Rough Road Ahead for Ethanol Industry?

The risk remains that all of this alternative fuel hype could evaporate if market conditions -- i.e. the price of oil drops -- don't accommodate an expanding supply of ethanol.

Published: 10-Mar-2005

rapidly expanding U.S. ethanol industry may be bound for cutbacks and downsizing in the future, while more and more American farmers invest millions of dollars to grow the alternative fuels business.

According to a story in Wednesday’s Wall Street Journal, 83 plants are currently turning corn into fuel in the U.S., with 25 additional plants still under construction. It is a record-breaking period in the fairly youthful business, as one industry group's data shows that those combined operations are on track to produce nearly 4 billion gallons of the farm-friendly commodity in 2005.

But the growth of the business has some agriculture policymakers cautious, worried that the bubble could burst and ethanol plants could face a bleak future.

The Director of Public Policy for the National Corn Growers Association says she is not worried about the current atmosphere in the industry. Samantha Slater, with NCGA’s Washington, D.C. offices, says business is expanding at a healthy pace. However, she warns that like any venture, ethanol investors may face the reality of a grim scenario in the future.

“Take for example the electric power generation industry. Several years ago there was a rush to build merchant power plants. That boom took off and by 2001 the market was just flooded with over 300,000 megawatts. Once Enron happened, the market was oversaturated,” she says.

“As people had predicted, the consolidation began and there were winners and there were losers and I think that plays out in most industries. I don’t think we’re at the peak in the ethanol industry yet, but I would imagine there will be a peak and then there will be a valley and there will be consolidation.”

Slater says most investors and farmers that have partnered in an ethanol operation seem forewarned about the risks. She believes that the ethanol companies are well educated about the way the market works and how the business has cycled in and could eventually cycle out.

As the spokesperson on NCGA’s ethanol interests, Slater says most of the nation’s corn growers are watchful of where plants are going up. Her enthusiasm goes beyond the benefits of added domestic markets for U.S. corn, to include the extensive investments that these fuel plants have made in dying rural communities.

“The rural development aspect to ethanol production is amazing. Not only are you reducing our country’s dependence on foreign oil, not only are you benefiting the environment by reducing greenhouse gases, but you are adding a considerable amount back to communities,” she says.

Slater says the facilities that are built to convert the crops into motor fuel greatly expand the tax base of small communities, adding new jobs and providing a source of funding that benefits rural school districts and local governments. She says, in some cases, the plants have also drawn new people and younger families to relocate from urban communities to the small towns.

But the risk remains that all of this alternative fuel hype could evaporate if market conditions don’t accommodate an expanding supply of ethanol. Slater says the concern is not so much that the fuel’s pricing is tied to crude oil prices, but more so that the product may hit a glass ceiling. She says industry analysts don’t worry too much about crude oil going back down to long-gone prices at $25 or $30 per barrel.

More critical, according to Slater, is action by members of Congress to pass an alternative fuels standard. Lobby groups like NCGA push for this type of measure, which they say would open the doors to more ethanol usage.

“That will give us a better idea of short-term growth capacity, what this country is going to need as far as ethanol production,” she says. “Long term, looking out to 2025, 2050, this country is going to have a serious problem with its dependence on foreign oil and its going to need an alternative.”

Slater says ethanol will never be able to complete replace crude oil, but it could significantly cut down the amount needed to meet the nation’s fuel demands. She insists the benefits of a domestic grown energy source will be crucial to the U.S. economy in the future.

“It is an incredibly viable alternative to oil. It’s an amazing tool for rural America,” she says.

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