Ethanol Bust Adds to U.S. Fuel Glut and Losses Across Corn Belt

by Mario Parker (Bloomberg Business) ... Back in 2007, when crude oil was headed toward a record $147.27 a barrel, ethanol was being touted as a cheap alternative from abundant domestic resources. The U.S. is the world’s biggest corn grower and exporter. Then-President George W. Bush signed the Energy Independence and Security Act, which forced refiners like Exxon Mobil Corp. and Chevron Corp. to blend escalating amounts of biofuel, including ethanol, in gasoline. At the time, policy makers envisioned an almost insatiable thirst for transportation fuels.

But that was before the shale boom unlocked oil deposits that sent domestic output to the highest since the 1930s and prices plunging to a 12-year low of $26 a barrel. Gasoline demand stalled, hamstrung by the worst recession since the Great Depression and improved vehicle mileage. Drivers will consume 141 billion gallons this year, less than the 142 billion in 2007, Energy Department data show. Average U.S. pump prices fell to $1.696 a gallon last month, the lowest since January 2009, according to data from AAA, the largest U.S. motoring club.

Ethanol producers expanded from 81 plants and 3.9 billion gallons of annual capacity in 2005 to 214 distilleries today that can produce 15.7 billion gallons, industry data show. When the government cut its minimum-use mandate to 14.5 billion gallons a year from 15 billion, that left 1.2 billion gallons of surplus capacity.

Increased exports have helped keep some plants from closing, said Tom Buis, the CEO of Growth Energy, a Washington-based ethanol industry group. But domestic stockpiles of the biofuel have surged to a record 979 million gallons, DOE data show. Earlier this month, Kinder Morgan Inc., the largest U.S. pipeline operator, said it had to reroute truck deliveries.

Compounding the industry’s woes was the government’s decision to phase out credits, starting this year, for so-called flex-fuel vehicles, which run on 85 percent ethanol. Most conventional engines use 10 percent, and there’s no agreement on whether that level should be increased. The American Petroleum Institute, which represents major oil refiners, wants to end the mandates, while ethanol producers seek additional government help to revive growth. READ MORE