Ethanol Concerns

Some express fear over energy bill's use of mandates to drive biofuel production

WASHINGTON -- As the new energy bill was signed by President Bush Wednesday, industry observers raised specific concerns over new hikes in ethanol requirements. The bill, which the U.S. House of Representatives passed this week and the Senate the week prior, calls for a sixfold increase in the use of renewable sources, primarily ethanol today, to 36 billion gallons a year by 2022a requirement some say may place undue burden on the current energy infrastructure.

John Eichenberger, vice president of government relations for the National Association of [image-nocss] Convenience Stores (NACS), told CSP Daily News that the legislation is creating an artificial demand, one that will flip-flop the pricing differential that ethanol-blended product currently enjoys.

"As soon as the mandate takes effect, prices will increase," Eichenberger predicted. "The petroleum industry is resilient, but the question is at what price."

Lynn Westfall, senior vice president of external affairs and chief economist for San Antonio-based refiner Tesoro, said if that happens, gasoline prices will be affected accordingly. "If [ethanol's price] is more than gasoline, it doesn't really drive [gasoline] prices down," said Westfall.

Westfall said the bill is what the refining industry has been waiting for in terms of how much it can do with ethanol.

"There's a limit to how much ethanol we can use right now in the U.S.," he said. "If you look at this year's ethanol use, it hasn't varied that much even though there's been more production because we can't add it during the summertime to gasoline until refineries make some investment in their facilities and, of course, we [were] waiting to see what the final [energy] bill [was] to come out of Congress before we as an industry start making those investments."

Congressional mandates call for increase production over time, but even with a multi-year implementation, reality may fail to live up to what lawmakers are demanding. The resulting clash will potentially put a massive strain on supplies of raw food stocks and upon operators of the nation's energy-production system.

"[Congress] is banking on a mandate for a product that does not yet exist," Eichenberger said. "Yet they refuse to put something [into the bill] about the infrastructure needed to accommodate the new requirements."

Others question the viability of the renewable energy source into the future. "Corn-based ethanol is a dead end," said Chris Ross, vice president, CRA International, Boston. "It doesn't make much sense [in that you're] taking food stock and putting it into the energy mix."

Ethanol processors can only use a small amount of corn "biomass" in its production, Ross told CSP Daily News. He said sugar is probably a better source for that method.

Biofuel companies are clear winners in the signed energy bill, while the auto industry and refiners will be required to invest billions of dollars to meet new federal standards said a Dow Jones report. "Absolutely, this will give a boost to the [biofuels] industry," said Matt Hartwig, a spokesperson for the Renewable Fuels Association (RFA) told Dow Jones.

Both major, integrated oil companies such as ExxonMobil and Chevron and independents such Apache and Murphy Oil can also claim a victory. Their lobbying effort motivated Republican senators to block the revenue-raising items that could have cost the large oil companies more than $13 billion over the next 10 years.

But under the renewable fuel mandate, refiners such as Tesoro and Motiva Enterprises will have to make billion-dollar investments to make sure a growing percentage of their output is blended with ethanol. They also may have to pay a fee for every gallon of advanced biofuel under the mandate that isn't produced.

"We're going to have to make investments now to get ready to be able to deliver the blend stock required...throughout the nation," Charlie Drevna, president of the National Petrochemical & Refiners Association (NPRA), told Dow Jones. He said many refiners fear that uncertain production of biofuels in the years aheadin the case of drought, or if planned advanced biofuel technologies didn't delivercould mean multi-billion-dollar investments would leave stranded assets.

The energy bill also signaled the first increase in automobile fuel economy in 32 years. The mandates on the auto industry boost mileage by 40% to 35 miles per gallon.

The auto industry will also be required to make multi-billion-dollar investments in retooling their manufacturing plants to build more fuel-efficient cars and light trucks. In the long run, however, some experts believe the U.S. carmakers could see profits rise more than their Asian competitors as a result of the new fuel efficiency standards, said the report.


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