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Focus on Agriculture

February 03, 2016

Ethanol and the Volatile Oil Market

By Stewart Truelsen

Download a 60-second audio version of this column at Stewart Focus.

The renewable fuels industry and Big Oil don’t share the same vision for the future of motor fuel. One sees a lower-carbon future and the other doesn’t, but both are affected by the slump in commodity prices. The price of ethanol generally tracks with the price of gasoline and the barrel price of crude oil. The steep slide in oil prices has affected ethanol producers, but not to the same extent as domestic oil producers.

According to Bob Dinneen, CEO and president of the Renewable Fuels Association, “The industry is doing okay, not great. We as an industry are prepared for this kind of thing. We have weathered storms in the past, and we will weather this one.”

The main input costs for ethanol are corn and natural gas. Dinneen says that low corn prices are helping ethanol producers keep the doors open, but he doesn’t like to see it that way. “Many of our producer members are farmer-owned cooperatives. They got into this business to increase farm income and help the rural economy.”

The decline in oil prices is creating another problem for ethanol producers—stepped-up attacks on ethanol financed or encouraged by the oil industry. “Maybe they are looking for any place they can recover market share,” suggests Dinneen, “But I think what has prompted the attacks is simply our success. We are in 10 percent of the nation’s motor fuel. They do not want to see the industry grow any more.”

Growth is what the industry has in mind with the expansion of E15 and E85 fuels. Sales have been held back by the lack of infrastructure at the pump and acceptance by carmakers. However, E15 is now approved by car manufacturers for use in more than 70 percent of new vehicles, a jump from last year.

At the same time, the Agriculture Department is partnering with 21 states through the Biofuel Infrastructure Partnership to increase the number of pumps, storage and related infrastructure to offer higher blends.

Dinneen praised USDA and Secretary Tom Vilsack for the agency’s commitment to renewable fuels, but was disappointed in the decision of another federal agency. Late last year the Environmental Protection Agency trimmed the Renewable Fuel Standard, the volume requirements that had been set by Congress. The RFS is the amount of biofuel that refiners are required to blend into motor fuel. The mandate is a prime target of the oil industry and other critics who seek to eliminate it altogether and halt the advance of renewables.

“If the EPA is going to put artificial constraints on the growth of the ethanol market in this country, we will build markets elsewhere,” says Dinneen. Ethanol is especially valued around the world for its octane-boosting quality. U.S. ethanol producers already are exporting to more than 60 countries, including the United Arab Emirates.

The volatility of the crude oil market and the havoc it plays with the world economy is just one more reason to embrace alternatives to petroleum and move forward with cleaner American-made fuels on the way to energy independence.

Stewart Truelsen, a food and agriculture freelance writer, is a regular contributor to the Focus on Agriculture series.