Once Red-Hot Demand for Ethanol Runs into a Cold Spot
By Reed Fujii, The Record, Stockton, Calif.
Oct. 7–STOCKTON — Dreams of a vehicle fuel from American farms — not Mideast oil fields — fewer global-warming emissions and a booming new industry, as well as government incentives, set off a wave of ethanol plant construction in the last couple of years.
That is evident at the Port of Stockton, where new roads, a railroad spur, a tank farm and a distillery are taking shape on a 30-acre site across the San Joaquin River from the city’s wastewater plant.
But some say the boom is already fading. So many ethanol plants were built that production now roughly matches current demand. Futures contracts that soared to $4 a gallon in mid-2006 have slid under $2 a gallon since July and last week ranged from $1.55 to $1.60.
Some companies are shelving new plant construction, according to news reports. But Sacramento-based Pacific Ethanol Inc., which has three distilleries in operation and three more due to open in mid-2008, remains committed to complete its Stockton project, an executive said.
“It’s great economic development,” said Tom Koehler, Pacific Ethanol vice president. “It’s just a great, great program.”
Stockton Port Director Richard Aschieris agreed.
While not deeply versed in the economics of ethanol, Aschieris said he had one main concern:
“Are they still building? And the answer is yes,” he said. “I’m pleased about that.”
That there might be bumps and bruises in store for the young and still-evolving ethanol industry is not surprising, said Rick Kment, a biofuels analyst with DTN, an information and news company in Omaha, Neb.
It would be impossible to expect the rapidly expanding production to always match overall demand.
“One and a half years ago, demand well outpaced production,” Kment said. “Now as we’re building up production, we’re at the point of meeting and exceeding current demand. But overall demand is expected to continue to increase.
“The current situation is going to be a short-term imbalance,” he noted, predicting continued volatile price swings for ethanol over next two to three years.
Koehler said government restrictions and major oil companies’ favoring their own petroleum stocks over ethanol from outside producers are distorting the market.
“Ethanol today is a dollar a gallon cheaper than gasoline, … and we have the highest oil prices in the history of our world,” he said. “What we really have is what I would term as a malfunctioning market.”
Pure ethanol cannot be used in vehicles designed to burn gasoline.
But, Koehler said, “There’s absolutely no way every gallon of gasoline in the country could not have 10 percent ethanol in it today.”
That would boost U.S. demand to about 15 billion gallons a year, from the current 6 billion to 7 billion gallons.
One problem is that state regulations cap ethanol blends at 7.5 percent for fuels sold in California.
A change is in the works, said Dimitri Stanich, spokesman for the state Air Resources Board in Sacramento.
A formula called the predictive model is used by California oil refiners to make gasoline blends that meet air-quality goals. It will be changed to allow up to 10 percent ethanol blends.
“The model is being used now … but the mandate for the 10 percent ethanol in the fuel blend won’t start until 2008,” Stanich said.
Koehler expressed impatience.
“We need to fix that regulation today. We really shouldn’t have to wait until January or longer,” he said.
“When that happens, I think you will see some, not all, oil companies going to 10 percent.”
Certainly, one can expect that oil companies will create blends that maximize their profits, Kment said. But there are many other forces affecting ethanol prices.
Trading in ethanol futures is relatively new and small, compared with petroleum trading, which can tend to magnify price swings. Many potential ethanol buyers might be sitting on the sidelines when prices decline, hoping to jump in at or near the bottom of the cycle.
Also, the price drop might simply be a seasonal swing, but there is not enough history in ethanol trading to know its seasonal pattern, he said.
“The ones that just jumped in to make a quick dollar a year and a half ago (when prices hit $4 a gallon or more), they’re very disillusioned, because their profit potential is not there,” Kment said. “This industry has actually come back to reality, in a sense.”
Contact reporter Reed Fujii at (209) 546-8253 or rfujii@recordnet.com.
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