[R-G] Weather Risks Cloud Promise of Biofuel
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Sun Jul 13 01:05:08 MDT 2008
July 1, 2008
Weather Risks Cloud Promise of Biofuel
By JAD MOUAWAD
The record storms and floods that swept through the Midwest last month
struck at the heart of America's corn region, drowning fields and
dashing hopes of a bumper crop.
They also brought into sharp relief a new economic hazard. As America
grows more reliant on corn for its fuel supply, it is becoming
vulnerable to the many hazards that can damage crops, ranging from
droughts to plagues to storms.
The floods have helped send the price of ethanol up 19 percent in a
month. They appear to have had little effect on the price of gasoline
at the pump, as ethanol represents only about 6 percent of the
nation's transport fuel today.
But that share is expected to rise to at least 20 percent in coming
decades. Experts fear that a future crop failure could take so much
fuel out of the market that it would send prices soaring at the pump.
Eventually, the cost of filling Americans' gas tanks could be
influenced as much by hail in Iowa as by the bombing of an oil
pipeline in Nigeria.
"We are holding ourselves hostage to the weather," said John M.
Reilly, a senior lecturer at the Massachusetts Institute of Technology
and an ethanol expert. "Agricultural markets are subject to wide
variability and big price spikes, just like oil markets."
Three years ago, Americans discovered that the vicissitudes of the
weather could have a powerful effect on energy prices when two
hurricanes struck the Gulf Coast. Hurricanes Katrina and Rita
interrupted a quarter of the nation's oil production and closed dozens
of refineries for weeks. Lines formed for the first time since the
1970s as gasoline spiked above $3 a gallon, a record at the time. The
nation's increasing dependence on crops for motor fuel adds another
level of vulnerability from the weather.
It is still too early to estimate damage to corn crops from the recent
floods, or their impact on ethanol output. Iowa, the biggest corn
state, may have lost as much as 10 percent of its harvest, according
to preliminary estimates.
But concerns that the floods could tighten corn supplies this year
have pushed up both corn and ethanol prices. Ethanol, which was
already rising before the floods, has nearly doubled from its low of
$1.50 a gallon in September.
Unexpected interruptions in oil supplies have been a factor driving
oil prices above $140 a barrel lately. Given the tight oil market,
there is little untapped capacity that can be brought online to make
up for sudden supply interruptions, whether of oil itself or of the
biofuels that are increasingly substituting for oil.
In the 1980s, the oil capacity cushion peaked at around 20 percent of
global consumption. Today, it represents only about 2 percent — less
than Iran's petroleum exports. Analysts have warned that such
record-low levels of spare capacity pose unprecedented risks to the
stability of oil markets and introduce a significant premium in the
price of oil.
"There is now a vulnerability to perfect storms, not just in a
metaphorical sense, but increasingly in a literal sense," said Daniel
Yergin, the chairman of Cambridge Energy Research Associates, a
consulting firm. "In addition to geopolitical risks, you must now add
While storms, torrential rains and hurricanes have always been a part
of energy production, the areas where most of the nation's new oil and
ethanol supplies are coming from — the corn belt and the Gulf of
Mexico — are especially vulnerable to hazardous weather.
"Our energy policy is like playing Russian roulette with every chamber
loaded," said Lawrence J. Goldstein, an energy analyst at the Energy
Policy Research Foundation, a group backed by the oil industry. "We've
doubled up on the weather risk."
Both the government and the ethanol industry recognize the risks of
tying fuels to crops. The secretaries of energy and agriculture, in a
joint letter to the Senate, recently said: "If we assumed a supply
disruption of ethanol, we would expect a fairly large increase in the
price of gasoline until ethanol supply were re-established or new
market equilibriums were achieved."
Backers of biofuels contend that growing ethanol supply is keeping
gasoline prices from rising even higher than they have, by anywhere
from 35 cents to 50 cents a gallon, in their estimation. They also
point out that the government's ethanol mandate, which requires oil
companies to blend ethanol into motor fuel, can be suspended in an
emergency. Finally, they say that future ethanol supplies will be
derived from materials like switchgrass or wood chips that are
resistant to bad weather.
Bob Dinneen, the president of the Renewable Fuels Association, the
industry's main trade group, said only two out of 160 ethanol
refineries nationwide shut down because of the storms. Both will
reopen soon, he said.
"There is a lot of overblown concern that is not really justified by
the facts on the ground," Mr. Dinneen said. "Certainly the weather is
going to have an impact on all sorts of industries. It had an impact
when Katrina wreaked havoc on the refining industry. It has an impact
on ethanol production, but it has been minimal."
In recent years, corn ethanol has been one of the few sources of
supply growth in transport fuels. Indeed, biofuels have become the
single biggest source of new fuels produced outside of countries
belonging to the Organization of the Petroleum Exporting Countries.
Production worldwide is expected to grow by 330,000 barrels a day this
year, to 1.4 million barrels a day, according to the International
In the United States, bipartisan public policies have driven the rise
of the ethanol industry. Congress has set rising requirements for oil
companies to blend ethanol with gasoline, backed with generous
subsidies that should total $12 billion this year, according to
estimates by Barclays Capital.
The ethanol mandate is set at nine billion gallons for 2008 and is
scheduled to rise to 36 billion gallons a year by 2022. By various
estimates, that would represent 20 to 25 percent of the nation's
gasoline consumption by then.
Corn ethanol is capped at 15 billion gallons from 2015 onward. The
rest is supposed to come from advanced biofuels. They would not
require food crops, but bringing them to market depends on perfecting
techniques that are still experimental.
Farmers who support the government's ethanol policy argue that truly
disastrous weather in the corn belt does not happen often.
"The last time we had real weather problems in the corn belt was
1988," said Tom Buis, the president of the National Farmers Union.
"That's pretty rare."
Emerson D. Nafziger, a professor of agronomy at the University of
Illinois, said farmers still had time to recover this year, to some
degree. But he said this year's storms were the first real test for
the nascent ethanol industry.
"We may end up feeling we dodged a bullet this year," he said. "We've
had a run of fairly favorable weather in recent years. But there is no
guarantee it will stay that way."
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