May 1, 2009 | Vol. 59, No. 11
|Dear PEI Member:
We can talk and/or fret all we want about the effects mid-level ethanol blends (E12, E13, E15, E20) might have on legacy petroleum equipment, but that conversation is wasted if the source of ethanol dries up. A new report, issued in April by the Congressional Budget Office (CBO), details the plight of the ethanol industry and suggests that the current economic environment has put all ethanol producers in dire straits.
The profitability of corn-based ethanol sits at the intersection of corn and gasoline prices. Although the relationship between these two commodity prices is highly volatile both season-to-season and year-to-year, the CBO has found that ethanol producers using current technology typically break even when the price of a gallon of gasoline is more than 90 percent of the price of a bushel of corn.
When the ratio breaks 90 percent, the CBO says that ethanol producers bring in enough capital to cover operating costs as well as invest in additional capacity and equipment. But when the ratio drops below 90 percent, the economics of producing corn-based ethanol begin to fall out of favor for producers.
When government subsidies for ethanol are factored in, the break-even ratio drops to 70 percent, says the CBO, providing some cushion for ethanol producers. The U.S. federal government currently provides a 45¢ per gallon subsidy. Nevertheless, the CBO study found that the gasoline-to-corn price ratio has only broken 90 percent once since 1970—in 2005—which illustrates just how reliant the ethanol industry is on government support.
Since hitting the high point in 2005, the ratio has been in a steady freefall. In fact, ethanol producers are currently facing some of their toughest economic conditions to date. On April 28, NYMEX gasoline futures settled at $1.42 per gallon and CBOT corn futures settled at $3.75 per bushel, putting the gasoline-to-corn ratio at a paltry 38 percent. The bankruptcy of ethanol producers such as VeraSun and Aventine over the past six months is testament to the intense pressure this sector is under.
Tough Times for Ethanol Producers
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U.S. ethanol production hit a record high last year, exceeding the nine billion gallon mark. According to mandates specified in the Energy Independence and Security Act of 2007, gasoline blenders in the U.S. are expected to blend in 15 billion gallons of corn-derived ethanol starting in 2015 and 36 billion gallons of biofuels by 2022, with non-corn based fuels bridging the gap. That’s a tall order, and that’s why the government and the petroleum industry are talking about raising mid-level ethanol blends and making sure the equipment used can safely store, meter and dispense it.
The CBO report drives home a few points I think that we should all consider going forward. First, ethanol producers are in the business to make money. If they can’t, they will go bankrupt and the industry might have trouble producing enough ethanol to meet the required blend levels. Second, any government policy dealing with alternative fuels should keep the economics in mind before mandates are set. And third, government support of the ethanol industry is critical. It must stay in place if the fuel is to continue in the marketplace.
CALIFORNIA TO WAIVE LISTING FOR BIODIESEL EQUIPMENT?
COSTCO SETTLES ATC CLASS-ACTION LAWSUIT
NATSO, the trade association that represents truck stops and travel plazas, called the litigation "completely without merit, and nothing more than a shakedown by trial lawyers." NACS says that NATSO's comments "are consistent with the NACS position." The petroleum marketing groups cite a California Energy Commission study and a report commissioned by NATSO, PMAA, NACS and SIGMA finding that consumers are not being overcharged for gasoline and diesel fuel, and that requiring ATC equipment will increase costs to consumers.
The National Conference on Weights and Measures will decide to permit, mandate, or not allow ATC at its annual meeting July 12-16, 2009, in San Antonio.
CALIFORNIA ADOPTS LOW-CARBON FUEL STANDARD
The fuel standard is part of California's push to reduce its emissions of
greenhouse gases 20 percent below 1990 levels by 2020, as mandated by the
state's landmark 2006 climate law, A.B. 32. The rule calls for fuel
blenders, refiners and importers to achieve those emission reductions for
their entire fuel mix and allows them to buy credits from producers of
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The TulsaLetter (ISSN 0193-9467) is published two or three times each month by the Petroleum Equipment Institute. Robert N. Renkes, Executive Vice President, Editor. Opinions expressed are the opinions of the Editor. Basic circulation confined to PEI members.