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Guest Editorial: 2010 Holds Promise for the Ethanol Industry
by Tom Waterman

It could very well be the year that defines an industry.

I'm a relative newcomer to the ethanol industry, having spent much of the last 25 years writing about oil and natural gas. After all, fossil fuels would be forever – or so I thought. Sure, we heard about pollution problems, the threat presented by MTBE as an additive, coal as an addictively cheap source of electricity that spewed noxious carbon emissions into the atmosphere, and of course natural gas – a fuel not quite as threatening as its peers.

But these threats paled by comparison to the benefits of the proliferation of fossil fuels and their contribution to the growth of a nation.

Fossil fuels have kept the gears of society grinding here and around the world for the last 100 years. However, fossil fuel supplies are finite. Alternatives are now a necessity and not just a passing fad. It is essential, for a host of reasons, that as a nation we move away from fossil fuels. I won't detail the many reasons why because I would simply be preaching to the choir.

Those who oppose ethanol specifically are many, and a most unlikely collection. That's not really surprising as the anti-ethanol movement consists of some environmentalists with an equally disdainful view of fossil fuels, naturally the fossil fuel community that seeks dominance for another 100 years, and big food corporations that see ethanol as a threat to their bottom lines are the charter members of the club. Individually they are formidable. Jointly they are nearly impossible to oppose, especially for a relatively small industry.

This fight has unfolded in the last six years, and two years ago it became quite apparent that the PR war had been lost. Frankly, the PR war is still lost because the ethanol industry simply cannot match the assets that the opposition brings to the fight. The best analogy might be the old line about bringing a knife to a gun fight.

Through all of my experiences with energy, covering oil and gas for 25 years, it has become obvious that the ethanol industry has one very big advantage – it is right. It is right for America. It has been right for Brazil for 30 years, and it is right for nations around the world. It is right for so many reasons, many of which I didn't understand six years ago.

But as 2009 comes to a close, the future looks so much brighter than it did one year ago. No, the opposition is not going away – they will continue to fight at every turn. However, I am confident that the American farmer and the American ethanol producer will prevail. How can it not?

I've watched as ethanol infrastructure has grown at an unprecedented rate in the annals of industry. In 2000, ethanol contributed just 0.5 percent to America's transportation fuel paradigm (gasoline + ethanol; volume measure). Then it was 1.0 percent. Quickly it became 2.0 percent, and is now about 6.9 percent (2009, our calculations). Next year, we see ethanol at an 8.9 percent share of the motor fuel supply.

America has turned a corner on gasoline consumption. It is no longer growing at the annual rate that seemed guaranteed several years ago. In 2008, gasoline supplied, according to the Energy Information Administration, was down 2.9 percent from 2007, while the amount of ethanol that was blended was 39 percent higher than the year prior. In 2009, gasoline supplied dropped another 3.4 percent year-over-year (based on our calculations), while ethanol blended was up an estimated 23.8 percent.

Some of this is a result of mileage improvements and weaker demand, but as a whole, it was assumed gasoline consumption would always rise, along with our dependence on foreign oil. But, finally, we are on the path to reducing that dependence.

Along the way efficiency in the ethanol industry has increased production per bushel of corn and reduced energy consumption. Distillers grain is becoming an important part of the feed market, and not just in America, but around the world. The American farmer continues to produce more corn per acre and in the process, utterly discrediting the food vs. fuel debate.

But why will 2010 be a defining year?

Partly because 2009 was such a horrible year. Actually, 2008 wasn't so great either. But the industry has survived. Yes, there have been bankruptcies and consolidation, and there may be more consolidation ahead. However, efficiency improvements will continue, and I would bet that by 2011 we will see three gallons of ethanol per bushel of corn.

The EPA will probably grant a partial E15 waiver in June (vehicle model year 2001 and newer), and then an "all automobile" vehicle waiver by August or September. However, it will include an exclusion for small engines. This does present more challenges, especially in the ongoing education of the American consumer. I suspect mid-grade gasoline will disappear as E15 makes its appearance.

I also expect major breakthroughs in cellulosic ethanol research in 2010, and increased investment in that sector after EPA moves the blend wall.

With respect to the day-to-day marketplace, there will be some weakness in ethanol prices in the first quarter, but we won't see a repeat of the 2008 commodity market nightmare, and corn will remain reasonably priced.

Direct Brazilian imports will be a non-factor through midyear in the very least. On average the U.S. imported roughly 42 million gallons per month in 2008. Aside from small amounts of Caribbean ethanol, and the occasional contract cargo into the U.S. (about 200,000 barrels per month), the U.S. market will be short about 33.6 million gallons of imported ethanol through June. In fact, we have talked with traders in Brazil that feel that exports to the Caribbean will be limited as well, perhaps resuming in April or May at a pace similar to a year ago. To put that in perspective, it’s the equivalent of losing 7.3 ethanol plants operating at a 55 mgy pace, when compared to the amount of ethanol imported in 2008.

By midyear, I expect that most ethanol producers will have experienced four consecutive profitable quarters.

It appears the economy has finally bottomed, and as it improves, demand for gasoline, and therefore ethanol, will improve as well. Overall, we estimate a 2.5 percent increase in gasoline consumption in 2010 vs. 2009 due largely to the weak demand we saw in 2009. Ethanol blended should reach 7.93 percent of the motor fuel supply in 2010, at a shade under 11.8 billion gallons.

In short, it will be a defining year.

About the Author:

Tom Waterman has been writing about oil, gas, electricity, and renewable fuels as a reporter, editor, and publisher for 23 years. He is publisher of The Ethanol Monitor, which can be accessed online through www.oilintel.com.

 
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The American Coalition for Ethanol publishes Ethanol Today magazine each month to cover the biofuels industryís hot topics, including cellulosic ethanol, E85, corn ethanol, food versus fuel, ethanolís carbon footprint, E10, E15, and mid-range ethanol blends.
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