Brownfield, MO
02-06-07
Jump in crude oil good news for ethanol industry
by Peter Shinn
As crude oil prices have risen over the last several days back toward $60 a
barrel, pump prices for gasoline have been heading higher as well. The American
Automobile Association laset week reported average gasoline prices across the
U.S. rose average by 1.3 cents per gallon last week to $2.16. That’s not good
news for motorists, nor does it bode well for farmers who haven’t yet locked in
their diesel fuel costs for spring planting.
But Iowa State University Ag Economist Dr. Bob Wisner told Brownfield
higher crude oil is good news for the ethanol industry, which he said faced
market conditions as recently as last month that could have slowed its
expansion.
"The break that we had in ethanol prices plus the rise in corn prices in the first
half of January brought us back close to a break-even situation on new plants
that would be breaking ground," Wisner said.
Wisner pointed out there are other factors that will influence ethanol prices, and
ultimately, the industry’s expansion. He said one of those factors is how quickly
ethanol completely replaces the carcinogenic MTBE as a fuel additive, which he
said would make for about a 14-billion gallon a year market for ethanol when fully
developed. Wisner said another key factor is the speed with which E-85, a fuel
made up of 85% ethanol and 15% gasoline, achieves more widespread adoption.
But according to Wisner, the price of crude oil is the single most important factor
in determining the price for ethanol. And that, he said, is the market signal
determining the potential growth of the U.S. ethanol industry.
"The real driving force here has been the high crude oil prices," Wisner
explained. "So the future of the crude oil market will be a key variable in
determining how big the ethanol industry gets."
Wisner said he wanted to emphasize that high crude oil prices were driving
adoption of renewable fuels, not just in the U.S., but around the world. He cited
burgeoning renewable fuels industries in Europe, Brazil, Malaysia and China.
And he said that global growth in renewable fuels makes the food versus fuel
debate a real one.
"All of this impacts the availability of corn and protein meal, as well as vegetable
oil, for food use and for animal agriculture," said Wisner. "So it's a global picture
that's emerging here."
In the near term, that's one reason Wisner said he continues to see upside
potential in U.S. corn prices, particularly if there's any kind of production hiccup
during the upcoming growing season. "When we think of an explosive market, we
think back to '95-96 when we had $5.00 corn in Iowa for almost six months,"
Wisner said. "That could be a possibility if we would have some major weather
problems."
But as for crude oil, Wisner said he agreed with other analysts who believe prices
of crude oil could fall dramatically if the economies of China and India stagnate.
And he added that worldwide efforts to diversify away from petroleum-based
energy sources could ulimately result in less crude oil demand.
"I would not rule out, possibly longer-term, a period of declining quantity of
energy used," Wisner concluded.