 08 01:23 PM