U.S. Ethanol Policy Sorely Needs To Be Addressed

The ethanol industry is struggling, despite the billions in subsidies and a government-guaranteed market. Those conditions along with record-high oil prices generated a flood of investment into the industry that many likened to an old-fashioned gold rush.

Unfortunately for ethanol, oil prices declined and demand is now well below capacity. Many plants have shut down and additional ones are expected to follow.

Corn ethanol was always seen as a bridge fuel, something to get the process started until something better came along. But the next generation of biofuels continues to be a promise in the future. And it increasingly looks like the government mandates – even though modest – for the next generation of economically viable fuels simply aren’t there, nor is the technology viable at this point.

It’s expected that the mandates will once again be revisited. Current economics dictate that only enough ethanol to meet the mandates is used, so if the government is going relieve some of the pressure caused by overexpansion, mandates will have to be increased.

Meanwhile, the other biofuel mandates also appear to be unrealistic and will likely have to be delayed.

But increasing the mandates for ethanol would not be a good thing for the livestock industry. In fact, the currently proposed mandates are already expected to seriously pressure the industry. With oil prices and demand down, disposable income falling, and deficits soaring, the willingness of the American voter to subsidize the industry is expected to have its limits tested.

In the past three months, 24 plants have shut down and several companies have declared bankruptcy. Almost one-sixth of ethanol-production capacity has been idled, and expansion plans have ceased.

But as tough as the economics look right now for the ethanol industry, government mandates will force companies to use 15 billion gals. by 2015. Thus, the long-term prospects are still pretty solid, especially considering that the alternative biomass fuels seem to be farther away than hoped.

The other dilemma with the current mandates is that gasoline consumption is declining. Experts are projecting that gas demand will remain 6% below 2007 levels for the next couple of years. If that’s the case, the mandates could actually exceed the 10% blend-level requirements.