Awake at the Wheel

We wrote about the inevitable biodiesel surplus in our 2007 prediction post. Ethanol faces the same market dynamic. The ethanol business has its origins in top down, mandate and blending based, constructed market pull. Midwest Gasahol in the 80s. This has changed a bit recently, with marketing dollars and high gas prices building a viable consumer demand near corn production regions where economic upside is local, and FlexFuel vehicles are available. For most fuel retailers, the downside MPG of e85 limits retail pricing power, limiting consumer access to niche providers.

Biodiesel, on the other hand, delivers near equivalent MPG and is the ultimate “FlexFuel” i.e. backwards compatibility with any diesel engine powered vehicle. Biodiesel users pay for the upside benefits: CO2 reduction, renewable and domestic fuel advantages without a significant performance or MPG penalty. Biodiesel’s lifecycle energy balance is also significantly more positive than ethanol. Yet, these two fuels remain linked not only in D.C. policy but in Big Oil uptake blending contracts and downstream supply choices, and of course crude oil contracts and price at the pump.

When ethanol/biodiesel is cheap, the refiners blend low and make money on volume. When ethanol isn’t cheap, the refiners only blend to state or Fed mandates. E100/B100 blend stock has no pricing power when feedstock prices rise and petro prices fall. Ignorance of the last mile delivery, positioning, and greed, are leading to the inevitable crash and investor bloodbath of 2007. The small, feedstock isolated biodiesel production start ups will be the first to go, as their “creative” project financing scenarios allow investors to pull the plug vs throwing good money after bad into a small market that now includes Cargill and ADM. Feedstock and scale win.

EnergyWashington reports: Congress May Be Needed To Keep Ethanol Bubble From Bursting

Plummeting oil and gasoline prices, spiking corn prices, historically high natural gas prices and ethanol production capacity reaching 15 billion gallons in a few short years are all the ingredients needed for a market massacre in the ethanol industry. Unless Congress comes riding to the rescue.

…So, if the price of gasoline were to drop substantially below the price of ethanol, why would any refiner add a high priced fuel additive, beyond the 5.4 billion gallon 2008 requirement of the renewable fuel standard (RFS) when cheaper alternatives exist? Suddenly a 15 billion gallon ethanol industry could find demand is only 5.4 billion gallons. The market solution is to cut ethanol prices, and a market collapses. Small, high cost producers would be the first victims, many of them pioneers in the farmer co-operative approach to building a viable U.S. ethanol industry. Small producers face not only the cost pressure of higher feedstock and operating costs but they also lack the capacity to store their product to wait out price declines. Increasingly the railroads, which ship the bulk of ethanol in the U.S., are demanding ethanol plants ship via so-called unit trains, i.e. single commodity ethanol trains consisting of 100 cars or more. Ethanol plants must have a quarter mile or more of railroad spurs available to process unit trains, which many of the smaller plants do not have, putting them at a further disadvantage.