Sioux Falls Argus Leader, SD
12-06-07
Big guys step in as ethanol hits a wall
By St. Louis Post-Dispatch
BAINBRIDGE, Pa. – Brian Utz dreamed of owning a piece of an ethanol plant.
So two years ago he rounded up a dozen fellow farmers to find a place for it and
finance all the work needed to build one of the first corn-to-fuel plants in the East.
But the costs – and the community opposition – grew too much to bear.
“We got tired of fighting. You’d have thought we were building an atomic bomb,”
says Utz.
So Utz and the other farmers got out, and the big guys stepped in. The really big
guys.
The new investor group aiming to build in southern Pennsylvania includes three
billionaires: Richard Branson, the British airline and music entrepreneur; Vinod
Khosla, a founder of Sun Microsystems; and Jeffrey Skoll, founder of eBay.
The arrival of the “makers and shakers,” as Utz calls them, is part of a sudden
change in biofuels, just two years after farmers were chipping in $20,000 or so
for shares in ethanol plants sprouting across the Midwest and elsewhere.
Since spring, prices for the corn-made fuel have plummeted by one-third. Local
opposition has spread, rooted in concerns about pollution, water consumption
and the aesthetic impact of refineries on neighborhoods. Plans for new ethanol
plants are being scrubbed or delayed as construction costs soar and lenders
grow tight-fisted.
While the ethanol boom has stalled, billionaire investors like those in
Pennsylvania see a bright long-term future for biofuels, and they have the money
to withstand the current lull.
After rapid, government-fueled growth, ethanol is hitting the wall – the so-called
“blend wall,” the maximum amount of corn-made ethanol that the oil industry is
able, and willing, to mix with gasoline. Like many times in the past, the ethanol
industry is looking to government for help. Soon, Congress will make decisions
on a final energy bill that will determine how much ethanol is used in America in
coming years and therefore how many more plants are built or expanded.
What does the industry want? Completion of legislation already passed by the
Senate that would require the nation to use 36 billion gallons of ethanol – 15
billion gallons of that from corn yearly by 2022. The present Renewable Fuel
Standard of 7.5 billion gallons will be surpassed early next year.
A House-passed energy bill has no such provision, meaning that Senate and
House members will be deciding behind closed doors which chamber carries the
day or whether a compromise might be reached.
Meanwhile, a debate is under way about ethanol’s benefits and costs to society,
with questions being raised about how far the government should go to promote
biofuels. It pits ethanol makers and corn growers against the oil industry,
environmental advocates and segments of the food industry that have seen their
costs grow in part because of increased corn prices.
Taxpayer advocates are weighing in, too. As it stands, the biofuels industry will
benefit from government subsidies valued at $92 billion from 2006 to 2012,
according to a recent study by the Global Subsidies Initiative, a Swiss-based
nonprofit group that is critical of ethanol subsidies.
Doug Koplow, the American economist who wrote the study, argues that the
proposed 36 billion-gallon rule would amount to another subsidy because it
would require the oil industry and consumers to do something they might
otherwise refuse.
“It changes people’s choices in the marketplace,” he said.
As the debate heats up, ethanol supporters and skeptics alike wonder how a
lavishly subsidized industry has reached the doldrums, just as farmers wonder
why doors to their participation have all but closed.
By many accounts, a gold-rush mentality set in, with new investors eager to reap
the benefits of a government-fueled boom. With self-restraint absent in the
industry, ethanol production more than doubled to about 7 billion gallons in three
years.
Meanwhile, demand has leveled off, complicated by the oil industry’s reluctance
to give up more of its market share and problems in transporting corrosive
alcohol-based fuel.
At the same time, the price of corn rose to more than $4 a bushel for a period this
year, making ethanol more expensive to produce.
“We just got out in front of ourselves. There was a little too much overexuberance,” said Doug Durante, a consultant to the ethanol industry and
director of lobby groups promoting renewable fuels.
Durante estimates that of 100 or so serious ethanol plant proposals six months
ago, at least half have been put on hold and others have virtually no chance of
ever getting off the ground. Part of the problem is increased costs of stainless
steel, concrete and the energy needed to fuel plants that make ethanol.
Echoed Chad Hart, an economist at the Center for Agricultural and Rural
Development at Iowa State University: “There’s a squeeze on people in the
game and on those who want in.”
While farmers can continue to profit from their corn for ethanol, the days of their
owning new plants may have passed. And many worry about seeing their
cooperatives swallowed up by big business.
“We can’t be the first in line anymore,” said Rick Tolman, CEO of the St. Louisbased National Corn Growers Association. “I try to remind members that this is
an investment, like other investments. You decide the time to get in and the time
to get out.”
Bob Dinneen, CEO of the Renewable Fuels Association, observed that eyecatching profits from ethanol turned it from “a Midwest novelty” into a golden
opportunity for Wall Street, real estate investors and companies with no
experience in the fuels business.
Dinneen believes that the industry will stabilize from the opening of new markets
in the Southeast and elsewhere and wider gas station availability of E85, a fuel
blend of 85 percent ethanol and 15 percent gasoline. And with oil approaching
$100 a barrel, Dinneen and others are stressing the importance to national
security of buttressing the fuel supply with ethanol.
Like others in the business, Dinneen considers it vital for Congress to hike the
ethanol use requirement to unplug investments and force oil companies to blend
more ethanol.
“It will certainly send a signal to what I would consider a broken marketplace
today,” Dinneen said.